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TRANSCRIPT
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No: 59188-PE
PROJECT APPRAISAL DOCUMENT
ON A
PROPOSED LOAN
IN THE AMOUNT OF US$54.5 MILLION
TO THE
REPUBLIC OF PERU
FOR THE
OPTIMIZATION OF LIMA WATER AND SEWERAGE SYSTEMS PROJECT
March 9, 2011
Sustainable Development Department
Bolivia, Chile, Ecuador, Peru and Venezuela Country Management Unit
Latin America and the Caribbean Region
This document has a restricted distribution and may be used by recipients only in the
performance of their official duties. Its contents may not otherwise be disclosed without World
Bank authorization.
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CURRENCY EQUIVALENTS
(Exchange Rate Effective December 31, 2010)
Currency Unit = Nuevos Soles US$1.00 = S./2.81 US$0.36 = S./1.00
FISCAL YEAR
January 1 – December 31
ABBREVIATIONS AND ACRONYMS
ANA
National Water Agency (Agencia Nacional
del Agua)
BOT Build Operate Transfer
BP Bank Procedures
CAF Andean Development Corporation
(Corporacion Andina de Fomento)
CO Country Office
CPS Country Partnership Strategy
CQS Consultant Qualifications Selection
DA Designated Account
DC Direct Contracting
EA Environmental Assessment
EGAm Environmental Management Team (Equipo
de Gestión Ambiental)
EMP Environmental Management Plan
EPS Sanitation Services Provider (Empresa
Prestadora de Servicios de Saneamiento)
FBS Fixed Budget Selection
FM Financial Management
FONAFE State Companies‟ National Fund (Fondo
Nacional Empresarial del Estado)
FY Fiscal Year
GDI Research and Development Management
(Gerencia de Desarrollo Institucional)
GDP Gross Domestic Product
GIS Geographical Information System
GoP Government of Peru
HQ Headquarters
HR Human Resources
IADB Inter-American Development Bank
IBRD International Bank for Reconstruction and
Development
ICB International Competitive Bidding
IDA International Development Association
IFR Interim Unaudited Financial Reports
INC National Institute of Culture (Instituto
Nacional de Cultura)
IPSAS International Public Sector Accounting
Standards
IRR Internal Rate of Return
JICA Japanese International Cooperation Agency
KfW German Cooperation (Kreditanstalt fur
Wiederaufbau)
LCS Least Cost Selection
MDG Millennium Development Goals
MEF Ministry of Finance (Ministerio de
Economía y Finanzas)
MINAM Ministry of Environment (Ministerio del
Ambiente)
MVCS Ministry of Housing, Construction and
Sanitation (Ministerio de Vivienda,
Construcción y Saneamiento)
NCB National Competitive Bidding
NGO Non Government Organization
NPS National Procurement System
NPV Net Present Value
NRW Non Revenue Water
O&M Operation and Maintenance
OM Operations Manual
OP Operational Policy
PAD Project Appraisal Document
PAPT Water for All Program (Programa Agua
para Todos)
PDO Project Development Objective
POA Annual Operational Program (Plan
Operativo Annual)
PP Procurement Plan
PPIAF Public Private Infrastructure Facility
PROMESAL Lima Marginal Areas Sanitation
Improvement Project (Proyecto
Mejoramiento Sanitario de las Áreas
Marginales de Lima)
PRONASAR National Rural Water Supply and Sanitation
Project (Proyecto Nacional de Saneamiento
Rural)
PVC Polyvinyl Chloride
QBS Quality Based Selection
QCBS Quality Cost Based Selection
SBD Standard Bidding Document
SCADA Supervisory Control and Data Acquisition
SEDAPAL Lima‟s Water and Sewerage Service
(Servicio de Agua Potable y Alcantarillado
de Lima)
SEIA System for Environmental Impact
Assessment
SEPA Procurement Plans Execution System
(Sistema de Ejecución de Planes de
Adquisiciones )
SIL Specific Investment Loan
SNTA Sub National Technical Assistance
SOE Statement of Expenses
SSS Sole Source Selection
SUNASS National Superintendence of Sanitation
Services (Superintendencia Nacional de
Servicios de Saneamiento)
TORs Terms of Reference
UFW Unaccounted for Water
UNSGAB United Nations Secretary General Advisory
Board on Water and Sanitation
WSP Water and Sanitation Program
WSS Water Supply and Sanitation
WWTP Wastewater Treatment Plant
Regional Vice President: Pamela Cox
Country Director: Laura Frigenti
Sector Director:
Sector Manager:
Laura Tuck
Guang Zhe Chen
Sector Leader:
Task Team Leader:
Ousmane Dione
Miguel Vargas-Ramirez
Table of Contents I. Strategic Context ...............................................................................................................1
A. Country Context ..........................................................................................................1
B. Sectoral and Institutional Context ................................................................................1
C. Higher Level Objectives to which the Project Contributes ............................................5
II. Project Development Objectives ........................................................................................6
A. PDO ...........................................................................................................................6
1. Project Beneficiaries................................................................................................6
2. PDO Level Results Indicators ..................................................................................6
III. Project Description .........................................................................................................6
A. Project components .....................................................................................................6
B. Project Financing ........................................................................................................8
1. Lending Instrument ..................................................................................................8
2. Project Cost and Financing .....................................................................................8
C. Lessons Learned and Reflected in the Project Design ...................................................8
IV. Implementation...............................................................................................................9
A. Institutional and Implementation Arrangements ...........................................................9
B. Results Monitoring and Evaluation ..............................................................................9
C. Sustainability ............................................................................................................ 10
V. Key Risks and Mitigation Measures ................................................................................. 10
VI. Appraisal Summary ...................................................................................................... 10
A. Economic and Financial Analysis .............................................................................. 10
B. Technical .................................................................................................................. 12
C. Financial Management .............................................................................................. 13
D. Procurement .............................................................................................................. 13
E. Social (including safeguards) ..................................................................................... 13
F. Environment (including safeguards) .............................................................................. 15
Annex 1: Results Framework and Monitoring .......................................................................... 17
Annex 2: Detailed Project Description .................................................................................... 19
Annex 3: Implementation Arrangements ................................................................................. 28
Annex 4 Operational Risk Assessment Framework (ORAF) ..................................................... 49
Annex 5: Implementation Support Plan ................................................................................... 52
Annex 6: Team Composition ................................................................................................... 55
Annex 7: Economic and Financial Analysis ............................................................................. 56
i
PAD DATA SHEET
Peru
Optimization of Water and Sewerage Systems Project
PROJECT APPRAISAL DOCUMENT
LATIN AMERICA AND CARIBBEAN
Urban, Water and Disaster Risk Management Unit (LCSUW)
Date: March 9, 2011
Country Director: Laura Frigenti
Sector Director: Laura Tuck
Sector Manager: Guang Zhe Chen
Sector Leader: Ousmane Dione
Team Leader: Miguel Vargas-Ramirez
Project ID: P117293
Lending Instrument: Specific
Investment Loan (SIL)
Sectors: Water supply (50%); Sewerage (50%)
Themes: Access to urban services and housing
(90%); Other public sector governance (10%)
EA Category: B – Partial Assessment
Project Financing Data:
Proposed terms: Variable spread loan with a final maturity of 18 years, including a grace
period of 17 years.
[X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other:
Source Total Amount (US$M)
Total Project Cost:
Cofinancing:
Borrower /SEDAPAL:
Total Bank Financing:
IBRD
IDA
New
Recommitted
64.9
10.4
54.5
Borrower: Republic of Peru
Responsible Agency: SEDAPAL
Contact Person: Jorge Barco
Telephone No.: +511 317 3000
Fax No.: +511 362 5148
Email: [email protected]
ii
Estimated Disbursements (Bank FY/US$ m)
FY 2012 2013 2014 2015 2016 2017
Annual 2.00 8.00 10.00 13.50 16.00 5.00
Cumulative 2.00 10.00 20.00 33.50 49.50 54.50
Project Implementation Period: July 4, 2011 – March 31, 2016
Expected effectiveness date: June 6, 2011
Expected closing date: October 31, 2016
Does the project depart from the CAS in content or other
significant respects?
○ Yes ● No
If yes, please explain:
Does the project require any exceptions from Bank policies?
Have these been approved/endorsed (as appropriate by Bank
management?
Is approval for any policy exception sought from the Board?
○ Yes ● No
○ Yes ○ No
○ Yes ● No
If yes, please explain:
Does the project meet the Regional criteria for readiness for
implementation?
● Yes ○ No
If no, please explain:
Project Development Objective
The Project Development Objective (PDO) is to improve efficiency, continuity and reliability
of water supply and sanitation services in the Northern Service Area of Lima.
iii
Project description
Component 1. Rehabilitation of water and sewerage networks in the First Northern Service
Area of-Lima. This component will finance the rehabilitation of the water and sewerage
networks in First Northern Service area of Lima, directly benefiting more than 158,380 low
income people. The exact proportion of replacement and renovation will be determined during
implementation based on a detailed hydraulic modeling of each subsector and an agreed
methodology.
Component 2. Improving SEDAPAL’s Efficiency. This component will finance studies and
consultant services to provide decision-making tools to SEDAPAL‟s management to improve
the company‟s efficiency. The activities will be focused on the following four areas: (a) support
for the implementation of the Geographic Information System (GIS); (b) SCADA information
technology standardization strategy and consolidation; (c) options for the development of a new
organizational model, and (d) preparation of a strategy to efficiently meet user demand for
water and sanitation services.
Component 3. SEDAPAL Project Management. This component will finance the additional staff
required for project management to establish a Monitoring and Evaluation System and
undertake the required financial audits as well as physical and procurement reviews.
Safeguard policies triggered?
Environmental Assessment (OP/BP 4.01)
Natural Habitats (OP/BP 4.04)
Forests (OP/BP 4.36)
Pest Management (OP 4.09)
Physical Cultural Resources (OP/BP 4.11)
Indigenous Peoples (OP/BP 4.10)
Involuntary Resettlement (OP/BP 4.12)
Safety of Dams (OP/BP 4.37)
Projects on International Waterways (OP/BP 7.50)
Projects in Disputed Areas (OP/BP 7.60)
● Yes ○ No
○ Yes ● No
○ Yes ● No
○ Yes ● No
● Yes ○ No
○ Yes ● No
● Yes ○ No
○ Yes ● No
○ Yes ● No
○ Yes ● No
Conditions and Legal Covenants:
Loan Agreement Reference Description of Condition/Covenant Date Due
Loan Agreement
Article V, 5.01 (a)
The Subsidiary Agreement has been executed on
behalf of the Borrower and the Project Implementing
Entity.
Before effectiveness
Loan Agreement
Article V, 5.01 (b)
The Operational Manual, in form and substance
satisfactory to the Bank, has been adopted by the
Project Implementing Entity through a managerial
resolution.
Before effectiveness
Loan Agreement
Schedule 2, Section I.A.1
The Borrower shall make the proceeds of the Loan
available to the Project Implementing Entity under a
Subsidiary Agreement
By effectiveness and
throughout Project
implementation
Loan Agreement
Schedule 2, Section I.C
The Borrower shall take any actions necessary to
assist the Project Implementing Entity in complying
with its obligations related to safeguard compliance
Throughout Project
implementation
iv
Project Agreement
Schedule, Section I.A
The Project Implementing Entity shall carry out the
Project through PROMESAL in coordination with
SEDAPAL‟s environmental and social units, and ,
for purposes of Part 2 of the Project, through
PROMESAL in coordination with GDI
Throughout Project
Implementation
Project Agreement
Schedule, Section I.A.2
The Project Implementing Entity shall maintain at all
times during Project implementation, competent staff
in adequate numbers and with terms of reference and
experience satisfactory to the Bank.
Throughout Project
implementation
Project Agreement
Schedule, Section I.C.1
The Project Implementing Entity shall carry out the
Project in accordance with the provisions and
recommendations of the Environmental Management
Plan and the Involuntary Resettlement Framework.
Throughout Project
implementation
Project Agreement
Schedule, Section I.D.1
The Project Implementing Entity shall carry out the
Project in accordance with the Operational Manual.
Throughout Project
implementation
Project Agreement
Schedule, Section II.B.2
The Project Implementing Entity shall contract the
auditors for purposes of Section 5.09(b) of the
General Conditions, under terms of reference
acceptable to the Bank.
No later than six
months after the
Effective Date
Project Agreement
Schedule, Section III.B
The Project Implementing Entity shall contract
annual independent procurement reviews for
previous year of Project implementation and furnish
to the Bank the report of such independent reviews.
Contract independent
review by October 15
of each year during
Project implementation;
furnish to the Bank the
report by July 31 of
each year; discuss with
the Bank by September
15 of each year during
Project implementation.
1
I. Strategic Context
A. Country Context
1. Peru's economy has seen a sharp recovery in 2010, returning to the high growth rates
recorded in the years before the global economic crisis. The Peruvian economy is expected to have
grown in 2010 by around 9 percent, up from a low of 0.9 percent in 2009 when the impact of the
global economic crisis affected the confidence of economic agents and resulted in sharply lower
private investments. Overall, the rate of economic growth achieved in 2010 and the main drivers of
the growth closely resemble those observed in the years 2006 to 2008 when the economy averaged
a rate of growth of 8.8 percent fueled by strong domestic demand and supported by positive terms
of trade shocks.
2. In light of the economic recovery the authorities have prudently started to gradually remove
the fiscal and monetary policy stimulus put in place in the midst of the crisis. The severity of the
global economic crisis in late 2008 and 2009 led the Peruvian authorities to launch a countercyclical
policy response designed to cushion the impact of the crisis in Peru. Thus, a two-year economic
stimulus plan of around US$4.8 billion, or about 3.5 percent of gross domestic product (GDP), was
launched. The fiscal stimulus plan combined with lower fiscal revenues caused a fiscal deficit of 1.9
percent of GDP in 2009. As the economy picked up in early 2010 the authorities have been
gradually removing this fiscal stimulus and, together with a sharp increase in fiscal revenues of
around 18 percent in real terms, are expected to have narrowed the fiscal deficit to around 0.9
percent of GDP in 2010. Despite the sharp economic recovery, inflation in 2010 remained low at
2.1 percent, well within the inflation targeting band of 1 to 3 percent. Still, interest rates were also
raised by the central bank throughout 2010 so as to gradually remove the monetary stimulus in
place since late 2008.
3. The increase in public spending on infrastructure, one of the hallmarks of the stimulus plan,
has been maintained. Sustained levels of public investment are key for both the competitiveness
agenda and to improve access to opportunities for all Peruvians. In fact public investment reached
5.3 percent of GDP in 2009, up from around 4.3 percent in 2008 and contrasting with 2006 and
2007 where public investment had bottomed out at around 2.8 percent of GDP. This stepped up
public investment was maintained in 2010 despite the fiscal consolidation efforts and public
investment reached around 6 percent of GDP in 2010. The authorities have been able to maintain
this higher level of public investment even after the stimulus plan concluded due to an overall
prudent fiscal stance. The government has been able to bring down its debt to 22.7 percent of GDP
in 2010, already below the pre-crisis level of 24 percent of GDP in 2008. Going forward, improving
infrastructure has been identified as one of the top priorities to contribute to the competitiveness of
the Peruvian economy as well as to provide opportunities for all Peruvians by improving access to
adequate basic services.
B. Sectoral and Institutional Context
4. Although the fast economic growth of recent years was accompanied by poverty reduction
and job creation,1 poverty incidence in Peru remains highly unequal in geographic terms, with some
1 Between 2005 and 2008 poverty fell from 48.7 percent to 36.2 percent, while extreme poverty was reduced from 17.4
percent to 12.6 percent. (Source: Instituto Nacional de Estadística e Informática –INEI).
2
regions posting poverty rates above 60 percent. This situation is also reflected in terms of access to
water supply and sanitation (WSS) services, where there are large disparities in coverage and
quality of services between urban and rural areas, socio-economic conditions and geographical
regions (Coastal, Andean and Jungle). Most of Peru‟s abundant water resources are concentrated in
the Amazon region, where less than 10 percent of the population lives and less than 10 percent of
the country‟s GDP is generated. Two thirds of the country‟s population (about 19.2 million people)
lives in the very dry Coastal area, receiving only about 1.8 percent of the national renewable fresh
water resources, and where the country‟s major cities, including Lima, are located.
5. Within the urban population, most of those without access to WSS services are located in
small urban centers or in peri-urban areas. At the national level, while 78 percent for the non-poor
have access to a water connection, only 45 percent of the poor do. This proportion drops to only 28
percent in rural areas (41 percent for the non-poor). This is in spite of an overall increase in water
supply coverage from 75 to 82 percent, and an increase in sanitation coverage from 54 to 68 percent
at the national level between 1990 and 2008.
6. The Lima-Callao metropolitan area (hereafter Lima) has been the main engine of Peru‟s
economic performance, accounting for 45 percent of the country‟s GDP in 2007. Rapid economic
growth has enabled reductions in poverty levels; however, these gains remain fragile and
infrastructure improvements are needed to sustain economic growth and further reduce poverty in
Peru in general and in Lima in particular. The provision of adequate WSS services in Lima remains
a challenge, given the explosive growth of the city (Lima‟s population has grown from 6.4 million
in 1993 to 8.4 million in 2009) and its scarce water resources. Lima water and sewerage coverage
rates are at around 91 percent, with the challenge to increase coverage for a population estimated to
reach 11.4 million in year 2030.
7. Lima is the world‟s second largest city located in a desert (after Cairo), with an annual
rainfall of 9 mm and an average total water flow of 20.5 m3/second, most of which (17.5 m
3/second)
is supplied by the Rimac River. During the dry season surface water flow in Lima drops by about 50
percent to 10 m3/second. Between 2004 and 2007 WSS coverage in the city has decreased by 3.5
percent for water and by 2.8 percent for sanitation services, mainly as a result of the city‟s high
population growth, including high rates of migration. Coverage of peri -urban areas represents a key
challenge in Lima, where about 40 percent of Peru‟s urban dwellers without access to piped water
(total 3.1 million) live.
8. Quality of WSS services is also a major issue in the sector. According to a 2005 survey
carried out in 1,628 municipalities, access to water services is not continuous in about half of them.
In 7.7 percent of the municipalities continuity of water services was less than 11 hours per day.
Large urban centers in Latin America have an average of 24 hours per day of water supply, while
Lima has only 21.
9. Poor urban areas suffer from low service standards, as lack of maintenance and sub-optimal
operation seriously affect the quality and sustainability of services. For instance, in the Northern
Service Area of Lima, non revenue water is estimated to be above 50 percent, with only 37 percent
of users receiving 24 hours of service and a very high frequency of pipe breaks and water leaks. The
sewerage network is in poor physical condition with frequent blockages and breaks, mainly due to
community self-construction using substandard building techniques and materials. In addition, some
3
of the older pipes have exceeded the lifetime use for which they were designed. Water quality is
also an issue, especially in rural areas and in smaller urban areas where services are provided
directly by the municipalities or by Water User Associations (Juntas Administradoras de Servicios
de Saneamiento).
10. These challenges stem mainly from policies adopted in the 1980s and early 1990s, when
Peru suffered from political and macroeconomic instability, which had long-term consequences for
the WSS sector. Lack of resources to adequately operate and maintain the existing WSS
infrastructure led to deterioration and need for considerable rehabilitation, while severe
underinvestment2 compromised service coverage and quality of service provision.
11. In order to address the issue of scarce resources and low service quality, as well as with the
goal to improve the efficiency of WSS service provision, over the past fifteen years the Government
of Peru (GoP) has implemented important reforms steps in the WSS sector, resulting in a well
established institutional framework, in which policy-setting, regulatory and service-provision
functions are differentiated. Policy-setting is assigned to the Ministry of Housing, Construction and
Sanitation (Ministerio de Vivienda, Construcción y Saneamiento – MVCS); regulatory functions to
the National Superintendence of Sanitation Services (Superintendencia Nacional de Servicios de
Saneamiento – SUNASS); and service-provision has been decentralized to Sanitation Service
Providers (Empresas Prestadoras de Servicios de Saneamiento – EPSs), municipalities, and/or
water user boards, with the exception of SEDAPAL (Servicio de Agua Potable y Alcantarillado de
Lima) the utility responsible for WSS service provision in Lima, which remains linked to the central
government.
12. The GoP has also undertaken a number of important reform steps on the water resource
management side to deal with water scarcity and pollution by approving a new Water Resources
Law (on March 31, 2009) and creating the National Water Authority (Agencia Nacional de Agua –
ANA) with a clear mandate for integrated, participative basin-scale management of water resources
with financial and administrative autonomy. The World Bank, through the Water Resources
Management Modernization Project, is supporting GoP in strengthening water resources
management institutional capacity to implement the new Water Resources Law, supporting the
creation, capacity building and operation of river organizations in three pilot basins and
strengthening ANA at the central level to support them.
13. The implementation of this institutional framework has enabled improved sector
management across different institutions, in particular sector service providers, who now work
under a clearer framework for tariff revisions. Nonetheless, there is much room for further
improvement and a need for deeper coordination among various sector entities at the central and
local government levels in the areas of investment planning, financing, as well as on the
implementation of mechanisms that further improves and brings accountability to the management
of EPSs.
2 During 1985-89 investments in water and sanitation infrastructure represented just 0.15 percent of GDP, one of the
lowest figures in Latin America. Latin American countries with better service had invested about 1 percent of their
GDP in water and sanitation infrastructure.
4
14. In 2007, the GoP launched the Water for All Program (Programa Agua para Todos – PAPT)
as a flagship initiative initially focused on providing sustainable access to WSS services for poor
neighborhoods in Lima. However, it soon became a national program focusing on complementing
existing initiatives and financing access to WSS for the poor, mostly located in peri-urban, small
towns and rural areas of the country and contributing to the achievement of the Millennium
Development Goals (MDGs) targets of reaching a national coverage rate of 82 percent for water
services and 77 percent for sanitation by 2015. Under the PAPT, the GoP plans to develop a
common platform and methodology to scale up investments in sustainable access to WSS, which
takes into account lessons learned from previous initiatives.
15. On the small towns and rural front, the MVCS is working with donors, including the World
Bank, the Water and Sanitation Program (WSP), the Inter-American Development Bank (IADB),
the Japanese International Cooperation Agency (JICA), as well as the German Cooperation
(Kreditanstalt fur Wiederaufbau – KfW), in reviewing the experience to date on providing access to
WSS and developing a common platform for intervention aimed at scaling up sustainable access to
WSS in these areas. The current World Bank-financed National Rural Water Supply and Sanitation
Program (Programa Nacional de Agua y Saneamiento Rural – PRONASAR) and its associated
Additional Finance are also part of this common platform. On the urban and peri-urban front, the
GoP is focusing on providing financing to EPSs and Municipalities to expand their service coverage
to poorer neighborhoods. In 2010, new rules to access financing from the PAPT, focused on
ensuring the sustainability of the systems built under the program, were adopted through a
Ministerial Resolution (No. 693-2008).
16. The PAPT has helped SEDAPAL‟s objective of expanding services. Indeed, under PAPT,
the utility has built 165,000 new water connections and 148,000 new sewerage connections in the
last 4 years, benefitting a population of around 732,000. This has meant doubling the expansion rate
in both water and sewerage, from a yearly rate of 20,220 for water and 19,220 for sewerage
connections between 2000 and 2005, to 43,750 and 38,450 new water and sewerage connections
during the past 4 years.
17. The following table presents some key performance indicators from SEDAPAL:
Figure 1. SEDAPAL’s Performance Indicators
Indicator Unit of
Measure
Actual Programmed
2005 2006 2007 2008 2009 2010 2011 2012 2013
New Water
Connections
x1000
connections 17 17,3 50,3 48,6 58,8 37,0 55,7 68,5 59,2
New Sewerage
Connections
x1000
connections 16,2 13,8 37,1 47,7 55,4 32,7 46,8 62,3 52,5
Continuity hours 21,5 21,1 21,2 21,5 21,6 21,5 21,6 21,8 21,9
Pressure meter of
water column 21,1 22,3 21,1 21,9 22,6 21,1 21,2 21,3 21,4
Metering % 60,4 68 70,1 70,3 68,8 78,9 85,9 87,4 87,4
Non revenue
water % 41,1 38,3 37 37 38,1 36,3 34,6 33,8 33,2
Working Ratio % 60,8 58 51,3 44,2 42,2 50,0 55,2 56,3 56,3
Volume of
Wastewater
Treatment
m3/s 1,6 1,57 2,43 2,53 2,77 2,70 2,77 17,84 17,86
5
18. Since the mid 1990s SEDAPAL embarked on an ambitious program for rehabilitation of
water and sewerage networks to avoid physical losses and delay investments on new sources. The
Bank supported a program for rehabilitation of networks on two of Lima‟s three regions: the
Southern and Central Areas (Lima Water Rehabilitation and Management Project, 3811-PE). The
investment program for the remaining Northern Service Area consists of interventions that include:
(i) supply-side management by increasing Rimac River‟s flow through a trans-boundary transfer, as
well as the expansion of water treatment and main distribution systems; (ii) demand-side
management by reducing physical and commercial losses and controlling demand through
installation of domestic meters, progressive tariff structures, and promotion of in-house water
saving devices; and (iii) increasing the wastewater treatment capacity through partnerships with the
private sector.
19. The first stage of this program consists of interventions aimed at (i) augmenting the flow of
the Rimac River by 2.8 m3/second by drawing water from the Huascacocha lagoon (the
Huascacocha Project, under implementation); (ii) increasing the drinking water treatment capacity
by constructing the Huachipa water treatment plant (a BOT with a private sector partner scheduled
for completion in mid 2011), as well as building/rehabilitating the distribution mains for the treated
water; (iii) rehabilitating the water supply and sewerage networks; and (iv) increasing wastewater
treatment capacity with the construction of the Taboada wastewater treatment plant (treatment
capacity of 14 m3/second) through a BOT with a private sector partner. The Huachipa and
Huascacocha projects, both under implementation, will increase the supply of drinking water in
Lima by 25 percent from 20.5 m3/second to about 25.5 m
3/second.
20. With the increase in water supply in the Northern Service Area of Lima, rehabilitation of the
water and sanitation network becomes particularly urgent. Given the poor physical condition of the
infrastructure it is expected that, without an adequate rehabilitation program, the increased water
pressure will take the already high frequency of pipe breaks and water leaks to unmanageable
levels. Within this context, SEDAPAL has developed a US$211 million program to rehabilitate and
optimize the WSS networks in the Northern Service Area of Lima, to be financed in parallel by the
World Bank through this proposed operation, JICA, KfW and SEDAPAL‟s own resources.
C. Higher Level Objectives to which the Project Contributes
21. The proposed operation would directly contribute to the Government‟s priority objective of
reducing inequality by ensuring that the poor get access to adequate basic services and improving
the quality of WSS services provided to low income urban dwellers. The proposed Project
contributes to the achievement of all three pillars of the current World Bank Group‟s Country
Partnership Strategy (CPS) for Peru3, as improving water services contributes to sustaining growth
and widening its base, as well as meeting basic needs in underserved areas, and promoting the
institutional and operational strengthening of SEDAPAL contributes to modernizing state
institutions.
3 The World Bank Group‟s Country Partnership Strategy 2007-2011 (Report #37913-PE) discussed by the Executive
Directors on December 19, 2006.
6
II. Project Development Objectives
A. PDO
22. The Project Development Objective (PDO) is to improve efficiency, continuity and
reliability of water supply and sanitation services in the Northern Service Area of Lima.
Project Beneficiaries
23. Project beneficiaries include the urban dwellers living in SEDAPAL‟s Northern Service
Area of Lima, which comprises 16 districts.4 It is envisaged that physical investments will largely
benefit the First Northern Area of Lima that means the following districts of the Borrower: Comas,
Independencia, San Martín de Porres y Los Olivos. The total beneficiary population is 158,380 in
an area of approximately 118 km2.
PDO Level Results Indicators
24. Achievement of PDO will be monitored by the following outcome indicators:
(a) Number of daily hours water services are provided in the project area5;
(b) Annual incidence of water pipe breakages per km of water supply network in the project area;
(c) Annual incidence of sewerage blockages per km of sewerage network in the project area;
(d) Volume of water saved in the project area; and
(e) Number of learning events on strategic planning and management
III. Project Description
A. Project components
25. In order to improve the efficiency, continuity and quality of the services, SEDAPAL will
follow a two-tier strategy. The first is to make more water available by reducing the physical losses
in the system, and the second is to improve the operational and commercial management of the
water and sanitation system by: (a) reducing commercial losses, and (b) optimizing the technical
operation of the systems (pressure management, sectorization and valve control, automatization for
the control systems and others). The proposed project will consist of three components, as follows:
26. Component 1. Rehabilitation of water and sewerage networks in Northern Service Area of
Lima (US$61.2 million, of which US$51.3 million will be financed by the Bank loan). This
component will finance the rehabilitation of the water and sewerage networks in First Northern
Service area of Lima, directly benefiting more than 158,380 low income people. The exact
proportion of replacement and renovation will be determined during implementation based on a
detailed hydraulic modeling of each subsector and an agreed methodology.
4 Ancón, Bellavista, Callao, Carabayllo, Carmen de la Legua, Comas, Independencia, La Perla, La Punta, Los Olivos,
Puente Piedra, Rimac, San Juan de Lurigancho, San Martín de Porres, Santa Rosa and Ventanilla. 5 Project area means the following SEDAPAL‟s hydraulic sub-sectors within the First Northern Service Area: 86, 334,
335, 336, 337 and 338.
7
27. To improve the appropriate management of the rehabilitated network and reduce losses the
component will also finance: (i) rehabilitation of water reservoirs (concrete storage tanks) to
increase storage capacity and pressure stabilization; (ii) replacement of household connections and
installation of new domestic water meters; and (iii) installation of bulk water meters and valves to
allow sectorization.
28. Social interventions will complement these physical investments to maximize the Project‟s
expected benefits by taking measures to facilitate the transition to a full pressure, continuous and
metered service. These will include gender-tailored initiatives such as the provision of guidance to
manage consumption in particular through the use of in-house water saving equipment.
29. Component 2. Improving SEDAPAL’s Efficiency (US$2.3 million, of which US$1.88
million will be financed by the Bank loan). This component will finance studies and consultant
services to provide decision-making tools to SEDAPAL‟s management to improve the company‟s
efficiency. The activities will be focused on the following four areas:
(a) Support for the implementation of the GIS: including an evaluation of the cadastre to determine
priority zones for updating and the identification of a process for regular updating, as well as
support to the training and institutional arrangements needed within SEDAPAL to maximize the
potential of the GIS;
(b) SCADA information technology standardization strategy and consolidation: including support
to SEDAPAL in the preparation of a SCADA Master and Investment Plan to ensure the
compatibility of current and future SCADA strategies;
(c) Preparation of a strategy to efficiently meet user demand for water and sanitation services :
including an evaluation of the exogenous and endogenous factors that affect demand for WSS
services, an estimation of future demand trends backed by adequate sensitivity analysis, and
identification of priority actions to meet such demand as efficiently as possible; and
(d) Options for the development of a new organizational model: including the preparation of a
strategic vision for SEDAPAL‟s management over the medium and long-term incorporating
new technologies, aligning human resources management with modern practices, exploring
options for sustainable financing of capital investments and rearranging institutional structure
along functional lines; and
30. Component 3. SEDAPAL Project Management (US$1.4 million, of which US$1.32 million
will be financed by the Bank loan). This component will finance the additional staff required for
project management to establish a Monitoring and Evaluation System and undertake the required
financial audits and physical and procurement reviews. Additionally, it will finance individual
consultants to strengthen the team on procurement, financial management and communication, as
well as the training for strategic planning, and selection of technical options to allow full
compliance with the Investment Plan 2009-2013 and subsequent plans. This component will also
support SEDAPAL‟s efforts to document the Project‟s process and results, and to mainstream
lessons learned and good practices.
8
B. Project Financing
1. Lending Instrument
31. The Project will be supported by a specific investment loan (SIL) in the amount of US$54.5
million.
2. Project Cost and Financing
Project Components* Project cost IBRD Financing
1. Rehabilitation of water and sewerage networks in Northern
Service Area of Lima
2. Improving SEDAPAL‟s efficiency
3. SEDAPAL Project management
Total Project Cost
61.2
2.3
1.4
64.9
51.3
1.88
1.32
54.5
*These amounts include physical and price contingencies.
C. Lessons Learned and Reflected in the Project Design
32. Using resource conservation techniques to liberate water resources for new clients. The
project design makes use of a comprehensive and synchronized application of demand and supply
management techniques, through non-revenue water investments as well as the social intervention
aimed at water conservation, in order to liberate scarce water resources to new users, with the
objective of increasing coverage and improving the quality of service provision. The project will
include conservation activities targeted to consumers, actively involving users in these efforts
through the promotion of water saving behaviors and equipment.
33. Verify the actual need for pipe rehabilitation or replacement through the use of hydraulic
modeling and field tests. Given the unknown state of the physical network, the most accurate
approach to determine the exact length of pipe to be replaced or rehabilitated is through hydraulic
modeling, paired with field tests, once the contractor is deployed rather than using these resources
on detailed designs that can only provide limited information. Thus, no network
rehabilitation/replacement will take place for a section of pipe that is not seen to be relevant based
on the results of the hydraulic modeling and field tests.
34. Implementation Arrangements. The proposed project has modeled its implementation
arrangements on the successful experience of the Lima Water Rehabilitation and Management
Project.6 SEDAPAL‟s project implementation division (PROMESAL) will be in charge of project
management and implementation reporting to SEDAPAL‟s management.
35. In addition, the Bank has learned important lessons from undertaking large complex
investment projects, such as not loading them with unrealistic policy reform measures or measures
which lack Government ownership. The proposed Project recognizes the need for further reforms in
the water sector in Peru, but proposes that: (i) the reforms and the pace at which they can be
implemented are Government owned; and (ii) the imposition of conditions or rigid covenants on the
proposed operation is not appropriate. This approach has already generated results, as the Bank is
involved in a number of parallel sector initiatives in partnership with: (i) SEDAPAL through a
6 Loans 3811-PE and 7180-PE
9
Public-Private Infrastructure Advisory Facility (PPIAF) proposal, under the Sub-National Technical
Assistance window that will evaluate the company‟s prospects for issuing debt instruments, (ii)
SUNASS and UNSGAB to provide technical assistance and support to EPSs in order to enable them
to access market financing, and (iii) the MVCS in developing a common platform for the scaling up
of sustainable investments in WSS in small towns and rural areas.
IV. Implementation
A. Institutional and Implementation Arrangements
36. PROMESAL will be the unit responsible for implementing the project , reporting directly to
SEDAPAL‟s General Manager (Gerencia General). Its responsibilities include: carrying out
bidding processes, selection of contractors, supervision, approval of contract amendments, and
general Project management. SEDAPAL‟s General Management (Gerencia General) will be
responsible for approving final designs, complementary studies, while Operations Management
(Gerencia de Operaciones) is in charge of the final reception of the works. PROMESAL is in
charge of most network rehabilitation and expansion projects in SEDAPAL, including recently
closed Bank-financed projects and parallel operations financed by JICA and KfW, and has proven
implementation capacity.
37. Through PROMESAL, SEDAPAL has been successfully implementing projects with
bilateral and multilateral institutions since 1995, including the US$170 million Lima Rehabilitation
and Management Project (3811-PE) and its associated Additional Finance Operation (7160-PE) for
the rehabilitation and expansion of water and sewerage services in the Southern and Center Service
Areas that closed in March 2009. Currently, PROMESAL is executing a US$410 million JICA loan
for the construction of the Huachipa Water Treatment Plant.
38. SEDAPAL strategy for intervening in rehabilitation of networks is a phased one, starting
with works on First Northern Area of Lima, continuing with the Second Northern Area of Lima,
following with interventions in San Juan de Lurigancho District and finalizing with network
rehabilitation in La Molina district. PROMESAL will be starting implementation of the first tranche
in First Northern Area of Lima in 2011, financed partially by JICA (US$67.1 million) and KfW
(US$50 million).
39. The Research and Development Unit (Gerencia de Desarrollo e Investigación- GDI) will be
in charge of overall coordination of Component 2, although contracting processes would be done
through PROMESAL. GDI has already designated teams to coordinate each consultancy of the
component, as well as the procedures and responsibilities for selection of consultants and approval
of products and payments. The IT Team at GDI will lead the support for the implementation of the
GIS and the SCADA information technology strategy and consolidation consultancies; the
Research, Standardization and Physical Planning Team will lead the preparation of a strategy to
meet user demand for water and sanitation services consultancy and the Operational Planning and
Financing Team will lead the options for the development of a new organizational model study.
B. Results Monitoring and Evaluation
40. The results framework and monitoring strategy are included in Annex 3. This framework
has been developed in close coordination with SEDAPAL. PROMESAL will consolidate the data at
10
the project level and produce semi-annual reports to monitor progress. An impact evaluation survey
– Encuesta de Evaluación de Impacto del Proyecto –will analyze the effect of the planned
investments on improving the quality of service delivery in the Project area.
41. Overall responsibility for monitoring and evaluation of the Project will lie with the
PROMESAL, which will provide timely information about the Project‟s implementation progress,
including qualitative information on the execution of selected activities, procurement and
contractual decisions, accounting and financial recording, and other operational and administrative
matters. The Project‟s Operations Manual will provide specific details regarding monitoring and
evaluation responsibilities, including data collection requirements, timing and use of information.
C. Sustainability
42. A financial analysis was undertaken to assess SEDAPAL‟s overall long-term financial
sustainability as well as its capacity to operate and maintain the investments supported under the
Project. The results of the analysis shows that SEDAPAL is in relatively good financial standing,
and its projected financial position is also relatively robust, provided that the company ensures the
availability and predictability of resources (about US$817 million) to implement the investments
under the PAPT. The projection results show that the company‟s working ratio will be maintained
below 0.89, and its debt service coverage is projected to reach 1.80 at the end of the projection
period.
43. Stakeholders’ engagement. The Project‟s beneficiaries will actively participate in all Project
stages through a robust social component, that has been designed using some specific gender
consultations, and which includes activities to be carried out by contractors as part of the
construction phase, civil society and interventions by SEDAPAL. Additionally, the Project
includes: (i) strengthening of the company‟s client relationship mechanisms (i.e. , claims
management, information disclosure, and others); and (ii) water savings equipment promotion using
social marketing tools to contribute both to resource conservation and lowering monthly payments
by families.
V. Key Risks and Mitigation Measures
44. Potential risks are summarized in the Operational Risk Assessment Framework (see Annex
4). The overall risk within this Project is rated as Medium, driven by likelihood. Risks identified are
manageable and mitigation measures are in place.
45. The two main risks identified are: (i) Institutional Risk: Lack of alignment in visions
regarding sector policy and investment priorities between sectoral actors (SEDAPAL, MVCS,
SUNASS, Municipality) could affect institutional priorities and impact tariff and subsidy decisions,
and (ii) Project implementation is delayed or discontinued due to competing priorities,
compromising the achievement of the PDO. Mitigation measures are an integral part of the Project‟s
design (for further details see Annex 4).
VI. Appraisal Summary
A. Economic and Financial Analysis
11
46. The proposed Project is economically feasible with returns of US$184 million and internal
rate of return of 20 percent. The evaluation shows positive economic results of US$181 million and
US$3 million for the water and sewerage components respectively and internal rate of returns of 20
percent and 13 percent. The financial evaluation shows that the project will be financial feasible
only with at least a ten percent tariff increase. A summary of the evaluation is presented in Annex 7,
and the full analysis is available in the project files.
47. The economic benefits were estimated as: (i) savings that SEDAPAL will get when water is
used more efficiently and water losses are reduced; (ii) savings that beneficiaries will obtain when
water intermittence is eliminated; and (iii) improving on living condition, which were assimilated as
appreciation of dwellings values. Given that a hedonic price study was not carried out, simulations
of property value increases were included.
48. The distributive analysis shows that the big winners will be the customers, whose economic
benefits will offset the higher bills to be paid to SEDAPAL once the service is improved. The
sensitivity and risk analyses shows very reassuring results for the economic evaluation, with a
probability of 100 percent of having positive returns for the water component and 69 percent for the
sewerage component.
Financial Assessment of SEDAPAL
49. A financial analysis was undertaken to assess SEDAPAL‟s overall long-term financial
sustainability as well as its capacity to operate and maintain the investments supported under the
project. The analysis is based on SEDAPAL‟s audited historical and pro-forma financial statements
for the 2007 to 2010 period and its projected financial performance for the next 10 years.
SEDAPAL is in relatively good financial standing. The company‟s audited accounts from 2007 to
2009 and estimates for 2010 results show that the company has been profitable. In 2007, the
company reported a net operating income of US$38 million. In 2008 this income was substantially
lower at US$1.3 million, mainly due to increased financial costs as a result of exchange rate
differences in its external debts. In 2009 the company had a net profit of US$74 million.
50. Projections to assess SEDAPAL‟s future financial position and performance were carried
out for the period of 2011 to 2021, with the following main assumptions in the base scenario: (a)
tariff adjustments for inflation, the real tariff increases already approved by SUNASS from 2010 to
2012 were incorporated; (b) a 6 percent real tariff increase was added in 2015 and 2016 as
additional planned investments expected to be approved by SUNASS are implemented, likely in
partnership with the private sector; (c) the investment plan excludes the investments related to the
PAPT and its associated benefits, given that the source and availability of funding are currently
under discussion; and (d) water losses are reduced to 32 percent company-wide by 2015 and 30
percent by 2021.
51. The implementation of the above assumptions ensures positive cash flow and a net profit for
SEDAPAL, enabling the company to meet its current operating expenses and debt obligations. The
company‟s working ratio will be maintained below 0.89 in all years and its debt service coverage is
projected to reach 1.80 at the end of the projection period. In 2015 the debt service coverage will
reach 1.15, highlighting the need for the company to carefully evaluate its debt position in an
ongoing basis. From 2015 onwards, SEDAPAL will also be able to finance a portion of its
12
investment needs (up to 50 percent depending on the overall levels of investment) from its own
resources.
B. Technical
52. SEDAPAL has carried out a detailed feasibility study on the status of the water and
sewerage pipes in the project area, and found that about 42 percent outlived their effective lifetime.
Also, the majority of pipes in the Northern Service Area were not laid by SEDAPAL and their
installation did not follow proper pipe installation standards, consequently they exhibit high water
losses of at least 50 percent. In addition, a large portion of these networks, especially the large
diameter pipes, are asbestos-cement pipes (89 percent of the water network is asbestos-cement and
10 percent PVC), which are not recommended for use considering their age and poor installation
practices. Under these conditions, the number of bursts and breaks in the networks is higher than
acceptable (about 3 bursts/km/year), leading to high frequency and cost of repair.
53. SEDAPAL, through its Northern Service Management Unit (Gerencia de Servicios Norte),
divides the system according to micro-watersheds grouping zones that share the same sewerage
outfall. The Northern Service Area corresponds to the Comas-Chillon primary outfall and is
considered priority as it is the closest to the Huachipa main branch bringing an additional water
flow of 5 m3/s. The Northern Service Area covers 12 operational sectors and 16 districts
7. Given the
nature of the intervention that encompasses not only the rehabilitation but also the creation of
hydraulically viable operational sectors, the four districts of Los Olivos, Independencia, San Martin
de Porres and Comas were prioritized.
54. Based on the hydraulic modeling, which provided information on pressure, length, network
layout and geographical distribution, it is expected that there will be 18 new operational sectors
replacing the current 12 ones. An operational sector is determined to be water-tight based on its
distribution lines so there is only one entry and exit point for interconnection with other sectors,
while a subsector is defined with valves mainly for operation and maintenance, which allows for the
carrying out of hydraulic balances to estimate physical losses.
55. The Project will finance works comprising the rehabilitation of 143km of PVC pipe with
diameters from 100 mm to 400 mm (about 130 km of 100 mm), 96 km of trenchless pipe
rehabilitation (cracking and/or relining), rehabilitation and/or replacement of about 26,000
household meters and provision, installation of 4 bulk meters and 700 water valves, and
rehabilitation of 4 reservoirs. Sewerage works will include the provision and installation of about
110 km of PVC pipe with diameter from 200 mm to 300 mm, as well as rehabilitation of about
14,000 sewerage connections and rebuilding/reconstruction of 1,300 manholes. More specific
information will be available once the detailed designs are completed, and these planned works are
also contingent to the availability of financing from other institutions.
56. SEDAPAL has divided the intervention zone in different independent areas, according to
available financing from the Bank, JICA and KfW. This will entail the independent contracting and
execution of each area, thus parallel financing of works is envisioned instead of co-financing. As a
7 Ancón, Bellavista, Callao, Carabayllo, Carmen de la Legua, Comas, Independencia, La Perla, La Punta, Los Olivos,
Puente Piedra, Rimac, San Juan de Lurigancho, San Martín de Porres, Santa Rosa and Ventanilla.
13
stand-alone project, the indicators developed for this Project and presented in Annex 1 refer
exclusively to the Bank‟s and SEDAPAL counterpart‟s investments.
57. The Taboada wastewater treatment plant, under construction, will collect and treat the
sewerage of the Northern Service Area, achieving a 70 percent increase in the wastewater volume
being treated. This plant is being implemented using a BOT contract that includes the design, 44-
month construction and operation and it is expected to start working in 2013.
C. Financial Management
58. A Financial Management (FM) assessment has been undertaken (see Annex 3) in
SEDAPAL, taking into account the entity‟s FM arrangements and performance during the
implementation of the previous Lima Water Rehabilitation project.
59. The Bank will consider retroactive financing for payments made up to one year before the
date of signature of the Loan Agreement and after February 16, 2011, provided that the works,
services and goods are procured in accordance with the Bank‟s guidelines and that the works are
executed in compliance with the Bank‟s safeguard policies. These expenditures would be paid in
advance by SEDAPAL and should not exceed US$10.9 million.
60. SEDAPAL through its Project Implementation Unit (PROMESAL) will implement the
proposed project. SEDAPAL previously implemented the Lima Water Rehabilitation project
financed through loan IBRD-3811-PE and additional financing IBRD-7160-PE. Hence, SEDAPAL
has developed experience in working with Bank funds and was consistently assessed during Bank
supervision and by external auditors showing satisfactory performance. On the basis of the FM
assessment performed, we can conclude on the adequacy of the FM arrangements for the project.
SEDAPAL will continue working on improving its financial information system with a module
capable to provide project financial reports and statement of expenditure (SOEs) from SEDAPAL‟s
current system. The Bank will follow up the progress made on this aspect during Project
implementation.
D. Procurement
61. An assessment of SEDAPAL‟s capacity to implement procurement actions for the Project
was conducted on November 2010 and a detailed action plan was prepared to address all risks
identified (see Annex 3). PROMESAL, SEDAPAL‟s project implementation unit, will be in charge
of project management and implementation, with guidance from a Managerial Investment
Committee that ensured ownership by SEDAPAL‟s management of the project activities under
implementation. PROMESAL has capacity for selecting consultants and procuring goods, works
and services and, as part of Project preparation, has updated the OM which provides detailed
procurement information for implementation. The proposed corrective mitigating measures are: (i)
establish a system to monitor and expedite contract modifications or change orders and (ii) publish
and manage the Procurement Plan through the Procurement Plans Execution System SEPA.
SEDAPAL has prepared an acceptable Procurement Plan.
E. Social (including safeguards)
14
62. SEDAPAL has prepared a social assessment covering the Project‟s area, including
consultation with female leaders, which provided information on the characteristics of the
population, a map of stakeholders, and social and economic issues affecting the Project‟s potential
beneficiaries. The report includes a directory of civil society organizations, NGOs and community
based groups for project implementation. The outcomes and findings of the social assessment were
disclosed in SEDAPAL‟s website.
63. The Project will benefit families of the districts of Comas, Independencia, Los Olivos and
San Martin de Porres, that includes 12 water service distribution sectors. About 28 percent of the
population are living under extreme poverty, located on the hills in the city‟s periphery, with the
risk of accidents due to rockslides; sub-stocked with drinking water 3 hours a day, and with a high
incidence of skin, respiratory and gastrointestinal diseases.
64. Women and men are mostly self-employed in commercial activities. The districts of San
Martin de Porres, Los Olivos and Independencia concentrate about 77.6 percent of the areas‟ small
enterprises in textiles, apparel, metalworking and wood furniture, having attracted the financial
services of 14 banks, microfinance institutions and village banking for credits focusing on women‟s
initiatives. A large union of micro and small business‟ network operates in the area.
65. SEDAPAL‟s policy is to guide the design and implementation of Involuntary Resettlement
Plans, establish policies and guidelines to mitigate and compensate the negative effects derived
from the involuntary taking of land to be used in the construction or rehabilitation of reservoirs,
wells, pumping stations, cisterns, tunnels, lagoons, networks, etc. aiming at reestablishing
equivalent and/or improved social and economic conditions to affected families. Even though the
preliminary designs in the known location for the works indicated that no resett lement will take
place, SEDAPAL has developed an Involuntary Resettlement Framework in accordance to OP 4.12,
in case some people could be potentially temporarily affected during construction. The Involuntary
Resettlement Framework will guide the preparation of Resettlement Plans, if necessary, during
Project implementation, and has been adopted and disclosed by SEDAPAL on February 16, 2011 as
corporate policy to guide all future investment operations.
66. The proposed Project also includes a social intervention to facilitate the transition to a full-
pressure, 24 hour metered service. The Project will select a marketing consultancy that will
strengthen SEDAPAL‟s efforts in promoting mechanisms to allow poor households to upgrade their
sanitary facilities with newer, water-saving equipment in order to minimize the impact of billing
according to actual rather than estimated consumption. This will be done through the creation and
expansion of current partnerships, development of new capacities at the utility and communication
management with the different stakeholders (employees, suppliers, private companies, clients,
users, community leaders and community-based associations). Given the traditional role of women
in water household consumption and use, special emphasis will be given to incorporate their
concerns and suggestions during the focus groups prior to intervention.
67. The Project‟s grievance mechanism will be disclosed as a part of the Project‟s general social
strategy. In other words users will interact personally with social professionals who will explain
their rights in terms of expressing complaints and grievances and the due redress process it will
follow. This mechanism is meant to cater especially to cases of involuntary taking of land. In
addition, SEDAPAL manages a claims system called AGUAFONO, which is considered best
15
practice in the public sector and is well-known by the population. This mechanism is another
channel where the company can receive feedback from civil society.
F. Environment (including safeguards)
68. The Project is expected to have very positive environmental impacts overall, by (i)
consolidating and improving water resources management in Lima; (ii) connecting people to
rehabilitated sewage collection systems in the Northern Service Area of Lima, thereby improving
human and environmental health conditions and protecting very scarce underground water sources,
and (iii) increasing the efficiency of the water supply services provided by SEDAPAL.
69. The Project will directly improve SEDAPAL‟s capacity of efficiently using water resources
by reducing water losses and the contamination of underground water sources. This reduction of
water losses is critical in a city like Lima, whose main water resources come from rapidly retreating
glaciers in the highlands due to climate change.
70. According to the Country Environmental Analysis, (World Bank, 2006), of all the impacts
of environmental degradation in Peru, those related to health are the most significant. The study of
the costs of degradation carried out as part of the Country Environmental Analysis estimated the
annual damages from environmentally related sources at S/. 8.2 billion (US$2.45 billion). Over 70
percent of that, around S/. 5.85 billion (US$1.75 billion) is attributable to environmental health,
arising from poor quality water supply, sanitation and inadequate hygiene. The project will directly
improve the environmental health conditions of the population to be served. Rehabilitation of
sewerage systems will decrease the rate of breaks in pipes that expose the population to water borne
diseases with significant human health impacts. Provision of full pressure, 24-hour service will also
eliminate the need for storage devices, change water use patterns and facilitate the adoption of
better hygiene practices. This behavioral change will in turn eliminate fertile ground for water borne
diseases, such as dengue and gastrointestinal cases associated with lack of hygiene. It is expected
that improved sewage collection systems will have a positive impact on the quality of aquifers in
Lima, as well as provide a healthier urban environment.
71. As the project is classified as Category B, an Environmental Assessment (EA) was
undertaken, in accordance with OP 4.01, including an Environmental Management Plan. The
detailed EA has identified potential direct and indirect environmental impacts associated with the
Project and other alternatives, and developed mechanisms and measures to avoid, minimize and/or
mitigate negative impacts. The Environmental Management Plan, contained in the EA study, has
specific activities, budget and responsibilities to ensure the implementation of these mitigating
measures. Detailed information on environmental impacts and mitigation measures is presented in
Annex 3. A copy of the full EA has been made available through the Bank‟s InfoShop on December
21, 2010. The EA report and its Addendum were also made available through SEDAPAL‟s website
on September 20, 2010.8
72. Physical Cultural Resources (OP 4.11). Peru has a well-developed legislative and normative
framework for management of physical cultural property, which is under the oversight of the
National Institute of Culture (Instituto Nacional de Cultura – INC). In accordance with local
8 http://www.sedapal.com.pe/estudio-impacto-ambiental
16
legislation and Bank requirements, SEDAPAL will include procedures for screening any known
cultural property in the Project area and incorporate „chance find‟ procedures in the event that
culturally significant resources are discovered during implementation. Procedures for the
identification and protection of physical cultural resources have been included in the EMP.
73. The EA report includes a list of archeological sites located in the project area and an
Archeological Monitoring Plan which specifies the following measures to be considered by project
contractor during the rehabilitation works: (i) preventive measures, (ii) immediate measures, (iii)
measures for the intervention of the monitoring Archeologist, (iv) prevention and mitigation
measures, and (v) a system for recording, analyzing, storing and delivering archeological materials
to Peru‟s INC.
17
Annex 1: Results Framework and Monitoring
PERU: Optimization of Lima Water and Sewerage Systems Results Framework
Project Development Objective (PDO): The Project Development Objective (PDO) is to improve efficiency, continuity and reliability of water supply and sanitation services in the Northern Service Area of Lima
PDO Level Results Indicators* C
ore
Unit of Measure
Baseline Cumulative Target Values**
Frequency Data Source/ Methodology
Responsibility for Data
Collection
Description (indicator
definition etc.) YR 1 YR 2 YR3 YR 4 YR5
Indicator One: Number of daily hours water services are provided in the project area.
Hrs/day 16.09 -. - 16.09 23.00 24.00 Bi-annual
Northern Management Zone bi-annual report
SEDAPAL‟s Northern Management Office
Weighted average in average service hours for sectors 86, 334, 336,337 and 338.
Indicator Two: Annual incidence of water pipe breakages per km of water supply network in the project area.
Breaks/ km/yr
0.214 - - 0.214 - 0.107 Bi-annual
Leakage Reduction and Control, and Commercial Management Teams Annual Report
Leakage Reduction and Control, and Commercial Management Teams
Weighted average in kilometers rehabilitated times the average of water pipe breakages per district
Indicator Three: Annual incidence of sewerage blockages per km of sewerage network in the project area.
Blockage/
km/yr 8.75 - - 8.75 - 4.38 Bi-annual
Annual Report from the Network Operation and Maintenance Team.
Leakage Reduction and Control, and Commercial Management Teams
Weighted average in kilometers rehabilitated times the average of sewerage blockages per district
Indicator Four: Volume of water saved in the project area.
m3/yr 0 0 - 2,000 7,500 12,000 Annual
Northern Management Zone annual report
SEDAPAL‟s Northern Management Office
Cumulative of weighted average in kilometers rehabilitated times the average water loss per district
Indicator Five: Number of learning events on strategic planning and management
Events 0 2 4 6 8 10 Annual PROMESAL PROMESAL
INTERMEDIATE RESULTS
Intermediate Result (Component One): Rehabilitation of water and sewerage networks in Northern Service Area of Lima. This component will finance the rehabilitation of the water and sewerage networks in Northern Service Area of Lima, directly benefiting more than 158,380 low income people. The exact proportion of replacement and renovation will be determined during implementation based on a detailed hydraulic modeling of each subsector and an agreed methodology.
18
Intermediate Result indicator One: Km of water pipes rehabilitated. Km. 0 0 0 75 150 250
Quarterly, once construction started
Monthly supervision report from supervisor consultant
Supervisor consultant
Intermediate Result indicator Two: Km of sewerage pipes rehabilitated. Km. 0 0 0 25 80 100
Quarterly, once construction started
Monthly supervision report from supervisor consultant
Supervisor Consultant
Intermediate Result indicator Three: Pipe household water connections affected by rehabilitation works undertaken under the Project
Number of households
0 5,000 20,000 35,000
Quarterly, once construction started
Monthly supervision report from supervisor consultant
Supervisor Consultant
Intermediate Result indicator Five: Water utilities that the Project is supporting
Number of
utilities 1 1 1 1 1 1 N/A N/A N/A
Intermediate Result indicator Six: Number of stakeholders reached with information on how to invest on water saving equipment
Number of stakeholder
s 0 100 250 300 300 300 Bi-annual
Progress Report
PROMESAL
Intermediate Result (Component Two): Improving SEDAPAL’s Efficiency. This component will finance studies and consultant services to provide decision-making tools to SEDAPAL‟s management to improve the company‟s efficiency. The activities will be focused on the following four areas: (a) support for the implementation of the Geographic Information System (GIS); (b) SCADA information technology standardization strategy and consolidation; (c) preparation of a strategy to efficiently meet user demand for water and sanitation services, and (d) options for the development of a new organizational model.
Intermediate Result indicator One: Action plan completed for the integration of GIS and SCADA systems.
Yes/No None - - - Study
completed
- Annual Progress Report
None
Intermediate Result indicator Two: Evaluation of current and future demand for water and sanitation services completed together with identification of priority actions to meet such demand as efficiently as possible.
Yes/No None - - - Study
completed
- Annual Progress Report
None
Intermediate Result indicator Three: Study on options for the development of a new organizational model completed.
Yes/No None - - - Study
completed
- Annual Progress Report
None
.
19
Annex 2: Detailed Project Description
1. The Project Development Objective (PDO) is to improve efficiency, continuity and
reliability of water supply and sanitation services in the Northern Service Area of Lima. The
project beneficiaries include the urban dwellers living in SEDAPAL‟s Northern Service Area of
Lima, which comprises 16 districts.9 It is envisaged that physical investments will largely benefit
the First Northern Area of Lima that means the following District of the Borrower: Comas,
Independecia, San Martín de Porres and Los Olivos. The estimated beneficiaries reached are
distributed as follows: in the district of Los Olivos-San Martin de Porres (44,920 inhabitants),
Independencia (66,516 inhabitants) and Comas-Los Olivos (10,994 inhabitants), with a total
beneficiary population of 158,380 in an area of approximately 118 km2.
2. SEDAPAL‟s objectives are to prioritize the expansion, quality improvement and
sustainability of water, sewerage and wastewater treatment services. These utility‟s objectives,
included on the Optimized Master Plan and the Strategic Institutional Plan, aim at (i) increasing
access to WSS services, (ii) improve service quality, (iii) achieve financial viability, (iv) increase
service sustainability, and (v) modernize management. This project contributes to objectives (ii),
(iii), (iv) and (v) by increasing hours of service, increasing financial viability by recovering water
losses, augmenting water availability by reducing leaks supporting service sustainability and
modernizing management with the aim at introducing an unified SCADA and GIS.
3. PAPT has helped SEDAPAL‟s objective of expanding services. Indeed, the utility has
built 165,000 new water connections and 148,000 new sewerage connections in the last 4 years,
benefitting a population of around 732,000. This has meant doubling the expansion rate in both
water and sewerage, from a yearly rate of 20,220 for water and 19,220 for sewerage connections
between 2000 and 2005, to 43,750 and 38,450 new water and sewerage connections during the
past 4 years. Such an important increase in coverage has been possible with investments that
have shifted from an average of US$66 million per year in the period 2000-2005 to an average of
US$150 million per year, and an estimation to increase this to US$225 million annually.
4. These investments have been financed with 46 percent external debt and 54 percent own
resources for the period 2001-2005, while for the period 2006-2009 they were financed with 52
percent external debt, 36 percent own resources and 12 percent with funds from the Treasury.
For the period 2010-2014, it is estimated to finance investments with 47 percent external debt, 31
percent own resources, 12 percent from the Treasury and 10 percent with connection sales.
5. The Project supports SEDAPAL‟s request for structural and non-structural measures to
improve service delivery and sets the basis for the modernization of the utility. Structural
measures include the rehabilitation of water and sewerage networks in the Northern Service Area
of Lima, and the non-structural measures will encompass the utility as a whole – the complete
service area – to enhance the management capabilities by integrating automated systems, better
assessing current and future demand and identifying priority actions to meet such demand more
efficiently, and analyzing options to develop a new organizational model.
9 Ancón, Bellavista, Callao, Carabayllo, Carmen de la Legua, Comas, Independencia, La Perla, La Punta, Los
Olivos, Puente Piedra, Rimac, San Juan de Lurigancho, San Martín de Porres, Santa Rosa and Ventanilla.
20
6. The Project will support the implementation of SEDAPAL‟s development strategy
consisting of: (i) supply-side management by increasing Rimac River‟s flow through a trans-
boundary transfer, as well as the expansion of water treatment and main distribution systems; (ii)
demand-side management by reducing physical and commercial losses and controlling demand
through installation of domestic meters, progressive tariff structures, and promotion of in -house
water saving devices; and (iii) increasing the wastewater treatment capacity through partnerships
with the private sector.
7. Through the rehabilitation of the water and sewerage network, the Project will support
the proper distribution (and sewerage conveyance) of the increased flow from the Huachipa
water treatment plant as well as contribute to the reduction of physical losses by renovating
ageing infrastructure and correcting construction problems. The institutional strengthening
component, particularly the standardization of the SCADA and the identification of information
gaps for the GIS systems combined with better demand assessment, will support the reduction of
both commercial and physical losses.
8. Currently, SEDAPAL divides its operation into three main geographical areas: the
Northern, Central and Southern Service Areas. Rehabilitation activities will be undertaken on the
Northern Service Area for the following reasons: (i) under a previous Bank financed project
(Lima Water Rehabilitation and Management Project, Loan 3811-PE) efforts were directed to the
rehabilitation of the water supply networks in the Southern Service Area, which achieved success
in reducing physical water losses; and (ii) when the Huachipa water treatment plant project
begins operation, the pressure in the water supply system in the Northern Service Area will
increase, with consequent increases in water losses necessitating further water loss reduction
efforts.
9. SEDAPAL strategy for intervening in rehabilitation of networks is a phased one, starting
with works on First Northern Service Area of Lima, continuing with the Second Northern
Service Area of Lima, following with interventions in San Juan de Lurigancho District and
finalizing with network rehabilitation in La Molina district. PROMESAL will be starting
implementation of the first tranche in First Northern Service Area of Lima in 2011, financed
partially by JICA (US$67.1 million) and KfW (US$50 million).
10. For un-rehabilitated networks, a negative relation exists between Non Revenue Water
(NRW) and increase of hours of service. However, the quantity and continuity of service in the
area are unacceptable, and improving it is the higher objective, even though NRW may increase
in absolute terms. The Project will finance activities aimed at improving rational use of water,
contribute to lower consumption –in particular through the installation of water meters, but
overall use will increase with more water availability which is necessary since the current
consumption levels (of piped water) are sub-standard. Full metering, demand management and
optimal system operation are only achieved on a continuous full-pressure water network.
Component 1. Rehabilitation of water and sewerage networks in the First Northern Service
Area of Lima (US$61.2 million, of which US$51.3 million will be financed by the Bank loan)
11. This component will finance the rehabilitation of the water and sewerage networks in the
First Northern Service Area of Lima, directly benefiting more than 158,380 low income people
21
living in the area. The exact proportion of replacement and renovation will be determined during
implementation based on a detailed hydraulic modeling of each subsector and an agreed
methodology.
12. To improve the appropriate management of the rehabilitated network and reduce losses
the component will also finance: i) rehabilitation of water reservoirs (concrete storage tanks) to
increase storage capacity and pressure stabilization; ii) replacement of household connections
and installation of new domestic water meters; and iii) installation of bulk water meters and
valves to allow sectorization.
13. Social interventions will complement these physical investments to maximize the
Project‟s expected benefits by taking measures to facilitate the transition to a full pressure,
continuous and metered service. These will include the provision of guidance to manage
consumption in particular through the use of in-house water saving equipment.
Background
14. Based on a pre-feasibility design and preliminary allocation of the intervention zones
among the different sources of finance, Component 1 will finance works comprising the
rehabilitation of 143km of PVC pipe with diameters from 100 mm to 400 mm (about 130 km of
100 mm), 96 km of trenchless pipe rehabilitation (cracking and/or relining), rehabilitation and/or
replacement of about 26,000 household meters and provision, installation of 4 bulk meters and
700 water valves, and rehabilitation of 4 reservoirs. Sewerage works will include the provision
and installation of about 110 km of PVC pipe with diameter from 200 mm to 300 mm, as well as
rehabilitation of about 14,000 sewerage connections and rebuilding/reconstruction of 1,300
manholes. More specific information will be available once the detailed designs are completed,
and these planned works are also contingent to the availability of financing from other
institutions.
15. SEDAPAL through its Northern Service Management Unit (Gerencia de Servicios Norte)
divides the system according to micro-watersheds, grouping zones that share the same sewerage
outfall. The Northern Service Area (First and Second) corresponds to the Comas-Chillon primary
outfall and is considered priority as it is the closest to the Huachipa main branch bringing an
additional water flow of 5 m3/s. Virtually all sewerage discharge will go to the WWTP at
Taboada with a capacity of 14 m3/s, which is currently under construction and is scheduled to
start operating in 2013. The First Northern Service Area covers 12 operational sectors and 16
districts. It is envisaged that physical investments will largely benefit the districts of Los Olivos-
San Martin de Porres (44,920 inhabitants), Independencia (66,516 inhabitants) and Comas-Los
Olivos (10,994 inhabitants), with a total beneficiary population of 158,380 in an area of
approximately 118 km2. Given the nature of the intervention that encompasses not only the
rehabilitation but also the creation of hydraulically viable operational sectors, the aforementioned
four districts were prioritized. The Second Northern Service Area lies in the districts of San
Martin de Porres, Callao, Comas, Los Olivos, Carabayllo and Puente Piedra and its intervention
is scheduled for future undertakings,
16. An economic analysis carried out by SEDAPAL demonstrated that it is advisable to
rehabilitate all the water pipes installed for more than 10 years in the First Northern Service
22
Area, or about 90 percent of the water network in this zone. This relatively new (10 years)
network was not installed or supervised by SEDAPAL but by community dwellers that used
substandard construction procedures and materials. The infrastructure was later transferred to the
utility when it went from being a bulk water provider to a retail distributor of water services.
SEDAPAL estimates that 60 percent of the water pipes would have to be replaced and 40 percent
renovated, while about 50 percent of the sewerage pipes would have to be replaced and 50
percent renovated.
17. Experience has shown that replacement/rehabilitation of all or most of the pipes is not
always the most efficient alternative. Many pipes installed 25 years ago, and certainly 10 years
ago, still have a remaining useful life. In general, a large portion of the leaks and water losses
occurs in the household connection installations, which can be replaced fairly easily. The fact
that most of the large diameter network is made of asbestos-cement pipes points to an advantage
of rehabilitation rather than replacing as the disposal of old asbestos-cement pipes is a difficult
environmental problem due to the toxic nature of such waste material. Even if asbestos-cement
pipes are replaced, it would be advisable to leave the old pipes in place and install new pipes in
parallel. Several trenchless rehabilitation methods are currently in common use; however,
choosing between an open cut or trenchless rehabilitation should be based on local conditions,
with Peru‟s low labor costs making the former more economical. As to the sewerage collectors,
it would be more advisable to use rehabilitation methods rather than replacement of pipes. Such
an approach still takes advantage of the large diameter perforated conduits by re-lining them,
even if the pipes inside themselves are highly corroded.
The Intervention
18. This component primarily consists of rehabilitating the primary and secondary water and
sewerage network by replacing old pipes and rehabilitating existing ones through various open
cut and trenchless methods. Currently, the number of bursts and breaks in the pipe network in the
First Northern Service Area is high (about 3 bursts/km/year), with consequent high required
repair frequency and costs.
19. Prior to replacing each pipe section, tests and estimates will be made to establish the need
for replacement, rehabilitation or no action, the detailed methodology for carrying out these tests
will be improved and finalized during project implementation. The methodology will be based
on a detailed hydraulic modeling of the subsector to confirm the initial conceptual design (i.e.
new requirements for pipe diameters, network layout and location), followed by gathering data
on the material and age of the pipe section under consideration as well as information on the
frequency of breaks and leaks per pipe unit length in this section and comparing this with
performance standards , carrying out measurements for detecting leaks without uncovering the
pipe through leak detection instruments based on various commonly used methods (noise,
electromagnetic, specific methods for asbestos-cement and PVC pipes, closed circuit TV for
large diameter pipes), laboratory test and, if necessary, uncovering various strategic points in the
pipe section. The works contractor will carry out the tests for each pipe section and the tests will
be supervised and approved by a supervision firm.
20. Component 1 also includes the rehabilitation of water reservoirs (built concrete storage
tanks) for safeguarding storage capacity and for pressure stabilization. Damaged and
23
nonfunctioning domestic water meters will be replaced, and new meters will be installed for
unmetered connections. Bulk water meters and valves will be installed in the required points of
the primary water network to allow sectorization (pressure-control).
21. Based on the hydraulic modeling, which provided information on pressure, length,
network layout and geographical distribution, it is expected that there will be 18 new operational
sectors replacing the current 12 ones. An operational sector is determined to be water-tight based
on its distribution lines so there is only one entry and exit point for interconnection with other
sectors, while a subsector is defined with valves mainly for operation and maintenance, which
allows for the carrying out of hydraulic balances to estimate physical losses.
22. Social interventions will complement the physical investments to facilitate the household
transition to a full pressure, continuous service (elimination of in-house storage devices and
change of water use patterns), while providing guidance to users on reducing the new water bills
based on actual consumption, reducing consumption and using water saving devices which
SEDAPAL will be promoting as part of the Project.
23. The number of estimated beneficiaries for this component is 158,380 people, representing
approximately 19,000 households (water connections). First Northern Service Area includes 27
percent of the blocks in Metropolitan Lima, but has a lower proportion of Socio-Economic Level
A (higher income) and Level B, with 93.9 percent of the population in the C, D and E (lower)
socio-economic levels.
24. JICA and KfW are also financing part of required investments in parallel in the First
Northern Service Area (see table below). These investments are in different areas and under
different contracting arrangements, and their performance will not impact the deliverables of the
Bank financed works.
Table 1– Interventions in First Northern Service Area by Source of Financing (estimated from
preliminary designs)
Item unit JICA IBRD KfW Total
Water
Pipe supply and installation trenchless(Φ 100-500) PVC and ductile
iron m 201,795 142,914 21,116 365,825
Pipe supply and installation with trench(Φ 100-500) cracking and/or
relining m 110,798 96,791 0 207,588
Rehabilitation of water house connections un 35,443 26,700 1,602 63,745
Pressure-reduction chambers and valves (Φ 100-350) un 16 20 0 36
Provision and installation of stainless steel and ductile iron valves un 1,117 1,277 117 2,511
Reservoirs to be rehabilitated un 13 4 2 19
Macro-meters to be installed un 13 4 2 19
Water Sectors to be intervened un 8 8 1 17
Sewerage
PVC Pipe provision and installation (Φ 200-300) m 224,930 109,835 5,186 339,951
Rehabilitation of sewerage connections un 28,478 13,906 657 43,041
Rehabilitation of inspection chambers un 2,666 1,302 61 4,030
24
Component 2. Improving SEDAPAL’s Efficiency (US$2.3 million, of which US$1.88 million
will be financed by the Bank loan)
25. This component will finance studies and consultant services to provide decision-making
tools to SEDAPAL‟s management to improve the company‟s efficiency. The rehabilitation,
sectorization and micro-metering activities from Component 1 that will result on reduction of
non revenue water, will be complemented with the undertaking of additional actions that would
allow SEDAPAL to improve its management, in particular the governance and transparency of
its operational and commercial management. Terms of Reference for each consultancy, including
deliverables, key personnel, calendar and budget have been prepared. The following represent
the priorities studies at this stage for the complement of the investments in Component 1.
a) Support for the implementation of the GIS:
26. SEDAPAL is in the process of developing a corporate GIS that includes the
standardization and inter-operation, unified database, corporate access to the digital maps and
plans, and flexible geo-architecture among others. The main expected benefits are to reduce
time, effort and costs in the operational and commercial management, accelerating and making
more efficient the decision making process and the response to the clients.
27. However, to achieve those benefits, the GIS requires a good level of update and data
quality, which means improving the technical cadastre, users cadastre and the maps base. Thus,
the Project would support a study that identifies the information gaps that need to be bridged for
a proper GIS operation, designing a Plan for updating the system and to put in place
organizational procedures within SEDAPAL that allows the utility to keep updated information
in a systemic way.
28. The Project will support an evaluation of the cadastre to determine the priority zones for
cadastre updating and the continuous process to follow for updating. Based on the results of this
evaluation, the Project will finance selected updates of the cadastre. Additionally, the Project will
finance a study with recommendations to SEDAPAL on the structural changes needed to ensure
that the GIS unit is fully integrated to maximize the potential of this tool, including the training
of personnel and establishing formal linkages to other parts of the utility.
b) SCADA information technology standardization strategy and consolidation. Integration
of the Supervisory Control and Data Acquisition (SCADA) systems
29. Since 1995, the Bank has supported SEDAPAL on the automatization of operations with
SCADA, beginning with the study for the sectorization of the central supply in Lima (El
Agostino, Callao, Chorrillos). In 1997, a wastewater treatment SCADA control center was
financed, and in 2000 the metropolitan SCADA with 220 remote stations started operations. As a
result of this positive experience, SEDAPAL continues operating the metropolitan SCADA, and
is increasing the remote stations. It has also implemented an additional number of SCADAs for
water re-pumping and in the main wastewater treatment plant such as Carapongo and Huáscar
among others.
25
30. Currently, SEDAPAL has at least 7 SCADA systems in operation with 5 different
technologies, and 4 new systems in preparation or implementation stage with no relation to one
another. Existing SCADA systems are built on different technologies, are operated
independently by different areas and staff in the company and use different policies and criteria
which results in important inefficiencies. The following table shows the diverse platforms
currently used for SCADA in SEDAPAL:
Table 2 – Different SCADA systems being used in SEDAPAL
Item SCADA Software
1 SCADA Primary Network Aspen One 2006- Aspentech
2 SCADA Re-pumping Survalent
3 Atarjea Water Plant Oasys
4 Huachipa Water Plant (in construction) TBD
5 Miraflores Wastewater Treatment Plant Wizcon
6 Huascar Wastewater Treatment Plant Wizcon
7 San Bartolo Wastewater Treatment Plant Wizcon
8 Carapongo Wastewater Treatment Plant CIMPLICITY
9 Machay Wastewater Treatment Plant (in construction) TBD
10 Taboada Wastewater Treatment Plant (in construction) TBD
11 La Chira Wastewater Treatment Plant (in construction) TBD
31. The Project will finance the consolidation of these systems into one corporate SCADA
system, grouping all current and future systems using a unified design for the integration of
SCADAs to guide all future investments in this field. Integration of SCADA systems is a priority
for SEDAPAL and is part of their current efforts to consolidate their rapidly growing, extensive
and complex network management systems. The fact that the current SCADA systems are not
properly managed has had a direct negative effect on the decision making process and has made
technical operation more costly and cumbersome. Other issues related to the SCADA system are
the need for systematic maintenance of equipment, development of preventive maintenance
plans, update of equipment inventory and staff training.
32. Notwithstanding the importance of a unified SCADA, until now a strategy for its
standardization and determination of future requirements has not been developed. The Project
will finance the formulation of the SCADA Master and Investment Plan to guide the new
SCADA investments and produce a specific plan and budget for SCADA integration including
the identification of the hardware and software required to make the different SCADA systems
compatible.
c) Options for the development of a new organizational model
33. This activity will support SEDAPAL in building a strategic vision for the medium and
long term, including developing its planning system. It will help the utility in the establishment
26
of long-term financial planning according to its expected capital investments and rest ructuring of
liabilities as well as exploring HR policy restrictions.
34. Building on the information generated by the previous studies, it will ensure that the
proposed changes can be accompanied by the correspondent institutional adjustments. The new
organizational model will not be limited to the information technology for management but it
will also consider the evaluation of organizational improvements in the area of Production,
Primary Distribution, and Works and Projects as well as recommendations for enhancing the
commercial system. It will finance high-level consultants to advise SEDAPAL on strategic
priorities regarding resource mobilization, technical alternatives and HR policies that accompany
the implementation of their Strategic Plan 2009-2013 and beyond, as well as the training of
existing staff to front the new challenges to establish the new institutional structure.
35. Other priority areas identified during Project preparation are Planning, Financing and
Regulation. There is a need to centralize the information and personnel with dedicated expertise
on areas such as regulatory control and mechanisms, financial expertise to determine the optimal
mix of financing sources and planning in a changing economic and political environment , and
dealing with the long-term liabilities with the tax agency. Such critical mass of personnel and
resources may be able to help the utility towards a sustainable access to capital markets, devising
the ideal combination of resources (multilateral, public or private) on its investment plan. This
support builds on the recommendation of the recent UNSGAB report and on several initiatives
sponsored by PPIAF SNTA aimed at identifying the utility‟s weak areas and bottlenecks that
have prevented the access to local and international private markets.
d) Preparation of a strategy to efficiently meet user demand for water and sanitation
services
36. According to SEDAPAL‟s data, water consumption in Lima and Callao appears to have
followed a relatively erratic progression over the past decade, for instance, there has been a 57%
increase in the number of users but no increase in the volume of water produced. At the same
time, 7% of connections are currently inactive and 20 percent of water consumed is not paid for.
This is due to a mix of endogenous and exogenous factors which have not been systematically
identified and analyzed by SEDAPAL. As a result, SEDAPAL lacks the tools to predict future
demand accurately and take appropriate steps to manage and efficiently meet such demand.
37. The Project will support an evaluation of the various factors that affect demand for water
supply and sanitation services, as well as an estimation of future demand trends backed by
adequate sensitivity analysis. This diagnostic will then be used to design an action plan
identifying and prioritizing the steps that need to be taken in order to proactively manage and
respond to user demand.
38. The Project will also help identify the structural as well as the process-related measures
that SEDAPAL might need to implement in order to ensure that this demand analysis becomes
part of normal operations and is updated on a regular basis. Appropriate training for relevant
staff will also be designed as needed.
27
Component 3. SEDAPAL Project Management (US$1.4 million, of which US$1.32 million will
be financed by the Bank loan)
39. Currently, PROMESAL has 20 full time staff to undertake its responsibilities; however
this unit will be in charge of implementing 4 new loans and will continue the support for the
supervision of the construction of the large wastewater treatment plant at Taboada.
40. Therefore, PROMESAL will need to be strengthened with hiring of additional personnel,
as well as the training of existing ones on engineering, contract administration, accounting and
financing services to ensure the proper and timely execution of the Project. This component will
finance the additional staff required for project management to establish a Monitoring and
Evaluation System and undertake the required financial audits as well as physical and
procurement reviews. Additionally, it will finance individual consultants to strengthen the team
on procurement, financial management and communication, as well as the training for strategic
planning, and selection of technical options to allow full compliance with the Investment Plan
2009-2013 and subsequent plans. This component will also support SEDAPAL‟s efforts to
document the Project‟s process and results, and to mainstream lessons learned and good
practices.
28
Annex 3: Implementation Arrangements
1. Project Administration Mechanisms
1.1 Project implementation institutional arrangements
1. The Republic of Peru will be the Borrower. The implementation agency will be
SEDAPAL. The Project will be managed by PROMESAL (Lima‟s Marginal Areas Sanitary
Improvement Project), a unit depending directly from SEDAPAL‟s General Manager (Gerencia
General). The unit will be responsible for overall management of the Project, and will ensure
consistency in the application of Bank guidelines and compliance with the Loan Agreement, the
Project Agreement, the Subsidiary Agreement, and the Operational Manual. The proceeds of the
loan will be passed on to SEDAPAL as a loan.
SEDAPAL
2. SEDAPAL (Servicio de Agua Potable y Alcantarillado de Lima) is a State owned
enterprise, constituted as a Sociedad Anónima, under the Ministry of Housing, Construction and
Sanitation. It has technical, administrative, economic and financial autonomy. It was created
through a Legislative Decree Nº150, dated June 12, 1981. It is ruled by its Estatuto and the
General Law of Societies (Law Nº26887), the norms that rule water and sanitation providers, and
the related laws in Peru. In March, 2006 Law Nº28696 modified the area under SEDAPAL‟s
responsibility, indicating that it includes the Province of Lima, the Constitutional Province of
Callao and those other provinces, districts or areas from the Province of Lima attached to the
service area through a ministerial resolution of the Housing Sector, as long as the territory is
adjacent and coverage can be provided directly.
3. SEDAPAL has been successfully implementing projects with bilateral and multilateral
institutions for several years, including the recently closed Lima Rehabilitation and Management
Project (3811-PE) and the associated Additional Finance Operation (7160-PE) for the
rehabilitation and expansion of water and sewerage services in the Southern and Center Service
Areas. Currently SEDAPAL is executing a US$65 million IFC bridge loan for the construction
of the Huachipa Water Treatment Plant, as well as parallel operations financed by JICA and
KfW for the rehabilitation of water and sewerage networks in the First Lima Norte Service Area.
Project Management Unit – PROMESAL
74. The implementation phase of the Project will be under the responsibility of PROMESAL
(Lima‟s Marginal Areas Sanitary Improvement Project), a unit depending directly from
SEDAPAL‟s General Manager (Gerencia General). Its responsibilities include: carrying out
bidding processes, selection of contractors, supervision, approval of contract amendments, and
general Project management. SEDAPAL‟s General Management (Gerencia General) will be
responsible for approving final designs, complementary studies, while Operations Management
(Gerencia de Operaciones) is in charge of the final reception of the works. PROMESAL is in
charge of most network rehabilitation and expansion projects in SEDAPAL, including recently
29
closed Bank-financed projects and parallel operations financed by JICA and KfW, and has
proven implementation capacity.
4. Following the successful implementation arrangements of the previously Bank financed
Project, the Managerial Investment Committee, comprising the full quorum of the company‟s
managers and headed by the General Manager of SEDAPAL, will provide a high level interface
with the rest of SEDAPAL. This committee will be responsible for approving all of the key
procurement and implementation decisions prior to the Bank‟s no objection, and it will ensure
coordination between PROMESAL and other areas of the company.
5. The operation and maintenance of the infrastructure will be in charge of SEDAPAL‟s
Norte Management (Gerencia Norte), as part of its overall responsibility of service provision in
the area. The following SEDAPAL organization chart shows the relation between the different
Management Units (Gerencias).
1.2 Measures to address capacity constraint
6. The administrative structure of PROMESAL will be strengthened in order to meet the
incremental needs associated with the administration and execution of the Project. Measures
include hiring individual consultants, training, and the use of firms for the supervision of large
contracts.
SEDAPAL
ORGANIZATIONAL CHART
LOGISTICS
MANAGEMENT &
SERVICES
PRIMARY PRODUCTION & DISTRIBUTION MANAGEMENT
COLLECTION,
TREATMENT &
DISPOSAL
MANAGEMENT
COMMERCIAL
MANAGEMENT
CENTRAL SERVICE
MANAGEMENT
SOUTHERN
SERVICE
MANAGEMENT
NORTHERN SERVICE
MANAGEMENT
HUMAN
RESOURCES
MANAGEMENT
FINANCIAL MANAGEMENT
RESEARCH &
DEVELOPMENT
MANAGEMENT
PROMESAL -PROJECTS &
WORKS MANAGEMENT
GENERAL
MANAGEMENT
BOARD OF DIRECTORS
INTERNAL
AUDIT
MANAGER
30
2. Financial Management, Disbursement and Procurement
2.1 Financial Management
Executive Summary of Financial Management Assessment
7. As part of the preparation process of the proposed project, the FM team has performed a
financial management capacity assessment to determine the adequacy of the entity “Servicio de
Agua Potable y Alcantarillado de Lima” SEDAPAL‟s financial management arrangements to
support project implementation. The assessment was performed in accordance with OP/BP 10.02
and the “Financial Management Manual” dated March 1, 2010.
8. SEDAPAL is a continuing entity with experience in working with Bank funds and was
consistently assessed through supervision of Bank‟s previous projects and external auditors
showing satisfactory performance. The FM arrangements will be similar to the previous project
implemented by SEDAPAL. As of the date of this document, SEDAPAL has the required
fiduciary staff to support beginning of project activities; and an additional Financial Management
Specialist will be selected and hired once implementation starts. Therefore, proposed project
implementation will rely widely on existing arrangements, strengthening them in specific areas
identified and agreed during the assessment in view of the expected increase in SEDAPAL‟s
operations and towards facilitating the preparation of financial reports. On such basis,
SEDAPAL is working on the following actions: recruiting the additional financial management
specialist whose terms of reference have been agreed with the Bank, and improving the financial
information system with a module to produce financial reports of the project and the Statement
of Expenditures (SOEs).
9. At present, the project‟s inherent risk and control risk are rated modest, mainly taking
into account SEDAPAL‟s experience with Bank-financed projects, and the existence of overall
acceptable FM arrangements, which are being strengthened in terms of staffing, information
system, and update of the Operational Manual. Thus, the overall FM risk rating is defined as
modest.
10. Based on the assessment performed, in general proposed FM arrangements are
considered acceptable subject to the successful implementation of agreed strengthening
measures, aimed at enhancing SEDAPAL‟s capacity for project implementation.
Programming and budget
11. PROMESAL will coordinate with SEDAPAL‟s technical area the activities to be
executed during the year to prepare the Annual Program (POA) and the budget of the project .
The Board of Director‟s of SEDAPAL has the responsibility to approve the budget of the project
which is submitted for approval to the Fondo Nacional Empresarial del Estado (FONAFE).
Thereafter, the Minister of Finance (MEF) will also include this budget under the national budget
and will approve the disbursements for loan resources to be used for project implementation. As
in the previous operation, the budget is operated under the Sistema de Administración Financiera
(SAP). The PROMESAL will be responsible for preparing and monitoring the overall project
31
budget, including all sources of financing –BIRF and SEDAPAL contributions– following the
functional classification in terms of components, sub-components and activities of the project.
The Financial Department of SEDAPAL will record the budget of the project in its information
system. The budgetary control will consist of: (i) timely preparation and approval of annual
programs, budget and procurement plans, establishing a clear relation among them; (ii) proper
recording of the approved budget in the financial management system; and (iii) timely recording
of commitments and payments as required, to allow an adequate budget monitoring, and (iv) also
provide accurate information on project commitments for programming purposes.
Accounting – Information System
12. Accounting records of SEDAPAL follows private sector regulations including the use of
the General Chart of Accounts established for the private sector entities. SEDAPAL accounting
follows the accrual basis of accounting; however, for the preparation of the financial statements
of the project, the PROMESAL will follow the cash basis of accounting. With this object, the
General Chart of Accounts will need to be complemented with a more functional classification,
including project components/sub-components/activities. Currently, SEDAPAL uses the SAP
financial information system for budget and accounting records. SEDAPAL will add a module to
its SAP system to prepare the project financial reports to guarantee the timely and reliable
preparation of financial information reports, SOEs, and to monitor the project execution to
control budget variances. The main FM regulatory framework for the project will consist of: (i)
Peru‟s laws governing financial management for the private sector and the entity‟s operating
manuals and norms. Project-specific FM arrangements that are not contemplated in the above
mentioned documents have been complemented in a concise FM section of the project‟s
operational manual. Among others, specific reference will be made to: (i) the appropriate internal
controls for the project; (ii) the formats of project financial reports; and (iii) auditing.
Procedures and Internal Controls
13. PROMESAL has submitted to the Bank for review the version of the Operational
Manual (OM) of the Financial Management chapter. The OM reflects processes, procedures, and
internal control mechanisms for the new project, including, chart of accounts according to the
functional classification of the project, the IFRs, terms of reference of the additional financial
management specialist, the flow charts that describe the procedures, roles and responsibilities,
and specific internal controls –ex-ante and ex-post- to be followed for the implementation of the
project. Therefore, this chapter of the OM is satisfactory to the Bank.
Financial Reports
14. On a semester basis, PROMESAL will prepare unaudited interim financial reports (IFR)
containing at least: (i) a statement of both sources and uses of funds for each calendar quarter
and cumulative uses (with expenditures classified by component/subcomponent, use of funds by
component and beginning and ending cash balances; along with a reconciliation of the
Designated Account accompanied by the copy of the bank statement; (ii) a statement of budget
execution per component/subcomponent (with expenditures classified by the major budgetary
accounts) and all sources of financing and including variances between budget and actual
32
expenses with the respective explanatory notes of main variances. PROMESAL will be
responsible for submitting the IFRs to the Bank not later than 45 days after the end of each
semester. The reports should be prepared in local currency and in US Dollars. On an annual
basis, PROMESAL will prepare the project financial statements including cumulative figures for
the year and as of the end of that year. The financial statements will also include explanatory
notes in accordance with the Cash Basis International Public Sector Accounting Standard
(IPSAS), and the entity‟s assertion that loan funds were used in accordance with the intended
purposes as specified in the Loan Agreement. As described above, IFRs will be prepared using
the information provided by SAP. Any working paper generated for the preparation of IFRs and
annual financial statements will be maintained by PROMESAL as supporting documents.
Auditing arrangements
15. Internal Audit. SEDAPAL has an Internal Audit Department, which depends on the
Board of Directors. The audit department may include under their annual program an ex-post
review of the project activities and proposed recommendations if needed. If such audits occur,
PROMESAL will provide the Bank with copies of internal audit reports covering project
activities and financial transactions.
16. External Audit. SEDAPAL through PROMESAL will prepare the annual project
financial statements, which will be audited following International Standards on Auditing (ISA),
by an independent firm and in accordance with terms of reference (TORs), both acceptable to the
Bank. The audit opinion covering project financial statements will contain a reference to the
eligibility of expenditures. An audit firm will be hired by SEDAPAL, through the General
Comptroller Office of Peru, which will perform the audit of the project and provide the audit
report. The audit report will be required to include a section on the state of the internal control of
the implementing entity. PROMESAL will submit the audit report to the Bank no later than 6
months after the end of each fiscal year. In addition to the audit report of the project, SEDAPAL
will submit its entity annual audited financial reports to the Bank. The audit work for the project
described above can be financed with loan proceeds. PROMESAL will ensure that the first
external audit is contracted within six months after Loan Effectiveness.
Flow of funds and Disbursement Arrangements
17. SEDAPAL will be the sole responsible entity for managing loan proceeds SEDAPAL
will co-finance the project and those funds will become available for the project implementation,
as counter-part funds, upon budget approval by SEDAPAL‟s Board of Directors.
Disbursement Methods
18. On a preliminary basis and following the general practice of the current portfolio, the
following disbursement methods may be used to withdraw funds from the credit: (a)
reimbursement, (b) advance, and (c) direct payment. Under the advance method and to facilitate
project implementation, a Designated Account in US Dollars would be opened and maintained
by SEDAPAL in the commercial financial institution. The ceiling of the Designated Account
will be of US$1 million for outstanding advances for the first six months after effectiveness and
US$2 million thereafter. Funds deposited into the Designated Account as advances, would
33
follow Bank‟s disbursement policies and procedures, to be described in the Legal Agreement and
Disbursement Letter.
Payment mechanism
19. To process payments, the entity will be able to withdraw the required amount to a local
currency bank account from where payments to consultants and suppliers would be made. The
procedures and internal mechanism are reflected in the Operational Manual and are being
updated to reflect particularities for this new operation.
Disbursement Deadline Date
20. Four months after the closing date specified in the Loan Agreement. Loan proceeds will
be disbursed against the following expenditure categories:
Table of Loan Proceeds Category Amount of the Loan
Allocated (expressed in USD)
Percentage of Expenditures to be
financed (exclusive of taxes)
10
(1) Goods, works, consultants‟
services, Non-Consultant Services and
Training for Part 1 of the Project
51,300,000 100%
(2) Goods, consultants‟ services, Non-
Consultant Services and Training for
Part 2 of the Project
1,880,000 100%
(3) Goods, consultants‟ services, Non-
Consultant Services and Training for
Part 3 of the Project
1,320,000 100%
TOTAL AMOUNT 54,500,000
2.3 Procurement Plan and Procurement Arrangements.
A. General
21. Procurement for the proposed project would be carried out in accordance with the World
Bank‟s "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004 revised
October 2006 and May 2010; and "Guidelines: Selection and Employment of Consultants by
World Bank Borrowers" dated May 2004 revised October 2006 and May 2010, and the
provisions stipulated in the Loan Agreement. For each contract to be financed by the Loan, the
different procurement methods or consultant and non-consultant selection methods, the need for
pre-qualification, estimated costs, prior review requirements, and time frame are agreed between
the Borrower and the Bank in the Procurement Plan. The Borrower has prepared a Preliminary
Procurement Plan for the entire scope of the Project and a detailed and comprehensive
procurement plan, that includes all contracts for which bid invitations and invitations for
proposals are to be issued in the first 18 months of project implementation. The Procurement
10
It will be important to ensure that the invoices sent to the Bank clearly indicate amounts net of taxes for Bank
financing which is exclusive of taxes.
34
Plan will be available at the Procurement Plans Execution System (SEPA). Goods and works
shall be procured under contracts awarded on the basis of International Competitive Bidding,
National Competitive Bidding, Shopping or Direct Contracting. Consultants‟ services shall be
procured under contracts awarded on the basis of Quality and Cost-based Selection, Quality-
Based Selection, Selection under a Fixed Budget, Least Cost Selection, Selection Based on the
Consultants‟ Qualifications, Single Source Selection and, Procedures set forth in Section V of
the Consultant Guidelines for the Selection of Individual Consultants, including Sole Source
Selection for Individual Consultants.
B. Assessment of the agency’s capacity to implement procurement
22. Country. The national procurement system of Peru has made significant progress in the
last few years, particularly with regard to access to information and adoption of standard bidding
documents. However, it still suffers from serious setbacks that affect both the efficiency and
transparency of government purchasing. Of most concern, is the distortion of competition
generated by the use of the referential price and the permanent concern for literal compliance
with the requirements set forth in the national regulatory framework, as well as the lack of
procurement capacity in some sectors, particularly at the local level.
23. Agency. Following the implementation arrangements, PROMESAL will be responsible
for the administration of the Project, including procurement, disbursement and financial
management matters of this operation. PROMESAL is adequately staffed and will maintain its
capacity to conduct Procurement under this new operation. As part of Project‟s preparation,
PROMESAL has updated the Operational Manual which provides detailed procurement
information for project‟s implementation.
24. An assessment of the implementation agency‟s capacity to implement procurement
actions for the project was finished on November 2010. The capacity assessment looked into PU:
(a) organizational structure, (b) facilities and support capacity, (c) qualifications and experience
of the staff that will work in procurement, (d) record-keeping and filing systems, (e) procurement
planning and monitoring/control systems used, and (f) capacity to meet the Bank‟s procurement
contract reporting requirements. It also reviewed the procurement arrangements proposed in the
Procurement Plan.
25. The overall project risk for procurement is Moderate
26. The corrective mitigating measures proposed are:
MITIGATING MEASURES STAGE
An external procurement review must be contracted To be carried out during/throughout
project implementation
The Procurement Plan must be included and managed through
SEPA
Procurement Special Provisions.
35
27. In addition and without limitation or restriction to any other provisions set forth in this
Section or the Procurement Guidelines, the following provisions shall govern the procurement of
goods, non-consultant services and works with National Competitive Bidding procedures:
(a) Foreign bidders shall not be required to be locally registered as a condition of
participation in the selection process.
(b) No reference value shall be required for publication in the bidding documents or used for
the purpose of evaluation.
(c) Award of contracts shall be based exclusively on price and, whenever appropriate, shall
take into account factors that can be quantified objectively, and the procedure for such
quantification shall be disclosed in the invitation to bid.
(d) Foreign bidders shall be allowed to participate in National Competitive Bidding without
restriction and shall not be subject to any unjustified requirement which will affect their
ability to bid such as, but not limited to, the requirement to authenticate their bidding
documents or any documentation related to such bidding documents with either Peruvian
Consulates, the Ministry of Foreign Affairs, or any Peruvian authorities as a prerequisite
of bidding.
(e) The Borrower shall use standard bidding documents and standard evaluation formats, all
satisfactory to the Bank.
28. In addition and without limitation or restriction to any other provisions set forth in this
Section or the Consultant Guidelines, the following provisions shall govern all employment of
consultants:
(a) Foreign consultants shall not be required to be locally registered as a condition of
participation in the selection process.
(b) Foreign consultants shall not be required to authenticate any documentation related to
their participation in the selection process with either Peruvian Consulates, the Ministry
of Foreign Affairs, or any Peruvian authorities as a condition of participation in said
selection process.
(c) The Borrower shall use standard requests for proposals and standard evaluation formats;
all satisfactory to the Bank.
(d) Foreign consultants, either individuals or firms, shall not be required to pay fees to the
Peruvian Consultants‟ Association that are different from those required for Peruvian
consultants.
(e) No consultant hired for the Project, at the time he or she is carrying out his or her
contractual obligations as consultant, may hold civil service office or any other position
in any agency of the Borrower, nor shall such consultant have any right to re-entry into
any such office or position upon the conclusion of his or her consulting services.
29. Annual Procurement External Reviews. The Project Implementing Entity shall: not
later than October 15 of each year during Project implementation or such other date agreed with
the Bank and set forth in the Operational Manual, contract annual procurement reviews for each
year of Project implementation, with independent reviewers of experience and qualifications
satisfactory to the Bank operating under terms of reference satisfactory to the Bank, and have all
the procurement records and documentation for each fiscal year of the Project reviewed, in
accordance with appropriate procurement review principles; ii) not later than July 31 of each
year during Project implementation or such other date agreed with the Bank and set forth in the
36
Operational Manual, furnish to the Bank the procurement review (covering the previous calendar
year), of such scope and in such detail as the Bank shall have reasonably requested; iii) furnish to
the Bank or to said reviewers such other information concerning said procurement records and
documentation as the Bank shall from time to time reasonably request; and iv) not later than
September 15 of each year during Project implementation or such other date agreed with the
Bank and set forth in the Operational Manual, discuss the results of such review with the Bank
and take into account the Bank‟s comments thereon
C. Procurement Plan
I. General
Bank’s approval Date of the procurement Plan – March 3, 2011
Expected Date of General Procurement Notice: April 2011
Period covered by this procurement plan: 4 years
II. Goods, Works and non-consulting services.
30. Prior Review Threshold: Procurement Decisions subject to Prior Review by the Bank as
stated in Appendix 1 to the Guidelines for Procurement:
Thresholds for procurement methods and prior review (thousands of USD)
Expenditure
Category
Contract Value (Thresholds) US
$ thousands Procurement Method
Contracts Subject
to Prior Review
1. Works >3.000 ICB All
250 – 3,000 NCB First
<250 Shopping First
Regardless of value DC All
2. Goods >250 ICB >350
50 - 250 NCB First
<50 Shopping First
Regardless of value DC All
Note: ICB = International Competitive Bidding
NCB = National Competitive Bidding
DC = Direct Contracting
Reference to Project Operational/Procurement Manual:
31. The Borrower, as part of Project‟s preparation, has updated the Operational Manual
which provides detailed procurement information for project‟s implementation.
37
III. Summary of the Procurement Packages
1 2 3 4 5 6 7
Ref.
No.
Description Estimated
Cost US$
million
Packages Domestic
Preference
(yes/no)
Review by
Bank
(Prior/Post)
Comments
CIVIL WORKS
1 Rehabilitation of
water and
sewerage
networks in
Northern Lima
50
(excluding
taxes)
2(Packages
3 and 4)
No Prior
IV. Selection of Consultants
32. Prior Review Threshold: Selection decisions subject to Prior Review by Bank as stated
in Appendix 1 to the Guidelines Selection and Employment of Consultants:
Thresholds for methods and prior review (thousands of USD)
Consulting Services Contract Value (Thresholds) US
$ thousands Procurement Method
Contracts Subject to
Prior Review
3.a Firms >100 QCBS, QBS, FBS, LCS
>200;
<200 Terms of Reference
<100
QCBS, QBS, FBS, LCS,
CQS Terms of Reference
Regardless of value SSS All
3.b Individuals
Comparison of 3 CVs in
accordance with Chapter
V of the Guidelines
>100;
<100 Terms of Reference
Note: QCBS = Quality- and Cost-Based Selection
QBS = Quality-Based Selection
FBS = Fixed Budget Selection
LCS = Least-Cost Selection
CQS = Selection Based on Consultants' Qualifications
SSS: Single Source Selection
33. Short list comprising entirely of national consultants: Short list of consultants for
services, estimated to cost less than US$350,000 equivalent per contract, may comprise entirely
of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant
Guidelines.
38
Consultancy Assignments with Selection Methods and Time Schedule
1 2 3 4 5
Ref. No. Description of Assignment Estimated Cost
US$ Processes
Review by Bank
(Prior/Post)
Firms
1.1 Communication Strategy for Social
Intervention
150,000
(excluding taxes)
QCBS Prior
1.2 Social Marketing for Water Saving Devices 1,250,000
(excluding taxes)
QCBS Prior
2.1 Support for the implementation of the GIS 432,000
(excluding taxes)
QCBS Prior
2.2 SCADA information technology
standardization strategy and consolidation
648,000
(excluding taxes)
QCBS Prior
2.3 Preparation of a strategy to efficiently meet
user demand for water and sanitation
services
300,000
(excluding taxes)
QCBS Prior
2.4 Options for the development of a new
organizational model
500,000
(excluding taxes)
QCBS Prior
Individuals
1 Contract Management Engineer $54,000 (per year) 3 CVs Prior
2 Works Supervisor Engineer $42,000(per year) 3CVs Prior
3 Procurement Specialist $42,000 (per year) 3CVs Prior
4 Financial Specialist 1 $42,000 (per year) 3CVs Prior
5 Financial Specialist 2 $36,000 (per year) 3CVs Prior
6 Procurement external review $10,000 (per year) 3CVs Prior
34. In addition to the prior review supervision to be carried out from Bank offices, the
capacity assessment of the Implementing Agency has recommended annual supervision missions
to visit the field to carry out post review of procurement actions. The size of the sample for post-
review will be not less than 1 in 10 contracts.
3. Environmental and Social (including safeguards)
35. The proposed development objective of this project is to improve the water and sewerage
services in the Northern Service Area of Lima. This will be achieved by the rehabilitation of the
infrastructure network and by the strengthening of SEDAPAL‟s operational capacity.
36. In order to improve the continuity and quality of the services, SEDAPAL will follow a
two-tier strategy. The first is to make more water available by reducing the physical losses in the
system, and the second is to improve the operational and commercial management of the water
and sanitation system by: (a) reducing commercial losses, (b) optimizing the technical operation
of the systems (pressure management, sectorization and valve control, automatization for the
control systems and others). Given the new water source that will become available in the
Northern Service Area in mid-2011 by the construction of Huachipa Water Treatment Plant, it is
important to count on a working water and sewerage system that is able to withstand the new
pressures and volumes.
39
37. The proposed project will consist of three components: (i) rehabilitation and
improvement of water and sewerage networks in the First Northern Service Area of Lima, which
include social interventions aimed at enabling households to maximize water benefit s, such as
promoting the use of water saving equipment; (ii) improving management for better transparency
and governance, which will provide technical assistance for the institutional strengthening of
SEDAPAL; and (iii) Project management.
38. This section provides information as to the World Bank Safeguard Policies triggered by
the project, safeguards-related risks and/or impacts identified through field visits to the project
area and discussions with SEDAPAL staff, the measures to be taken to address those safeguards
related risks as stated in the terms of reference for the EA undertaken according to the national
environmental regulations, and procedures for ensuring those measures are implemented during
project execution. The project has been designed to comply fully with the World Bank
Environmental and Social Safeguards Policies.
Compliance with the World Bank Safeguards and the Peruvian Environmental Legislation
39. Following the World Bank safeguards principles, the project was classified as an
Environmental Category B and the following safeguards were triggered: OP 4.01 Environmental
Assessment; OP 4.12 Involuntary Resettlement; OP 4.11 Physical and Cultural Resources.
40. According to the sectoral environmental legislation for water and sanitation projects,
enforced by the Ministry of Housing, Construction and Sanitation (MVCS), SEDAPAL has to
conduct a detailed Environmental Assessment (EA). Terms of reference for this detailed EA
were prepared by SEDAPAL in close coordination with the World Bank in 2009 to fully comply
with the letter and spirit of relevant World Bank Safeguard Policies. The preparation of the EA
has been completed.
Environmental Assessment (OP 4.01)
41. As the project is classified as Category B, an Environmental Assessment (EA) is in
required, in accordance with OP 4.01, including an Environmental Management Plan. The
detailed EA has identified potential direct and indirect environmental impacts associated with the
project and other alternatives, and developed mechanisms and measures to avoid, minimize
and/or mitigate negative impacts. The Environmental Management Plan, contained in the EA
study, has specified activities, budgets and responsibilities to ensure the implementation of these
mitigating measures.
42. Since the detailed EA has been reviewed by the World Bank, an Addendum to the
original EA report was prepared by the consulting firm. The full EA report (including the
Addendum) was disclosed at SEDAPAL‟s Webpage in September 20, 2010. A copy also has
been disclosed at the Bank‟s InfoShop on December 21, 2010.
40
Positive Environmental Impacts
43. The project is expected to have a very positive environmental impact overall, by (i )
consolidating and improving water resources management in Lima; (ii) connecting people to
rehabilitated sewage collection systems in the First Northern Service Area of Lima, thereby
improving human and environmental health conditions and protecting very scarce underground
water sources, and (iii) increasing the efficiency of the water supply services provided by
SEDAPAL.
44. Efficient water supply services. The project will directly improve SEDAPAL‟s capacity
of efficiently using water resources by reducing water losses and the contamination of
underground water sources. This reduction of water losses (estimated at 12,000 m3/yr after
project completion) is critical in a city like Lima, the second largest city in the world located in a
desert area after Cairo and a city whose main water resources come from rapid retreating glaciers
in the highlands due to climate change. This support will consist of the rehabilitation of the
primary and secondary water networks as well as the construction of several water reservoirs for
storage and pressure stabilization, the installation of water sectors for consumption and water
meter and pressure management, and the replacement of water and sewerage connections.
45. This component will include a social intervention to facili tate the households
transitioning to a full-pressure, 24 hour-service, while minimizing the impact of the new water
billed based on actual consumption rather than estimated by replacing the current sanitary
installation with water-savings devices. This support will also include support to SEDAPAL
aimed at maximizing the benefits gained by the infrastructure interventions under Components 1
(listed above), and also includes: (a) automatization and operational control systems, (b)
enhancing the micro-credit mechanisms to allow poor households to upgrade their sanitary
facilities with newer, water-saving devices, and (c) Project Management to include also studies,
audits, as well as monitoring and evaluation.
46. Improvements in environmental and human health conditions. According to the Country
Environmental Analysis, (World Bank, 2006), of all the impacts of environmental degradation in
Peru, those related to health are the most significant. The study of the costs of degradation
carried out as part of the Country Environmental Analysis estimated the annual damages from
environmentally related sources at S/. 8.2 billion (US$2.45 billion). Over 70 percent of that,
around S/. 5.85 billion (US$1.75 billion), is attributable to environmental health, arising from
poor quality water supply, sanitation and inadequate hygiene. The project will directly improve
environmental health conditions of population to be served. Rehabilitation of sewerage systems
will decrease the rate of breaks in pipelines what exposes population to water borne diseases and
odors with significant human health impacts. This full pressure, 24-hour service will also
eliminate storage devices, change water use patterns and modify hygiene practices. This
behavioral change will in turn eliminate fertile ground for water borne diseases such as dengue
and gastrointestinal cases associated with lack of hygiene. It is expected that improved sewage
collection systems will generate positive environmental benefits to the quality of aquifers in
Lima, as well as provide a healthier urban environment due to improved sanitation and water
services to the urban population to be served by this project.
41
Potential Negative Impacts
47. During construction: The environmental and social impacts associated with these works
are considered low and no significant and irreversible environmental damage is expected.
Potential temporal minor negative environmental impacts, mostly nuisances (e.g., disposal of
waste from works and replaced pipelines, occasional spills from liquid waste in machinery
camps, odors, dust and noise, traffic congestion, access-related restrictions on neighbors,
temporary effects on socioeconomic activities and small businesses, street vendors proliferation,
etc.) might happen, associated with the construction works. To avoid these potential negative
impacts, appropriate measures will be incorporated in the project‟s design. These measures have
been addressed in detail in the EA report and its constituent Environmental Management Plan
(EMP). Table 1 presents the major negative environmental impacts identified during the EA
process.
Table 1 Negative Environmental Impacts during construction
Generation of particulate matter and dust during transportation of materials and due to
manipulation of asbestos-cement pipelines
Accumulation of pipelines waste materials due to excavations
Temporal interruption of water and sewage services
Increase in congestion due to restricted access to vehicles and pedestrians
Unpleasant odors due to wastewaters
Noise produced by machinery and trucks and by demolition of existing infrastructure
Removal of trees and bushes due to rehabilitation of reservoirs located in parks
Soil contamination generated by accumulation of concrete waste in the area of works, solid
waste generated by workers and spillover of fuels, painting material and oils
Human health and security risks during excavations and construction works in reservoirs Source: EA report (Nippon Koei, 2010)
Environmental Management Plan (EMP)
48. The Environmental Management Plan (EMP) includes a series of very detailed and
adequate mitigation and enhancement measures designed to ensure the project minimizes any
negative impacts, and improve the positive ones. Costs of these measures have been estimated.
The EMP is organized into several programs to be implemented during the
construction/rehabilitation and operation phases. The EMP includes the following measures and
programs:
Environmental impacts control and mitigation measures
Water management program
Soil management program
Solid waste management and final disposal program (includes disposal of wastes from
asbestos-cement pipelines)
Vegetation conservation, restoration and compensation program
Environmental compensation measures program
Construction materials management program
Social management program
42
49. The EA report also includes other plans and programs such as: (i) Environmental
monitoring plan, (ii) Environmental training and education plan, (iii) Surveillance program, (iv)
Investment program, (v) Occupational health and safety plan, (vi) Closing program, and (vii)
Contingency plan.
50. Table 2 summarizes the main negative environmental impacts and the corresponding
mitigation measures:
Impacts Mitigation Measures
Air pollution due to combustion
gases, dust from works in pipelines
and others
Preventive inspection and maintenance of engines and vehicles
(trucks, machinery, etc.)
Optimization of transport time
Preventive maintenance of unpaved access roads, considering
wetting down those roads
Permanent wetting down of streets to avoid dust
Carefully selecting the places to store construction materials and
excavation wastes and materials
Provide health protection equipments to workers
Wetting down of land to be removed
Speed limits to tipper trucks and cover the tipper to avoid dust
Use of protection equipment by workers exposed to particulate
matter from polyethylene and asbestos-cement pipelines
Compliance with safety measures to replace asbestos-cement
pipelines
Transport of asbestos-cement wastes in the minimum possible time
to an identified landfill for hazardous materials (located in Chilca,
south of Lima)
Soil alteration due to operation of
heavy duty equipments Prevent dumping of materials from excavations in adjacent land
plots and properties
Heavy load machinery will limit their movement to the project area
and access ways
Minimize the area to be excavated
Nuisances due to noise generated by
transit of heavy duty vehicles Frequent maintenance of equipments engines
Use of protection equipments against noise by workers
Landscape alteration due to heavy
duty machineries and equipments Proper management of wastes
Move equipments and machinery immediately after completion of
works
Clearing and leveling only the minimum area required by
construction activities
Soil contamination due to solid and
liquid wastes, wastewaters, fuels
and spillovers, etc.
Distribution of containers for collection of wastes in the project
areas
Collection of wastes in specific containers, avoiding to mix them,
according to the procedures established
Proper disposal of solid wastes in designated sanitary landfills
Containers for fuels and oils must be hermetic and in perfect
conditions
Hire of portable chemical toilets and hygiene facilities for workers
Disposal in appropriate landfills and recycling of industrial wastes
(e.g. bottles, cans, used filters, cement residuals, etc.)
Store fuels and lubricants in appropriate containers in a designated
area within the camp site
43
Impacts Mitigation Measures
Generation of waste materials Segregate and accumulate solid wastes in hermetic containers for
disposal in authorized landfills
Impacts on health due to workplace
accidents Hire experienced and trained personnel for operation of machinery
and equipments
Permanent use of personal protection equipment by personnel
Training on safety measures
Training on hygiene habits and cleaning up of facilities
Impacts on green areas Restore trees and gardens in areas affected by civil works Source: EA report (Nippon Koei, 2010)
51. Project Environmental Management: The environmental management of this project will
be undertaken by SEDAPAL‟s Environmental Management Team (EGAm) in close coordination
with the Ministry of Housing, Sanitation and Construction‟s Office for Environment.
SEDAPAL‟s EGAm and SEDAPAL‟s Social Unit will be responsible for coordinating the
project‟s environmental and social actions respectively, while the Ministry of Housing,
Sanitation and Construction‟s Office for Environment will be in charge of providing inspection,
follow-up and guidance to the execution of mitigation measures required according to what was
established in the EA report, that has to be approved by the Ministry of Housing, Construction
and Sanitation‟s National Directorate for Sanitation, as well as environmental oversight of the
works. The Ministry of the Environment (MINAM) will be permanently informed since it is the
ruling authority o the National System for Environmental Impact Assessment (SEIA) and is
allowed o randomly review this project‟s EA according to the regulation of the law that created
the SEIA.
Borrower’s institutional capacity for environmental and social safeguard policies and
institutional strengthening needs.
52. The Borrower‟s institutional capacity for safeguard policies is good. SEDAPAL‟s
Environmental Management Team (EGAm) is ascribed to the Management Unit for Logistics
and Services. EGAm‟s main functions are: (i) prepare SEDAPAL‟s Environmental Management
Plan and assuring its implementation and updating11
; (ii) develop planning, implementation,
enforcement and evaluation actions in investment projects for maintenance and expansion of
green areas, reforestation and landscape development in SEDAPAL‟s Operations Center located
in La Atarjea and the Rimac River Landscape Reserve; (iii) undertake inter-institutional
coordination for the proper management of the Rimac, Chillon and Lurin River watersheds,
including their environmental restoration; and (iv) establish linkages with national and
international entities on environmental management issues.
53. In order to fulfill these tasks, EGAm‟s structure currently includes a 13-person
environmental management team in charge of environmental aspects of water and sanitation
11
This in turn will require: (i) coordinate with project, services and activities affecting SEDAPAL‟s environmental
management, (ii) propose to and coordinate with SEDAPAL‟s different teams the preparation of procedures to
ensure that SEDAPAL personnel‟s behavior conducts to improvements in the environmental performance of their
activities, products and services, (iii) coordinate with projects and teams the inclusion of EAs into sewerage projects,
and (iv) develop environmental awareness programs targeted to workers, suppliers and clients.
44
projects. At present, out of these, 5 people are specialists in environmental impact assessments
and environmental management.
54. A Plan for the Organizational Strengthening of SEDAPAL‟s Environmental Management
has been recently prepared. Under this Plan, EGAm will be transferred from the Logistics and
Services Management Unit to the Research and Development Management Unit. Also, tasks
such as maintenance of La Atarjea Operations Center‟s green areas, operation of the irrigation
system and management of forested areas in the Rimac River Ecological Reserve will be
transferred from EGAm to SEDAPAL‟s Administration and Conservation Team. In practice this
internal reforms in SEDAPAL‟s organizational structure will imply a reduction in personnel
allocated to EGAm, which will be reduced to a team of 6 professionals. Out of these, only 3
people will be in charge of environmental management issues, including EAs review and
monitoring of measures contained in the corresponding EMPs on the basis of information
reported by an independent supervision company.
55. Implementing the aforementioned Plan for the Organizational Strengthening of
SEDAPAL‟s Environmental Management will also include the following actions: (i) preparation
of EGAm‟s Organization and General Responsibilities Manual, (ii) preparation and
implementation of SEDAPAL‟s 2011-2015 environmental management plan,12
(iii) approval of
EGAm‟s Personnel Allocation Chart (EGAm will be reduce from a 13 person team to a 6 person
team), and (vi) allocation of human resources to EGAm to strengthen its environmental
management capacity.
56. Main responsibility for oversight implementation of the EMP will lay on SEDAPAL‟s
Lima Marginal Areas Sanitation Improvement Project (PROMESAL) and SEDAPAL‟s
Environmental Management Team (EGAm). PROMESAL will count on the technical support to
be provided by a consulting firm responsible of supervising contractor‟s compliance with the
World Bank‟s social and environmental safeguards. This supervision company will send its
supervision reports to PROMESAL which in turn will send them to EGAm and the World Bank.
EGAm and PROMESAL‟s Social Team will be responsible for verifying proper implementation
of the project‟s environmental and social actions respectively. Also, PROMESAL, in permanent
coordination with EGAm, will be in charge of providing inspection, follow-up and guidance to
the technical execution of civil works and implementation of mitigation measures required
according to what was established in the EA report and its EMP as well as environmental
oversight of the works.
57. Social Management Program: As part of the detailed EA, a social management plan will
be developed for this project. This plan will ensure a permanent and timely communication
among social and institutional stakeholders and allow mitigation of social and economic impacts
that might occur during the project construction and operation phases.
58. Disclosure, Consultation and Communication program : A public consultation on social
and environmental issues was held in October 2010 with sector stakeholders and civil society to
12
This Environmental Management Plan includes: (ii) SEDAPAL‟s Solid Waste Management and Minimization
Plans, (iii) Implementation and operation of the Integrated Management System (ISO 14001), and (iii) Coordination
with national and international institutions working on environmental management.
45
discuss the findings of social assessments, and present the EA report and mitigation measures
contained in the EMP. The EMP includes strategies on disclosure, consultation and
communication to inform the affected groups on management of environmental impacts. Specific
procedures to permanently inform the local groups on the scope of works and the EMP proposed
have also been prepared. Mechanisms to ensure consultations with these groups during the
project implementation have been designed aimed at addressing environmental issues that might
affect them.
59. In addition, SEDAPAL manages a grievance mechanism called AGUAFONO, which is
considered best practice in the public sector and is well-known by the population. This
mechanism is another channel where the company can receive feedback from civil society.
During preparation the Project team discussed the integration of system data acquired by
AGUAFONO and the technical department, with regards to pipe breakages and network issues,
in order to have a comprehensive picture on the performance of its networks. The undertaking of
this activity will be further considered during project implementation.
Physical Cultural Resources (OP 4.11)
60. Peru has a well-developed legislative and normative framework for management of
physical cultural property, which is under the oversight of the National Institute of Culture
(Instituto Nacional de Cultura – INC). In accordance to local legislation and Bank requirements,
SEDAPAL will include procedures for screening any known cultural property in the Project area
and incorporate „chance find‟ procedures in the event that culturally significant resources are
discovered during implementation. Procedures for the identification and protection of physical
cultural resources have been included in the EMP.
61. The EA report has included a list of archeological sites located in the project area and an
Archeological Monitoring Plan which specifies the following measures to be considered by
project contractor during the rehabilitation works: (i) preventive measures, (ii) immediate
measures, (iii) measures for the intervention of the monitoring Archeologist, (iv) prevention and
mitigation measures, and (v) a system for recording, analyzing, storing and delivering
archeological materials to Peru‟s National Institute for Culture (INC). The contractor will hire
two archeologists to support its personnel to take into account the aforementioned measures.
Implementation of the Archeological Monitoring Plan will be supervised by the National
Institute for Culture (INC).
Involuntary Resettlement (OP 4.12)
62. SEDAPAL has developed an Involuntary Resettlement Framework to be applied on all its
future interventions, regardless of source of financing. The Involuntary Resettlement
Framework (Norma Técnica de Reasentamiento) was developed in accordance to OP 4.12, and
will guide the preparation of Resettlement Plans, if necessary, during Project implementation,
and has been adopted and disclosed by SEDAPAL on February 16, 2011 as corporate policy to
guide all future investment operations.
46
63. SEDAPAL‟s policy is to guide the design and implementation of Involuntary
Resettlement Plans, establish policies and guidelines to mitigate and compensate the negative
effects derived from the involuntary taking of land to be used in the construction or rehabilitation
of reservoirs, wells, pumping stations, cisterns, tunnels, lagoons, networks, etc. Aiming to
reestablish equivalent and/or improved social and economic conditions to the ones families
enjoyed previous to the institution‟s intervention.
64. Specific objectives include: (i) Acknowledgment of involuntary displacement; (ii) fair
and assisted compensation for physical, economic and social losses; (iii) reestablishing previous
social and economic living conditions; (iv) assisting resettled families in their transition and
adaptation to their new surrounding until they have started to rebuild social networks; (v) Inform,
consult and engage affected people in the objectives of the project; (vi) assistance in the
productive use of compensation payments; (vi) minimizing the social and economic impacts that
derive from land acquisition, lots, housing or limitations in their use; (vii) Reestablish and
improve, if possible, affected people‟s living; ( viii) In the case that the affected person prefers to
receive economic compensation for their house, ensure that the affected people, families and
communities participate in the decision.
65. Grievance Mechanism: The project‟s grievance mechanism will be disclosed as a part of
the project‟s general social strategy. In other words users w ill interact personally with social
professionals who will explain their rights in terms of expressing complaints and grievances and
the due redress process it will follow. This mechanism is meant to cater especially to cases of
involuntary taking of land. In addition, SEDAPAL manages a grievance mechanism called
AGUAFONO, which is considered best practice in the public sector and is well -known by the
population. This mechanism is another channel where the company can receive feedback from
civil society. During preparation the Project team discussed the integration of system data
acquired by AGUAFONO and the technical department, with regards to pipe breakages and
network issues, in order to have a comprehensive picture on the performance of its networks.
The undertaking of this activity will be further considered during project implementation.
Social Assessment
66. Beyond the safeguards that were triggered: OP 4.01 Environmental Assessment; OP 4.12
Involuntary Resettlement; OP 4.11 Physical and Cultural Resources, SEDAPAL has prepared a
social assessment for the area of the Northern Service Area, focusing on the four prioritized
districts (Los Olivos, Independencia, San Martin de Porres and Comas), which provided
information on the characteristics of the population, map of stakeholders, social and economic
issues of the beneficiaries and developed a consultation with female leaders. The report includes
a directory of civil society organizations, NGOs and community based groups, for project
implementation. The outcomes and findings of social assessment will be disseminated via
SEDAPAL‟s web site including a video of a social consultation with women.
67. The social report has identified the following social risks and mitigation measures.
68. The social assessment evidences opportunities and risks in the project, among the
relevant opportunities there is the improvement of the capacities of the water management of the
47
population, participation in the decisions, control of works and surveillance of the system for its
sustainability, and access to temporary employment in the works (estimate a hiring capability of
2600 people). It identified as potential risks, potential social conflicts during the installation of
meters of water consumption, for the excessive extension of the duration of the works, and/or for
the increasing of the costs of the works beyond the expected ranges.
69. People‟s participation and social consultations can be a mechanism for good government,
and therefore requires resources for its appropriate implementation. There are four aspects for to
follow, (i) commitment of the local actors for preventive group actions to avoid unwanted
outcomes, (ii) public investment (SEDAPAL, Municipalities) to strengthen the mechanisms of
social participation and water management; (iii) management planning by results; and (iv)
transparency and social accountability.
3.1 Institutional Arrangements for Management of Environmental and Social issues
70. In order to fulfill these tasks, the EGAm‟s structure includes an 11-person environmental
management team in charge of environmental aspects of water and sanitation projects. Out of
these, 5 people are specialists in environmental impact assessments. EGAm‟s team with count on
the support of the technical experts from the company in charge of rehabilitation supervision to
be hired by SEDAPAL. This rehabilitation supervision company will have a team in charge of
environmental oversight of the works.
4. Monitoring & Evaluation
71. The results framework and monitoring strategy are included in Annex 3. This framework
has been developed in close coordination with SEDAPAL. PROMESAL will consolidate the
data at the project level and produce semi-annual reports to monitor progress. An impact
evaluation study – Encuesta de Evaluación de Impacto del Proyecto – that will analyze the effect
of the planned investments on improving the quality of service delivery in the Project area is
currently being designed.
72. Overall responsibility for monitoring and evaluation of the Project will lie with
PROMESAL, which will provide timely information about the progress and execution of the
project, including qualitative information on the execution of selected activities, procurement
and contractual decisions, accounting and financial recording, and other operational and
administrative matter. The Project Operations Manual provides specific details regarding
monitoring and evaluation responsibilities, including data collection requirements, timing and
use of information.
5. Role of Partners
73. The proposed project is part of SEDAPAL‟s program to rehabilitate the water supply and
sewerage networks in the Northern Service Area of Lima. This program will be financed in
parallel by the World Bank through this proposed operation, JICA, KfW and SEDAPAL‟s own
resources.
48
74. SEDAPAL has already secured resources from JICA and KfW, and the corresponding
specific designs are being prepared. The social interventions financed by the proposed project
will encompass the entire program (including the areas financed by JICA and KfW),
complementing the physical investments to facilitate the household transition to a full pressure
continuous service, improve hygiene practices, and provide guidance to manage consumption
including the use of in-house water saving equipment. During implementation bi-annual/annual
meetings will be scheduled with all financiers in order to review overall progress of the program
and resolve any identified issues.
75. The Bank implementation team has signed an Aide Memoire with JICA and KfW
representatives expressing the intention to share information and knowledge about the
implementation of the Program, as well as standardization of technical project reporting and
social intervention with the beneficiaries‟ communities. This Aide Memoire is in Project files.
49
Annex 4 Operational Risk Assessment Framework (ORAF)
Project Development Objective(s)
The Project Development Objective (PDO) is to improve efficiency, continuity and reliability of water supply and sanitation services in the Northern Service Area of Lima
PDO Level Results Indicators:
1. Number of daily hours water services are provided in the project area
2. Annual incidence of water pipe breakages per km of water supply network in the project area
3. Annual incidence of sewerage blockages per km of sewerage network in the project area
4. Volume of water saved in the project area
5. Number of learning events on strategic planning and management
Risk Category Risk
Rating Risk Description
Proposed Mitigation Measure
Timing for Mitigation Prep/Imp.
Project Stakeholder Risks
Stakeholder L
Borrower relation: Project implementation is delayed or discontinued due to competing priorities. Donor relation: A potential conflict or tension of objectives amongst the three donors active in the area (JICA, KfW, WB) could cause delays and undermine PDO achievement. Direct Stakeholder view: Envisaged consultation and information sharing activities fail to gain stakeholder support, delaying or obstructing Project implementation.
This project is part of a larger investment program in the Northern Service Area of Lima, one of the poorest and more marginalized areas of the city, considered a priority by SEDAPAL. Bank, JICA and KfW teams have kept fluid communications since the identification phase of the Project to ensure good levels of cooperation, coordination and complementarity. All contract packages are independent which limits inter-dependency and the implementing unit is the same, which prevents overlapping. Disclosure and consultation have begun during Project preparation and will continue throughout its implementation. SEDAPAL has an experienced team working on social outreach and appropriate communications channels (including grievance and redress mechanisms) are in place.
X X
50
Implementing Agency Risks (including FM & PR Risks)
Sector Policies and Institutions
M-L
The lack of reliable and updated information on the situation of the water and sanitation services makes the formulation of far reaching programs very difficult.
The Bank team will keep involved in its current dialogue with the government as well as the multilateral and bilateral –participation in the AGUA forum, and joint missions- to ensure that projects adhere to single sector policies. The Bank will increase its support to the standardization and collection of information though the PRONASAR project. SUNASS has already agreed to this investment Project, and given the strong justification for the investments, strong support from all actors is to be expected.
X X
Project Risks
Design
M-I
The Project will be negatively affected if the drinking water treatment plant (Huachipa) or the wastewater treatment plant (Taboada) are not fully operational by their scheduled completion time. There is also the risk of inefficiency in the investment by replacing more parts of the system than what would be technically and economically feasible.
The team will maintain close coordination with the technical staff at SEDAPAL to monitor the progress of the complementary works and to be able to adapt the proposed investments accordingly. The construction of the Huachipa water treatment plan has a 94 percent completion rate as of January 31, 2011. A methodology was developed to guide the infrastructure investment with an aim at cost containment and ensuring that expected benefits are fully realized. This methodology will be adapted and incorporated into the design of the bidding packages.
X X
Social & Environmental M-I
It is possible that the population’s shelter, assets, and/or income may be temporarily or permanently affected once the exact interventions are identified. The inappropriate handling and disposal of asbestos residuals could have significant health and environmental impacts. The full benefits of the Project will not be achieved if the beneficiaries (i.e. SEDAPAL’s customers) don’t adjust their behavior to the new levels of service being provided.
SEDAPAL prepared and adopted an Involuntary Resettlement Framework following Bank’s policy. Once the exact intervention is defined, SEDAPAL may need to prepare an Involuntary Resettlement Action Plan. Additionally, the population will be adapting to new infrastructure and thus it may take some time to adjust their use and behavior. In order to support this process, the project will include awareness-raising activities to help them adapt to the new volumes and regularity of water. The Environmental Management Plan will include specific actions to mitigate the health and environmental risks from asbestos pipelines residuals. The social intervention, which is an integral part of the Project, will be focused on preparing beneficiaries for the new levels of service. The Bank will continue working with SUNASS to point out any tariff affordability issues.
X X
51
Program & Donor L
Given the Project is part of a wider investment program in the area financed by multiple donors, lack of success in other programs or mere capacity constrains could negatively affect the impact of the Project.
The objectives of the Project are shared by the other donors. Bank and other donor’s teams will continue to keep fluid communications to ensure good levels of cooperation, coordination and complementarity.
X X
Delivery Quality L
Given the beneficiaries’ low levels of income; there is a risk that the nonpayment of water bills affects the proper maintenance and sustainability of investments.
Direct mitigation measures to be undertaken are included in the institutional development component. Component 2 of the Project will support a series of measures aimed at improving SEDAPAL’s capacity to efficiently provide water and sanitation services. The sustainability equation for SEDAPAL is computed as a whole, thus there is an intrinsic cross-subsidy to this population.
X X
Overall Risk Rating at Preparation
Overall Risk Rating During Implementation
Comments
M-L M-L
52
Annex 5: Implementation Support Plan
Strategy and Approach for the Implementation Support
1. The Implementation Support Strategy has been designed based on the following
considerations:
The Project is part of a larger investment Program for water and sanitation in the
Northern Service Area of Lima, which includes financing by JICA and KfW.
The Project‟s implementation will be managed by PROMESAL, a unit with experience in
managing large projects with international finance institutions.
All investments in the area (even those financed by other institutions and SEDAPAL‟s
own funds) will need to comply with Bank‟s safeguards.
The Project will be supervised by a mix of HQ and CO based staff. In addition to sector
specialists and safeguard and fiduciary staff, the Bank‟s team will also be supported by
local and international consultants.
Frequency of supervision missions will likely be higher at the beginning (4 per year) to
decrease to 2-3 per year after project implementation regularizes.
Fiduciary and safeguards training will be offered as necessary to PROMESAL.
2. The Implementation Plan will be revised regularly during implementation on the basis of
project progress and continuous risk assessment.
Implementation Support Plan
3. Technical Support. SEDAPAL counts with a large body of engineers with many years of
experience in the management of their complex network of water and sewerage. However, the
rehabilitation in such a scale for water supply systems will require hiring high level engineers to
assist in the reviewing technical studies.
For Component 1, world-class engineers advising the local firms on the methodology to assess
block by block whether the pipe may be replaced, rehabilitated, removed or left on site
abandoned. This involve specialized knowledge on Leak Detection Processes and Technology,
Water Loss Management in Developing Countries, Assessment of pipe infrastructure and
materials to further refine the methodology for pipe replacement or rehabilitation. Additionally,
technical advisors alternative construction technologies, and construction site management for
large works among others may be desirable.
4. Fiduciary support. As stated in Annex 3, SEDAPAL has experience implementing several
programs financed by multilateral banks. Additional measures will be taken during
implementation to strengthen SEDAPAL to support its implementation of the Program with
different financiers at the same time. Specifically:
Procurement: Implementation support will include: (i) providing training to members of
SEDAPAL; (ii) reviewing procurement documents and providing timely feedback to the
procurement units/specialists; (iii) providing detailed guidance on the Bank‟s
53
Procurement Guidelines; and in the SEPA system (iv) monitoring procurement progress
against the detailed Procurement Plan.
Financial Management. Supervision will review the Project‟s financial management
system, including but not limited to, accounting, reporting and internal controls.
Supervision will also cover sub- projects on a random sample basis.
5. Safeguards support. Given the scale of investment undertaken by SEDAPAL, particular in
the last years has created the capacity in the institution to implement large works according to
environmental and social considerations. However, the nature of the interventions as well as the
innovations introduced in the additional social activities envisaged in the Component 1, requires
advise of specialized social and marketing consultants.
6. Thematic support. The Bank has a large portfolio in Peru, including water resources and
water supply systems, and has kept engaged in policy dialogue with the Ministry of Housing,
Construction and Sanitation, the Water Regulator and Service Providers. This projects would
allow further engagement on utility management, for which SEDAPAL, the largest utility sets up
the example and innovative approaches countrywide, The team expects that most of this dialogue
will be led by the Project‟s sector specialists, particularly in the areas of financial planning,
project implementation on low-income areas and efficiency improvement. together with
representatives from the Country team and the Water and Sanitation Project. Specific support
from other sector specialists or specialists from other fields might be needed at certain times of
project implementation, particularly in the discussions about the products of the studies financed
under Component 2.
7. Implementation main focus. The following table summarizes the main focus of
implementation during the life of the project:
Time Focus Resource Estimate Partner Role
First 12 months Project launch,
establishing of Project‟s
procedures, review of
bidding documents
(including technical
designs) and monitoring
selection of consultants for
Component 2.
150 % supervision budget Joint missions, when
possible.
12-24 months Ensuring quality of works
and monitoring of
safeguards, review and
dissemination of
Component 2 products.
150 %Normal supervision
budget
Joint missions, when
possible.
24-36 Ensuring quality of works
and monitoring of
safeguards
Normal supervision budget Joint missions, when
possible.
36-60 Ensuring quality of works
and monitoring of
safeguards
Normal supervision budget Joint missions, when
possible.
Closing Collect final technical and
financial information.
50% of Normal
supervision budget
NA
54
Skills Mix Required
8. The following table summarizes the proposed skill mix and number of staff weeks in the
initial phase of project implementation. It is expected that demand will change with time.
Skills Needed Number of Staff
Weeks
Number of Trips Comments
HQ based Sector Specialists 20 4-5 Based in HQ
Environmental Specialist 3 1-2 Based in Country Office
Social Specialist 3 4 Based in Country Office
Procurement Specialist 3 1 Based in Country Office
Financial Management Specialist 1 1 Based in Country Office
Disbursement Specialist 1 0 Based in Country Office
Consultant(s) on Institutional and
Technical Issues
6 2-4 International Consultants
Other specific consultants 6 4-6 International and Local
Consultants
Partners
Name Institution/Country Role
JICA Japan Parallel Financer
KfW Germany Parallel Financer
55
Annex 6: Team Composition
World Bank staff and consultants who worked on the project:
Name Title Unit
Miguel Vargas-Ramírez Task Team Leader, Senior Water and
Sanitation Specialist
LCSUW
Lizmara Kirchner Water and Sanitation Specialist LCSUW
Michel Kerf Sector Leader LCSSD
Iris Marmanillo Senior Water and Sanitation Specialist TWILC
Raúl Tolmos Environmental Specialist LCSEN
Maria Elizabeth Dasso Senior Social Development Specialist LCSSO
Gabriela Arcos Environmental Specialist LCSEN
Kimberly Vilar Social Development Specialist LCSSO
Francisco Rodríguez Procurement Specialist LCSPT
Ana Lucia Jimenez Financial Management Analyst LCSFM
Silvia Delgado Program Assistant LCSUW
Mara Elena La Rosa Team Assistant LCC6C
Elizabeth Huaman Team Assistant LCC6C
Pilar Gonzalez Senior Counsel LEGLA
Maria Del Rocío Florez de
Cilloniz
Water and Sanitation Specialists,
Handwashing
TWILC
Patricia de la Fuente Hoyes Senior Finance Officer CTRFC
Nelly Ikeda Financial Management Analyst LCSFM
Menahem Libhaber Consultant, Lead Sanitary Engineer LCSUW
Luz Maria Gonzalez Consultant, Economist LCSUW
Augusta Dianderas Consultant, Water utility expert
Fabio Garzón Consultant, Networks Rehabilitation LCSUW
James Thomson Consultant, Pipe Materials and
construction techniques
LCSUW
Guillermo Hernandez Consultant, Automatization Specialist LCSUW
Malva Rosa Bascovich Consultant, Sanitation Markets TWILC
Ana Lucia Barragan Team Assistant LCSUW
Ignacio Urrutia Junior Professional Associate LCSUW
56
Annex 7: Economic and Financial Analysis
Cost-Benefit Analysis
Overview
1. The project will improve water supply reliability and water and sewerage service
provision in the Northern Service Area of Lima, through: (i) rehabilitation of current water and
sewerage network; and (ii) installation or replacement of equipment to induce water use
efficiency, such as: meters, and sanitary tools. On this basis, a cost-benefit analysis was
undertaken to evaluate the economic and financial viability of the project, its distributive impact,
and risk analysis.
2. The cost-benefit evaluation was made from financial and economic perspectives. From a
financial perspective, each component was evaluated appraising its costs and benefits at market
price, in the same way that SEDAPAL will be paying or getting from each component. From an
economic perspective, each component was evaluated converting financial cash flows into
economic cash flows through: (i) the use of conversion factors for the costs; and (ii) the
estimation of savings and other benefits that beneficiaries and SEDAPAL will have when the
project is implemented.
3. The proposed Project is economically feasible with returns of US$184 million and
internal rate of return of 20 percent. The evaluation shows positive economic results of US$181
million and US$3 million for the water and sewerage components respectively and internal rates
of return of 22 percent and 13 percent. The financial evaluation shows positive results only when
the tariff is raised by at least 10 percent additional to the increase already approved by the
regulator (SUNASS). The detailed cost-benefit analysis carried out for the project is available in
the project files, along with the distributive, sensitivity and risk analyses.
Summary of Methodology
4. All project components were appraised measuring their flow of costs and benefits for the
project lifetime, estimated as 30 years. Costs and benefits were expressed in constant prices of
June 2009.13
The discount rate corresponds to the opportunity cost of capital for Peru estimated
as 10 percent.
5. The benefit of the project was estimated as the incremental benefit of two scenarios: with
and without project situations. The with project situation includes the proposed investment
program and its associated targets. The without project situation considers the service would be
provided under the same conditions as it is today, and current operational indicators remain the
same or worsen along the years.
6. The with and without project scenarios were built taking into consideration that
SEDAPAL is constructing a new water treatment plant, Huachipa, and the North main water
pipe, which will bring in the first phase, an additional 5 m3/second to the water distribution
13
The exchange rate used was S/. 3.00: US$1
57
system. The Huachipa plant will treat water from the Rimac River up in the North and will
improve the water supply system through a better use of water resources. Specific considerations
were made in both the with and the without project scenarios using SEDAPAL‟s historical data
to ensure that the impact of the entry of Huachipa is properly taken into account.
7. Cost. The analysis includes investment and operating costs, and encompasses the totality
of the short-term/priority rehabilitation investments planned in the Northern Service Area of
Lima regardless of source of financing. Financial investment cost include: (i) project cost with
physical contingencies, supervision and taxes; and (ii) operation and maintenance cost (i.e.,
production cost of each of the water sources, distribution and energy costs, as well as network
maintenance). The volume of water produced is calculated based on the production capacity and
projected losses under each scenario (with and without project). Water capacity remains the same
in both scenarios; however, water losses vary in each scenario. In the with project scenario, water
losses improve from current level of 50.3 percent to 30 percent; while in the without project an
increases of one percent per year was assumed due to the high water pressure that the increase of
water supplied by Huachipa will bring. Financial prices were converted into economic prices
through the use of conversion factors.
Table 1. Investment Cost (million)
Investments S/. US$
1. Water rehabilitation, coverage expansion, and
reduction of water losses 427.3 142.4
2. Sewerage rehabilitation and coverage expansion 180.5 60.2
Total 607.8 202.6
8. Benefits. The benefits were measured in market prices and economic prices. The
financial prices correspond to the prices SEDAPAL pays for each input and the price that it
receives for each component, while the economic price corresponds to the real cost to the society
when market distortions are eliminated. Service levels in the project area are lower than
company averages, due to the shortage of water. Intermittence is high, with about 59 percent of
users receiving less than 9 hours of service per day. Non revenue water is estimated at 50.3
percent in the project area (compared with 37 percent in SEDAPAL), 80 percent of which
corresponds to physical water losses, and the remaining 20 percent to commercial losses; 33
percent of connections are metered.
9. The proposed Project is expected to improve service reliability in such a way that
rationing will be eliminated; water losses reduced to 30 percent: 25 percent of physical water
losses, and 5 percent of commercial losses; micro metering extended to 100 percent of
customers. Another benefit that comes along with an efficient water usage is the release of some
water that can be used to serve population in other areas in Lima with similar levels of water
intermittence.
10. Project benefits were measured in financing terms as follows: (a) increase of revenues,
measured as volume of water billed, times the average tariff per cubic meter for each category of
users, (b) reduction of operating costs, measured as savings on operating costs when reduction of
water losses is attained, and operation improvement is achieved, and (c) water release that comes
along with measures for an efficient water usage is included as a financial benefit when sold to
58
vicinity areas (the social tariff was used to calculate this benefit, which was also partially offset
for the operating cost required to distribute this water).
11. The Project‟s economic benefits were estimated as follows: (a) elimination of
intermittence in the water supply, (b) savings on operating costs, as a result of network
rehabilitation and reduction of water losses, and (c) savings on operating costs associated with a
reduction in the number of sewer pipes plugged. In addition, households that currently are
connected to the sewerage are subjected to bad odors, overflow of wastewater on the streets and
sometimes inside their houses. When the project is implemented none of these problems will
persist, which will bring along improvement in the quality of life and health benefits. To identify
the economic benefits, surveys were done during preparation, with results showing that the most
important impact could be measured through increase in property value of the households.
Given that no hedonic price study was carried out, different value increases on the properties
were tested for this evaluation. Finally, health benefits are likely occur when environmental
conditions improve; however they were not quantified in this evaluation.
Results
12. Economic Results. The economic evaluation shows positive results for both components
with overall returns of US$184 million and internal rate of return of 20 percent. The water
component alone shows profits of US$181 million and 21.8 percent of rate of return, while the
sewerage component‟s profit is US$2.6 million and 12 percent return. For sewerage component
the evaluation was done assuming an increase in property values of US$1,000 per dwelling
already connected to the service, which corresponds to a 5 percent increase on property value.
Additional benefits are expected from the sewerage component, which were not included in the
evaluation such as health and environmental benefits.
Table 2. Summary of Economic Results
NPV of flows („000 US$)
IRR Benefits Costs Net benefit
Water 258,532 77,447 181,085 21.8%
Sewerage 19,630 16,981 2,649 12.8%
Water and sewerage 278,162 94,428 183,734 20.2%
13. Financial Results. As Table 3 shows, neither water nor sewerage component are
financially viable showing losses of US$14 million and 9.1 percent internal rate of return. If
tariffs were increased an additional 10 percent, the internal rate of return would increase to 10
percent and the profit to US$25 million. This increase would be additional to the already
approved in June 2010 by sector regulator (SUNASS); the higher the tariff, the bigger the
financial benefits will be.
Table 3. Summary of Financial Results
NPV of flows („000 US$)
IRR Benefits Costs Net benefit
Water 79,860 89,417 (9,557) 9.1%
Sewerage 15,745 20,325 (4,580) 8.9%
Water and sewerage 95,605 109,742 (14,137) 9.1%
14. Distributive Analysis. The difference between economic and financial flows represents
rents or monetary flows that accrue to someone else than SEDAPAL. Winners and losers were
59
identified when decomposing inputs of all economic and financial costs. The big winners are the
customers who reap US$182 million benefits, which are explained mainly in the savings they
will have when service is provided continuously. The increase in bills they will have to pay to
SEDAPAL is paid off with the averted costs when rationing is eliminated. The same with the
sewerage project, customers will have higher economic benefits that compensate bills payments.
The fiscal impact for the government is positive as well increasing the taxes by US$17.5 million.
On the other hand, suppliers will have a loss of US$2 million. Society as a whole will have a net
gain of US$197 million.
15. Sensitivity Analysis. The sensitivity analysis measures the impact on the results when
variations occur on the assumptions. The outcome is measured changing one variable while all
others remain constant. The variables selected as those believed of carrying major risks were: (i)
investment cost overrun; (ii) operating cost overrun; (iii) project delays; (iv) reduction on
rationing cost; and (vi) increase of property values.
16. Results from the sensitivity analysis show that the project would have positive economic
results even when investment increases by 117 percent and when operating cost are doubled. The
rationing cost could decrease by 74 percent and the project would still be profitable. Regarding
the changes in property value, the results are highly sensitive; a one percent increase would mean
additional profit of about US$3 million.
Table 4. Results of the Sensitivity analysis. Break-even Point of Benefits
Economic results
Investment costs overrun 117%
O&M costs overrun 250%
Project Investment delays (# years) 4
Rationing costs decreases 74%
17. Risk Analysis. To enhance the accuracy of the financial and economic analysis, the
uncertainties of the real world are approximated using Monte Carlo simulation with the Crystal
Ball software. Based on a simulation of 1,000 trials the model recalculates the results of t he
financial and economic analyses by simultaneously changing each of the selected risk variables
according to their assigned probability distributions. As seen in Table 5 below, the result of the
risk analysis confirms the robustness of the economic results. The probability of having positive
economic returns is 100 percent for the water component and 69 percent for the sewerage
component.
Table 5: Risk Variables and their impact on economic results
Economic Results
Probability of positive NPV Mean expected NPV („000 US$)
Water 100% 159,914
Sewerage 69% 19,333
Total project 100% 179,142
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Financial Assessment of SEDAPAL
18. A financial analysis was undertaken to assess SEDAPAL‟s overall long-term financial
sustainability as well as its capacity to operate and maintain the investments supported under the
project. The analysis is based on SEDAPAL‟s audited historical and pro-forma financial
statements for the 2007 to 2010 period and its projected financial performance for the next 10
years.
Summary of Institutional Framework
19. Since 1990, the responsibility for water and sanitation service provision has been
decentralized to subnational governments (district or provincial municipalities).14
Local
municipalities received the ownership of the water supply and sanitation infrastructure and were
mandated15
to create urban water utilities as autonomous ring-fenced corporations under private
company law. The only exception is the service provision in Lima, which remains under the
responsibility of the central government, who retained the ownership of the infrastructure and
created SEDAPAL as a public utility operating under private law.16
SEDAPAL is the biggest
utility in the country serving more than one million connections, and its service area includes the
Lima Metropolitan Region and Callao.
20. The Ministry of Housing construction and Sanitation (MVCS) is the ruling entity for the
water and sanitation sector. Within the Ministry, the Vice Ministry of Construction and
Sanitation (Viceministerio de Construcción y Saneamiento, VMCS) is in charge of formulating,
approving, executing and supervising the country‟s water and sanitation policies.
21. The Ministry of Economy and Finance (Ministerio de Economia y Finanzas, MEF) plays
an important role in the sector, related to the terms of investment, sector planning, and
regulation. The General Directorate of Multiannual Planning for the Public Sector assesses the
multiannual strategic plans for each sector and the viability of selected infrastructure projects
through the National Public Investment System (Sistema Nacional de Inversion Pública, SNIP).
The General Directorate of Public Budget plans and assigns budget resources to each sector,
while the General Directorate of Public Credit is responsible for approving and for issuing the
national guarantee for any external debt or international cooperation for the sector. The
Directorates of Public Budget and Public Debt, determine to some extent the financing policies
of water utilities. They do so by setting limits on their indebtedness and by guaranteeing their
debts before local and international lenders.
22. The National Agency of Sanitation Services (Superintendencia Nacional de Servicios de
Saneamiento, SUNASS) was created in 1992 through the Law Decree No. 25965, and is the
sector regulator. SUNASS reports directly to the Presidency of the Council of Ministers. In
particular, the SUNASS is in charge of regulating the activity of the 50 Peruvian water and
14
Decree 574-1990 and Decree 601-1990, transfers the responsibilities for service provision to local governments.
The Constitution of 1993 and the Organic Law of Municipalities (23853) confirms that local responsibility. 15
Law No. 26338 of July 22, 1994 known as the General Water and Sanitation Law (Ley General de Servicios de
Saneamiento). 16
Decree-Law No. 25491 (May 7, 1992), which merges the Ministry of Housing and Construction with the Ministry
of Transport, with the exception of SEDAPAL that is transferred to the Ministry of Presidency.
61
sanitation utilities, including SEDAPAL. The agency publishes regularly reports on the
performance of the service operators and proposes management frameworks such as tariffs
models.
23. The main planning tool for public water and sanitation utilities in Peru is the optimized
master plan, which defines the needs in terms of investments and resources for a period of
around 30 years. Every optimized master plan has to propose an investment program meeting the
five following priorities: (a) improvement of water quality; (b) increased efficiency in the use of
water resources; (c) increased access to water supply and sanitation services; (d) increase in the
level of wastewater treatment; (e) and other required investment projects. In addition to
investment planning this plan is required to determine the tariff structure and level (calculated
according with a specific methodology developed by SUNASS) and the performance indicators
to be achieved by the each utility. In the absence of an approved optimized master plan,
SUNASS does not allow a water and sanitation utility to revise their tariffs. However,
adjustments to reflect the country‟s inflation index are automatic.
Past and Current Performance of SEDAPAL
24. SEDAPAL‟s main source of revenue is the provision of water supply and sanitation
services to the population in Lima. Until August 2010, the company charged a volumetric water
tariff, with no separate tariff structure for the provision of sanitation services. Thereafter, the
tariff was disaggregated between water and sanitation charges (70 and 30 percent respectively);
the sanitation tariff represents 43 percent of the water tariff. Audited accounts from 2007 to 2009
and estimates for 2010 results show that the company has been profitable. In 2007, the company
reported a net operating income of US$38 million. In 2008 this income was substantially lower
at US$1.3 million, mainly due to increased financial costs as a result of exchange rate differences
in its external debts. In 2009 the company had a net profit of US$74 mill ion. As shown in the
table below, SEDAPAL is in relatively good financial standing.
Table 6: SEDAPAL Historical Indicators
25. In the first half of 2010, SEDAPAL submitted to the regulator (SUNASS) a new
optimized master plan containing an ambitious 5-year investment program valued at US$1.5
INDICATORS 2,007 2,008 2,009 2,010
Liquidity Indicators
Current Ratio 0.9 1.0 1.0 1.4
Profitability Indicators
Operating ratio 0.8 0.8 0.8 0.77
Working ratio 0.6 0.5 0.6 0.58
EBITDA Operating margin 20% 24% 23% 23%
EBIT Operating margin 20% 4% 27% 12%
Leverage/coverage
Total Debt/Equity 0.5 0.5 0.6 0.67
Total Debt /Revenues 1.9 1.8 2.2 2.08
EBIT/Interest expense 3.6 1.1 5.1 2.04
EBITDA/Interest expense 8.1 11.6 8.2 7.05
62
billion and proposed associated tariff increases.17
After evaluating the company‟s proposal
SUNASS approved a lower tariff increase than that requested from SEDAPAL, given that 54
percent the investments proposed (about US$817 million) were to be implemented under the
National Water for All Program for which SEDAPAL is supposed to receive investment
subsidies from the national government. SEDAPAL, SUNASS and the government are currently
discussing this issue, given that the investment subsidies from the national government are not
materializing as predictable as originally envisaged – e.g., the company invested about US$100
million under the program in 2009 and has not received the full equivalent subsidy from the
government. Given the large nature of these investments and their potential impact on the
company‟s long-term financial sustainability, SEDAPAL needs to ensure the availability and
predictability of resources (either via subsidies or tariff increases) before these planned
investments are undertaken.
Future Performance of SEDAPAL
26. Projections to assess SEDAPAL‟s future financial position and performance were carried
out for the period of 2011 to 2021. The main assumptions and a summary of the main projected
indicators are presented below, while the detailed analysis is in the project files.
27. In the base scenario, projections were based on the following key assumptions:
a. In addition to adjustments for inflation (including the 3 percent increase approved in
January 2011), the real tariff increases already approved by SUNASS for 2010 (3.2
percent) was incorporated. A 6 percent real tariff increase was added in 2015 and 2016
as additional planned investments are implemented, likely in partnership with the private
sector. These are expected to be approved by SUNASS in due time.
b. The investment plan excluded the investments and associated benefits related to the
National Water for All Program, given that the source and availability of funding are
currently under discussion.
c. Water losses are reduced to 32 percent companywide by 2015 and 30 percent by 2021.
28. The implementation of the above assumptions ensures positive cash flow and a net profit
for SEDAPAL, enabling the company to meet its current operating expenses and debt
obligations. The company‟s working ratio will be maintained below 0.89 in all years and its debt
service coverage is projected to reach 1.80 at the end of the projection period. In 2015 the debt
service coverage will reach 1.15, highlighting the need for the company to carefully evaluate its
debt position in an ongoing basis. From 2015 onwards, SEDAPAL will also be able to finance a
portion of its investment needs (up to 50 percent depending on the overall levels of investment)
from its own resources. Table 7 below provides an overview of the company‟s main indicators
based on the projected financial results.
17
The proposed project represents 3.5 percent of SEDAPAL‟s proposed investment program .
63
Table 7: SEDAPAL Projected Indicators
INDICATORS 2,011 2,012 2,013 2,014 2,015 2,016 2,017 2,018 2,019 2,020 2,021
Liquidity Indicators
Current Ratio 2.4 2.3 2.4 3.7 4.7 5.8 6.6 7.2 6.9 6.8 7.0
Profitability Indicators
Operating ratio 0.81 0.85 0.89 0.83 0.88 0.83 0.82 0.80 0.81 0.77 0.76
Working ratio 0.62 0.66 0.71 0.66 0.72 0.67 0.67 0.66 0.66 0.63 0.62
EBITDA Operating margin 19% 15% 11% 17% 12% 17% 18% 20% 19% 23% 24%
EBIT Operating margin 19% 15% 11% 17% 12% 17% 18% 20% 19% 23% 24%
Leverage/coverage
Total Debt/Equity 0.70 0.71 0.72 0.74 0.77 0.76 0.72 0.68 0.59 0.48 0.39
Total Debt /Revenues 2.27 2.23 2.14 2.07 2.07 1.96 1.90 1.81 1.59 1.31 1.11
EBIT/Interest expense 3.17 2.62 1.72 2.68 2.01 2.85 2.87 3.05 3.05 4.44 5.81
EBITDA/Interest expense 6.45 5.86 4.61 5.39 4.84 5.35 5.21 5.36 5.39 7.12 9.14
Debt service coverage 2.75 2.33 1.68 1.32 1.15 1.28 1.27 1.22 1.19 1.57 1.80