PROJECT INFORMATION DOCUMENT (PID)

APPRAISAL STAGE

Report No.: AB3551

Project Name

/ Water Sector Institutional Development Project
Region / AFRICA
Sector / Sanitation (25%); Water Supply (75%)
Project ID / P096360
Borrower(s) / MINISTRY OF PLANNING
Republic of Angola
Implementing Agency
Ministry of Energy and Water
Angola
Environment Category / [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined)
Date PID Prepared / June 25, 2008
Date of Appraisal Authorization / April 16, 2008
Date of Board Approval / July 22, 2008

1.  Country and Sector Background

The proposed Water Sector Institutional Development Project, a seven-year US$113.2 million project (IDA financing US$57.0 million) is designed to offer crucial support in institutional development and capacity building for a large sector investment program by the Government of Angola (GOA). This project has components key to the sustainability of capital investments financed by several sources, including the IDA Emergency Multi-sector Recovery Program. It will build government capacity to: (a) develop water supply entities capable of providing sustainable services; (b) implement the needed institutional reforms at the national level to provide technical support and direction; and (c) to develop the needed Regulatory Agency. The project will assist in the implementation of government policies of utilizing the private sector and of cost-recovery in water supply, and finance the rehabilitation of existing water supply networks in nine cities, which will complement investments in production and treatment being financed by the Emergency Multi-sector Recovery Program, and the Government of China. Also, the project will finance institutional components that will complement activities being financed by the Government of Brazil, Germany, Spain, and other development partners, by providing an institutional framework for sustainable operations of the rehabilitated systems.

The water sector in Angola is undergoing a period of sizeable investment and change that present both the need and opportunity for institutional development. The hydrological network is being rehabilitated and a new institution is proposed to assist in river basin-oriented management. The establishment of public companies, Autonomous Provincial Water and Sanitation Utilities (PWSUs), to manage water supply and sanitation in several major cities is underway. In addition, policies and institutions are being developed to support adequate management of water supply assets, and the World Bank’s knowledge and recommendations have been taken into account by the GOA in aligning policy and institutional development with capital investments in this and other projects.

The Water Sector Institutional Development Project supports all three pillars of support for Angola identified in the Interim Strategy Note (Report No. 39394-AO) approved by the Board on May 22, 2007: (a) strengthening public sector management and government institutional capacity, (b) supporting the rebuilding of critical infrastructure and the improvement of service delivery for poverty reduction, and (c) promoting the growth of non-mineral sectors.

In large measure, political stability has been established in Angola since the signing of the peace accords between the Government of Angola and the Union for the Total Liberation of Angola (União Nacional para Independência Total de Angola, or UNITA) in April 2002. The Government of National Unity established at that time is recognized by all parties and has remained cohesive and functioning. Demobilization of over 100,000 ex-combatants has been largely completed. There is progress toward national legislative elections in September 2008 and presidential elections in 2009, and the government has increased social spending and infrastructure investment in many areas, at the same time improving its macroeconomic performance.

High international oil prices and increasing oil output have made Angola one of the fastest-growing economies in the world. Average annual GDP growth was 11.5 percent in 2003-2005 and real GDP growth was roughly 15 percent in 2006, including growth of some 17 percent in non-oil sectors of the economy. Better macroeconomic management has meant that inflation in 2006 was 12 percent, down from 23 percent in 2005 and a significant improvement from near hyper-inflation levels of the 1990s. Reserves are substantial at five months of imports and debt repayment ability is currently sound. Gross national income per capita was US$1,980 in 2006, although income is highly unequally distributed. While the GDP per capita more than doubled (around 132.7%) in the period between 2000 and 2004, the Gini coefficient, the indicator of the level of inequality in income distribution, is currently cited by many sources at 0.62.

After 14 years of anti-colonial conflict and 27 years of civil war, however, many indicators of the economy and of human development remain abysmally low. According to Angola’s own Strategy for Poverty Reduction (Estratégia de Combate a Pobreza, or ECP), around 62% of the Angolan households lived below the poverty line (US$1.70 per day), 15% of which lived in a situation of extreme poverty (less than US$0.75 per day). Life expectancy is 47 years, only 30 percent of adult men and 20 percent of adult women can read, write, or perform basic computations, and about one in four children die before their fifth birthday. County-wide, only about 38 percent of Angolans have access to safe drinking water (compared with about 55 percent in sub-Saharan Africa) and 44 percent have access to adequate sanitation services. Cholera is endemic. An outbreak in 2006 resulted in more than 48,000 cases. Out of 177 countries in the UN’s Human Development Index, Angola ranks among the lowest at 162. The economic and social data are from “Interim Strategy Note for the Republic of Angola” Report No. 39394-AO.

2.  Objectives

The project development objective (PDO) is to strengthen the institutional capacity and efficiency of agencies in the water sector to improve access and reliability of water service delivery. Achievement of the PDO will be measured in terms of the following indicators: (i) 66% of PWSUs achieving annual profitability targets; (ii) 80% of hydrometric stations operational; and (iii) 72,000 households with connections to the piped water supply network managed by the utilities in the target cities.

The above key performance indicators were selected as measures of the institutional changes being financed by the project. The profitability of the PWSUs will depend on the successful design and implementation of the WSS utilities, the regulatory system developed and implemented and the management of the physical assets. If these institutional changes are effective, the gradually increasing tariffs, the improved collection efficiency and the careful management of the relevant operating costs will enable the various utilities to achieve the profitability targets that have been established for them in the financial models. In addition, the establishment of the hydrometric stations will provide the information needed by GOA to manage the water resources in the country, and the number of household connections will not only indicate the number of households achieving the tangible benefits of increased supply of water at a fair price, but it will also indicate the ability of the GOA to implement investment projects.

3.  Rationale for Bank Involvement

The Government of Angola is currently implementing an aggressive capital investment program to rehabilitate the major works including treatment facilities, pumping stations, transmission mains and distribution networks in major urban areas throughout Angola. The hydrological network is being rehabilitated and new institutions are being created to assist in river-basin oriented management. Investments should total well over US$1 billion in the period 2002-2012. While the physical rehabilitation and expansion of the various works is a major step in the process of developing the sector, the government also recognizes the importance of providing adequate support to the operations of these newly rehabilitated systems. The government is also keen to align policy and institutional development with capital investment. With the World Bank’s assistance, the GOA has started to design a series of commercially-oriented water supply utilities to deliver sustainable services, which once successfully piloted, will be rolled-out to all urban centers and thus complement the investments being financed by the Governments of China, Brazil, Germany, Spain, and other development partners

The government has requested the World Bank’s assistance to provide support to: (a) develop water supply entities capable of providing sustainable services; (b) implement the needed institutional reforms at the national level to provide technical support and direction; and (c) develop the needed Regulatory Agency. The World Bank’s experience in developing an institutional and regulatory framework and in establishing sustainable operating companies (utilities) to deliver water supply services in many countries throughout the world, is critical at this stage in the development of the water sector in Angola. The expertise of the World Bank would be useful in the design and implementation of these new utilities, as well as, in designing systems which will enable the government to maximize the use of the private sector in the delivery of services to both improve the quantity and quality of services provided and to reduce the cost to the consumer.

The Bank’s Interim Strategy Note (ISN) for the period 2007-2008, approved by the Board of Directors on May 22, 2007, provides for this project (as well as for the Fourth Social Action Fund and an Agriculture Development project) in FY08. The proposed project supports the main pillars of the ISN, in particular, strengthening public sector management and government institutional capacity, and supporting the rebuilding of critical infrastructure and the improvement of service delivery for poverty reduction. The proposed project will help the GOA improve its governance through strengthening its capability to perform its functions transparently and effectively in the water sector.

4.  Description

The project will finance the following four components: (1) development of the institutions in the water supply sub-sector; (2) water resources management; (3) rehabilitation of water supply systems; and (4) capacity building and change management.

Component 1 - Development of Institutions in the Water Supply and Sanitation Sub-Sector (US$21.7 million)

The objective of this component is to strengthen the institutional framework for the water supply sub-sector at both the central and regional levels. The objective will be achieved through the implementation of three related subcomponents: (1.1) development of the Asset Management Unit; (1.2) creation of Provincial Water Supply and Sanitation Utilities; and (1.3) development of a Regulatory Agency for the water supply and sanitation sub-sector.

The new institutions to be established under this project, as described in more detail below, will be created using existing laws/decrees. The most immediately relevant laws/decrees are the Public Enterprise Law (9/95) and the Public Institute Law (9/03) of October 28, 2003. The Public Institute Law (9/03) of October 28, 2003 will need to be amended to allow for the creation of the proposed institutes.

Sub-components and activities

1.1 Development of the Asset Management Unit (US$18.8 million)

This sub-component supports the development and adaptation of sustainable institutional and regulatory modalities for cities and towns under an Asset Management Unit (AMU). The AMU is intended to be responsible for the assets of all urban water supply systems that involve water treatment facilities on behalf of the GOA. The AMU is expected to be the entity responsible for managing both the water and wastewater public assets located in provinces and in the municipal urban centers. The AMU, when formally established, is expected to have the power to mobilize, plan, and manage dedicated funds, plan and oversee the execution of investments, promote public private partnerships for the development and delivery of services and introduce performance based contracts with PWSUs. The AMU will be a full public enterprise under the tutelage of Ministry of Energy and Water (MINEA) pursuant to provisions of the Public Enterprise Law 9/95.

1.2 Creation of Provincial Water and Sanitation Utilities (PWSUs) (US$1.4 million)

Autonomous Provincial Water and Sanitation Utilities (PWSUs) will be created, and the AMU will delegate responsibility for contracting and supervising service operators to the PWSUs through performance-based contracts. This arrangement will further the decentralization and devolution process and promote provincial involvement in and “ownership” of the utilities. The PWSUs will also provide opportunities to capture economies of scale and will create a mechanism for more transparent and effective consultation between central and local levels regarding the planning and implementation of investments. It is envisaged that the diversity of stakeholders will be appropriately represented in the Conselho de Administração (Board of Directors - BOD) of PWSUs. These BODs will represent the interests of and report to stakeholders, negotiate and sign performance-based contracts with the AMU, monitor and report on compliance with the performance-based contract, appoint an executive director, and approve budgets and business plans of PWSUs. The PWSUs will be public corporations created under the project pursuant to provisions of the Public Enterprise Law 9/95. The establishment and operationalization of the PWSUs will be done in two phases. The first phase will focus on piloting the concept in five cities (likely to be Malange, Kuito, N’Dalatando, Uige and Huambo) where the water supply networks are currently being rehabilitated. These cities were selected as the pilot cities because rehabilitation of the networks is underway and the need for effective operators is critical. The experience from these five pilot cities will be transferred to the four phase two cities when the agreed upon milestones have been met.

1.3. Development of Regulatory Agency for the Water Supply and Sanitation Sub-Sector (US$1.5 million)

This sub-component will provide: (a) technical assistance to create a regulatory agency; and (b) continuing support to the operational work, capacity building, and technical assistance for the Regulatory Agency. Various options for the design of the Regulatory Agency will be studied including a regulatory institute in form and function similar to the existing Institute for Electricity Sector Regulation, and/or having only one regulatory agency for both water and electricity.

Component 2: Water Resources Management (US$12.0 million)

The objective of this component is to support the strengthening of the institutional framework for the water resources management sub-sector. This objective will be achieved through three sub-components which are: (2.1) development of an institution for water resources management; (2.2) development of systems for water resources management; and (2.3) rehabilitation of water resources management systems.

Sub-components and activities