Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 11440-CR

STAFF APPRAISAL REPORT

COSTA RICA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

MAY 25, 1993

Country Department IIInfrastructure and Energy Operations DivisionLatin America and the Caribbean Regional Office

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

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CURRENCY EQUIVALENTS

Currency Unit = Colones (C)USS 1.00 = C 136 (December, 1992)

FISCAL YEAR

January 1 to December 31

UNITS OF WEIGHTS AND MEASURES

Metric British/US Equivalent

1 kilometer (km) = 0.62 mile (mi)1 meter (m) = 3.28 feet (ft)1 milimeter (mm) = 0.039 inches (in)1 gram (g) = 0.0022 pounds (lb)1 kilogram (kg) = 2.20 pounds (lb)1 ton (tn) = 2,205 pounds (lb)1 cubic meter (m3) = 264 US gallons (gal)1 cubic meter (m3) = 35.32 cubic feet (ft3)1 liter (1) = 0.264 US gallon (gal)

ABBREVIATIONS AND ACRONYMS

AyA Costa Rican Water Supply and Sewerage Institute (Instituto Costarricense de Acueductosy Alcantarillado)

CAAR Local Rural Committees (Comites de Acueductos y Alcantarillados Rurales)CABEI Central American Bank for Economic IntegrationCACM Central American Common MarketCARE Care IntemationalFRAU Revolving Fund for Urban Water Supply (Fondo Revolvente de Acueductos Urbanos)GAM Great Metropolitan Area of San JoseGTZ Technical Assistance Agency of the German GovernmentICAITI Central American Industrial Technological Research InstituteICAFE Costarrican Coffee InstituteIDB Inter-American Development BankIFAM Municipal Development and Assistance Institute (Instituto de Fomento Municipal)KfW German Development Bank for ReconstructionMSP Ministry of Public Health (Ministerio de Salud Plblica)OECF Overseas Economic Cooperation Fund (Japan)PAC Community Self Help Program (Programa de Apoyo Comunitario)PAHO Pan American Health OrganizationPD Planning Department of AyA (Oficina de Planificaci6n de AyA)PLAMAGAM Water and Sewerage Master Plan of the GAMSJMA San Jose Metropolitan AreaSNE National Electricity Service (Servicio Nacional de Electricidad)SPI Staff Productivity IndexTCUFW Technical Committee for UFWUFW Unaccounted-for-Water

FOR OFFICIAL USE ONLY

COSTA RICASECOND WATER SUPPLY AND SEWERAGE PROJECT

STAFF APPRAISAL REPORT

Table of Contents

Pagze No.

LOAN AND PROJECT SUMMARY ............ ............ i-iii

1. THE SECTOR........................... I

Macroeconomic Linkages .................................... 1... Population and Service Levels ....................................... 2Water Resources, Environmental and Health Aspects ........ .................. 2Sector Organization . ....................................... 3Sector Investments and Financing ...................................... 4Sector Performance ......................................... 5Lessons from Past Experience ....................................... 6Rationale for Bank Involvement ....................................... 7

2. THE BORROWER ........................................ 8

The Borrower and Executing Agency .................................... 8Management and Organization ....................................... 8Personnel and Training ........................................ 10Operations and Maintenance ....................................... 10Commercial and Information Systems .................................... 12Water and Sewerage Tariffs ....................................... 13Financial Performance ........................................ 14Financial Prospects ......................................... 15Accounting and Auditing ........................................ 16

3. THE PROJECT ........................................ 17

Project Origin . ....................................... 17Project Objectives ......................................... 18Project Description ........................................ 18Project Cost ....................................... 20Project and Program Financing Plan . .................................. 21Project Implementation ...................................... .. 23Monitoring and Supervision ....................................... 24Procurement . ....................................... 26Disbursements ............ ........................... 28

4. ECONOMIC JUSTIFICATION ........................................ 28

Project Justification and Benefits ...................................... 28Environmental Impact ........................................ 29Risks and Safeguards ........................................ 30

5. AGREEMENTS AND RECOMMENDATION .31

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

ANNEXES

Pae No.

Annex 1: Sector Investments, 1980 - 1990 ................................... 34Annex 2: Lessons Learned From Bank's Past Experience ............ .............. 35Annex 3: AyA's Organizational Chart ...................................... 41Annex 4: AyA's Water and Sewerage Tariffs .................................. 42Annex 5: AyA's Unaccounted-for-Water Program ............................... 47Annex 6: AyA's Financial Analysis ................................... 54Annex 7: Water Supply and Sewerage Systems in the GAM ........... ............. 65Annex 8: Project Description ................. .................. 69Annex 9: Project Cost Estimates ................. .................. 71Annex 10: Project Implementation Schedule .................................. 72Annex 11: Institutional Strengthening Program ................................. 73Annex 12: Operational and Financial Targets .................................. 75Annex 13: Monitoring Indicators ................. .................. 77Annex 14: Allocation of Loan Proceeds ................................... 79Annex 15: Estimated Loan Disbursement Schedule ............................... 80Annex 16: Project Implementation and Supervision .............................. 81Annex 17: Sector Policy Letter ......................... 86Annex 18: Outline Terms of AyA's Performance Plan ............................ 90Annex 19: Outline Terms of Reference for Private Sector

Participation and Decentralization Study .. 92Annex 20: Outline Terms of Reference for the Institutional

Framework of the Sector ....... ........... 94Annex 21: Environmental Assessment .................. 97Annex 22: Program for Refinancing AyA's Outstanding Debt with the

Ministry of Finance ...................................... 102Annex 23: List of Documents and Data Available in Project Files ......... ............ 105

MAP IBRD No. 24304: Costa Rica - Second Water Supply and Sewarage Project - SJMARehabilitation Sewerage Works

MAP IBRD No. 24305: Costa Rica - Second Water Supply and Sewarage Project - SJMAWater Supply System

MAP IBRD No. 24381: Costa Rica - Second Water Supply and Sewarage Project

This report is based on the findings of an appraisal mission that visited Costa Rica betweenAugust 27 - September 9, 1992. The mission was comprised of Ms. Augusta Dianderas (LATIE) - TaskManager; Messrs. Roberto Laver (LEGLA); Manuel Marihlo (LATIE); Abraham Kogan (LA2IE); Jairo Niho(Consultant); and Luis Carlos Rangel Soares (Consultant, PAHO). The peer review team comprisedMessrs. G. Yepes (INUWS); L. Pereira (LATIE), and B. Gdmez (EClIV). Mmes. M. Quijada, L. Benziand M. Fernanda Cash assisted in the production of this report. Mr. Edilberto Segura is the DepartmentDirector, Mr. Paul Knotter the Project Advisor and Mr. Ricardo A. Halperin the Division Chief responsiblefor the project.

COSTA RICA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

LOAN AND PROJECT SUMMARY

Borrower and Executing Instituto Costarricense de Acueductos y Alcantarillados (AyA)Agency:

Guarant: 'MThe Republic of Costa Rica

Benefiarie: AyA and users of AyA services accounting for 70% of thepopulation of Costa Rica

hn Amoun: US$26 million equivalent

I0ma: Repayment in seventeen years, including four years of grace at thestandard variable interest rate.

Objective: The proposed project has four major objectives: (a) help theGovernment and AyA strengthen the institutional framework for theprovision of water and sewerage services in the country, includingpromotion of private sector participation and develop and implementsound sector policies; (b) support AyA in carrying out aninstitutional and financial restructunng strategy, to increaseefficiency in operations and achieve and consolidate financialviability; (c) improve the quality of water supply operations in theSan Jose Metropolitan Area (SJMA); and (d) improve the sewerageservice in SJMA, mainly in poor areas.

DesciDtion: To achieve its objectives the project would include the following fivecomponents:

(a) Th'M instititnal ngthening.prgram (9% of total projectcost) includes technical assistance, equipment and staff training for:(i) developing and implementing improved sector policies andinstitutional framework for the sector; (ii) improving AyA's financialmanagement and corporate planning; and (iii) decentralizing AyA'sactivities taking into account private sector participation andpossibilities for operating costs reduction;

(b) The Unaccounted-for-Water rogram (UFW) (42%) includestechnical assistance, equipment and staff training mainly for: (i)metering; (ii) commercial system improvement; (iii) updating ofconsumer and pipes cadastres; and (iv) operational control of theSJMA water system;

(c) The SJMA water supply and distribution comDonent (33%)includes civil works, equipment and consultancy services for the

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construction of four wells, pipe distribution facilities, storage tanksand pumping stations;

(d) The SJMA sewerage rehabilitation component (10%) includescivil works, equipment and consultancy services for: (i) therehabilitation of sewage collectors and pumping stations; and(ii) construction of sewage collectors in a poor neighborhood of theSJMA to improve its environmental conditions; and

(e) The operations and maintenance com=onent (6%) includes civilworks, equipment and technical assistance for: (i) operation andmaintenance of sewerage systems; and (ii) rehabilitation of the Orosipipeline (financed under Loan 1935-CR).

Benefits: The project would seek to achieve a framework of clearly definedand sound sector policies and institutional arrangements to enhanceits sustainability. It would yield important economic, financial,environmental and health benefits. Economic benefits include: (i)decreased operational costs resulting from the increase of staffproductivity, the optimization of the production capacity and thereduction of water losses (physical and commercial); (ii) reducing therisks to which the Orosi pipeline is exposed; and (iii) increasedrevenues from water and sewerage sales, resulting mostly fromadditional connections as well as from increased rates. Financialbenefits would arise from an improved tariff structure and bettercollection that will reduce AyA's dependence on Governmentsubsidies at a time when Government is strapped for funds.Environmental and health benefits will be achieved by alleviating thepollution of rivers and streams that run through the SJMA and byimproving the environmental conditions of low-income areas.

Rsl¶a: The main risks lie outside the project itself and are linked to possibleslippage in the government's commitment to reform the public sectorand to implement a sounder regulatory framework for publicutilities, particularly after a new Administration takes office in May1994. To reduce this risk, significant actions were sought beforeappraisal and Board presentation in coordination with the proposedSAL III operation. To reduce the risk of future slippage, annual andmid-term reviews of project implementation would be undertakentogether with the authorities responsible for public sector reform.Specific project-related risks arise from AyA's institutionalweaknesses that constrain its ability to improve rapidly its overalloperational performance. To reduce this risk, specific operationaland financial targets to measure AyA's performance will be closelymonitored. A potential additional risk could occur as a result ofpossible access to external financing without adequate conditions toimprove sector performance. To address this issue, the Bank is

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maintaining a close dialogue with the Inter-American DevelopmentBank (1DB), the other major multilateral donor in the sector, tocoordinate positions on sector policies and priority issues.

Estimated Project Costs (in US$ million):

Estimated Project Cost (in USS million)

COMPONENTS Local Fo''' .- Total

A. Institutional Strengthening 0.7 2.1 2.8

B. UFW Program 1.5 10.8 12.3

C. SIMA Water Supply 5.2 4.7 9.9

D. SJMA Sewerage Rehabilitation 2.4 0.6 3.0

E. Operation and Maintenance 0.4 1.3 1.7

Base Cost (December 1992) 10.2 1:5 29.7

Physical Contingencies 1.5 2.8 4.3

Price Contingencies 2.3 3.7 6.0

Total ProjectCost 14.0- : 0 40.0:

Yinancing Plan (in US$ million)

World Bank - 26.0 26.0

AyA 14.0 - 14.0

lTotal 14.40 26.; 4.

Estimated Bank Disbursanents (in US$ milion):

Ban _ 1 19_ 1997 .19%I9.

|I Anxinual 1.41" 3.5 4.0 5.0 6.7 3.6 1.8

ILe~ ulat1ve X 1.4 4.9 8.9 13.9 20.6 24.2 26.0

Estimated Rate of Return: Not applicable.

1/ Represents the initial deposit in the special account plus reroative frnning of up to USSU3 miliomwhich would be provided for eligible expendiht inurred after September 30, 1992, but not bore12 months prior to loan signature.

COSTA RICA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

STAFF APPRAISAL REPORT

1. THE SECTOR

Macroeconomic Linkages

1.1 Since 1982, Costa Rica has reoriented its growth strategy from import substitution to anoutward oriented strategy, with particular emphasis on expanding non-traditional exports to marketsoutside the Central American Common Market (CACM). The basic policy franework whichaccompanied this structural transformation has been: improving macroeconomic management, gradualtrade liberalization, real exchange rate devaluation, export incentives, and partial financial sectorliberalization.

1.2 The present Government which assumed office in May 1990 is aware that while importantprogress has been achieved, the reform process must be deepened and consolidated if it is to providea solid base for sustained and equitable development into the next century. In pursuit of this goal, theGovernment's development strategy focuses on: (i) accelerating integration into the world economy;(ii) streamlining and restructuring the public sector to improve its efficiency, strengthen its financialbase, and reorient it away from activities that can be carried out more efficiently by the privatesector; (iii) improving efficiency and competition in labor, financial and capital markets; (iv)improving infrastructure and encouraging private sector investment to accelerate growth and diversifythe economy's export base; (v) channeling social spending and programs to those in greatest need,while improving coverage and efficiency; and (vi) protecting natural resources.

1.3 In the water and sewerage sector, the Government is committed to improve its efficiency,strengthen its financial base and seek major private sector participation. To achieve this, Governmentefforts seek to increase the role of the private sector in the provision of water and sewerage services;for this to happen it is necessary to define an appropriate regulatory framework for public services.The Government's aims, which the proposed project would support, are to improve the organizationaland operational arrangements for the provision of water and sewerage services in the country;improve productivity, particularly in the areas of personnel and water losses; define sound investmentand cost recovery policies to strengthen sector finances, reducing its dependence on Governmentsubsidies; and improve the operation of the existing water and sewerage systems. Measures theGovernment is taking or will be taking to address environmental aspects related to the water andsewerage sector are discussed in subsequent sections of this report. The National Water Supply andSanitation Policy Statement (Annex 17) outlines sectoral goals and policy objectives which will besupported under the project (para. 1.18).

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Population and Service Levels

1.4 Costa Rica's population in 1990 was estimated at 3.0 million inhabitants of whom 51 percentwere urban' and 49 percent rural. Total population is projected to reach 3.7 million by the turn ofthe century when the urban population is expected to account for 57 percent of the total. About 1.4million (45%) of the country's population lives in the Great Metropolitan Area of San Jose (GAM).2Some 72 percent of the urban population is concentrated in 18 municipalities with more than 20,000inhabitants, but only three of these municipalities are located outside the GAM.

1.5 In 1990, 92 percent of the total population had access to public water supply through a houseconnection and about 96 percent of the population had also access to sanitation services through ahouse discharge, septic tank or latrine, although effective sewerage coverage is less because ofsubstandard conditions of the latter. Water and sewerage services in the GAM are the best in thecountry, as 95 and 44 percent of the population respectively has access to water and sewerage througha house connection. Although coverage of water service is high nationwide, most water systems areoperating with very high water losses (para. 2.7) which in turn compromise continuity of service andmake necessa.y the construction of additional production capacity to compensate for them.

Water Resources. Environmental and Health AsDects

1.6 Costa Rica has abundant water resources. Surface water is used extensively for domesticwater supplies, but degradation of many of these water resources is a growing problem. Importantrivers are being contaminated, especially in the GAM, by discharges of untreated domestic sewage,liquid industrial wastes (of which coffee processing is one of the most important organic pollutionloads), and solid wastes from municipal services and industry. Liquid industrial wastes produce 85%of the actual total organic waste, with the coffee mills accounting for 70% of the total. During dryflow conditions, the ecological problems increase because of the lack of dissolved oxygen in the waterand the deleterious effects on fish life.

1.7 Regarding the problem of domestic liquid wastes, the Instituto Costarricense de Acueductos yAlcantarillado (AyA) has initiated a process of improving the sewerage collection, treatment anddisposal facilities of the GAM with the preparation of a Water and Sewerage Master Plan(PLAMAGAM). Following this, AyA with the assistance of Inter-American Development Bank(IDB) and Overseas Economic Cooperation Fund (OECD) is contracting the feasibility study andengineering designs of a first phase of development until the year 2000. These studies are expected tobe completed by early 1996. The proposed project will finance high priority sewerage actions andworks mainly to address the environmental conditions of poor urban areas in the San JoseMetropolitan Area (SJMA). These will provide sewerage to up to 10,000 families in the low-incomeareas of Los Guido and La Pax, and up to 6,500 in other areas of the city. It has been estimated thatthe works to be undertaken in Los Guido and La Pax would represent an additional volume ofsewerage equivalent to only 6% in the organic load dumped into the sewerage system as organic

I Commwsfesa with more dhan 60 howeholds are defined as urban areas.

2 The GAM comprses Ae cap)hal cd of San Jos SMA) and 30 adjacen mwuicipalides of the Provinces ofHeredia, Cutago and AijueLa.

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charge (BOD) and that the overall reduction of the pollution load from domestic sources in the SJMAstreams will be 62%. The negative environmental effects of these works are negligible, while thepositive benefits are evident, as they will improve the sanitary and aesthetic conditions of large areasof the city, where mainly poor population live. In addition, with project execution an improvement inthe quality of water service is expected.

1.8 To address the problem of industrial and coffee mill waste dumping, AyA, the CostarricanCoffee Institute (ICAFE), the Central American Industrial Technological Research Institute (ICA1TI)and the Technical Assistance Agency of the German Government (GTZ) are discussing support for:(i) programs to improve industrial processes, so as to optimize their water consumption, and (ii)technical and economical treatment programs for the coffee mills wastes. A pilot treatment plant hasbeen constructed and is being operated and monitored by ICAFE.

1.9 Although laws and regulations already exist to protect the water resources, their enforcementis far from adequate mainly due to a complex institutional framework, which has produced overlapsof responsibilities of public entities and a dilution of accountability for enforcement. Through projectexecution, a streamlined institutional framework for the sector would be defined and implemented(para. 1.18).

1.10 Costa Rica has made steady progress in the improvement of health conditions. Healthstatistics indicate that the morbidity and mortality rates of water-borne and sanitation related diseaseshave been declining through the years, mainly due to improvements in the water and sanitationservices, particularly in the GAM. Life expectancy in 1988 was as high as 75 years and infantmortality in the same year was 15 per 1,000 live births, which is one of the world's lowest rates.

Sector Organization

1.11 Responsibilities for water supply and sanitation services are assigned primarily to AyA and tothe Ministry of Public Health (MSP). Municipalities also play an important role by providing servicein many areas. AyA is responsible for services in urban and concentrated rural areas, while the MSPis responsible for services in dispersed rural areas. The Instituto de Fomento Municipal (IFAM)assists local governments with concessionary loans and technical assistance. The Servicio Nacional deElectricidad (SNE), a regulatory body, is responsible for reviewing and approving utility tariffsincluding those for water and sewerage services. In addition, the Procuraduria (Attorney General'sOffice) and the Contraloria General de la Republica (an independent Government audit/controlagency) oversee all activities of public entities for compliance with national legislation.

1.12 AyA serves about 45% of the population and provides technical support to rural concentratedcommunities (about 24% of the population) that have local committees (CAAR) for the managementof their water services. Local governments serve about 26 percent of the population, but only onemunicipality (Heredia) has its own autonomous agency, created in 1976, in charge of water, sewerageand electricity services.' The MSP is responsible for the design and construction of water systems

3 lhc cdr of Canago is also consuldHng upgrading ts Watcr and Santataon Depasmen so an fndependentagency.

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and latrines in scattered human settlements that house 5% of the total population. Both the MSP andAyA have legal responsibility for water quality control, but only AyA is currently carrying out thisfunction in an effective manner.

1.13 IFAM also plays a role in the water and sewerage sector by strengthening municipal systemsand encouraging efficient operation of the services that the municipalities provide. However, mostmunicipalities are still small, short of financial and human resources and in the initial stages ofdevelopment. IFAM's support is not achieving the expected results in strengthening localgovernments, mainly because it is mostly financial, responding to immediate needs and withoutproviding meaningful institutional development assistance. IFAM also serves as a financial windowto the municipalities, channeling government and external funds to finance all types of works coveringthe complete range of municipal services, including water and sewerage. These issues would beaddressed under the institutional framework improvement included under the proposed project (para.1.18).

1.14 SNE is responsible for the approval of utility tariffs throughout the country and for theadministration of water resources, although in practice it does not fulfill this function. TheGovernment as part of its efforts to increase the efficiency of public services and as a Board conditionof SAL III (which has been negotiated) has submitted for approval of the Assembly the Law for theRegulation of Public Services, which seeks to transform SNE into a Regulatory Agency for PublicServices. A second tranche release condition of SAL Im would be that the necessary regulations toimplement the proposed Law and an action plan to restructure SNE in line with its new functions andresponsibilities should have been prepared satisfactory to the Bank. If the Government had notenacted legislation, adopting a comprehensive regulatory framework and the regulations related tosuch legislation and an action plan to restructure SNE by December 31, 1994, this would be an eventof default under the project (para. 4.7). In addition, if by the following annual reviews (para. 3.14)SNE's restructuring plan has failed to be implemented in accordance with its terms and timetable, itwould also be regarded as an event of default (para. 4.7).

Sector Investments and Financing

1.15 During the past decade (1981-1990) sector investments were on average US$ 13 million peryear (about 0.3% of GDP), in current dollars. These investments were financed by: (i) loans (55%),mainly from the IDB and one World Bank loan; (ii) government loans on a highly concessionarybasis, or grants (24%); (iii) the Family Assistance Fund (13%) that finances a Revolving Fund forUrban Water Supply (FRAU) and the Community Self Help Program (PAC) addressing needs ofconcentrated rural areas;' and (iv) AyA's internal cash generation (8%). However, AyA's positivecash generation is deceiving, as during this time AyA's debt service was being paid by theGovernment. Past investments in the water supply and sanitation sector are shown in Annex 1. Sinceinvestment requirements will more than double historical averages (para. 1.16) and the Governmentparticipation in the grant financing of sector investments is likely to ebb (para. 1.3), a more

4 7he Family AaisUnce F.w d (FAF) was creased in 1978 wih Gowmernjfsi asd fanances e FRAU and PACprograms a&Wlnt4red by AyA. The FRAU program wag esuab&hed to swnghwn and improve sectorcoordJnauon wad to handk emergency waer sqply siaono at bg In IwICpaUy owned sysem. The PACprogrm is aimed ast soMag Ae water need of covenca rwul area, (se5Xne wih 200 so 2,000wnhabitanu).

aggressive strategy to recover costs and improve efficiency of operations will be implemented underthe project (para. 2.14).

1.16 Investments during 1991 and 1992 were only US$ 10 million on average per year, in currentdollars. Investment needs for 1993-2001 are estimated at US$ 293 million, in 1992 dollars (para.3.7), or about USS 33 million per year (0.6% of GDP) in order to reach by the year 2001 a 96percent population coverage in water and 50 percent in sewerage (through a house connection).Additional investments would be required to address sanitation and environmental issues in the SJMA,and these are still being evaluated. The investments to be carried out during 1993-2001 wouldcompensate for many years of neglect in the maintenance of AyA's assets in order to bring them toacceptable standards of quality and would improve operations and reduce costs.

Sector Performance

1.17 Costa Rica has made significant progress in the past two decades in expanding its watersupply and sanitation services and this is reflected in very high service coverage levels that rankamong the highest in Latin America. Nevertheless, there are still major problems to be addressed inthe water and sanitation sector, including the need to:

(a) define sectoral goals and develop a consensus within the Government on thesegoals and how they should be pursued, and develop and implement soundinvestment and cost recovery policies;

(b) improve organizational and operational arrangements for the provision ofwater and sewerage services in the country so as to avoid unnecessaryduplications and overlap of responsibilities between sector agencies;

(c) develop and put in place a sound regulatory framework for sector utilities toeventually allow and encourage private sector participation;

(d) improve productivity, particularly in the areas of personnel and in reducingwater losses; and

(e) assign an increasing share of investment funds to implementing environmentalimprovements.

1.18 As noted in para. 1.11, several Government agencies are now active in the sector butcoordination is poor and a common vision of sectoral goals is lacking. In the context of the proposedproject, the Government has provided the Bank with the National Water Supply and Sanitation PolicyStatement (Annex 17), outlining sector policies and goals, institutional reform goals, water qualitytargets, financing policies, and the goals of improvement and expansion of water and sewerageservices. The Government attaches particular importance to decentralization, private sectorparticipation and efficiency improvements. The Government has prepared terms of reference to studythe improvement of the institutional framework of the sector (Annex 20) coherent with its goals ofpublic sector reform which would be supported under SAL m. During negotiations, agreements

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were reached with the Government and AyA on: (i) the sectoral goals and policy objectives outlinedin the Policy Statement; (ii) the terms of reference of the study of investment and cost recoverypolicies and that it would be carried out by December 31, 1994 and a satisfactory follow-up actionplan will be submitted to the Bank by March 31, 1995 and implemented thereafter; (iii) the terms ofreference of the study of the institutional framework for the GAM and that it would be completed byJune 30, 1994 and a satisfactory follow-up action plan wil be submitted to the Bank by September30, 1994 and implemented thereafter; and (iv) the terms of reference of the study for the institutionalframework for the sector and that it would be completed by December 31, 1994 and a satisfactoryfollow-up action plan will be submitted to the Bank by March 31, 1995 and implemented thereafter(paras. 5.1 (a), 5.1 (b), 5. 1(c) and 5.1 (d)). Compliance with these plans would be monitored closelyduring supervision (para. 3.14). In addition, through project execution a performance plan that takesinto account productivity and efficiency improvements in AyA with specific operational and financialtargets will be executed and monitored (paras. 2.3, 2.10, 2.21 and 3.13). The regulatory frameworkreview is being addressed under SAL III (para. 1.14), but to ensure that the proposed project standson its own, AyA's performance will be monitored based on operational and financial targets agreed atnegotiations (paras. 2.21 and 4.7).

Lessons from Past Experience

1.19 Bank involvement in the sector has been limited so far to the San Jose Water Supply Project(Loan 1935-CR approved in 1980). This US$26 million loan was cofinanced by the CommonwealthDevelopment Corporation (CDC). The project included mainly the construction of the Orosi waterscheme, which brings water to the SJMA from the Rio Macho catchment, a distance of approximately28 Km. This project solved the problem of water rationing that the SJMA was facing in the 70's andpart of the 80's, and it assisted in the rehabilitation of part of the water distribution system of theSJMA and the strengthening of AyA's organization and management. The Project CompletionReport (No. 9166) shows that while the physical targets of the project were achieved with somedelays, the project did not achieve all its institutional objectives, mainly because of major managerialproblems. Nevertheless, some improvements occurred in AyA's commercial management. TheProject also helped to identify the causes of the high levels of UFW, thus facilitating the formulationof the UFW program under this proposed project.

1.20 In November 1991, the Bank completed a Water Supply and Sanitation Sector Overview(Report No. 10070-CR) which made recommendations for addressing the major sectoral issues as wellas for improving AyA's operational and financial efficiency. This sector report was discussedthoroughly with AyA and the Government and has been instrumental for project design.

1.21 The lessons learned from the Bank's past activities in the water and sewerage sector and inother infrastructure sectors of relevance to the water and sewerage sector are presented in Annex 2.In designing the proposed project, due consideration has been given to these findings and thoseoutlined in a June 1992 OED' water sector report. One of the main recommendations of the OEDreport is the need to develop and implement sound sector policies (as attempted under the proposedproject) and to provide explicit guidance on how to reconcile the objectives of public sectormanagement and private sector development with poverty alleviation and environmental protection

s 'Wazer Supply and Swaiadon Project - che Bank's Expeience: 1967-1989- Jiaw 19. 1992.

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concerns. The main issues identified in other infrastructure projects in Costa Rica (Annex 2) aresummarized below where we also outline how they are being addressed in he proposed project:

(a) Physical and Institutional Objectives. Inadequate linkages between physicaland institutional objectives help explain some of the shortcomings in reachingthe main objectives, particularly on the institutional front in several of theprojects reviewed. Thus, a strong linkage between physical and institutionalobjectives is the cornerstone of the proposed Project. The overall objective ofthe project will be to ensure sustainability, for which it is necessary for AyAto attain financial self-sufficiency. This objective would be achieved throughtariff actions, the implementation of an UFW program and an institutionalstrengthening program (para. 3.3);

(b) Demand/Production Forecasts. Failure to forecast demand and productionneeds with reasonable accuracy is a recurrent problem of most water supplyand sewerage projects. The demand projections for the SJMA were reviewedto ensure that the proposed investment program is well justified. For thedesign of the water facilities to be included in the project all relevantinformation on consumption patterns and production was analyzed thoroughly.This information also was the basis for the formulation of the UFW program.Since commercial losses account for 55% of total water losses, the programassigns priority to respective reduction actions. The program defines theactions to be carried out, targets to be achieved and costs and resourcesrequired. The analysis of AyA's implementation capacity for this programand necessary improvements received special attention, to ensure a realisticimplementation schedule of the project (paras. 2.8 and 3.3); and

(c) Cost Recovery and Cash Generation. The setting of a sound cost recoverypolicy is very important since Government participation in sector financingshould be eliminated to allow funding of other social programs in a context offiscal austerity. In most countries this has been an elusive target. Therefore,special emphasis was placed on setting ambitious but realistic financial targetsand seeking upfront actions before submitting the proposed project to theBoard. With recent tariff increases, the financial situation of AyA willimprove to a satisfactory level, but future periodic adjustments will benecessary to counter the effects of inflation (para. 2.14). The institutionalstrengthening component of the proposed project also includes technicalassistance to strengthen AyA's financial management (paras. 2.22 and 3.3).

Rationale for Bank Involvement

1.22 The Bank assistance strategy in Costa Rica seeks to consolidate an ongoing process ofstructural adjustment, which is now focusing on public sector reform to lay the basis for privatesector led growth, and to support the continued implementation of poverty alleviation andenvironmental programs. Continuing Bank involvement in the water and sanitation sector wouldassist the Government to define its goals and main policies for sector development, as well as to

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implement the required policy and institutional reforms (para. 1.18). In addition, it will support theimprovement of efficiency and finances of sector institutions, in order to reduce their dependence onGovernment subsidies, at a time when investment requirements are high and government resourcesare limited. Since major investmnents in the sector would continue to be financed by IDB, Bankinvolvement would be closely coordinated with the IDB and would concentrate on helping to definesound sector policies and on financing investments and technical assistance for the overallimprovement of AyA's operational efficiency, institutional strengthening and improvement of thewater supply and sewerage services in the SJMA.

2. THE BORROWER

The Borrower and Executing Agency

2.1 The Borrower and executing agency for the proposed project will be AyA, which is anautonomous Govermment agency responsible for the provision of water and sewerage services to theSJMA and to other 33 towns throughout the country. AyA also provides technical support to ruralcommunities and is responsible for coordinating the development of the sector. AyA is under thejurisdiction of the MSP and is headed by a Board of Directors and its Executive President appointedby the Government Council (integrated by the President of Costa Rica and the full Cabinet). TheExecutive President, also Chairman of the Board, is supported by three senior managers forEngineering, Finances and Administration (See Annex 3). The internal organization, procurementprocedures, budgets, personnel policies and salary structure are tightly regulated by other publicentities such as the Ministry of Finance, which approves the budget, and the Contralorfa General de laRepdblica, which oversees all activities of public entities for compliance with national legislation.The structural adjustmnent program, proposed to be supported by SAL III would include budgetary andinstitutional reforms which are expected to bring more accountability in public sector institutions andreduce red tape, which is a major cause of inefficiency. The proposed project is in line with thisstructural reform effort by supporting improvements in the institutional framework of the water andsanitation sector (para. 1. 18).

Manaeement and Organization

2.2 Following Bank recommendations, on January 21, 1993, AyA's Board of Directors hascancelled the position of general manager, which overlapped with that of the Executive President,clarifying the channels of command and authority between the Executive President and the threesenior managers of the agency (para. 2.1). Historically, AyA's management has given priority to theprovision of service and hence has tended to focus on engineering matters. However, AyA's keymanagerial personnel often lack adequate expertise in financial, commercial and other non engineeringmatters. The Engineering Departrnent together with the six regional offices that have mainlyoperational functions, account for about 80 percent of the total agency staff. In contrast, keycommercial and financial activities are understaffed and have generally less qualified personnel.Consequently, an organizational imbalance exists and the results can be clearly seen. For a long timeAyA has been suffering serious and unresolved problems in the commercial and accountingdepartments, a very weak financial department and lack of corporate planning. The proposed projectaddresses the strengthening of these areas through technical assistance, including training for theimplementation of the respective reforms (paras. 2.4, 2.10 and 2.22). In addition, during

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negotiations assurances were obtained from AyA that it would maintain at all times senior managers(para. 2.1) whose qualifications and experience shall be satisfactory to the Bank (para. 5.2(a)).

2.3 Although AyA has six offices in the Metropolitan Area, Chorotega, Pacifico Central, Central,Huetar Atlantica and Brunca regions (see map), which are in charge of operations in their respectiveareas of jurisdiction, its organization is highly centralized. There is almost no delegation of authorityto the Regional Offices and their managers have to travel extensively to San Jose to obtain clearancefor operational decisions. This organization is not conducive to an agile and responsive managementof day to day operations outside San Jose and is impairing AyA's efficiency. In addition, all levels ofAyA's organization are burdened with cumbersome controls, most of them mandated by othergovernment agencies. These issues are being addressed under SAL III as part of public sectorefficiency improvement (para. 1.2). The institutional strengthening component of the proposedproject includes technical assistance for the analysis of all these issues and for the reinforcement ofAyA's organization and promotes decentralization as a way to improve productivity. Private sectorparticipation will also be sought with this same objective. The proposed technical assistance has beenincluded as part of the technical assistance to be provided by PAHO (para. 3.10). A decentralizatiotimodel with its correspondent implementation plan will be developed, defining the role of thecommunities and local governments, as well as the private sector participation. The correspondentterms of reference are presented in Annex 19. During negotiations agreement was confirmed withAyA that: (i) the decentralization model including areas or functions to be contracted with the privatesector would be completed by June 30, 1994 and that a satisfactory follow-up action plan would besubmitted to the Bank by September 30, 1994 and implemented thereafter; and (ii) 100%subcontracting with the private sector in all areas identified in the decentralization model would beimplemented by June 30, 1996 (para. 5.2(b)). Compliance with this plan would be monitored closelyduring supervision (para. 3.14).

2.4 Efforts are being made by AyA to define long term objectives and targets, so as to develop avision of its future which will provide a basis for proposed institutional and managerial reforms andguide its investments. The corporate planning function is extremely important, particularly at present,given the need to analyze the effects on AyA's organization and finances of incorporating newmunicipal water and sewerage systems. A Planning Department (PD) to coordinate actions with thedifferent areas has been created in AyA but has not yet been totally organized and equipped. OnFebruary 17, 1993, AyA's Executive President approved the organizational scheme, jobs descriptionand staffing plan of the PD, all of which are satisfactory to the Bank. Full staffing of the PD wouldbe a condition of effectiveness (para. 3.9). The PD would have primary responsibility for overallcoordination and supervision of project implementation, as well as for developing and overseeing theimplementation of short, medium and long-term strategies for the sector and for coordinating andmonitoring the activities of all units within AyA to ensure that the strategies are being implemented.In addition, such a unit could be expected to coordinate actions on longer term issues, such asenvironmental protection of water bodies, that presently receive inadequate attention as management'spriorities focus on short term issues. The institutional strengthening component of the proposedproject includes specific technical assistance in corporate planning for: (i) the design andimplementation of a budgetary process with programmatic content following Government's budgetaryreform proposals which would be completed by December 31, 1995 and December 31, 1996,respectively; and (ii) the design and implementation of a medium term strategic plan for AyA whichwould be completed by December 31, 1996 and December 31, 1997 respectively (Anmex I).Compliance with these plans would be monitored closely during project implementation (para. 3.14).

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The proposed technical assistance has been included as part of the technical assistance to be providedby PAHO (para. 3.10).

Personnel and Training

2.5 As may be seen in the graph below,staff productivity has been increasing in the last STAFF PRODUCTIV1TYfew years. However, there is still room for Staff per 1000 Water Connectionssignificant improvement. Some 2,660 persons ..

work in AyA, resulting in an average staffproductivity index (SPI) of 9.5 workers/ 1,000 lawater connections, compared to less than 5 per .thousand water connections in efficient sector ..companies of similar size in the region. In .1990, personnel costs represented 68 percent ofthe operational costs (excluding depreciation),compared to 30 to 40 percent in comparable -_,.

sector utilities. During negotiations agreementwas reached on AyA's Performance Plan, thatprovides that AyA will reduce its costs byimproving its staff productivity throughdecentralization of its operations and by seeking increased private sector participation, so as toachieve an SPI of 7.2 workers/1,000 connections by 1996 and of 6.6 by 1999 (para. 2.21). Interimtargets have also been established and would be monitored annually (paras. 2.21, 3.13 and 3.14).Future staff increases, if any, are expected to be marginal. In addition, under the Performance Plan,agreement was reached on a financial target that calls for a relation of personnel costs to operationalcosts not higher than 56 percent by 1999 (para. 2.21). Technical assistance would be provided underthe project for the analysis of the decentralization process, promotion of private sector participationand achievement of cost reductions (para. 2.3).

2.6 Training is done on an ad-hoc basis and not in response to AyA's main development andoperational needs. These problems are compounded by the constraints put on AyA by the CentralGovernment through the procedures chosen to keep public expenditures within set ceilings, whichmandate across the board cuts for all autonomous institutions without regards to efficiency oroperational considerations. Training programs would be designed and implemented under the project,as part of technical assistance to the planning, financial, commercial and operational areas (paras. 2.4,2.10 and 2.22). About 8 percent of the technical assistance loan component for these areas will beused for training.

Operations and Maintenance

2.7 The main operational problem is the high level of UFW (49% in 1990 compared to less than20% in well run sector utilities). Failure to meter consumption, repair meters and leaks, replace oldpipes, and maintain the commercial system and users' census up to date are among the most importantfactors that help explain these high losses. Physical losses account for 34 percent of all losses.

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Overflows in treaFwater reservoirs are one UNACCOUNTED FOR WATERof the main causes of UFWphysical losses, and aredue to lack of adequatelevel control valves inthese reservoirs.Approximately II Phil Billing Errors Free Waterpercent of the UFW is MocromterIng 34_ 17% \ 27%C

due to deficiencies in the 11% -

estimates of water Motoring

produced. Commercial 15% - nlosses represent 55 CommerciOl 41 N

percent of total losses, 55%

and they are related toconsumers' register Coposition Commercialdeficiencies and to of UFW (I 990) Lossesinadequate meter readingand handling of complaints. Only 80 percent of AyA's users are metered and it is estimated that the20 percent of non-metered users account for 45 nercent of the commercial losses. In addition, duemainly to the lack of spare parts there are some l1,000 meters (5% of total) that are not functioning.Financing to purchase meters would be available from the Central American Bank for EconomicIntegration (CABEI), IDB and from the proposed project (para. 3.7). In addition the informationroutinely provided by the meter readers on the condition of the meters is not being used to guidemaintenance programs. Also, because of inadequate controls, meters are often not read and the useris billed according to historical consumption averages. As a result of this neglect, water waste by theconsumer is increasing as users are charged on a flat rate basis and the price signals to conserve waterare removed. Moreover, this water waste is depriving AyA of important revenues and increasing itsoperational costs unnecessarily. The lack of adequate data on consumption deprives AyA of valuableinformation to guide day to day operations of the distribution system and to properly plan theexpansion of the different systems. All these issues would be addressed under the project whendesigning and implementing the commercial system (para. 2.10).

2.8 In 1990, AyA began the implementation of corrective actions to reduce UFW by carrying outa new census of the SJMA users and by adjusting its billing process. As a result UFW has beenreduced in the SJMA by some 9 percentage points thus far and monthly billings have increased by 20percent. Since the main causes of the UFW have been identified, an ambitious focussed program forthe reduction of these losses has been designed with Bank assistance and will be implemented underthe proposed project. The UFW program assigns priority to actions in the following areas: metering;commercial system; consumer and pipes cadastres; and operational control of the SJMA water system.The proposed goal is to reduce the level of UFW from 49% in 1990 to 289% in 1999. Details of theprogram are shown in Annex S.

2.9 In general, maintenance is done when a problem arises, instead of being programmed topreserve AyA's operating assets. Maintenance problems are noticeable in the Bank-financed Orosipipeline (para. 1. 19), that provides half of the water to SJMA. Although unstable soil conditions thatthreaten the stability of this pipeline were identified almost two years ago (when a major earthquakehit Costa Rica on April 22, 1991), corrective actions were not taken immediately, in part due to the

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precarious financial situation of AyA. The project includes a vulnerability study of the Orosi pipelineto natural hazards, as well as financing of the equipment and works required for its protection. Theproposed study has been included as part of the technical assistance to be provided by PAHO (para.3.10). During negotiations, agreement was reached that this study will be completed by December31, 1994, and that a satisfactory follow-up action plan detailing the organizational and engineeringmeasures to protect the pipeline would be submitted to the Bank by June 30, 1995 and would beimplemented thereafter (para. 5.2(c)). Compliance with this plan would be monitored closely duringsupervision (para. 3.14).

Commercial and Information Systems

2.10 In early 1989 AyA implemented a new billing system for the SJMA, which has severalserious limitations. Among them are lack of integration with the financial system and inability toproduce managerial monthly reports needed for follow up and decision-making. In addition, bills areissued without previous pre-billing or review process to detect errors, and require billing adjustmentsof around 18 percent of total monthly billings. These problems are magnified at the regional offices,as they are operating with an outdated billing system and lack operational autonomy (para. 2.3). Allthese issues would be addressed under the proposed project under the UFW program, which assignspriority to the commercial area (para. 2.8). The proposed technical assistance has been included aspart of the technical assistance to be provided by PAHO (para. 3.10). [uring negotiations,agreement was reached that upon completion of the design of the commercial system, no later thanJune 30, 1994, AyA would furnish to the Bank a satisfactory follow-up action plan by September 30,1994 and would implement this plan thereafter (para. 5.2(d)). Compliance with this plan would bemonitored closely during supervision (para. 3.14).

2.11 Another aspect of the commercial operations that needs to be addressed is collectionefficiency. To improve this, AyA is taking corrective actions to clean up its accounts receivable andto implement an active disconnection policy for lack of prompt payment. In 1991, AyA's accountsreceivable were equivalent to 3.9 months of billing. During negotiations, agreement was reachedwith AyA that by December 1993 its accounts receivable will not exceed 2.5 months of billing andthat it will not exceed this level every year thereafter (para. 2.21). Through periodic reports andregular supervision the Bank intends to monitor this target closely (paras. 3.14 and 3.15).

2.12 AyA does not have adequate management information and cost accounting systems thatprovide relevant, timely and accurate information to all levels of management. Basic information onbillings, unit costs per cost center, cash flow and maintenance needs, for instance, are not routinelyproduced, and monitoring indicators to assess performance of different units or departments do notexist. In other areas, the reports are not managerial and result oriented, and therefore, of little or norelevance for decision making. The only regular reports come from the Commercial area, althoughthey are hardly used in the decision-making process, perhaps because they are numerous and notalways relevant. These management information system (MIS) issues would also be addressed as partof the commercial and accounting systems to be implemented under the proposed project (paras. 2.10and 2.22).

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2.13 There is no compatibility and uniformity in the basic data processing equipment used by AyA.The two mainframe computers, one located in the financial department and the other in thecommercial department, use different processors and incompatible software that do not allow theelectronic exchange of information among them. As a result the accounting department has to inputinformation from the commercial department manually, increasing the risk of errors and slowingdown the process. The proposed project would provide technical assistance under the UFW and theinstitutional strengthening components to support AyA in establishing coordinated and compatiblecommercial and financial systems (paras. 2.10 and 2.22).

Water and Sewerage Tariffs

2.14 The lack of sound cost recovery policies partly accounts for the poor financial situation of thewater and sanitation sector in Costa Rica. This issue is more evident at the local government levelwhere municipalities apply tariff policies which vary widely and in general fail to structure charges torecover costs and discourage the wasteful use of water. Until 1991, tariffs were insufficient to coverAyA's operating and maintenance expenses and debt service obligations. In December 1991, AyAwith Bank assistance, prepared a proposal for tariff increases which was approved by SNE in March1992. The new rates became effective in April 1992 and provided for an average increase in thewater tariffs of 18% in April and a series of monthly increases of 3.5% until April 1993, which hasnow been extended until July 1993 (See Annex . Sewerage levies on those houses that havesewerage connections are 18 percent of the water charges and thus are being increased in parallel.Satisfactory implementation of this program of monthly increases would be a condition of loaneffectiveness (para. 5.3 (a)). The average water rate for AyA's operated systems expected for July1993 would be equivalent to about USS 0.35/m3, and the average water tariff for the SJMA to aboutUSS 0.45/m3 which is in line with the estimated average incremental cost (AIC) of water. Theserates, adjusted annually to compensate inflation, would permit AyA to cover its operational costs anddebt service, as well as to generate sufficient cash to contribute about 22% to its 1993-2001investment program, provided the envisaged performance and cost control measures are alsoimplemented (paras. 2.21 and 3.13). During negotiations, agreement was reached with AyA on theoperational and financial targets that have been incorporated in its Performance Plan (para. 2.21 and3.13) and that the achievement of these would be reviewed annually (para. 3.14). As a consequenceof these reviews, and if the Bank shall so recommend, AyA will formulate a satisfactory proposal fortariff adjustments to the regulatory authority, SNE, within a framework of time acceptable to theBank (para. 5.2()). The approval of such tariff increases, as may be required, will be one of thefactors to enable AyA to comply with the financial targets proposed under the project (para. 2.21). IfSNE or any other authority having jurisdiction does not review and grant approval to any of the tariffadjustments requested by AyA that are required to achieve its financial targets within 75 days of theirrespective publication in the official gazzette, it would be regarded as an event of default (para.5.4(a)).

2.15 AyA's tariff structure provides for four consumer categories (residential, commercial,industrial and concessional) and five narrow consumption block rates for the first 60 m3 of waterconsumed monthly. Separate tariff schedules are maintained for the SJMA, other urban centers andrural areas. Outside San Jose, urban and rural rates are 90 and 70 percent of the SJMA rates. Thetariff structure and its analysis are presented in Annex. AyA's tariff structure has the followingmain drawbacks:

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(a) consumers with the basic fixed charge are subsidizing consumers with higherlevels of consumption;

(b) commercial, industrial and concessional tariffs fail to discourage the wastefuluse of water;

(c) the rationale and criteria for classifying commercial and industrial businessesare not clear; and

(d) flat rates assigned to unmetered users, particularly in the industrial andconcessional categories, do not take into account the higher consumption ofunmetered connections.

Under the institutional strengthening component, technical assistance has beenincluded to study AyA's tariff structure and propose the necessary adjustments to eliminate thementioned drawbacks. In addition, a study and corresponding implementation plan to adjust thesewerage charges in the SJMA and to determine the charges to be established in other urban areas(including sewerage treatment) will also be carried out as part of the technical assistance program tobe provided by PAHO (para. 3.10 and Annex II).

Financial Performanc

2.16 AyA's financial results for the years 1986-92 are shown in Annex 6. During this period,AyA's cash generation was insufficient to contribute to its investment program approximatelyUSS 17 million. The situation deteriorated since 1988, as operating losses tended to increase (USS1.0 million, USS 6.5 million and USS 3.3 million in 1988, 1989 and 1990, respectively) but AyA'sfinancial situation has begun to improve since 1991 (para. 2.14). Until 1992, AyA's net contributionto investments was not internally generated as the result of an increase in current liabilities. In 1989and 1990 AyA could not cover its debt service payments from its internal cash generation.

2.17 A substantial increase in operating costs coupled with lower than expected increases inrevenues contributed to the deteriorated financial situation. While on average current operationalrevenues increased during the period 1986-1990 by 17% per year (i.e. only roughly at the rate ofinflation, despite significant increases in the volume of water billed), operating costs increased by anaverage of 25% per year, reflecting real production volume increases and loss of efficiency as well asinflation. Inadequate tariff adjustmnents during periods of relatively high inflation and currencydevaluation (no tariff adjustments were made during 1988 and 1989), coupled with lack of control ofoperational expenses and lax commercial practices in billing and collection have been the mainreasons for this unsatisfactory financial performance.

2.18 Unsound investment and bulk water pricing decisions have aggravated AyA's financialsituation. With external financing, AyA constructed water systems in municipalities which were notpart of the AyA system, for which AyA assumed the corresponding debt service without dueconsideration to the sub-borrowers' capacity to pay. In most cases these municipalities were not in asound financial situation and the prospects of repayment were from the outset very slim. AyA alsoentered into long term contracts with local governments to supply bulk water at a set price which is

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much lower than the real cost of producing this water. These problems have been taking into accountin the financial projections, as part of the refinancing agreement with the Ministry of Finance (para.2.20) and will be totally eliminated once the revised institutional framework of the sector has beenimplemented (para. 1.18).

2.19 During 1986 to 1990 AyA obtained the cash needed to finance its current operation andcapital investments through: (i) government equity contributions; (ii) government grants in an amountequivalent to about US$ 20.0 million to service AyA's debt service ; and ( iii) increases in currentliabilities. Performance improved during 1991 and 1992, when AyA generated sufficient cash tocover its operational costs, debt service, and on average about 30 percent of its investment program.

Financial Prosets

2.20 AyA's financial projections (Annex 6 are based on a strategy to achieve and maintainfinancial self-sufficiency, so as to permit AyA to operate and maintain adequately its water andsewerage systems and pay debt service and make a reasonable contribution to its investment program.The basic assumptions of the financial projections are:

(a) implementation of a tariff increase of about 41 percent in real terms between1992-1993 and additional annual increases to compensate for inflation in 1994and thereafter;

(b) reduction of the UFW levels to 44% by 1993, 29% by 1996, and 28% by1999;

(c) staff increases, if any, beyond the present level of 2,660 will be marginal until1999;

(d) outstanding debt with the Ministry of Finance will be refinanced based on theagreed amortization plan (See An=e 22);

(e) AyA's 1993-2001 investment program will amount approximately to USS 293million (in 1992 USS);

(f) AyA's investment program will be financed through external loans (59%),external grants (5%), Government contributions (11%), communities andmunicipalities contributions (3%) and AyA's internal cash generation (22%)(para. 3.7).

2.21 In support of the timely implementation of the investment program and the achievement of theoperational improvements supported by the proposed project, during the appraisal mission inSeptember 1992, AyA agreed to the following operational and financial targets (An 12) that havebeen incorporated in its Performance Plan (para. 3.13):

(a) achieve a micrometering level of 79% in 1993, 91% in 1994, 96% in 1995and 99% in 1996 and thereafter (micrometering levels in 1991 and 1992 were77% and 74% respectively);

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(b) attain a macrometering level in the SJMA of 50% in 1994, 60% in 1995, 80%in 1996 and 100% in 1997 and thereafter (macrometering levels in the SJMAin 1991 and 1992 were almost zero);

(c) reduce the UFW levels to 44% in 1993, 39% in 1994, 34% in 1995, 29% in1996 and 28% in 1997 and thereafter (UFW levels in 1991 and 1992 were46%);

(d) achieve a SPI of 8.2 in 1993, 7.8 in 1994, 7.5 in 1995, 7.2 in 1996, 7.0 in1997, 6.8 in 1998 and 6.6 in 1999 (SPI in 1991 and 1992 were 9.1 and 8.6respectively);

(e) attain a working ratio of 0.55 in 1993 and 1994, and 0.5 in 1995 andthereafter (the working ratio for 1991 and 1992 was 0.7);

(f) achieve a debt service coverage ratio of 2.4 in 1993 and thereafter (the debtservice coverage ratios for 1991 and 1992 were 1.3 and 1.7, respectively);

(g) attain a relation of personnel costs to operational costs not higher than 58percent in 1993-1996, 57 percent in 1997 and 56 percent in 1998-1999 (thisrelation was 64% in 1991 and 58% in 1992); and

(h) achieve a contribution to investment of 14% in 1993 to 1995, 20% in 1996and 30% in 1997 and thereafter (the contribution to investment was about30% during 1991 and 1992, but investment requirements are expected toincrease significantly starting in 1993).

This agreement on the operational and financial targets in AyA's Performance Planhas been confirmed during negotiations (para 5.2(e)). Actual performance, and possible revisions ofthe agreed upon targets will be reviewed annually by SNE as part of the information to be consideredfor the approval of tariffs (para. 2.14), as well as by the Bank to assess compliance with the Plan andto agree with AyA on any corrective actions that may be necessary (paras. 3.14 and 4.7).

Accounting and Auditing

2.22 AyA's accounting system (financial, costs and budgetary systems) is mostly manual and is notintegrated with the commercial system (billing and collection). Therefore, there are problems withthe conciliation of revenues and the accounting information is not timely enough for managementdecisions. In addition, no budgeting and cost accounting systems are in place to help managementwith its decision making. To address these issues, AyA has been attempting to implement acomprehensive computerized accounting system but without success since the system is not designedto integrate the financial, budgeting and cost accounting systems nor the commercial system.Therefore, technical assistance has been included under the Project, for an integrated managementaccounting system that would integrate the financial, budgetary and costs systems. This would permitAyA to have a budgeting system not just geared to the needs of the government, but withmanagement objectives in mind, together with a cost accounting system that would increase awarenessand responsibility for costs at the different management levels. This new system would also be

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integrated with the commercial system to be developed under the project (para. 2.13). This integratedaccounting management system will also be the basis for the medium and long range corporateplanning (para. 2.4). The proposed technical assistance has been included as part of the technicalassistance to be provided by PAHO (para. 3.10). During negotiations, agreement was reached withAyA that upon completion of the design of the accounting system, no later than June 30, 1994, AyAwould furnish to the Bank a satisfactory implementation plan by September 30, 1994 and wouldimplement this plan according to a timetable satisfactory to the Bank (para. 5.2(f)). Compliance withthis plan would be monitored closely during supervision (para. 3.14).

2.23 Financial statements up to and including 1991 have been audited by a private auditing firm,with minor qualifications. Following the practice of the previous years, the financial statements of1992 will be audited by June 1993. During negotiations, agreement was reached with AyA that itwould continue using qualified private independent auditors acceptable to the Bank, to review yearlyits financial statements, project expenditures, Special Account and Statements of Expenditures and thatthe Auditor's Reports, including a management letter reviewing the adequacy of accountingprocedures, internal controls and management practices, would be submitted to the Bank not laterthan six months after the end of each financial year (para. 5.2(g)).

3. THE PROJECT

Project OQigin

3.1 The proposed project supports the Government's plans to improve the efficiency and financesof sector institutions in order to reduce their dependence on Government subsidies and is beingcoordinated with parallel efforts under the proposed SAL m, which would support public sectorreform. Further Bank assistance to the sector was envisaged under the first Bank loan to AyA (Loan1935-CR) which was completed by mid 1989. Initially AyA requested the Bank only to financeinvestments to improve water supply services in the GAM (mainly the development of well fields andthe expansion of water storage and distribution network), to improve its UFW levels and toconsolidate the institutional strengthening gains achieved with the first Bank operation. Subsequently,it was also agreed that the institutional framework for the sector should be reviewed and improved.In addition, the project includes improvements in the water and sewerage services of the SJMA, aswell as actions required to support AyA in carrying out an institutional and financial restructuring, toincrease efficiency in operations and consolidate AyA's financial viability.

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Project Objectives

3.2 The proposed project has four major objectives:

(a) Help the Government and AyA to improve the institutional framework for theprovision of water and sewerage services in the country, including promotionof private sector participation, and to develop and implement sound sectoralpolicies;

(b) Support AyA in carrying out an institutional and financial restructuring, toincrease efficiency in operations and achieve and consolidate financialviability. Key elements of the restructuring program include reduction ofoperating costs (especially of personnel), increased tariffs and improved tariffstructures, measures to increase private sector participation through the use ofservice contracts and decentralization of AyA's actual organization;

(c) Improve the operation of the existing water supply system in the SJMA (seeAnnex 7), by reducing water losses, defining pressure zones better andincreasing storage and regulation capacity in the distribution system. Theseactions would also help reduce operating costs and postpone large capitalinvestments that would otherwise be required; and

(d) Improve the SJMA sewerage service, (see Annex 7) mainly to address theenvironmental conditions of poor urban areas.

Project Description

3.3 The proposed project, which would be carried out during a six year period, between 1994 and1999, includes five main components as described in detail in Annex and summarized below:

A. INSTITUTIONAL STRENGTHENING PROGRAM - (9% of total project cost).

The program comprises equipment, technical assistance and staff training for:

1. Development and implementation of sound sector policies, especiallyinvestment and cost recovery policies, and development and implementation ofthe institutional framework reform;

2. Improvement of AyA's corporate planning, including: (i) the development andimplementation of a budgetary process with programatic content followingGovernment's budgetary reform; and (ii) the development and implementationof a long term corporate plan;

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3. Improvement of AyA's financial management, including: (i) the developmentand implementation of an integrated accounting system; (ii) the reform of thewater tariff structure; and (iii) the development and implementation ofsewerage rates to be applied in the SJMA and other urban areas; and

4. Operating costs reduction, private sector participation and decentralization,including the development and implementation of a decentralization modelpromoting major private sector participation.

B. UNACCOUNTED-FOR-WATER REDUCTION PROGRAM (UFW - (42% of totalproject cost).

The program comprises equipment, technical assistance and stafftraining needed for the implementation of the following priority projects:

1. Metering, including: (i) procurement and installation of approximately 86,300new meters; (ii) replacement of approximately 25,000 old meters; (iii) repairof approximately 13,000 meters; and (iv) procurement and installation ofmacrometers to control water production in the SJMA;

2. Commercial System, including: (i) the definition, development andimplementation of an integral commercial system linked to the accountingsystem; (ii) development of a commercial management information system;and (iii) development and implementation of special procedures for the controlof consumers with high levels of water consumption;

3. Updating of consumer and pipes cadastres, including: (i) the incorporation ofillegal water connections to AyA's consumers cadastre; and (ii) thedevelopment and implementation of the pipes cadastre.

4. Operational Control of the SJMA water supply system, including thedevelopment and implementation of an operational control system to improveits efficiency; and

5. Replacement of approximately 8,000 water connections in the SJMA (about12% of total connections).

C. SJMA WATER SUPPLY AND DISTRIBUTION SYSTEM - (33% of total projectcost), including:

1. Installation of 19 km. of primary distribution pipes (arger than 300 mm) and57 km. of small diameter pipes (50 to 300 mm) in the distribution system;

2. Construction of 10 storage tanks (one each in Curridabat, San Isidro, BeloHorizonte, San Juan de Dios, Pizote, Mata de Platano, and two each in SanPablo and Coronado) with a combined capacity of 21,500 m3;

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3. Construction of production facilities consisting of 4 wells, 2 in Potrerillos and2 in Zona Norte, with expected increase in water production of 0.3 m3/sec;

4. Construction of four water pumping stations; and

5. Consultancy services for the final designs of some of the above mentionedworks and supervision during construction.

D. SJMA REHABILITATION SEWERAGE WORKS - (10% of total project cost),including:

1. Rehabilitation and/or interconnection of sewage collectors that will incorporateinto the system 6,500 sewerage connections (households) benefitting some32,000 inhabitants;

2. Installation of 27 km of secondary sewage collectors (smaller than 400 mm) toimprove the environmental conditions of two poor neighborhoods, Los Guidoand La Pax, benefitting about 27,000 inhabitants;

3. Rehabilitation of seven sewage pumping stations; and

4. Consultancy services for the final designs of some of the above mentionedworks and supervision during construction.

E. OPERATIONS AND MAINTENANCE - (6% of total project cost), including:

1. Purchase of equipment for operation and maintenance of sewerage systems;and

2. Consulting services, equipment and civil works required for the vulnerabilitystudy and maintenance of the Orosi pipeline.

Project Cost

3.4 The total project cost is estimated at USS 40.0 million equivalent, including physical and pricecontingencies, net of duties and taxes. A summary of estimated project costs is presented in Table 1,and a detailed cost estimate is given in Annex 9.

3.5 The project is in an advanced stage of preparation, and cost estimates for all construction andequipment purchase components are based on preliminary designs or on the costs of recently awardedcontracts for similar works or equipment. Base prices are based on current prices as of December1992. Physical contingencies were calculated assuming 15% for components B, C, D and E and 10%for component A. Price contingencies were calculated assuming project start-up in 1994 so as to takeinto account the historic lengthy Congressional approval process in Costa Rica and a project executionperiod of six years, at an estimated international inflation of about 3.7% per annum between 1993-1999. It is assumed that any future exchange rate adjustments will reflect the difference betweendomestic and international inflation.

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Table 1 ESIMATED PROJECT COSTS(In USS million)

NENTJ ISIBASICOMPONT LOCAL V`OREIGN, TOTAL COST.

A.Institutional 0.7 2.1 2.S 9Strengthening

B.UFW Progrm 1.5 10.8 12.3 41

C.SJMA Water Supply 5.2 4.7 9.9 33

D.SWMA SewerageRehabilitation 2.4 0.6 3.0 10

E.Operation andMaitenance 0.4 13 17 6

BASE COST(Dec. 1992) 10.2 19.5 29.7 100

PbysicalConinncies 1.5 2.8 4.3 14

PriceContingencies 2.3 3.7 60 20

TOTALPROJECT COST 14.0 26.0 40.0 135

Project and Program Financing Plan

3.6 The project financing plan is presented in Table 2. The proposed Bank loan of US $26.0million, which corresponds to the estimated foreign exchange cost of the project, represents 65% oftotal project cost, net of taxes. AyA's internal cash generation will be sufficient to finance thebalance, provided: (i) its water rates continue to be increased monthly by 3.5% until July 1993 andfrom then on as required to enable AyA to comply with the financial targets to be agreed upon underthe project (paras. 2.14 and 2.21); and (ii) the agreed operational targets are achieved (para. 2.21).Assurances were obtained during negotiations that AyA would submit to the Bank, not later thanSeptember 30 of each year: (i) its financial projections for the following six year period; (ii) its six-year investment plan with specific details for the upcoming year; and (iii) the project's investmentplan with specific details for the upcoming year (para. 5.2(h)), all satisfactory to the Bank. It wasalso agreed during negotiations that AyA, prior to approving or making any commitment in respect toa major investment (in excess of US$500,000), would provide evidence to the Bank that theinvestment in question would have no adverse effect on AyA's agreed operational and financialperformance. It was agreed that grant-financed investment and also those investments alreadyincluded in AyA's overall investment plans would be excluded from the above requirement (para. 5.2(i)).

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Table 2. PROJC FINANCING PLAN(USS bLko)

..... ............. ..,- ' t-;-;-t

_ _ _.::\-i-,,: - i,7

Wodd Bank 26.0 65

AyA'a ltnurrCab G.m.ation 14.0 35

TOTAL 40.0 100

3.7 AyA's overall investment program for the period 1993-2001 is estimated at USS 293 millionand includes almost exclusively investments in water supply (74% of the total) and sewerage (23% ofthe total). Investments in water supply are to be executed in the SJMA (33% of the total), otherurban areas (49% of the total) and rural areas (18% of the total). Investments in sewerage are to beexecuted in the SJMA (65% of the total) and other urban areas (35% of the total). To finance itsprogram of sector investments, AyA has already signed three loans with IDB/OECF, KfW andCABEI respectively, in amounts that represent in total about USS93 million which is equivalent to32% of the total investment program. In addition the proposed project, together with new projects tobe financed by international agencies after 1998, would increase the external financing by US$79million, equivalent to an additional 27%. Grants from CARE International and OECF are alsoexpected for the financing of a watershed protection study and sewerage studies in the SJMA andother urban areas, in an amount equivalent to 5%. Local contributions in an amount equivalent to -

i1 % would come from Goverment through FAF (para. 1.15) and are earmarked to financeinvestments in rural areas. Communities and municipalities contributions are also considered in anamount equivalent to 3%. AyA's contribution to its investment program is expected to be about22%. Table 3 summarizes AyA's investment and financing plan for 1993-2001 and details arepresented in Annex 6, Table 6.1.

Table 3. AvA's DrVESTMENT FINANCING PLAN (1993-2001)(US sMalOi)

Wodd Bank pod Project) 26.0 9MB 51.0 17OBCF (oa) 12.0 4RFW (Gamiay) 7.3 2CABEI (CeInmi Am.tcka Buak) 23.0 aNow Foi"p L<n 53.0 19Cozntbdom from:

Governw- 31.8 1 1ComNanilisa & Municipalities 10.0 3CARE and OECP 13.9 5

AyA Internal Cub GOsentaon 65.5 22

1TTAL 293.5 100

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Proiect Implementation

3.8 The project implementation schedule for each component is shown in Annex I0. Projectpreparation is well advanced. Special attention has been given in project design to the implementationcapacity of AyA and a project launch workshop, as well as the annual and mid-term reviews areexpected to facilitate the project implementation. Land acquisition needs are minor (0.6 ha.),basically to accommodate the construction of some of the water storage tanks. Detailed designs areavailable for most of the items included in the SJMA water supply and sewerage components. Inaddition, technical specifications for the procurement of most of the goods included under the projectare in an advanced stage of preparation and proceeding satisfactorily.

3.9 The overall coordination and supervision of project implementation would be carried out bythe Planning Department (PD) of AyA (para. 2.4). Its responsibilities would include:

(a) preparation of an annual detailed implementation plan and of cost schedulesfor project execution;

(b) confirmation of the availability of counterpart funding for the proposed projectand for AyA's overall investment program;

(c) preparation of the project progress reports to be submitted to the Bank everysix months, that would be the basis for the annual reviews (para. 3.15);

(d) identification of possible implementation gaps and ensuring that appropriateaction is taken to resolve those gaps;

(e) coordination of the engineering, bidding, procurement and constructionactivities of components C, D and E of the project with the EngineeringDepartment of AyA;

(f) coordination of the implementation of the UFW program (component B) withthe Technical Committee of UFW responsible for the coordination andmonitoring of this program;

(g) coordination of the execution of the institutional strenhening program withthe different organizational Units of AyA; and

(h) monitoring key targets and indicators and evaluation of overal performance ofthe proposed project and of AyA's performance plan (paras. 3.13 and 3.14).

On February 17, 1993, AyA's Executive President approved the organizatonalscheme, jobs description and staffing of the PD to carry out the above mendoned responsibilities,satisfactory to the Bank (para. 2.4). During negotiatoi assurances were obtained that AyA would:(i) maintain the PD with functions, structure and staffing satisfactory to the Bank; and (ii) allocatefunds and other resources as required for its satisfactory operation during the project execution perid(para. 5.2a)). As a condition of loan effectiveness AyA would appoint in its PD, a project

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coordinator and three planners in charge of the physical planning, short-term planning and long-termplanning all with functions, qualifications and experience satisfactory to the Bank (para. 5.3(b)).

3.10 The implementation of the institutional strengthening program and of the UFW program willbe executed mainly by AyA staff assisted by foreign and local consultants. The specific objectives,actions, targets and monitoring indicators of these two programs are presented in Annexes 11 and Srespectively. For the provision of the technical assistance required by these two programs, AyA hasapproached the Panamerican Health Organization (PAHO), a UN specialized agency. PAHO hassatisfactorily provided similar technical assistance to AyA in the past and there is a good workingrelationship. PAHO has the advantage of having experienced professionals in water supplymanagement with regional experience and is able to recruit short term specialists from water utilitiesthat are not easily available otherwise. The proposed PAHO technical assistance program would besimilar to programs successfully provided to other water utilities and sector water agencies financedthrough Bank loans in Brazil, Honduras, Ecuador and other countries. In January 1993, AyAsubmitted to the Bank a final agreement with PAHO for the provision of technical assistance togetherwith the correspondent terms of reference, satisfactory to the Bank, in line with the informationprovided in Annexes 5 and 11. The signature of this agreement would be a condition of loaneffectiveness (para. 5.3(c)). Terms of reference to analyze the private sector participation anddecentralization of AyA and to study the improvement of the institutional framework of the sector tobe developed under the mentioned agreement are presented in Annexes 19 and 20 respectively.

3.11 For the coordination and monitoring of the UFW program, AyA's Executive President hasappointed a Technical Committee of UFW (TCUFW) integrated by high level officials of theengineering, financial, planning and commercial departments. This committee has an executivesecretariat, which will be responsible for coordinating the execution of the program with the differentorganizational Units of AyA and through a management information system assess the progress inprogram execution and in the reduction of the levels of the UFW. The TCUFW will meet monthly tosupervise and assess progress in program execution, and whenever required by the Secretariat to takecorrective actions. The TCUFW and its secretariat will be a permanent arrangement in AyA.Assurances were obtained at negotiations that AyA would maintain such committee and its secretariatpermanently with functions and staffing satisfactory to the Bank (para. 5.2(k)).

3.12 The construction of the storage and distribution water works, as well as the sewerage worksin general are expected to be executed and supervised by local contractors and consultantsrespectively, since from the technological point of view Costa Rica has sufficient experience with thistype of works. However, the production works are respectively expected to be contracted with andsupervised by foreign contractors and consultants.

Monitoring and Sugervision

3.13 In February 1993, AyA submitted to the Bank its Performance Plan (1993-2001) inaccordance with the outline presented in Annex 18. This plan incorporates the agreed operational andfinancial targets shown in Annex 12 and would pursue the timely implementation of the mentionedinstitutional strengthening program and UFW program. Close process project monitoring and reviewby the Bank would be essential given the range of institutional and policy changes planned withproject execution. During the first three years of project implementation, an allocation of 25 to 30

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staff weeks per year are planned. Supervision would involve a sanitary engineer, a financial analyst,an institutional development specialist and specialized consultants.

3.14 On or about September 30 of each year, starting in 1994, the Bank together with theBorrower and public sector reform authorities would conduct formal reviews of progress made inimplementing the proposed project. Should these reviews indicate that progress toward meeting theproject objectives is unsatisfactory, the Borrower would prepare, not later than one month after saidreview, and execute to the Bank's satisfaction, remedial action plans. The annual and mid-term (seebelow) reviews would provide an opportunity to assess project and Borrower's performance (andidentify remedial actions) which would be measured against the progress made in achieving thosetargets which constitute legally binding commitments: the agreed operational and financial targets(Annex 12); the agreed key implementation target dates of the institutional strengthening program andthe UFW program (Annex 11 and 5); and the agreed implementation target date for the protection ofthe Orosi pipeline (para. 2.9). In addition, the annual review will also assess project performance bytaking into account other targets and indicators which, though not as important as the above ones, willprovide a basis for assessing overall project and Borrower's performance (Annexes 5, 10, 11 and 13).The annual reviews will also assess progress made in the implementation of AyA's 1993-2001 overallinvestment program and funding and will evaluate project management and coordination, inparticular: (i) the performance of the PD to adequately manage technical and administrative issues toachieve the project objectives, and (ii) technical ability and soundness of judgement in the areas ofprocurement and disbursements. Special attention would be given in the annual reviews to the reviewof the adequacy of AyA's water supply and sewerage charges and to the proposal and approval oftariff adjustments (para. 2.14). After three years of project implementation (by September 30, 1996),the Bank together with the Borrower and public sector reform authorities would conduct a mid-termreview of project execution in lieu of an annual review. In addition to covering all areas included inthe annual reviews, the mid-term review would pay particular attention to: (a) the overall progressbeing made in achieving the aims of the project and of the Government's Water Supply and SanitationPolicy Statement; (b) the progress made in implementing key actiuns related to the institutionalstrengthening program and UFW program; (c) the progress made in implementing SNE'srestructuring plan; and (d) the actions concerning and time taken by SNE for approval of tariffrequests. Annex 16 presents further details on the supervision plan and the proposed agenda for theannual and mid-term reviews. During negotiations, agreement was reached with AyA on the scopeand timing of such reviews and its commitment to the implementation, if necessary, of satisfactoryremedial actions (para. 5.20)).

3.15 During negotiations, agreement was reached that AyA would submit semi-annual progressreports to the Bank, by February 28 and August 31 of each year for the previous semester, starting in1994 (para. 5.2(m)). As important objectives of the project are to support Government plans todevelop and implement sound sector policies, as well as to implement the required institutionalreforms, and to improve overall efficiency and finances of AyA, the semi-annual progress reportsshould review progress in these areas as well as in the implementation of all physical projectcomponents. The PD, with the assistance of the different organizational units of AyA, would beresponsible for physical and financial monitoring of project activities; and would coordinatepreparation of all reports and consolidate the same for submission to the Bank. AyA would also berequired to present to the Bank a project completion report not later than six months after the closingdate of the loan (para. 5.2(m)).

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Procurement

3.16 Procurement under the proposed project will be in accordance with the Bank Guidelines forProcurement of Goods and Works (May 1992) and Bank Guidelines for the Use of Consultants(August 1981). AyA's management has the capabilities to handle adequately the procurementprocesses required for this project. During negotiations agreement was reached with AyA that allprocurement of goods and civil works, whether subject to international competitive bidding (ICB) orto locally advertised competitive bidding (LCB), shall be done using standardized bidding documentsagreed upon with the Bank (para. 5.2(n)). As a condidon of loan effecdlv , these standardizedbidding documents would have been completed, satisfactory to the Bank (para. 5.3(d)). To the extentpracticable, the procurement of goods and works would be done by grouping the variousequipment/materials items in bid packages estimated to cost the equivalent of US$250,000 andUS$1,000,000 or more per package, respectively, so as to encourage greater supplier interest.

3.17 A breakdown of project costs and loan amounts by procurement method is shown in Table 4.

Table 4. PROJECT COST BY PROCUREMENT MEM=O1(in US S Million)

i -, -: <> ;.:i.: ..t -' ' :. ' ~ w -

1. Ciy Wor

UFW Progmm - 1.4 - 1.4

(0.5) (0.5)Water 1.1 3.7 - 4.8

(0.3) (1.1) (1-4)Seweage 1.2 - 1.2

(0-4) (0.4)

Sub-Total 1.1 6.3 -7.4

________________________ (0.3) (2.0) _ (2.3)

2. 1 3 _

InsiutionalStrengthening Progam 1.5 1.5

(1.1) (1.1)UFW Program 9.5 - 3.5 13.0

(6.2) (2.3) (8.5)Waer 1.8 6.7 8.5

(1.2) (4.3) (5.5)Scweae 0.5 2.4 - 2.9

(0.4) (1.5) _ (1.9)

Sub-Total 13.3 9.1 3.5 25.9(8.9) (5.8) (2.3) (17.0)

3. Con ul h.and..Iuiaing 1.4 5.3 6.7

(1.4) (5.3) (6.7)

TOTAL 14.4 16.8 8.8 40.0_______ _ (9.2) (9.2) (7.6) (26.0)

NOTEI: In paunthesis, amounts to be finnced by the Bank.

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3.18 Procurement procedures would be as follows:

(a) bid packages or contracts for the supply of goods estimated to cost more thanUS$250,000 equivalent each, and contracts for civil works estimated to costmore than US$1,000,000 equivalent each, would be procured following ICBprocedures in accordance with the Bank's guidelines. In procurement ofgoods through ICB, domestic and regional manufacturers members of theCentral American Common Market (CACM) would be granted a margin ofpreference of up to 15% or the amount of custom duties and import taxes,whichever is smaller, in accordance with Bank's procedures;

(b) although it is not foreseen at present, the procurement of equipment/materialsbelow US$250,000 may eventually be procured through LCB proceduressubject to Bank's prior approval, up to an aggregate amount of US$1,000,000equivalent; and

(c) civil works of US$1,000,000 equivalent or less, up to an aggregate amount ofUS$2,000,000 equivalent would be awarded through local competitive biddingprocedures and foreign bidders would be given an equal opportunity tocompete.

Special procurement provisions are being included according with the findings of the recentCountry Procurement Assessment Report (CPAR) of Costa Rica. During negotatlons, agreementwas reached on the following special provisions regarding international competitive bidding and localcompetitive bidding procedures (para. 5.2(o)):

For ICB:

(a) in respect of the procurement of works, bids shall not be rejected on thegrounds that they fall outside a pre-determined bracket; and

(b) in respect of the procurement of works and goods, foreign bidders will bepermitted to submit bid securities from foreign sureties without therequirement of endorsement by local banks or by the Instituto Nacional de

For ICB and LCB:

(a) for contracts of civil works or for the procurement of goods, suitablemechanisms, acceptable to the Bank, shall be allowed providing for priceadjustment formulae to reflect increased costs.

3.19 All contracts for goods estimated to cost the equivalent of US$250,000 or more, and allcontracts for works estimated to cost the equivalent of US$1.0 million or more, which overallrepresent about 65% of all Bank-financed goods and civil works, would be subject to the Bank's priorreview in accordance with paras. 2 and 4 of Appendix 1 of the Bank's Procurement Guidelines.Procurement information will be collected and recorded in the progress reports to be presented to theBank every semester (para. 3.15).

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Disbursements

3.20 The proceeds of the proposed loan are expected to be disbursed in accordance with theallocation by categories shown in Annex 1 over a period of 6 years which is somewhat faster thanthe disbursement profile for water sector projects in Latin America (7 years), but is consideredreasonable since there are no major works considered in the project. The disbursement period wasdetermined after taking into account the status of project designs, AyA's execution capacity and thelimitations placed on project finances by AyA's cash generation capacity. The proposed loan will bedisbursed against various expenditures categories in the following percentages:

(a) Expenditures for civil works: 30%;

(b) Expenditures for equipment and materials: 65%; and

(c) Expenditures for consultant services (including supervision of works),technical assistance and training: 100%.

3.21 Out of the proposed loan up to USS 0.3 million (1% of the total loan) is recommended forretroactive financing of technical assistance expenditures under components A and B of the project.All retroactive financing would be in accordance with Bank guidelines and for expenditures incurredafter September 30. 1992 and within a period of 12 months prior to the expected date of loan signing.

3.22 For civil works contracts valued at less than US$ 1,000,000 equivalent and for goods andservices valued at less than USS 250,000 equivalent, disbursements would be made against statementof expenditures (SOEs). Documentation for these expenditures would not be submitted to the Bank,but would be retained by AyA for periodic inspection by Bank staff and for audit purposes. All otherdisbursements would be made against full documentation. To expedite disbursements, a SpecialAccount will be opened in a banking institution acceptable to the Bank, with an initial deposit of upto US$1.4 million to cover four months of average disbursements. The closing date fordisbursements will be June 30, 2000, i.e. six months after the estimated completion of projectexecution (December 31, 1999). The detailed disbursement schedule is shown in Annex I.

4. ECONOMIC JUSTIFICATION

Project Justification and Benefits

4.1 The economic justification for this project is based, primarily, on its contribution to achieve aframework of sound sector policies and institutional arrangements to enhance its sustainability. Inaddition, the project will help in building up an institutionally sound and financially sustainable watersupply and sewerage organization capable of operating efficiently and meeting growing servicedemands. Costs per unit of production would be reduced by: (i) increasing staff productivity andother personnel actions; (ii) optimizing the use of production capacity through improved control offlow and better use of storage capacity; and (iii) reducing water losses (reduction of physical losses

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will reduce production costs and postpone the need for new investments in water production, andreduction of commercial losses will encourage demand pattern changes to better reflect the economiccosts of supply). In addition to these economic benefits, the project will result in a tariff structuremore in line with incremental costs than the current tariffs and in a large number of additionalconnections (mostly from existing capacity and the modest additional capacity provided by theproject). Furthermore, the project will help prevent future disruption of supply by reducing the risksof damage to the Orosi pipeline, and, thereby, the need for costly standby and other emergencyarrangements. The sewerage investments under the project will result in environmental and healthbenefits and will have a positive impact on low-income segments of the San Jose population, largelyby improving environmental conditions in these areas (para. 4.6). Finally, in addition to directeconomic benefits, the financial improvements arising from sounder tariffs and better collection willreduce the need for Government funding at a time when the Government is strapped for funds.

4.2 Although it is customary in water and sewerage projects to calculate an internal rate of returnbased on increased revenues, no such calculation has been made since the project's expectedregulatory and institutional achievements cannot be valued precisely. If successful, this project willprovide the basis for rationalizing not only the future operation of AyA; but the scale and timing offuture investments in water and sanitation service in the service area and beyond. The magnitude ofthe benefits which will be realized depends, in considerable part, on non-physical aspects of theproject-adherence to the program for reduction of unaccounted for water and increased staffproductivity. As has been widely recognized, the key incentives for such improvement depend, inturn, of the government's continuing commitment to reform the public sector and create anappropriate regulatory framework for public utilities. This project provides a needed stimulus forachieving these outcomes.

Environmental Impact

4.3 The Engineering Department in AyA has prepared an environmental impact assessment for theproposed project (Category B), where its main negative and positive consequences are analyzed andremedial measures are established to mitigate the possible negative ones. AyA has the capability tocarry out environmental assessments as the one developed for this project and relies on extenalconsultants when major environmental assessments should be carried out. Such is the case of thestudy to be initiated with IDB/OECD funds for the improvement and expansion of the seweragefacilities of the SJMA. A summary of the environmental assessment is presented in Annex 21.

4.4 All the projected works are situated in areas of urban or pasture uses. Construction of thewater and sewerage works proposed under the project do not entail the displacement of occupants ofland nor will they affect any known archeological deposit or valuable natural resource. Mitigationmeasures have been established for the control of the possible minor disturbances caused duringconstruction. The actions required both at the design and construction phases, to ease anyenvironmental impacts during the construction of the works are simple to put in effect and can beeasily added to plans, specifications and construction procedures. Each work will have its ownconstruction plan which will minimize the possible negative impacts.

4.5 A detailed operation and maintenance plan for the sewerage system in the SJMA has beenprepared to be implemented as part of the project. It will allow for the organization and furnishing ofAyA's Sewerage Division with the necessary equipment to improve its efficiency and effectiveness to

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solve problems. The definition and execution of the preventive, corrective and restoring maintenanceprograms will permit the extension of the life span of pipelines, structures, installations andequipment and the reduction of the magnitude and frequency of the negative impacts, caused bysystem failures, on the water receiving bodies.

4.6 Environmental and social benefits will be achieved with the project by improving the qualityof the water service in the SJMA, which will benefit the urban poor who suffer most from the presentdeficiencies, without increasing significantly the production of water. In addition, the sewerageworks proposed under the project will alleviate the pollution of rivers and streams that run throughthe SJMA and will improve the enviromnental conditions of low-income areas. The projected worksin the water and sewerage systems are integrated within the PLAMAGAM and future works toimprove sewerage collection, treatment and disposal facilities are expected to be defined andimplemented once the feasibility studies and engineering designs are completed (para. 1.7).

Risks and Safeguards

4.7 The main risks lie outside the project itself and are linked to possible slippage in thegovernment's commitment to reform the public sector and to implement a sounder regulatoryframework for public utilities, allowing and promoting expanded private sector participation,particularly when a change in Administration takes place. To reduce this risk, significant actions(relating to sector organization and tariffs) were sought before appraisal and Board presentation. Toaddress the risk of future slippage in sector reforms, annual and mid-term reviews of projectimplementation would be undertaken together with the responsible authorities (para. 3.14) and in casethe Govermnent is delayed in the implementation of the revised regulatory framework (para. 1.14),the Bank together with Government, during the annual and mid-term project reviews, would be ableto assess AyA's performance as measured by the operational and financial targets shown in Annex 2and press for corrective actions if necessary. It would be an event of default if by December 31,1994, the Government has not enacted legislation, adopting a comprehensive regulatory frameworkfor public services in Costa Rica and the regulations related to such legislation and an action plan torestructure SNE in accordance with its new functions (para. 5.4(b)). In addition, if by the time ofany of the following annual reviews (para. 3.14) SNE's restructuring plan has failed to beimplemented in accordance with its terms and timetable, it would be regarded as an event of default(para. 5.4 (c)). Specific project-related risks arise from AyA's institutional weaknesses, which thisproject tries to address. To minimize this risk, AyA has agreed on the operational and financialtargets to be achieved under its performance plan (para. 3.13). Lastly, there is also a risk thatfinancial pressure to carry out significant reforms may be undermined by the availability of creditfrom bilateral or international agencies that may not focus on the need to resolve sector issues. Toaddress this and since MIB is one of the major financial actors in the sector (para. 1.22), the Bank ismaintaining a close dialogue with the IDB to coordinate positions on sectoral policies and issues.

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5. AGREEMENTS REACHED AT NEGOTIATIONS AND RECOMMENDATION

5.1 During negotiations, the following were confirmed or agreed upon with Government andAyA:

(a) Sectoral goals and policy objectives as outlined in the Policy Statement (para. 1.18);

(b) The terms of reference of the study of investment and cost recovery policies and theGovernment's commitment to complete it by December 31, 1994 and a satisfactoryfollow-up action plan will be submitted to the Bank by March 31, 1995 andimplemented thereafter (para. 1.18);

(c) The terms of reference of the study of the institutional framework for the GAM andthe Government's commitment to complete it by June 30, 1994 and that a satisfactoryfollow-up action plan will be submitted to the Bank by September 30, 1994 andimplemented thereafter (para. 1.18); and

(d) The terms of reference of the study for the institutional framework for the sector andthe Govermnent's commitment to complete it by December 31, 1994 and that asatisfactory follow-up action plan will be submitted to the Bank by March 31, 1995and implemented thereafter (para. 1.18).

5.2 During negotiations the following were confirmed or agreed upon with AyA:

(a) AyA would maintain at all times, senior managers whose qualifications and experienceshall be satisfactory to the Bank (para. 2.2);

(b) The decentralization model including areas or functions to be contracted with theprivate sector would: (i) be completed by June 30, 1994 and a satisfactory follow-upaction plan will be submitted to the Bank by September 30, 1994 and implementedthereafter; and (ii) 100% subcontracting with the private sector in all areas identifiedin the decentralization model would be implemented by June 30, 1996 (para. 2.3);

(c) A vulnerability study of the Orosi pipeline to natural hazards will be completed byDecember 31, 1994, and a satisfactory follow-up action plan detailing theorganizational and engineering measures to protect the pipeline would be submitted tothe Bank by June 30, 1995 and would be implemented thereafter (para. 2.9);

(d) The design of the commercial system would be completed no later than June 30,1994, and a satisfactory follow-up action plan would be submitted to the Bank bySeptember 30, 1994 and would be implemented thereafter (para. 2.10);

(e) The operational and financial targets that have been incorporated in AyA'sPerformance Plan and are presented in Annex 12 would be achieved (paras. 2.21 and3.13);

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(f) The design of the accounting system would be completed no later than June 30, 1994,and a satisfactory implementation action plan would be submitted to the Bank bySeptember 30, 1994 and would be implemented thereafter (para. 2.22);

(g) AyA would use qualified private independent auditors acceptable to the Bank, andmake the audit reports (financial statements, project accounts, SOEs, Special Accountand Management Letter) available to the Bank by June 30 of each year (para. 2.23);

(h) The following would be submitted, satisfactory to the Bank, no later than September30 of each year: (i) AyA's financial projections for the following six year period;(ii) AyA's six-year investment plan with specific details for the upcoming year; and(iii) the project's investment plan with specific details for the upcoming year (para.3.6);

(i) No new major investment in excess of USS 500,000 equivalent would be approved orcommitted without providing evidence to the Bank that the investment in questionwould have no adverse effect on AyA's agreed operational and financial performance(para. 3.6);

(j) The Planning Department would be maintained with functions, structure and staffingsatisfactory to the Bank and AyA will allocate funds and other resources as requiredfor its adequate operation during the project execution period (para. 3.9);

(k) The TCUFW and its secretariat would be maintained permanently with functions andstaffing satisfactory to the Bank (para. 3.11);

(1) The Bank together with AyA and public sector reform authorities would: (i) carry outan annual review, on or about September 30 of each year, beginning in 1994, to beexpanded to a mid-term review, held by September 30, 1996, of the progress made inachieving the project objectives and, if necessary, prepare and execute to thesatisfaction of the Bank, remedial actions agreed during the annual and mid-termreviews (para. 3.14); and (ii) as a consequence of these reviews and if the Bank shallso recommend, AyA would prepare, within a framework of time acceptable to theBank, a proposal for tariff adjustments to be submitted to SNE (para. 2.14);

(m) AyA would submit to the Bank: (i) semi-annual progress reports by February 28 andAugust 31 of each year for the previous semester, starting in 1994; and (ii) a projectcompletion report not later than six months after the closing date of the loan (para.3.15);

(n) All procurement of goods and civil works, whether subject to internationalcompetitive bidding (ICB) or to locally advertised competitive bidding (LCB), shall bedone using standardized bidding documents agreed upon with the Bank (para. 3.16);and

(o) Special provisions regarding ICB and LCB procedures (para. 3.18).

- 33 -

5.3 Conditions of effectiveness:

(a) Satisfactory implementation of AyA's water tariff program of monthly increases (para.2.14);

(b) A project coordinator and three planners in charge of the physical planning, short-term planning and long-term planning, all with functions, qualifications andexperience satisfactory to the Bank should have been appointed in the PlanningDepartment (para. 3.9);

(c) The agreement with PAHO for the provision of technical assistance should have beensigned (para. 3.10); and

(d) AyA's standardized bidding documents would have been completed, satisfactory to theBank (para. 3.16).

5.4 Events of Default:

(a) SNE or any other authority having jurisdiction has not reviewed and granted approval,within 75 days of their respective publication in the official gazzette, to the tariffrequests made by AyA to comply with its financial targets (para. 2.14);

(b) The Bank has not received by December 31, 1994: (i) evidence showing that theGovernment has enacted legislation, adopting a comprehensive regulatory frameworkfor public services in Costa Rica and the regulations related to such legislation; and(ii) an action plan to restructure SNE in accordance with its new functions (para. 4.7);and

(c) SNE's restructuring plan has not been implemented in accordance with its terms andtimetable (para. 4.7).

5.5 With the above conditions, the proposed project is suitable for a Bank loan of US$26 millionequivalent to AyA. The loan would have a term of 17 years, including a grace period of 5 years, atthe standard variable interest rate. The loan would be guaranteed by the Republic of Costa Rica.

I

-34 - ANNEX I

COSTA RICA

SECOND WATER SllPL AND SEWERAGE PROJECT

SECTOR INVESTMENTS 1981-1990(Current USS millions)

Investments during the last decade (1981-1990) were on average US$ 13 million per year, in currentdollars.

lIvestments 1981-1990:___________ ~~~(Current: US$ mIllons):

Total TAverage I on

U- T% Toal Per oYer T SCapnip (1) j (Percent)

Metropolitan Area 60.4 45 6.0 8.1 91 9

Other Urban Areas 53.0 40 5.3 10.9 89 11

Rural Areas 19.6 15 2.0 1.4 100 0

Totals [133.0 J 100 13.3 5.1 94 6- . =~~~~~~~~~~~~~~~~~~~~~~~~~~~

(1) Based on total population.

SECTOR INVESTMENTS DISTRIBUTION BY AREAS

METROPOLITAN AREA(45%)

RURAL AREAS(1 5%)

OTHER URBAN AREAS(40%)

- 35 -

ANNEX 2Page 1 of 6

COSTA RICA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

LESSONS LEARNED. FROM THE PAST PROJECTS AND PROJECT DESIGN

INTRODUCTION

1. This Annex reviews the main lessons learned from a total of 21 operations, 12 of themselected from 87 Bank-wide water and sewerage PCRs and 9 from other infrastructure sectoroperations that could have lessons applicable to the water and sanitation sector. In addition, 3 watersector reports from OED, INUWS and LATIE were reviewed. The relevant projects are summarizedin Table 1.

LESSONS FROM THE PROJECTS

2. Most of the lessons derived from the analyzed reports can be summarized under the followingsubjects:

Country Conditions

3. Deteriorating macroeconomic conditions or changes in the political environment have asignificant impact on project costs, implementation and in the achievement of objectives. Projectobjectives can also be adversely affected by changes in government, foreseeable in the politicalcalendar. Major changes in country conditions are, of course, difficult to predict at the time ofproject preparation but nevertheless they can occur and often lead to a revision of institutionalpriorities which in turn affect project objectives.

4. The worsening of the economic situation in Brazil, Bolivia and Costa Rica were factors thatadversely affected, at least temporarily, Loans 1850-BR, 1939-BR, 948-BO and 1935-CR. TheCentral Governments periodic economic and political priorities were the sole determinants ofpermissible tariff increases, irrespective of the financial situation and investment program of theutility, such was the case in loans 1939-BR, 1850-BR, 948-BO, 1935-CR, 741/1997-CO and1351-CH. Counterpart funds were often delayed, such as in the case of Loans 1187-CR and1845-CR.

Management Changes/Implementation Schedules

5. Frequent management changes was a recurrent and undesirable feature of loans 1845-CR,1935-CR, 1776-EC and 1939-BR. In the case of the latter, lack of managerial continuity due topolitical changes generated discontinuity and affected the project planning. In the case of Loan1935-CR, some doubt was expressed in the PCR, that the project as implemented was fullysustainable. This as the result of the inability to implement the desired institutional changes that wereexplicit in the project, and it is attributed, to a large extent, to frequent changes in top managementpositions. The financial situation of the water agency is still of concern as objectives related to costrecovery, efficiency gains and staff productivity have not been achieved.

_~~ ~ ~~ ~ - - - - -_-- - -- - - - - - - - - -

- 36 -

ANNEX 2Page 2 of 6

6. Project 1615-PH, on the other hand, is a positive experience of a utility that is morecompetent, due to its competent higher and middle management and professional staff that have beenretained even though changes have occurred at top positions.

7. Delays for obtaining congressional approval have been a recurrent factor for almost all theloans to Costa Rica, thus affecting loan effectiveness and project start-up. Such was the case of loans2019-CR (15 months), 1410-CR (9 months) and 1935-CR (over a year). In the case of the latter, thedelay for effectiveness was due to the non fulfillment of conditions of effectiveness of the cofinancingagency (CDC) and the non-compliance of the water agency of covenanted financial provisions.

8. In most of the projects there have been delays in project execution due to different type ofproblems in procurement (Loans 1187-CR, 1724-MOR, 1041-CE, 741/1997-CO and 1935-CR).Project execution of loan 1935-CR was estimated to be 3 years and the actual execution period wasalmost 7 years. The initial timing was too optimistic, taking into account the complexity of theproject, the financial weakness of the water agency and the lack of experience of the borrower with arelatively large project and with Bank operations.

Physical and Institutional Objectives

9. Inadequate linkages between physical and institutional objectives help explain some of theshortcomings in reaching the main objectives, particularly in the institutional front. A soundconnection between physical and institutional objectives can also prevent a meaningful reformulationof project components in response to a change in priorities.

10. In Loan 1935-CR, institutional goals were too ambitious and lacked a sense of priority for anagency with a poor operational and financial performance record. Efforts to improve efficiency(reduce unaccounted-for-water, UFW) were not well defined and not linked to the physical objectivesof the project, and not surprisingly, UFW was not reduced. Even though in most water andsanitation PCRs reviewed, there is a widespread acceptance to reduce the UFW, results achieveddemonstrate that proper design and implementation efforts are needed to be effective in the reductionof the UFW levels.

Simplicity of Design

11. Project complexity is closely related to implementation capacity and to the number ofcomponents and participating agencies. New agencies, unfamiliar with Bank bidding anddisbursement procedures or with relatively large investment program experience initial and significantdelays in starting the project; such was the case of project 1935-CR. The analysis of theimplementation capacity of executing agencies did not seem to have received adequate attention atappraisal in projects 1845-CR, 1935-CR, 1776-EC and 1495/1496/1983-NI. Cumbersome internalcontrols and procedures affecting all phases of project implementation and bidding decisions proved tobe a formidable obstacle in the case of project 1935-CR. Provisions have been made in the design ofthe proposed project to minimize the effects of the previous mentioned issues.

12. In project 741/1997-CO project complexity is also cited as a key factor in the delay of projectexecution. Project complexity can easily overburden not only the implementation capacity of local

- 37 -

ANNEX 2Page 3 of 6

agencies but project preparation and supervision capacity of the Bank as has been pointed out byINUWS.

Cost Recovery and Cash Generation

13. Most projects reported problems with cost recovery and with timely provision of counterpartfunds. These problems directly affect the cash flow situation of implementing agencies and thereforeproject execution and costs. Inadequate or untimely tariff increases affect both cost recovery and cashgeneration (1351-CH, 1939-BR, 948-BO, 741/1997-CO, 2222-PA and 1935-CR).

14. 'Pricing of services tends to be viewed primarily as a mechanism to achieve reasonablefinancial projections, while insufficiently emphasizing its relationship to demand estimation, to thesize and timing of supply expansions, to the willingness to pay of beneficiaries, and its instrumentalrole in providing incentives for improved operational performance", as has been pointed out byINUWS.

15. Special attention should be placed in the selection of the financial covenants. When a utilityhas been incurring operating losses for a period of time and when there is not a formal methodologyin the country or agency for fixed assets revaluation, the selection of the financial rate of return onrevalued assets as the financial covenant does not seem to be appropriate. (Loan 1935-CR).

16. On the positive side the Bank is credited by the implementing agency (Loan 1935-CR) ofusing very effectively the threat of suspension and of not extension of the closing date to obtainneeded tariff increases from a reluctant central government and agency.

Demand/Production Forecasts

17. Failure to forecast demand, within reasonable limits, is a recurrent problem of most watersupply and sewerage projects as documented by almost all the PCRs, LATIE, OED and INUWS. Atoo optimistic view on the forecasted increase of water demand has even produced modifications ofthe proposed project facilities generating delays in project execution, as in the case of Loan1724-MOR. The increase in the number of connections and the unit consumption per connection(cubic meters per connection per month) were over estimated in projects 1577-IVC, 741/1997-CO and1935-CR. Failure to recognize the elasticity of demand, as well as the full impact on aggregatedemand of lower than average demand of low income groups, when service coverage is beingincreased, seem to have been the main factors in the mentioned projects.

18. Almost all the PCRs reviewed had goals to reduce high levels of water losses (unaccountedfor water, UFW). In general, it is reported that little improvement has been made (Loans 1939-BR,741/1997-CO, 1495/1496/1983-NI, 1615-PH, 2222-PA and 1935-CR). UFW reduction programsfocused, for the most reported, lie mostly with deficiencies in the commercial system, i.e. they areinstitutional. Illegal connections and failure to meter all consumption and repair meters are amongthe most important factors that contribute to high levels of commercial losses.

19. The lack of reliable information on production and consumption patterns clouds the analysisof the UFW problem and the formulation of effective plans to reduce it. Nevertheless, a more

- 38 -

ANNEX2Page 4 of 6

focused attention is needed to evaluate the capacity and reliability of commercial systems to accountfor all users and consumption and the effectiveness of maintenance programs, as stated by LATIE.

20. Productivity gains in the work force as a mean to control operating costs was an importantobjective in projects 2222-PA and 1935-CR. Progress was not achieved in these projects, althoughmeasures have been taken to suspend the hiring of new personnel (Loan 1935-CR). A stablemanagement group, a competitive salary structure, and the judicious use of the private sector inoperations are the main factors that have contributed to make the productivity gain a reality and asustainable one since then.

21. High demand projections translate into over-designed physical components, optimisticassessment of revenues and economic benefits from new facilities and corresponding financialproblems which in turn adversely affect project implementation. High levels of UFW aresymptomatic of inadequate responses to maintain physical facilities and commercial systems with adirect bearing on higher operating costs and lesser revenues. Project components to increaseproduction capacity without a meaningful attempt to reduce high levels of UFW lower the pressure tofind long lasting solutions to this problem.

SPECIFIC LESSONS INCORPORATED IN THE DESIGN OF THE II WATER SUPPLY ANDSEWERAGE PROJECT

22. In designing the proposed second water and sewerage project for Costa Rica, attempts havebeen made to recognize the findings set out in this Annex. Clearly, some problems cannot becompletely safeguarded against, such as changes in the political environment. Nevertheless, the mainfeatures that respond to the type of problems described in the previous paragraphs are as follows:

23. Physical ad institutional Obiectives. A sound connection between physical and institutionalobjectives is being proposed in the II Water and Sewerage Project for Costa Rica. The overallobjective of the proposed project will be to improve AyA's operational efficiency, in order for theagency to achieve financial self-sufficiency and thus sustainability. This improvement in efficiencywould be achieved through the implementation of an unaccounted-for-water program and aninstitutional strengthening program, together with the construction of works and equipment needed forthe rehabilitation or improvement of the water and sewerage facilities in the San Jose MetropolitanArea (SJMA). The sector overview carried out by the Bank as part of project preparation has beeninstrumental for project design.

24. Demand/Production Forecasts. Special attention was given to demand calculations for theSJMA. Information available on consumption patterns and production have been carefully analyzedfor the design of the water facilities to be included in the proposed project. This information has alsobeen the basis for the formulation of the unaccounted-for-water program, and since the commerciallosses account for 55% of total losses, the program is assigning priority to the actions or projects inthe commercial system. The program clearly defines the projects or actions to be carried out, targetsto be achieved, costs and resources required per project or action. The analysis of AyA'simplementation capacity for this program received special attention, because of its effects in theoverall implementation schedule of the project. Productivity gain targets will also be established inthe project, and an institutional strengthening component has been prepared to help achieve them.Considering that success in this type of component can only be achieved with high levels of

- 39 -

ANNEX 2Page 5 of 6

participation and commitment of local counterparts, a special effort was placed in the design of thiscomponent.

25. Cost Recovery and Cash Generation. Since the financial situation of AyA is poor and thefinancial resources of the central government for the financing of sector investments tend to ebb,special emphasis has been placed in the analysis of the financial targets to be considered in theproposed project. Tariff increases, during 1992 and 1993, to cover the financial gap and price waterat its average incremental cost have been recently approved by SNE. The institutional strengtheningprogram also includes specific projects for the improvement of AyA's financial management.

Table 1. RETROSPECTIVE REVIEWDOCUMENTS INCLUDED IN THE LITERATURE SEARCH

IActual Loan IDate of PCR! i X tProject/Report ; D; fLoan Nuber Closing Date or Report

I. Infrastructure Bank's Projects - Costa Rica (7):

Fourth Highway 1187-CR June 1984 April 1986

Fifth Highway 1845-CR December 1986 May 1990

Petroleum Sector Technical Assistance 2019-CR December 1987 June 1990

Agricultural Credit and Development 1410-CR December 1984 December 1985

San Jose Metropolitan Area Water Supply 1935-CR June 1988 May 1990

Fourth Telecommunications 1006-CR June 1981 March 1983

Sixth Power 1713-CR June 1985 December 1987

II. Infrastructure Bank Projects - Other Countries (3):

Chile. Sixth Power Sector 1351-CH June 1981 March 1985

Ecuador. Guayaquil Urban Development 1776-EC June 1987 January 1990

El Salvador. Urban I and II 1050/1465-ES December 1984 March 1987

III. Water Supply and Sewerage Bank Projects (11):

Cote d'Ivoire. Second Abidjan Sewerage and 1577-IVC December 1985 August 1986Drainage

Sri Lanka. Second Water Supply and Sewerage 1041-CE March 1987 May 1988

Philippines. Second Manila Water Supply 1615-PH December 1978 March 1988

Philippines. Manila Sewerage and Sanitation 1814-PH December 1988 June 1990

- 40 -

ANNEX 2Page 6 of 6

- I Actual Loan Date of PCRProject/Report - Loan Number Closing Date - or Report

Morocco. Second Water Supply 1724-MOR December 1987 October 1989

Bolivia. Santa Cruz Water Supply and Sewerage 948-BO June 1986 June 1990

Brazil. Second Minas Gerais Water Supply and 1309-BR September 1982 April 1985Sewerage

Brazil. Third Minas Gerais Water Supply and 1850-BR December 1987 February 1990Sewerage

Colombia. Second Bogota Water Supply 741-CO June 1985 May 1988

Nicaragua. Managua Water Supply Engineering 1983-NI June 1985 November 1988and Water Supply III 1496-NI December 1983 November 1988

Panama. Second Water Supply and Sewerage 2222-PA June 1989 June 1991

IV. Water Sector - Other Bank Reports (3)

Water Supply and Waste Disposal Sector February 1990Annual Review. Project Performance Results1988. O.E.D.

Water Supply and Sanitation. December 190FY90 Sector Review. INUWS.

Review of Urban/Water PCRs CY90, IATIE May 1991

COSTA RICASECOND WATER SUPPLY AND SEWERAGE PROJECT

Instituto Costarricense de Acueductos y Alcantarillados (AyA)Organizational Structure

I OF I 7ChOIi

I~~1a~~mmMi P£OFi~~~~~O Ia,PORA

m

x

CAW -" -C CA AIMCLM[ CM [k1[ aAaAr7

rOiM , _ _

- 42 -

ANNEX 4Page 1 of 5

COSTA RICA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

Analysis of AyA's Tariff Structure

1. AyA's tariff structure provides for four consumer categories (residential, commercial, industrialand concessional), five narrow consumption blocks rates for the first 60 m3 of water consumedmonthly and a basic flat rate for the first 15 m3 consumed. The rationale for classifying commercialand industrial businesses is based on the perceived profits these can obtain from the use of water.Government and charitable institutions (churches, asylums, etc.) are classified as concessional users.

2. Separate tariff schedules are maintained for the SJMA, other urban centers and rural areas.Outside San Jose, urban and rural rates are 90 and 70 percent of the SJMA rates. In March 1992,SNE approved an increase in water tariffs for AyA's operated systems of an estimated 20 and 17% inreal terms for 1992 and 1993 respectively. The new rates include a one time average increase of 18%(effective in April 1992), followed by 12 consecutive accumulative monthly average increases of3.5%. The average water rate for AyA's operated systems expected for July 1993 would beequivalent to about US$ 0.35/m3, and the average water tariff for the SJMA to about US$ 0.45/m3.In the SJMA, the average rate for residential and concessional consumers is about 76% of the overallaverage rate, while average commercial and industrial rates are 179% and 182% of the overallaverage rate, respectively.

3. The results of the application of the actual structure can only be analyzed for the SJMA, sincemonthly billing statistics for AyA's operated water systems are not routinely produced. This analysisis based on the information of water billing for the SJMA for November 1991. The average watertariff versus consumption is shown in Figure 1.

4. The residential rates are progressive in nature up to a consumption of 60 m3/month. Thelowest residential consumption block, represents 36% of SJMA' metered domestic users and accountsfor around 14 to 18% of all metered water and 19% of all revenues. The three lowest residentialcategories (up to 40 m3/month) account for 90% of domestic customers, 68 to 72% of consumptionand 70% of revenues. Consumption blocks for commercial, industrial and concessional users are thesame as for residential users, but rates are flat for all levels of consumption. Given the high basiccharge the average cost per cubic meter decreases with consumption. It follows that consumers withthe basic fixed charge are subsidizing the higher consumers (Figures 1 and 2).

5. Approximately 96% of the metered consumers have a rate lower than the average water rate.These consumers are mainly residential and concessional. Residential or domestic consumers were93% of total, used 73% of the water sold and paid 58% of SJMA's revenues. Commercial consumerswere 5% of total, used 6% of the water and provided 10% of the revenues. Industrial consumers arevery few representing about 1 % of the total, but use 15% of the water and provide 28 % of therevenues. Concessional consumers are also very few (1%), use 6% of the water and provide 4% ofthe revenues. This situation can be summarized as follows:

- 43 -

ANNEX 4Page 2 of 5

Metered Consumption(In %)

Categories '-No. Users J Consumption Billing:X

Residential 91 71 55

Commercial 6 8 13

Industrial 2 15 27

Concessional 1 6 5

| Total T100 ioIoo L=lJ6. The total distribution of consumption and revenues is shown in Figure 3. It is shown thatconsumption in SJMA follows similar patterns found elsewhere; almost 70% of the consumers useapproximately 30% of the water consumption; conversely, 45% of the water is used by only 10% ofthe users. Because of the progressive tariff, 90% of the consumers account for 47% of the totalbilling, while 10% of the consumers account for 53% of the billing.

7. Metered connections representing 89% of SJMA connections, yielded an average rate inNovember 1991 of US$ 0.32/m3 or US$ 9.10/connection/month, while non-metered consumersgenerated an average revenue of US$ 7.3/connection/month, even though by experience non-meteredusers consume at least 40% more than metered ones. The comparison between charges of metered andunmetered connections per category is shown below:

Average Monthly Billing (m3/Connection)

R|d;al I OO. .Mted. Unmteredi

Categories Colones olones US$

Residential 739 5.6 833 6.3

Commercial 2477 18.6 2640 19.9

Industrial 16629 125.1 3276 24.6

Concessional 7162 53.9 1545 11.6

Average 1216 9.1 972 [ 7.3

8. As shown, flat rates established for non-metered users in all categories do not take into accounttheir higher consumption, especially in the industrial and concessional categories. Under the proposed

- 44 -

ANNEX4Page 3 of 5

institutional strengthening component, technical assistance has been included to study AyA's tariffstructure and propose the necessary adjustments to eliminate the mentioned drawbacks.

9. Sewerage charges, levied on those houses that have sewerage connections, are 18 percent of thewater charges, which are low even when compared to similar services in other countries in theregion. Under the proposed institutional strengthening component, technical assistance has also beenincluded to study the sewerage charges that should be implemented in the SIMA and in other urbanareas.

AVERAGE WATER RATES(SJMA)

Coloneslm3100

80 ;. .......................................................................................................................... ................................ .............s \ ... .......*..........

80 -1 1 1

0 50 100 150 200Consumption m3/month/connec

- Actual Rate Average Rate

* AIC Water + Sewerage o AIC Water

NMOVEKR 1991 nM .

Figure 1

- 45 -

ANNEX 4Page 4 of 5

AVERAGE WATER RATEAverage Rant. Colon-e-ma

I 60

140.....

120._

1 00

100

s o ., ..... .......................................

40

20 _ -=

0 L0 20 40 o0 eo 100 120

Consumptlon m3S/month

- teldntlu *l Induetriol -- Averre. Rals

NOVEMBER t1l PMo. a

Figure 2

CONSUMPTION AND REVENUES(SJMA)

Peront of Total

ao - -1 -.--

0 20 40 00 so IN 120

Percent of Connectlons

-Conamptlon Rtwnur

NOVEMBER t99¶ FG. 3

Figure 3

- 46 -

ANNEX 4Page 5 of 5

COSTA RICA

SECOND WATER SUPPLY AND SEWERAGE PROJECTAvA's WATER TARIFFS AS OF APRIL 1. 1992 (2)

(In Colones)

Range/Category DOM (3) COM (4) IND (5) CONC. (6)

M_________________ Metropolitan Area

0 - 15 (Basic) 854.00 3,051.00 3,455.00 1,977.00

16 - 25 35.19 76.79 89.94 37.54

26 - 40 36.05 76.79 89.94 37.54

41 - 60 59.09 76.79 89.94 37.54

> 60 78.20 76.79 89.94 37.54

Unmetered Users 955.75 3,108.27 3,747.45 1,477.07(CfMonth)

Urban Area

0 15 (Basic) 768.60 2,745.90 3,109.50 1,779.30

16 - 25 31.67 69.11 80.95 33.79

26 - 40 32.45 69.11 80.95 33.79

41 - 60 53.18 69.11 80.95 33.79

> 60 70.38 69.11 80.95 33.79

Unmetered Users 860.18 2,797.44 3,372.71 1,329.36(C/Month) ____I

Rural Area

0 - 15 (Basic) 597.80 2,135.70 2,418.50 1,383.90

16 - 25 24.63 53.75 62.96 26.28

26 - 40 25.24 53.75 62.96 26.28

41 - 60 41.36 53.75 62.96 26.28

> 60 54.74 53.75 62.96 26.28

Unmetered Users 669.03 2,175.79 2,623.22 1,033.95(C/Month) l

Sewerage rates (1) (1) (1) (')

NOTES: (1) 18% of water billed.(2) Monthly increases of 3.5 percent have been approved until July 1993.(3) Domestic Users.(4) Industrial or commercial users that do not profit from the use of water.(5) Industrial or commercial users that profit from the use of water.(6) Government and charitable institutions (churches, schools, asylums, etc).

- 47 -

ANNEX 5Page 1 of 7

COSIA RICA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

AyA's Unaccounted-for-Water Program (UFW)

Background

1.1 The main causes of the UFW in AyA's operated systems have been identified and they arepresented in Table 5.1. Since commercial losses represent 55 percent of total losses, priority is beinggiven in project implementation to actions that will solve these problems. In 1990, AyA initiatedproject implementation by carrying out a new census of the SJMA' users and adjusting its billingprocess. As a result UFW was reduced by some 9 percentage points between 1989 and 1990 andmonthly billings increased by 20 percent. However, to continue with project implementation, AyA isseeking financing of technical assistance, equipment and training, mainly to solve its problems in thefollowing areas: metering; billing and collection; consumer and pipes cadastres; and operationalcontrol of the SJMA water system.

Obiectives

1.2 The main objectives of the UFW program are: (i) to capture the lost revenues from thecommercial losses; (ii) to reduce AyA's physical losses; and (iii) to optimize the use of the actualproduction capacity.

Goals

1.3 The proposed goal with program execution is to reduce the UFW from the level of 49%reached in 1990 to 28% by the year 1999. This goal has been set after analyzing the results to beachieved with the execution of the 21 projects included in the program. A reduction by 10 percentagepoints is expected between 1990 and 1994 with program execution being undertaken by AyA with thefinancial aid of the Central American Bank (CABEI) and IDB.

Scope of Work

1.4 The program comprises the execution of 21 projects as detailed in Table 5.2. Each project hasa detailed description of its objectives, justification and activities to be carried out. In addition, animplementation plan, costs and financing has been proposed for each of the activities. All thisinformation is listed and available in the Project Files.

1.5 Table 5.3 summarizes the basic areas to be addressed with project execution, its issues, actionsproposed to be undertaken, targets and monitoring indicators.

Costs and Financing

1.6 The total program cost is estimated at about US$27.5 million equivalent, including physical andprice contingencies. Base prices are based on current prices of December 1991. About 62% of the

- 48 -

ANNEX 5Page 2 of 7

total program cost is included under the proposed Bank project and Bank financing is estimated tocover 66% of this cost. A summary of program cost and its financing plan is presented in Table 5.2.

Implementation Plan

1.7 The proposed program will be implemented in six years. The program implementationschedule for each project is available in Project Files. Detailed terms of reference and technicalspecifications will be prepared for the contracting of services and purchase of equipment. For theprovision of the technical assistance, AyA has approached the Panamerican Health Organization(PAHO), a UN specialized agency. Basically the services that AyA is estimating will be contractedwith or through PAHO are: (i) design and implementation of the commercial system, integrating allthe activities, procedures and information of this system; (ii) definition and implementation of anoperational and maintenance control and information system; and (iii) definition and implementationof a customer service system.

Organization

1.8 For the coordination and monitoring of the UFW program execution, AyA is creating aTechnical Committee of UFW (TCUFW) integrated by high level staff of the engineering, financial,planning and commercial departments. T'his committee will have an executive secretiarat where oneof the mentioned members will be assigned. Responsibilities of the secretiarat will be to coordinatethe execution of the program with the different organizational Units of AyA and through amanagement information system assess the progress in program execution and in the reduction of thelevels of the UFW. The TCUFW will meet monthly to supervise and assess progress in programexecution, and whenever required by the secretiarat to take corrective actions in program execution.The TCUFW and its secretiarat will be a permanent committee in AyA to ensure UFW reductiongoals are reached and remain under control.

- 49 -

ANNEX 5Page 3 of 7

COSTA RICA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

INSTITUTO COSTARRICENSE DE

ACUEDUCTOS Y ALCANTARILLADOS (AyA)

Table 5.1 Causes of the UFW(1990)

:%0 otWater % oftt_____________-____:____:___ Produced Total UFW

1. COMMERCIAL LOSSES

1.1 Illegal connections 4.87

1.2 Unregistered connections 2.17

1.3 Billing adjustments 4.22

1.4 Unmetered connections 10.50

1.5 Non-functioning meters 1.43

1.6 Submetering 2.37

Total Commercial Losses 25.56 55

2. PHYSICAL LOSSES

2.1 Overflows 2.00

2.2 Hydrants 1.00

2.3 Leaks 12.80

Total Physical Losses 15.80 34

3. MACROMETERING 5.00 11

Total Commercial, Physical and Macrometering Losses:46.36 100

- 50 -

ANNEX 5Page 4 of 7

COSTA RICA

SECOND WATER SUPPLY AND SEWERAGE

INSTITUTO COSTARRICENSE DE ACUEDUCTOS Y ALCANTARILLADOS (AvA)

Table 5.2 UFW Progrm Costs and Fnancing Plan, 1992-1999(In US $ Thousands)

COSTS SOURCE OF FUNDS

| OFAREASIPROJECTS USS BASE EBRD y ACE - yA

COST -

Meterine1. Macrometering 456.02. Micrometering 7372.5

Sub-Total 7828.5 41 2980.0 64.5 4225.0 559.0

Commercial System(Integral)3. Billing nd Collection 3112.24. Control of higher consumers 10.85. Improvement of disconnection

procedures 343.0

Sub-Total 3466.0 18 3466.0

Consumers and Pipes Cadastres6. Pipes Cadastre 927.07. Equipment and Facilities

Cadastrm 15.08. S1MA Consumers Cadastre 71.09. Regional Areas Consumenrs

Cadastre 259.0

Sub-Total 1272.0 7 1013.0 259.0 _

Operational Control10. Pitometry 262.011. Operational Planning 50.012. Operational Control 2914.013. Operational Information

System (1) (1)

Sub-Total 3226.0 17 2884.0 342.0

- 51 -

ANNEX 5Page 5 of 7

COSTS -_-___ - SOURCK OFFUNDS

AREA OJC US$, B$ASZ.. IDRD IDS BCIE AYA

Others:14. Replacement of Connections 570.015. Design, construction and

operation coordinatioa (I)16. Leak detection 1340.017. Equipment and facilities

mnaintenance 787.01. S Depumtion of accounu

receivable 10.319. Rationalization of meter

reading 25.020. Autonatization of meter

reading 185.021. Decentralization of the SJMA

commercial system 490.0

Sub-Total 3407.3 17 1560.0 939 - 908.30

TOTAL BASE COST 19199.8 100 11903.0 1262.5 4225.0 1809.3(December 1991)Physical Contigencies (15%) 2880.0 17S5.4 189.4 633.7 271.4Total Base Cost plus

Contingencies 22079.8 13688.4 1451.9 4858.7 2080.7Price Contingencies Total 5387.5 3340.0 354.2 118S5.5 507.7

TOTAL PROGRAM COST 27467.1 17028.4 1806.1 6044.3 2588.4

COST PER SOURCE OFFUNDS (%) 62 7 22 9

(1) Projects carried out by AyA's Engineering Depantment as part of their regular budget.

COSTA RICA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

Table S.3 Summary of the UFW Prgrm

Obieiva (I) To reduce the economic loses to AyA's opemied systern geneated by the physical lross;(2) To capture the lot revenues fromn de commnctial losss;(3) to optimize the use of the exiding production capacity.

AREA -.UES ACTIONS PROJOSED TARGET MONTORJNG INDICATOR/DATE

Metering Uaamcterd connections Insaltion of netea (one for Insailation of 78,300 meters. C.setioa With operating meter ()Faulty mcters. ech connection). Replacement of 25,000 meters. 1994 195 1996 1°97 199 1999Underregisationof meters. Replaccmewtandrepair of Repairl3,000meters. SJMD 96.6 100 100 100 100 100Lack of confidenc ia volumes metrs. Inallation of mcromteters. Other UA S2.5 91.3 224 994 99.4 99.7of water produced. Macro-meters o as to control Total (1) 90.7 96.3 99.7 99.7 99.7 99.7All thee account for almod 100% of the water produced.40% of the total UFW. Mwrometeing (*)

SJMA (1) 50 60 s0 100

Conmercial Sytem Inefficient billing system. Design And inplemetation of a A compkte design of the Cmplints per month (% of number of bills)Poor dimconnection prmcedures new commwecial systcm. commercial sysem will be 1994 1995 1996 1997 1991 1999which have an cffcct on prompt Improvcment of conrumption completed by no lter than SJMD &psymewt and collection. data. June 30, 1994 anda satisfactory 2 Reg. 10 10 8 6 4 4Receivables from ccral and Impiemenation of active action plan will be submitted to Billing auatmuets (% totial monthy biligawononous government disconnection policies. the Bank by September 30, 1994 1995 1996 1°97 1998 1999agencies ar high, being Control of higher volumc 1°94 and impiemcated SJMA &equivalat to 30% of accounts consumera thereaftcr (1). 2 Reg. 10 10 1 6 3 3receivable. All these account Arrange for settiement of 70% A commercial maagemnct Accounts Receivable/Average Monty Snle (1)for aImos 15 # of the UFW of receivables fmm govenwment information systm by 195. 1994 1995 1996 1997 1991 1999of the SJMA and 4% of the agencies in 1993, and institute Control of 10% of the SIMA &total UFW. system of car-marking funds in consumers of the SJMA that 2 Reg. 2.5 2.5 2.5 2.5 2.5 2.5

official agencics budget to ccount for 45% of the water No. Disconnected User/Aver. Avnal C_mtecti ()prvtent recurrence consumed nd 53% of the 1994 1995 1 197 199 1999

billig. SJMA &Starting December31 1993, 2 Reg. 10 8 6 4 4 3AyA'c accounts teccivable willnot excecd 2.5 months ofbilling (1). __

-u

I00 D-+I X

ARE, ISSUES ACTIONS PROPOSED : TARGETS MONITORING INDICATOR/DATE

Conutmers & Pipes ilegal water & ewerage Incorporation of illegl Incorporate in the SJMA around No. of additional consectios/year (llgal & low-incme)Cadagrec connections. connections & low incom users 4,000 connection/year 1994 1295 1996 1997 1998 199

Low income user not recently detected through the including: (i) illegal connectionsincorporeted in AyA's registers usen' census in the SJMA. and (ii) low-income users. SJMA 4000 4000 4000 4000 4000 4000Lack of maintenance of the Maintenance of uers' census Integrate the consumers'users' cens and pipes up-to-date in the SJMA. cadastres with the billing and Pipes ad Water Facilitis Cadestr (I impl)entation)ceadast up-toate. All these Up-datc and/or complete the collection system to be 1994 1995 1996 1997 1998 1999account for almost 23 S of the pipes and water facilities implemeted and with the pipes SJMA &tot UFW. cadastres of the SJMA and msin and water facilities cadastre to 2 Reg. 10 40 70 100 - -

urban system. be designed and implmented.Update and/or compktc thepipes and watcr faciGitiecadre in the SJMA and atls in 2 Regkoal.

Operational Control Limited operationAl control of Compete the automatization of A complete cenral operational % Imolmentationthe existig water aipply system the water supply system of contrl unit in operation for 1994 1995 1996 1997 1998 1999of the SJIA an other urban the SIMA, so as to have a the SJMA and for the principal SJMA &sysems. Centrl Control Unit through urban center by 1999. Principal Usban

which opeations cn be Cities - - 20 50 S0 100executed .ud coatrolkdDesign the appropriateoperational control unit of thewater pply syetems of theprincipal urban centers.

Replacement of Old water connections are the Replacement of water. Replacemcnt of 3.000 Number of Cannectias replaed/ymrConnections cae of consant leakages in connections in the SJMA. connections with their 1994 1995 1996 1997 1993 1999

specific areas of the SJMA. corresponding metenr. SIMA - 4,000 4,000

TOTAL UFW UFW ached a peak of 56% in Continue with the UFW levels to fall to 2S% by UFW Leeds (%)PROGRAM 1989 when a program of impkmentationof the on-going 1999(1). 1994 1995 1996 1997 1992 1999

reductin began. UFW program. assigning SIMA 32.5 29.3 26.9 26.8 26.7 26.6priority to the actionm Otherpreviously mentioned. Urbn 43.1 36.0 27.3 27.2 27.1 27.0

Total (1) 33.7 33.7 23.7 28.4 23.0 27.9

(I) mplmentation and monioring target which will constitute legal covenants.

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ANNEX 6Page 1 of 11

COSTA RICASECOND WATER SUPPLY AND SEWERAGE PROJECT

AvA's FINANCIAL ANALYSIS

1. The financial performance for the period 1986-1992 is shown in the first three tables of thisannex. The 1986-1991 information corresponds to audited financial statements and the information of1992 corresponds to the financial statements recendy issued by AyA, to be audited by June 1993.

2. Following the previous mentioned tables, the financial projections are shown for the period1993-2001 at current prices. The assumptions considered for the financial projections are presentedin pages 8 and 9 of this annex. Tables 6.1 and 6.2 present major details of AyA's investment anddebt service programs, respectively.

COSTA RICAINSTITUTO COSTARRICENCE DE AaUEDUCTOS Y ALCANTARILLADO

SECOND WATER SUPPLY AND SEWERAGE PROJECT

HISTORIC INCOME STATEMENT

(MILt ColS)

1986 1987 1988 1989 1990 1991 1992 (1)as================= … …==== …==============-== … == =======

WATER REVENUES 1,000 1,285 1,488 1,507 1,944 3,225 4,800SEWERAGE REVENUES 102 131 115 117 205 326 415OTHER 0 0 0 0 0 9 76---------------------------- .------------------------------------------------

OPERATING REVENUES 1,102 1,416 1,603 1,624 2,149 3,560 5,290

PERSONNEL COSTS 525 673 904 1,150 1,302 1,665 2,111POWER COSTS 129 166 193 248 214 287 500OTHERS 107 143 198 269 404 636 1,009--------------------------------------------------------------------------------------------------- v |OPERATING COSTS 761 982 1,295 1,667 1,920 2,588 3,620 vn

INCOME BEFORE DEPRECIATION 341 434 308 (43) 229 972 1,670DEPRECIATION 226 289 384 491 532 679 841

…-- -- ---- --- ------OPERATING INCOME 115 145 (76) (534) (303) 293 829FINANCIAL AND OTHER EXPENSES (Net) (21) 7 24 (314) (325) (129) (360)

NET INCOME 94 152 (52) (848) (628) 164 468

WORKING RATIO 0.69 0.69 0.81 1.03 0.89 0.73 0.68OPERATING RATIO 0.89 0.90 1.05 1.33 1.14 0.92 0.84RATE OF RETURN n.a. 0.43 -0.18 -0.99 -2.45 1.91 4.51

(1) Non-audited

ou

zo z

COSTA RICAINSTITUTO COSTARRICENSE DE ACUEDUCTOS Y ALCANTARILLADO

SECOND WATER SUPPLY AND SEWERAGE PROJECT

HISTORIC CASH FLOW STATEMENT

(mitt CoLS)

1986 1987 1988 1989 1990 1991 1992 (1)

INCOME BEFORE DEPRECIATION 341 434 308 (43) 229 972 1670

OTHER NONOPERATING INCOME 47 60 73 117 56 297 0

INTERNAL CASH GENERATION 388 494 381 74 285 1269 1670

AMORTIZATION 254 142 268 423 357 539 630

INTEREST 52 47 30 301 381 426 360

TOTAL DEBT SERVICE 306 189 298 724 738 965 990

WORKING CAPITAL NEEDS 41 69 (42) 492 (352) 361 (243) 0'

OTHER ASSETS AND LIABILITIES NEEDS 107 197 6 312 47 629 (67) 1

5-==== ==_===== ================ ====== === == =5=======-s= = = = =… 55= … 55=====sst== 55== =… =

CONTRIBUTION TO INVESTMENT (66) 39 119 (1454) (148) (686) 990

INVESTMENTS 1738 1778 1727 2204 1625 1064 2058

TOTAL LOANS 1221 837 634 819 0 895 34

TOTAL CONTRIBUTIONS 583 902 974 2839 17m 907 1212

TOTAL FINANCING 1804 1739 1608 3658 1773 1802 1246

CHANGE IN CASH 0 0 0 0 0 52 177

DEBT SERVICE RATIO 1.27 2.61 1.28 0.10 0.4 1.3 1.7

PERCENT CONTRIBUTION TO INVESTMENT -3.8 2.2 6.9 -66.0 9.1 -64.5 48.1

(1) Non-audited

tOZmo z

COSTA RICAINSTITUTO COSTARRICENSE DE ACUEDUCTOS Y ALCANTARILLADO

SECOND WATER SUPPLY AND SEWERAGE PROJECT

HISTORIC BALANCE SHEET

(mitl ColS)

1986 1987 1988 1989 1990 1991 1992 (1)

Total Net Fixed Assets 7551 9459 11753 15325 20715 24673 28550Current Assets 958 1175 1419 1156 1139 1859 1698other Assets 448 645 651 963 36 661 580

…-.-.-.-----..-----------------------------------..-..--------------...- .---..--------------.---------.-.------.-------.--------Total Assets 8957 11279 13823 17444 21890 27193 30828

Equity 7060 8268 9634 12256 14876 18038 24383Long Term Liabilities 1626 2423 2913 3945 4267 6996 5026Current Liabilities 259 569 1235 1183 2747 2159 1419 _nother Liabilities 12 19 41 60 0 0 0

Total Equity and Liabilities 8957 11279 13823 17444 21890 27193 30828

(1) Non-audited

zo Z_Mvx

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COSTA RICAINSTITUTO COSTARRICENSE DE ACUEDUCTOS Y ALCANTARILLADO

SECOND WATER SUPPLY AND SEWERAGE PROJECT

INCOME STATEMENT 2/

(Milt CotS) 1/

------ ACTUAL ------------><----------------------- PROJECTED ----------------------------------------------------1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

WATER REVENUES 1,944 3,225 4,800 6,650 7,493 8,473 9,530 10,699 11,960 13,320 14,534 16,158SEWERAGE REVElUES 205 326 415 560 613 696 809 898 992 1,093 1,180 1,299CONNECTION FEES 0 0 65 68 71 74 77 80 83 86 24 27RECONNECTION FEES 0 0 0 0 0 0 0 0 0 0 0 0OTHER 0 9 11 12 13 14 15 16 18 19 0 0

--------.-----.--------------- -------- _ -..-------.-------- ---------- .. -- .----- . .....-.-.-.-.- ....--------------- --------.-.---------------- -

OPERATING REVEHUES 2,149 3,560 5,290 7,289 8,190 9,260 10,431 11,693 13,053 14,518 15,738 17,484

PERSONNEL COSTS 1,302 1,665 2,111 2,364 2,601 2,809 3,034 3,276 3,538 3,821 3,701 4,064CHEMICAL COSTS 57 74 94 122 126 132 138 154 1 72 191 212 23SPOWER COSTS 214 287 500 565 585 612 640 715 796 885 982 1,090OPERATION & MAINTENANCE 0 456 456 539 623 704 791 885 986 1,098 753 878PRIVATE CONTRACTORS 0 0 0 0 0 0 0 0 0 0 0 0 1OTHER OPERATION COSTADMINISTRATIVE COSTS 347 106 459 514 565 611 660 712 769 831 1,402 1,514 o

TOTAL OPERATING COST 1,920 2,588 3,620 4,104 4,500 4,868 5,262 5,742 6,261 6,825 7,140 7,771

INCOME BEFORE DEPRECIATION 229 972 1,670 3,186 3,691 4,392 5,169 5,950 6,792 7,693 8,590 9,713DEPRECIATIATION 532 679 841 975 1,082 1,422 1,779 2.188 2,630 3,046 3,637 4,433

OPERATING INCOME (303) 293 829 2,211 2,609 2,970 3,390 3,762 4,163 4,647 4,961 5,280INTEREST EXPENSES 381 426 360 401 430 383 663 630 930 1,017 1,254 1,337INTEREST EARNED ON INVESTMENTS 56 297 0 0 0 0 0 0 0 0 0 0INTEREST FROM JNICIPALITIES 0 0 0 32 81 134 181 187 231 293 160 165

NET INCOME (628) 164 468 1,842 2,260 2, 721 2,909 3,319 3,464 3,923 3,067 4,108=S2$S==2=S2a=32222S2222.U3=U22=======2=g=2Z===-======--===== ====Z = =3=2=…t====5==s=5====a==ss8a=====--s=att25s=

WORKING RATIO 0.89 0.73 0.68 0.56 0.55 0.53 0.50 0.49 0.48 0.47 0.45 0.44OPERATING RATIO 1.14 0.92 0.84 0.70 0.68 0.68 0.67 0.68 0.68 0.68 0.68 0.70RATE OF RETURN -2.45 1.91 4.51 10.78 12.01 9.73 8.58 7.59 6.94 6.75 5.97 5.15

Source: AyA and IBRD estimtes. 1992 figures are not audited.

1/ current prices.2/ Please refer to the notes in pages 7 and 8. z

o Z-4~ M

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COSTA RICAINSTITUTO COSTARRICENSE DE ACUEDUCTOS Y ALCANTARILLADO

SECOND WATER SUPPLY AND SEWERAGE PROJECT

CASH FLOW STATEMENT 2/

MiLL Cots 1/......... ............ ..... =.....

- ----- --ACTUAL---------------------- PROJECTED --------------------------------------------- >1990 1991 * 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

INCOME BEFORE DEPRECIATION 229 972 1,670 3,186 3,691 4,392 5,169 5,950 6,792 7,693 8.598 9,713INTEREST ON IiV. AID OTHER NONOPERATING INCOME 56 297 0 32 81 134 181 187 231 293 160 165

INTERNAL CASH GENERATION 285 1,269 1,670 3,218 3,771 4,526 5,351 6,137 7,023 7,986 8,758 9,178DEBT SERVICE, IJICIPALITIES 32 81 134 399 411 461 531 253 261AORTIZATION 357 539 630 909 1,217 1,289 1,366 1,594 2,00s 2,021 1,649 1,698INTEREST EXPENSE 381 426 360 401 430 383 663 630 930 1,017 1,254 1,337

TOTAL DEBT SERVICE 738 965 990 1,277 1,566 1,538 1,629 1,812 2,473 2,507 2,650 2,774WORKING CAPITAL NEEDS (352) 361 (243) 375 188 214 165 99 294 339 240 196OTHER ASSETS AND LIABILITIES NEEDS 47 629 (67) (40) (40) (40) (40) (40) (40) (40) 0 0

CONTRIBUTION TO INVESTMENT (148) (686) 990 1,605 2,057 2,815 3,596 4,266 4,296 5,180 5,649 6,900

INESTMENT COST, IBRD PROJECT 0 0 0 0 359 1,433 1,647 1,441 578 413 426 439INVESTMENT COST, OTHER (INICL. REPOSIT. FIXED ASSETS) (*) 1,625 1,017 2,006 6,781 6,698 5,468 4,236 1,453 3,936 6,143 4,888 2,365INVESTMENTS COSTS, (MAINTENANCE) 0 0 777 803 1,179 1,221 1,532 1,873 2,227 vREORGANIZATION COSTS 0 0 0 0 0 0 0 0 0 0 0 0 o

INVESTMENTS SUBTOTAL 1,625 1,017 2,006 6,781 7,057 7,678 6,686 4,073 5,736 8,088 7,186 5,031CAPITALIZED INTEREST 0 47 53 88 225 397 254 353 120 72 75 77

TOTAL INVESTMENT COSTS 1,625 1,064 2,058 6,868 7,283 8,076 6,940 4,426 5,855 8,161 7,261 5,108

REWJIRED FINANCING 1,M 1,750 1,069 5,263 5,226 5,261 3,344 160 1,560 2,960 1,612 (1800)

TOTAL DISBURSEMENT, IBRD 0 0 0 0 311 994 1,141 999 402 283 888 1,463TOTAL DISBURSEMENT, IDB 0 0 0 1,423 2,097 2,267 1,909 0 1,687 2,465 2,025 0TOTAL DISBURSENENT, BCIE 0 0 0 1,673 1,041 650 0 0 0 a 0 0TOTAL DISBURSEMENT, OECF 0 0 0 0 168 735 759 206 0 0 0 0TOTAL DISBURSEMENT, KfU 0 0 34 384 401 253 0 0 0 0 0 0

TOTAL LOANS 0 895 34 3,481 4,018 4,899 3,809 1,206 2,089 2,748 2,913 1,463TOTAL CONTRIBUTIONS 1,m 907 1,212 2,291 1,723 1,035 974 949 1,354 2,158 1,560 1 144

TOTAL FINANCING 1,7m 1,802 1,246 5,771 5,741 5,934 4,783 2,155 3,443 4,906 4,472 2,607

CHANGE IN CASH 0 52 177 509 515 673 1,439 1,995 1,883 1,925 3,080 4,407

DEBT SERVICE RATIO 0.4 1.3 1.7 2.5 2.4 2.9 3.3 3.4 2.8 3.2 3.3 3.6PERCENT CONTRIBUTION TO INVESTMENT -9.1 -64.5 48.1 23.4 28.2 34.9 51.8 96.4 73.4 63.5 90.8 135.2

Does not include USS 4.5 millions, for Limon's Project In 1994.Source: AyA and IBRD estimtes. w

1/ Current prices.2/ Please refer to the notes in pages 7 and 8. z

o z-^ rn

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COSTA RICAINSTITUTO COSTARRICENSE DE ACUEDUCTOS Y ALCANTARILLADO

SECOND WATER SUPPLY AND SEWERAGE PROJECT

BALANCE SHEET 2/(mitt CotS) 1/

<----- ACTUAL ----------><-------------------- PROJECTED --------------- )------------------------- >1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001========…-=- === fl========sS=======ss===========… = …=_====s==s============FIXED ASSETS 20,853 25,430 30,659 34,338 37,771 57,019 61,581 84,281 91,024 112,017 135,020 160,508ACCUMULATED DEPRECIATION 7,058 8,485 10,854 13,132 15,526 18,190 21,425 25,327 29,982 35,426 41,396 49,141

NET FIXED ASSETS 13.795 16,945 19,W804 21,206 22,245 38,829 40,156 58,955 61,042 76,591 93,632 111,367

FIXED ASSETS TRANSFERRED FOR ADMINISTRATION 1,033 1,044 0 0 0 0 0 0 0 0 0 0

WORK IN PROGREESS 5,887 6,684 6,746 16,226 24,546 17,774 25,679 13,711 20,235 15,566 3,584 15,766

CASH 150 169 346 855 1,370 2,044 3,483 5,478 7,361 9,287 13,051 16,757ACCOUNTS RECEIVABLE SERVICES 774 1,169 1,274 1,518 1,706 1,929 2,173 2,436 2,719 3,024 3,278 3,642TRANSITORY INVESTMENTS 22 321 0 0 0 0 0 0 0 0 0 0INVENTORY 189 198 77 261 296 322 281 171 241 340 302 211ANTICIPATED PAYMENTS 4 2 0 0 0 0 0 0 0 0 0 0

TOTAL CURRENT ASSETS 1,139 1,859 1,698 2,634 3,373 4,295 5,937 8,084 10,321 12,650 17,431 22,110-_----------..--.----.---- -----.. I----------------- ------------------------- -------------------------- ------------------------- I------------------------

OTHER ASSETS 36 661 580 540 500 460 420 380 340 300 300 300 1

TOTAL ASSETS 21,890 27,193 30,828 40,606 50,663 61,358 72,192 81,131 91,938 105,107 114,917 128,012 OLONG TERN DEBT, BEGINNING BALANCE 6,175 6,531 5,935 8,507 11,308 14,918 17,361 16,974 17,058 17,785 21,610 21,375LONG TERM DEBT, INCREMENTAL REVALUATION 0 0 0 0 0 0 0 0 0 0 0

LONG TERM DEBT, REVALLIED, ENDING BALANCE 6,175 6,531 5,935 8,507 11,308 14,918 17,361 16,974 17,058 17,785 21,610 21,375LONG TERM DEBT, CURRENT PORTION 1,926 1,551 909 1,217 1,289 1,366 1,594 2,005 2,021 1,600 1,600 1,600LONG TERN DEBT, LONG TERM PORTION 4,249 6,982 5,026 7,290 10,019 13,552 15,768 14,969 15,037 16,185 20,010 19,775OTHER LONG TERM LIABILITIES 18 14 0 0 0 0 0 0 0 0 0 0

TOTAL LONG TERM LIABILITIES 4,267 6,996 5,026 7,290 10,019 13,552 15,768 14,969 15,037 16,185 20,010 19,775ACCOUNTS PAYABLE 332 470 377 435 475 515 557 617 681 751 840 922SHORT TERN LOANS 0 0 0 0 0 0 0 0 0 0 0 0SNORT TERN PORTION OF LONG TERN DEBT 1,926 1,551 909 1,217 1,289 1,366 1,594 2,005 2,021 1,600 1,600 1,600ACCLMULATED EXPENSES 489 138 133 128 123 118 113 108 103 98 93 98TOTAL CURRENT LIABILITIES 2,747 2,159 1,419 1,780 1,887 1,999 2,264 2,730 2,805 2,449 2,533 2,610TOTAL LIABILITIES 7,014 9,155 6,289 9,034 11,905 15,770 18,674 18,720 19,326 21,209 22,543 22,385 D

EQUITY 14,876 18,038 24,383 31,537 38,758 45,807 54,161 63,433 74,096 84,642 92,573 103,196

TOTAL EQUITY AND LIABILITIES 21,890 27,193 30,828 40,606 50,663 61,358 72,192 81,131 91,938 103,276 114,917 128,012 Zo zDEBT/(DEBT+EQUITY) RATIO 29.33X 26.58X 19.58X 21.24X 22.59X 24.57X 24.27X 21.11X 18.71X 17.36X 19.26X 17.03X _CURRENT RATIO 0.41 0.86 1.20 1.48 1.79 2.15 2.62 2.96 3.68 5.17 6.63 8.47 -o

Source: AyA and IBRO estimates

1/ Current prices.2/ PLease refer to the notes in pages 7 and 8.

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ANNEX 6Page 8 of 1 1

COSTA RICA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

ASSUEMPONS F'OR FINANCIAL PROJECTIONS

1. Inflation and Exchange Rate. The annual average increase in consumer prices isestimated to be about 12% and 10% in 1993 and 1994 respectively. Thereafter, prices are assumedto increase at a rate of about 8% until 1999. Projected exchange rates reflect the difference betweendomestic inflation and the expected international inflation, in order to maintain 'Purchasing PowerParity".

2. Water Demand. It is assumed that the volume of water consumed per customer ismaintained at 28 e 3 per month between 1992 and 1999, and the population is assumed to grow at arate of 2.7 percent per year. The unaccounted for water is reduced from the actual level of 46% to287% in 1999. (Annex 5)

3. Revenues. Revenues projections are based on existing tariffs and approved realincreases for 1993 of 17.3 % respectively. Thereafter, tariffs are adjusted for inflation only. Seweragecharges are maintained at actual level of 18% of the water tariff.

4. Operational Expenses. Projection of personnel costs are based on the assumption thatthe number of employees will be maintained at the actual level of 2660 until 1999. Wage costsreflect adjustments for inflation. The cost of chemicals and power have been increased in proportionwith the water produced, and inflation.

5. Debt Service. Amortization of principal is calculated based on the terms of eachloan. Interest payments are calculated over outstanding balance. (See Table 6.2) It has been assumedthat the outstanding debt with the Central Government will be refinanced based on an agreededamortization plan. (Annex 22).

6. Investment Program. AyA's 1993-2001 investment program includes several projectsfor a total of about US$293 million. The investment program includes new works, replacement offixed assets, new acquisitions, and studies. (See table 6.1.)

7. Financing Plan. The overall financing plan for AyA's investment program (1993-2001)includes about US$ 172 in new external financing, including the proposed US$26 million Bank loanfor this project and a new loan of US$13 million (not before 1998); about US$91 million from MDB;US$23 million from CABEI; US$12 million from OECF; and US$7 million from KfW.Contributions from the Government and other donors add up to US$56 million. AyA is expected tofund about US$66 million of the investment program. Details of AyA's financing plan are shown inTable 6.1.

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ANNEX6Page 9 of 11

8. Balance Sheet Accounts. Accounts receivable are assumed at about 2 ! percent ofoperating revenues, or about 75 billing days per year. Inventories are forecast at 4.2% ofInvestments. Accounts payable are considered 3 months of direct operating expenses (other thanpersonnel and depreciation).

9. Dgreciation. The average depreciation rate is about 3 percent per year of RevaluedFixed Assets.

10. Asset Revaluadon. Projected revaluation of fixed assets was done based on theconsumer price index.

11. Fixed Assets Transferred for Administration. This item includes investments donejointly by AyA and local rural communities on equipment and buildings. These assets are transferredto the communities for their administration.

TABLE 6.1COSTA RICA

INSTITUTO COSTARRICENSE DE ACUEDUCTOS Y ALCANTARILLADOSINVESTMENT PROGRAM AND FINANCING

*- ACTUAL-* I PROJECTED >TOTAL 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001EXTERNAL LOANS

IDO 51.03 0.03 0.00 10.00 14.10 14.80 12.09 0.00 0.00 0.00 0.00 0.00DO8 40.00 0.00 0.00 0.0O 0.00 0.00 0.00 0.00 10.41 18.20 11.39 0.00OECF 12.00 0.00 0.00 0.45 3.40 3.86 4.29 0.00 0.00 0.00 0.00 0.00KIW 7.30 0.00 0.00 2.30 2.40 2.60 0.00 0.00 0.00 0.00 0 00 0.00CABEI 23.00 0.00 0.00 11.23 8.05 3.37 0.34 0.00 0.00 0.00 0.00 0.008IRF 26.00 0.00 0.00 0.00 2.09 6.49 7.23 6.15 2.40 1.64 0.00 0.008IRF INewi 13.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.00 8.00TOTAL EXTERNAL FINANCING 172.33 0.03 0.00 23.98 30.04 31.12 23.95 6.15 12.81 19.84 16.39 8.00

CONTRIBUTIONS. OTHER 70.05 7.76 6.62 14.93 9.36 4.71 4.43 4.10 5.85 6.00 4.35 1.96Governent 43.88 7.76 4.30 4.10 4.09 3.82 3.82 3.80 3.80 3.60 3.15 1.65Municipalities and Commurities 10.23 0.00 0.25 1.13 1.09 0.90 0.61 0.30 2.06 2.40 1.20 0.30 1CARE 7.06 0.00 1.80 5.26 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 O,OECF 8.88 0.00 0.27 4.44 4.17 0.00 0.00 0.00 0.00 0.00 0.00 0.00 LW

ITOTAL AyA 71.45 2.23 3.74 7.18 6.52 7.45 7.14 5.82 6.57 10.24 9.18 5.38

TOTAL INVESTMENT PROGRAM 313.82 10.02 10.36 46.10 45.91 43.29 36.62 16.07 25.23 36.08 29.92 15.33TOTAL INVESTMENTS 1991-2001

WA rER SuP Y1. SJMA 74.58 0.50 3.60 14.66 11.89 14.16 11.80 9.88 3.01 2.08 2.00 1.002. Other Uubln Areas 112.14 3.98 1.66 16.64 19.80 20.49 18.27 0.67 10.68 12.68 6.73 0.733. Rural Areas 46.06 3.90 3.06 7.33 7.25 6.62 3.50 3.50 3.50 3.30 2.80 1.30Sub-total 232.78 8.38 8.22 38.63 38.94 41.27 33.57 14.05 17.19 18.06 11.53 3.03SEYWRAGE1. SJMA 44.08 0.14 0.34 3.83 1.57 0.00 0.00 0.00 5.51 10.00 11.39 11.302. Other Urban Aroas 24.86 _0.00 .... 1.102___.2.72 4.41 0.82 0.84 0.82 1.33 8 6.2 6.00 ---- 0.00.

toSub-total 68.94 0.14 1.44 6.55 5.98 0.82 0.84 0.82 6.84 16.82 17.39 11.30OTHERS 12.11 1.50 0.70 1.01 1.00 1.20 1.10 1.20 1.20 1.20 1.00 1.00 0 Zz

0 zTOTAL 313.83 10.02 10.36 46.19 45.92 43.29 35.61 16.07 26.23 36.08 29.92 15.33 X

ol~~~~~~~~~~~~~~~~~~~

Table 6.2COSTA RICA

INSTITUTO COSTARRICENSE DE ACUEDUCTOS Y ALCANTARILLADOSECOND WATER SUPPLY AND SEWERAGE PROJECT

SUMMARY OF DEBT SERVICE

(Mill CotS) (1)

1993 1994 1995 1996 1997 1998 1999 2000 2001

AMORTIZATION, IBRO LOAN 0 0 0 0 0 363 374 385 396AMORTIZATION, IDB 0 0 0 226 232 239 247 254 262AMORTIZATION, BCIE 0 263 271 279 374 385 397 408 421AMORTIZATION, OECF 0 0 0 0 0 0 0 0 0AMORTIZATION, KfU 0 0 0 0 79 81 84 86 89AMORTIZATION, REFINANCED LOANS USS 781 815 833 391 487 485 500 515 530AMORTIZATION, REFINANCED LOANS COLS 50 57 100 53 41 42 0 0 0

TOTAL AMORTIZATION Mitt ColS 832 1135 1205 949 1213 1595 1602 1648 1698

INTEREST, ON IBRD, TOTAL 0 38 82 158 238 283 287 332 388INTEREST, ON IDB, TOTAL 79 155 253 345 393 473 573 693 752INTEREST, ON OCIE, TOTAL 67 171 223 234 215 191 165 137 107INTEREST, ON OECF, TOTAL 0 3 19 46 65 70 72 75 77INTEREST, ON KfU, TOTAL 7 23 41 52 52 49 47 45 42INTEREST, REFINANCED LOANS USS 273 212 127 76 52 49 46 42 38INTEREST, REFINANCED LOANS COLS 36 29 20 13 0 0 0 0 0INTEREST, OPERATIONS

INTEREST, TOTAL MiLL CotS 462 632 766 925 1015 1119 1190 1324 1404

(1) Current Prices.

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Annex 7Page 1 of 4

COSTA RICASECOND WATER SUPPLY AND SEWERAGE PROJECT

Water Supply and Sewerage Systems in the GAM

Water Supply

1. In 1990, about 1.4 million (45%) of Costa Rica's total population lived in the GreatMetropolitan Area of San Jose (GAM) and by the year 2,000, 1.8 million are expected to live in thisarea. The GAM comprises the San Jose Metropolitan Area (SJMA) and 30 adjacent municipalities ofthe Provinces of Heredia, Cartago and Alajuela. Of these 30 municipalities, 16 have water systemsthat are under local government responsibility and the rest are under AyA's management (66% oftotal GAM population). Water service coverage in the GAM is one of the best in the country, as 95percent of the population has access to water through a house connection, but quality of service needsimprovement. Recently, a water and sewerage master plans have been prepared by AyA, establishingtechnical solutions for the GAM as an integrated area. Although from the technical and economicalpoint of view this approach is adequate, an acceptable solution for the management and operation ofthese services still has to be settled between AyA and the adjacent municipalities (a study to look intothis has been included under the project, para. 1.18). This should lead to more uniform levels ofservice, water quality and water charges across all municipalities.

2. The proposed project has been designed to assist AyA to improve the water supplysystem of the SJMA which is AyA's area of jurisdiction. The analysis of the water demand andsupply of the SJMA is presented in Table 7.1. The average water production capacity of the SJMA is4.4 m3/s (139 million m3/year) with variances between the dry and wet season of 10%. In 1991, theaverage water production was 3.9 m3/s (124 million m3/year). It is composed of surface waters(64%) and of deep wells and springs (36%). The most important surface water facility is the Orosiwater supply scheme (47% of total water provided to SJMA) that includes a pipeline of 28 Km. of1.8 m3/s capacity and the Tres Rios treatment plant of 2.5 m3/s capacity. The major well fields areLa Valencia, south of Heredia and Puente de Mulas, south of Alajuela, presently with a combinedcapacity of 1.4 m3/s (32% of total water provided). The total water production capacity of the SJMAis not sufficient to meet the peak daily demand, which is estimated to reach 4.6 m3/s by 1996.

3. The SJMA distribution network consists of 390 Ikm. of pipes larger than 150 mm. and760 km. of small diameter pipes which account for 65% of the total network. In some areas of thecity there are operational problems mainly because of the poor functioning of these small pipes whichare old and in bad condition. In addition, the system has about 26 storage tanks, 8 pumping stationsin operation and a great number of valves and special equipment for pressure and flow controls. Thecombined capacity of the storage tanks is 91,330 m3 which is not sufficient to guarantee effectivewater pressures to certain areas of the city, especially at peak daily demands.

4. The recently prepared water master plan (PLAMAGAM) has identified the groundwateras the technical and most economical solution for the additional supply of water needed to cover thedemand of the GAM until the year 2015, with a first phase of development until the year 2003. Thisstudy recommends the development of two batteries of wells, one located in Alajuela (Potrerillos) andthe other one in Heredia (North Zone). The proposed project will include the development of four

- 66 -

Annex 7Page 2 of 4

wells, two in each of this two areas, to cover the deficits of the near future of the SJMA and to helpdefine future exploration of groundwater in these areas. The expected production capacity increasewith this four wells is 0.3 m3/s.

5. In addition to the need for increasing water production capacity, the water master planhas identified the works and measures needed to improve the operational efficiency of the SJMAwater distribution system. The proposed project includes part of the first phase of theseimprovements, since CABEI is financing the other part. These improvements will bring about betterwater pressures throughout the city, reduction of operational costs and reduction of the vulnerabilityof the Orosi pipeline. After these improvements are carried out, together with the UFW program(reduction from 55% in 1990 to 27% by the year 1999, Annex 5), the capacity of the SJMA watersystem would reach 4.7 m3/s which should be sufficient to cover the peak daily demand until the year1999.

Sewerage Collection/DisDosal in the GAM

6. The sewerage network in the GAM covers around 44 percent of the population andconsists of more than 140 km of main sewer mains with diameters ranging between 300 and 1470mm. Wastewater is discharged without treatment into the four main rivers that cross the area fromEast to West (Virilla, Maria Aguilar, Torres and Tiribi) to converge in the Rio Grande de Tarcoleswhich discharges into the Golfo de Nicoya (Pacific Ocean).

7. Coverage of the GAM by the sewerage network is incomplete and deficient. There areseveral areas with insufficient collection network or without connection of these partial networks tothe main sewer mains that follow the four principal river basins, and many of the newer "barrios",mainly those of low-income population, lack any form of sewerage. Also, several bridges andpumping stations that connect the network of main sewer mains are non-operative because of lack ofmaintenance or due to the effects of the latest earthquake, resulting in various important discharges ofuntreated sewage in the upper parts of the rivers that cross the city.

8. The pollution of these rivers is aggravated by the discharges of several industries andcoffee "beneficios' that increase the organic load and contribute to the general degradation of themargins and the water quality, with important negative effects, both aesthetic and sanitary, to largeareas of the city.

9. AyA has initiated the process of improving the sewerage collection, treatment anddisposal facilities of the GAM with the preparation of a Sewerage Master Plan (PLAMAGAM) whichincludes increasing the capacity and completing the sewerage network and the main sewer main todischarge in the proposed site of a sewage treatment plant in the Rio Virilla, as well as the expansionof the coverage of the network to include those areas of the city which have difficulties for thehousehold disposal because of lack of surface or inadequate infiltration capacity of the soil.

10. The Master Plan assigns priorities to the actions to be undertaken until the year 2,015according to the affected population (giving higher priority to low-income areas) and the relationbetween the required investment and the overall effect on the river water quality. The construction ofsewerage in Los Guido and La Pax, the completion and connection of the sewerage in those areaswhich discharge into the streams and the reconstruction of the pumping stations and bridges that give

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Annex 7Page 3 of 4

continuity to the main sewer mains are included among the urgent and priority actions of the wholePlan.

11. With IDB/OECD funds, AyA is in the process of contracting the feasibility study andfinal designs of the first phase of the PLAMAGAM which includes the improvement and expansion ofsewerage collection, treatment and disposal facilities of the GAM. This study and designs areexpected to be completed by early 1996.

Water Demand and SuDDly in the SJMA

12. Water consumption and production projections until 1999 are presented in Table 7.1,based on the following assumptions:

a) The volume of water consumed per connection/month will be maintained around 29 m3,(actual average consumption of metered connections).

b) The number of water connections will increase by 11,300 in 1992; 8,000 annually from1993 to 1996; and 6,000 annually from 1997 to 1999.

c) The micrometering will be increased from 79% in 1991 to 100% by 1995 and will bemaintained at this level until 1999.

d) The UFW program will continue to be implemented (Annex 5) and thus the levels of UFWare expected to be reduced from 55% in 1990 to 27% by 1996 and be maintained at thislevel until 1999.

- 68 - Annex 7Page 4 of 4

Table 7.1Water Demand and SupRIy of the SJMA

Vobase ot of W- - -Year (Thonean) (MI lmmtaCo) (Mi: C-/Year).. (%) NW= WPW.

1990 163.0 27.2 57 55 126

1991 171.2 2S.7 64 48 124

1992 182.5 28.7 68 44 121

1993 190.5 28.7 72 40 119

1994 198 5 28.7 75 33 t1l

1995 206.5 28.7 78 29

1996 214.5 28.7 81 27 111

1997 220.5 28.7 84 27 115

1998 226.5 28.7 86 27 118

1999 232.5 28.7 89 27 121

13. Expected savings in terms of volume of water produced until the end of the century are;

Tab!e 7.2UFW Progran - Water Savings

-- 1- 'Stiavpina l Total Demam4 - - - ----. UFW My)

Year (9miilty er) 310 4 FrWOecut |-- - V IFYect ar)

1990 57 55 55 0

1991 64 49 48 0

1992 68 48 44- 9

1993 72 4S 40 1I

1994 75 48 33 32

1995 78 48 29 40

1996 81 48 27 45

1997 84 48 27 46

1998 86 48 27 48

1999 89 48 27 49

TOTAL 287

1/ Target already achieved under project preparation.

- 69 -ANNEX 8

Page 1 of 2

COSTA RICA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

Detailed Project Description

1. The proposed project, which would be carried out during a 6 year period between 1994 and1999, includes five main components: two (institutional strengthening and UFW) related specificallyto support the Government and AyA with main sectoral reforms and the improvement of efficiencyand finances of the sector, and three (water supply, sewerage and operations and maintenance) relatedto the improvement of these services in the SJMA. The following is a description of the itemsincluded in the project.

2. INSTITUTIONAL STRENGTHENING PROGRAM (9% of project cost) consistingof provision of office equipment, technical assistance, contractual services and staff trainingfor: (i) development and implementation of sound sector policies and institutional frameworkreform; (ii) improvement of AyA's corporate planning; (iii) improvement of AyA's financialmanagement; and (iv) operating costs reduction, private sector participation anddecentralization. Details of this component are presented in Annex 11.

3. UNACCOUNTED-FOR-WATER REDUCTION PROGRAM (UFW) (42% of proiect cost)consisting of the provision of O&M equipment, approximately 112,000 meters, officeequipment, vehicles, contractual services, technical assistance and staff training for theimplementation of the following priority projects: (i) metering; (ii) commercial system(integral); (iii) consumer and pipes cadastre; (iv) operational control of the SJMA watersystem; and (v) replacement of connections in the SJMA. Details of this component arepresented in Annex 5.

4. SJMA WATER SUPPLY AND DISTRIBUTION SYSTEM (33% of project cost) consistingof:

(a) Distribution pipes and storage tanks for the improvement of existing systems indifferent areas of the SJMA, such as San Pedro, Pavas, Alajuelita, San Juan de Dios,Escazu, San Pablo and Coronado. The distribution pipes vary in diameter from50mm to 700mm and have a total length of about 76 km. There are 10 storage tanksincluded in the project with a volume varying between 500 and 10,000 m3 each andan aggregate volume of about 21,500 m3;

(b) Production works including: 2 wells in the Potrerillos area and 2 in the Zona Nortearea. These wells will help define the future exploration of groundwater in theseareas.

(c) Water pumping stations including the rehabilitation of the Guadalupe and Ipisstations and the construction of the Maiquetia and San Pablo stations.

(d) Consulting services including engineering designs of some of the above mentioned

I

- 70 -

ANNEX8Page 2 of 2

works and supervision during construction.

5. SJMA REHABILITATION SEWERAGE WORKS (10% of project cost) consisting of:

(a) Rehabilitation, reconstruction and interconnection of sewage collectors andpumping stations including the reconstruction of six interconnecting bridges and 40selected points of completion and connection of sewerage collectors, of a diametervarying between 150mm and 550mm and a total length of about 15 km. The pumpingstations to be rehabilitated are 7 and are located in marginal areas of the SJNIA.

(b) Construction of sewage collectors in low income areas consisting of: (i) seweragecollectors in Los Guido and La Pax with diameters varying between 150mm and300mm and a total length of about 18 km.; (ii) an interceptor and pumping station todischarge the effluent from La Capri into the San Miguel sewerage network. Theinterceptor has a length of about 1 km and a diameter varying between 200mm and250mm. The discharge pipe has a length of about 1 km. and a diameter of 250mm;and (iii) San Miguel main sewage collector expansion in a length of about 7 km. anddiameters varying between 300mm and 400mm.

(c) Consulting services including engineering designs of some of the above mentionedworks and supervision during construction.

6. OPERATIONS AND MAINTENANCE (6% of proiect cost) consisting of: (i) O&Mequipment and vehicles to improve operations and maintenance of the sewerage systems; and(ii) consulting services, equipment and civil works required for the vulnerability andmaintenance of the Orosi pipeline to natural hazards. Upon the completion of the consultingservices, an action plan will be formulated detailing the organizational and engineeringmeasures to be taken periodically to protect the pipeline.

COSTA MCAaMworD WATY m M S AAND OsmW J3vT

ATD COSTS

_ baauin S:00 0 186. -866 1 - 1W- 166 1_8-

A. WSnTV1noAL S1T TH"O1. gaevd PeIdem 64 6 415 30 042. CarpwUs Fla 362 106 2U 7 1 146 146 733.A uiM 1126 327 1131 70 30 oil 306 3064. _ruu*oIun M d.euUbn J30 207 622 75 ISS 18O 166 ISS 166

3. UFW P01#1 ._ 3060 464 2627 35 303 327 327 0272.C l__m ddeVISmII30d 2364 366 3236 30 710 1076 1073 7102. C.usanwuud pm Ca res 1060 32 1019 37 106 316 316 3154. OpwouuiCal 2861 120 2371 so Soo B37 397 66lS. A gmu sICee M Sl1 So1 0 0 230 293

3. 03w. 1027 0 1027 100 103 206 205 S13-:f00j** j L . , . '. "IS 1, 113 ,313 2211 2064 1102 1111

C. UJMA WATER SMLY1.1.1 powwow "I 476 406 46 331

1.2 ZmnaNo" Wuft 773 324 443 s 773MA-TotdP r.dsI ttl 1654 600 364 62 0 331 773 0 0 0

2. SIWag Md Diotbatio2.i hutp mm ofFibmy Ntwork 1773 1046 727 41 632 12412.2 _ipeawm of S - 1iwNetwok 2932 1022 161 64 *61 19372.3 C _rw rtrt o sT 1453 1177 276 1S 436 10172A Cnu_um of Pwipbu 3Wdw 116 406 756 e6 360 3163ii.Teed3 srq. _t2sIhMAuon 7220 2663 3677 40 0 632 2628 3364 16 02. bjj~mh

3.1 FindurID_ 104 62 62 s0 1043.2C_wtu_dm bsp n on 713 166 1 141 330 336 32

kATad ,uin.u, I3I 861 771 221 22 104 141 330 336 82 0i _lO :-a 865*0 : 64 4* 4i* 14 1V C14 2622 SO 33 0

D. UJMA 6WA0E1. holubA,ewem. Sewag CuIscwr 337 M87 0 0 443 4432. kd. Swp C _ectmLos t0de 1933 1425 213 13 1063S.S dtt mn Ptwrph 9tbu6l 162 16 146 g0 46 1134.I3i3 - 2 iii 220 6e 72 213 so

E. OPfATIOS AID MAUTEBiANCE1. E.dpemtf f S _w EIII 416 60 365 me 207 207

2. 1Ah*sden O_I

2.1 C _wbu_ermy m Ls - 145 0 146 100 146

2. 2E2t Equiparwit NM wWwk1141 342 7" 70 670 670SL60-y"m FAIMM Orem to 1286 342 644 73 146 570 570 0 0 0

_ 1. 02 16 1 -70 24-- 7if - 0 0 a

TOTALBA6ECOST Vemnbe_ 10611 3727 100 10313 10416 e6 2136 3212 8631 7224 2167 III1PIIC_ {, 11 s I 11 6 orw 10%1 4320 1513 2907 e6 28 1136 1306 1030 317 167Tftd Dow Cow pk4 rC I a 34040 11626 22223 e6 2421 9336 10136 6234 2433 1276

Pdee C -6 Totul548 1 24 67 134 1031 IS33 1647 G06 372

T_E"1__ 8 * 1-62 j? 68 303 1 0047 1173 6641 o3063 is"

7 20 30 23 3 4

COSTA RICASECOND WATER SUPPLY AND SEWERAGE PROJECT

PROJECT IMPLEMENTATION SCHEDULE

COMPONENT/SU8COMPONENT 1994 1995 1998 1997 1998 1999

A. INSTITUTIONAL STRENGTHENING1. Sectoral Poicies -.

2. Corporate Planning - - - - - - - __3. FinancIal Management _----------- _-_-_._-.4. Organization and dscentraflztlon - _- ------ ---- - --------

B. UFW PROGRAM1. Metwino - - -_ __ - - -.2. Commweial System lintgral 1 _ ._ _ _.3. Conumerw and i Csdestres .- -- 4. Oprational Control .- - _-5. Replacemnt of Connections _ _. - -6. Other . ... . .- - - --

-4jC. SJMA WATER SUPPLY

1. Production1.1 Potrerlo. We -_ _1.2 Zone Norte Wek2. Storage and Distibution2.1 Improvement of Primay Network __ _ _._2.2 Improvement of Secondary Network _ - __2.3 Construction of Storage Tanks - _2.4 Construction of Pumpin Statiorn ._- -3. Engyee_n3.1 Final Design3.2 Construction Supervision - - - - - - - -

D. SJMA SEWERAGE1. Rehmbjlnterconn. Sewage CoNectore2. Intal Sewage Colastors Los Guido3. RehabIltotion Pumping Stations __ ___ _4. Eneern .__......

E. OPERATIONS AND MAINTENANCE1. Equipment for Sewerage2. Rehabilitation Orosi2.1 Consultancy services2.2 Equipment end materials -------- -----------

COSTA RICA

SECOND WATER SUPPLY AND SEWERAGE PROIECT

INSTITUTIONAL STRENGTHENING PROGRAM

Obiectives: (I) To support Government and AyA with the definition of main sectoral policies and institutional framework for the sector; (2)0 oassure AyA 's longer termfinancial viabiliy by addressing key financial and planning issues; and (3) to enhance the efficiency of AyA 's provision of essential public services by addressingdecentralization of AyA s operations together with cost reduction and private sector participation.

ARKA I ACTIONS SSTA.RGMTSDATES

Sectoral Plicies Lack of sound investment A Working Group integrated by Study of investment and cost recovery policies byand cost recovery policies national Government authorities in Dec. 31, 1994 and satisfactory action plan to befor setor development. charge of the institutional reformn submittod to the Bank by March 31, 1995 andUnnecessary duplication and AyA's authorities has been satisfactorily implemented thereafter (1).and overlaps of established to review and dcfine: Study of institutional ftrameerk for the GAM byresponsibilities between (i) sound investment and cost June 30, 1994 and salisfactory action plan to beentities acting in the sector. recovery policies; (ii) an action submitted to the Bank by September 30, 1994 and

plan for the implementation of the satisfactorily implemented thereafter (1).invcstment and cost recovery Study of the institutional framework for the seor bypolicies as well as for the Dec. 31, 1994 and atisfactory action plan to beinstitutional framework mainly for submited to the Bank by March 31, 1995 andthe GAM. satisfactorily implemented thereafter (1).

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I AREA ISSUES , ACTIONS , TARGETS/DATES

Corporate Planning Planning heavily oriented to A long tcrm corporate plan will be Budget model designed and approved bytechnical investment developed for AyA. December 31, 1995.planning and weak A budgdary process with Training and budgetary process implemented byintepation exists between progrmatic content following December 31, 1996.the objectives and targets of Government's budgetary reformn Corporate planning model designed and approved bythe different opertional proposals will be designed and Decembcr 31, 1996.areas. impiemcnted. Training and effective corporate strategic planning in

place by December 31, 1997.

Financial Management Manual financial accounting An integrated financialbudgetary Integrated financialbudgetary and cost accountingnot integrated to the and cost accounting system system designed by June 30, 1994.commercial system. integrted to the commercial Satisfactory action plan to be presented to the Banklack of budguty and cost system will be developed, by September 30, 1994 and implemented thereafteraccounting systms The tariff structure will be (1).necessary for managerial reviewed to eliminate the Reform of tariff structure to be implementeddecisions. drawbacks mentioned in Annex 4 grduafly beginning Dec 31, 1994 and completed bySeveral drawbacks in the to reflect oconomic costs and equity Dec. 31, 1996.tariff structur,. considerations. Sewerage study to be completed by June 30, 1995Lack of financial A financial projections system will and implmented in correspondent urban areas by -projections system. be developed. December 31, 1996.Very low sewerg charges. A study and correspondent

implementation plan to fix andadjust sewerage charges in theSJMA and other urban areas willbe carried out.

Decentralization, Cost Lack of responsive A decentralization model with its Decentralization model to be completed byReduction and Private management outside San correspondent implementation plan, June 30, 1994 and a follow-up action plan to beSector Participation Jose. taking into consideration the presented to the Bank by Sept. 30, 1994 and

Personnel costs reprecsnt changes in AyA's organization, implemented thereafter (1).about 60% of operational costs, personnel, etc., will be 100% subcontracting with the private sector in allcosts developed. The model will also areas identified in the deecntralization model by JuneMinimum sub-contracting define communities, local 1996 (1).with private sector. governments, as well as private

sector participation.

(I) Impkmentation and monitoring targets which will consttute kgal covnants. >zm

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-4.

COSTA RICA

INSTITUTO COSTARRICENSE DE ACUEDUCTOS Y ALCANTARILLADO

SECOND WATER SUPPLY AND SEWERAGE PROJECT

OPERATIONAL AND FINANCIAL TARGETS

I ______________________ I- 401993 1199411995 199C1997 811999l

OPERATIONAL TARGETS

1. Micrometering Level (%) 74 79 91 96 99 99 99 99No. Connections with Operating meter x 100No. Water Connections

2. Macrometering Level SJMA (9) 50 60 80 100 100 100Metered water produced x 100Water Produced

3. Unaccounted for Water (%) 46 44 39 34 29 28 28 28Water Produced - Water Sold x 100Water Produced

4. Staff Productivity Level 8.6 8.2 7.8 7.5 7.2 7.0 6.8 6.6Emplovees year end1,000 Water connections year end

FINANCIAL TARGETS

5. Personnel Costs/Operating Costs (%) 58 58 58 58 58 57 56 56Personnel Costs x 100 X

Operational Costs (without depreciation) u_ D

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1992 1993- 1994 -1995 J1996 j1997 1998 I 1999

6. Working Ratio 0.7 0.55 0.55 0.5 0.5 0.5 0.5 0.5Operational Costs (without depreciation) x 100Opeational Revenues

7. Debt Sevice Coverage Ratio 1.7 2.4 2.4 2.4 2.4 2.4 2.4 2.4Intenal Cash GenoationTotal Debt Service

8. Average Collection Period (Months) 2.9 2.5 2.5 2.5 2.5 2.5 2.5 2.5Accounts Receivable year end x 12Annual Water x Sewerage Revenues

9. Contribution to lnvestmnt (X) 36 14 14 14 20 30 30 30Net Intemal Cah GenerationTol Investments

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COSTA RICAINSTITUTO COSTARRICENSE DE ACUEDUCTOS Y ALCANTARILLADO

SECOND WATER SUPPLY AND SEWERAGE PROJECT

MONITORING INDICATORS

OPERATIONS ------ ACTUAL -----><------------------------------- PROJECTED ------------------------------------------ .- - - -M-I- - - - -UNITS 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001C S ================z=SS==S ==S======3 =====S= ==Sa====== S 535…===zz====S.- SSS=g=3zs.==aa==nu

SAN JOSE METROPOLITAN AREA (SJMA)

WATER PRODUCED 1.3 126.1 124.3 121.4 119.3 111.1 110.5 111.1 114.6 117.6 120.6 123.6 126.6WATER SOLD 1M3 57.4 64.4 68.2 71.9 75.0 78.1 81.2 83.9 86.2 88.5 90.0 93.2UNACCOUtTED FOR WATER X 54.5 48.2 43.8 39.7 32.5 29.3 26.9 26.8 26.7 26.6 26.5 26.4WATER SOLD PER CONNECTION u3/w4onth/comn 27.2 28.7 28.7 28.7 28.7 28.7 28.7 28.7 28.7 28.7 20.7 20.7WATER CONNECTIONS YEAR END ('000) 163.0 171.2 182.5 190.5 198.5 206.5 214.5 220.5 226.5 232.5 238.5 244.5SERVICE COVERAGE, WATER 2 93.7 95.9 99.5 98.9 98.1 99.4 98.3 98.4 98.4 98.3 98.2 98.0SEWERAGE CONNECTIONS YEAR END ('000) 114.9 132.2 135.2 138.2 141.2 147.5 159.2 162.2 165.2 168.2 171.2 174.2SERVICE COVERAGE, SEWERAGE X 66.1 74.0 73.7 71.8 69.8 71.0 72.9 72.3 71.8 71.1 70.5 70.0CONNECTIONS WITH OPERATING NETER ('000) 136.0 135.1 138.1 161.1 191.8 206.5 214.5 220.5 226.5 232.5 238.5 244.5CONNECTIONS UITN OPERATING METER X 83.4 78.9 75.7 84.6 96.6 100.0 100.0 100.0 100.0 100.0 100.0 100.0

OTHER URBAN AREAS----------- _-----_ ---- _ --------- _

UATER PRODUCED IX3 63.5 69.8 84.1 88.5 84.4 79.1 72.5 75.2 78.0 80.7 83.4 86.1 -.UATER SOLD .3 39.5 41.5 42.8 45.1 48.0 50.6 52.7 54.7 56.8 58.9 61.0 63.1UNACCOUNTED FOR UATER X 37.8 40.5 49.1 49.0 43.1 36.0 27.3 27.2 27.1 27.0 26.9 26.8WATER SOLD PER CONN4ECTION m3/month/comr 28.2 27.8 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0UATER CONNECTIONS YEAR END (Qo0o) 116.8 120.7 126.7 134.2 143.2 149.2 155.2 161.2 167.2 173.2 179.2 185.2SERVICE COVERAGE, WATER 2 67.9 70.4 70.4 70.4 70.4 70.4 70.4 70.4 70.4 70.4 70.4 70.4SEWERAGE CONNECTIONS YEAR END ('000) 12.8 12.7 13.2 13.7 14.2 14.7 15.2 15.7 16.2 16.7 17.2 17.2SERVICE COVERAGE, SEWERAGE X 7.4 7.4 7 4 7.5 7.6 7.6 7.7 7.7 7.7 7.8 7.8 7.8CONECTIONS WITN OPERATING METER (o000) 86.7 89.7 90.7 96.2 118.2 136.2 154.2 160.2 166.2 172.7 178.7 184.2CONNECTIONS WITN OPERATING METER 2 74.2 74.3 71.6 71.7 82.5 91.3 99.4 99.4 99.4 99.7 99.7 99.7

TOTAL AyA

WATER PRODUCED 113 189.6 194.1 205.5 207.8 195.5 189.5 183.5 189.8 195.6 201.3 207.0 212.7WUTER SOLO 113 96.9 105.9 111.0 117.1 119.9 125.6 130.8 135.9 140.7 145.1 149.5 153.9UNAcCaUTED FOR WATER X 48.9 45.4 46.0 43.7 38.7 33.7 28.7 28.4 28.0 27.9 27.9 27.9WATER SOLD PER CONNECTION .3/month/comn 28.0 28.5 28.4 28.4 27.7 27.7 27.8 27.9 28.0 28.0 28.0 28.0WATER CONNECTIONS YEAR END ('000) 279.8 Z91.9 309.2 324.7 341.7 355.7 369.7 381.7 393.7 405.7 417.7 429.7SERVICE COVERAGE, UATER 2 81.5 83.8 83.8 83.8 83.8 83.8 83.8 83.8 83.8 83.8 83.8 83.8SEWERAGE CONNECTIONS YEAR END ('000) 127.7 144.9 148.4 151.9 155.4 162.2 174.4 177.9 181.4 184.9 188.4 191.9SERVICE COVERAGE, SEWERAGE V.3 37.2 41.6 41.3 40.6 40.0 40.6 42.0 41.7 41.4 41.1 40.8 40.4CONNECTIONS WITH OPERATING METER ('000) 222.7 224.8 228.8 257.3 310.0 342.7 368.7 380.7 392.7 405.2 417.2 429.2CONNECTIONS WITH OPERATING METER 2 79.6 77.0 74.0 79.2 90.7 96.3 99.7 99.7 99.7 99.9 99.9 99.9EMeOYEES/1000 WATER CONNIECTIONS, YEAR-END Per/1000 Corm 9.5 9.1 8.6 8.2 7.8 7.5 7.2 7.0 6.8 6.6 6.4 6.2No. EMPLOYEES 2660.0 2660.0 2660.0 2660.0 2660.0 2660.0 2660.0 2660.0 2660.0 2660.0 2660.0 2660.0

m0 _

r-4'

FINANCIAL

TOTAL AyA

AVERAGE UATER TARIFF/M3 (CUJRRENT Cots) CotS/m3 20.1 30.5 43.2 56.8 62.5 67.5 72.9 78.7 85.0 91.8 97.2 105.0

AVERAGE UATER TARIFF/M3 (CONSTANT 1990 ColtS) CotS/a3 20.1 24.3 29.7 34.9 34.9 34.9 34.9 34.9 34.9 34.9 34.9 34.9

AVERAGE UATER TARIFF/M3 - ANNUAL INCREASE IN R.T. x 0.0 0.0 20.3 17.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

AVERAGE COST/M3 SOLD (CLURRENT Colts) 19.8 24.4 32.6 35.0 37.5 38.7 40.2 42.2 44.5 47.0 47.0 50.5

AVERAGE COST/M3 SOLD (CONSTANT 1990 CoLt) 19.8 19.5 22.4 21.5 21.0 20.0 19.3 18.7 18.3 17.9 16.8 16.5

AVERAGE PERSONNEL COST/M3 SOLD (CURRENT Cots) 29.0 32.8 34.7 36.2 37.4 38.8 40.3 42.2 44.3 42.7 45.0

AVERAGE PERSONNEL COST/M3 SOLD (CONSTANT 1990 CoLs) 23.1 22.6 21.3 20.2 19.4 18.6 17.9 17.3 16.8 15.0 14.6

PERSONNEL COSTS/OPERATING COSTS X 67.8 64.3 58.3 57.6 57.8 57.7 57.6 57.1 56.5 56.0 53.0 52.5

AVERAGE PERSONNEL COSTS/WATER CONN. YEAR-END CoLS/Coin. 4.7 5.7 6.8 7.3 7.6 7.9 8.2 8.6 9.0 9.4 9.1 9.5

AVERAGE ANNUAL SALARY PER EMPLOYEE ColS/Eop./Yea 489.5 625.9 793.6 888.8 977.7 1055.9 1140.4 1231.7 1330.2 1436.6 1425.4 1535.2

AVERAGE ANNUAL SALARY PER EMPLOYEE (CONSTANT 1990 CoLS) 489.5 499.5 546.0 546.0 546.0 ,46.0 546.0 546.0 546.0 546.0 546.0 546.0

WORKING RATIO 0.9 0.7 0.7 4.&O,O:< O-TO.•; 0.5 0.5 0.5 0.5 0.5 0.5 0.4

OPERATING RATIO 1.1 0.9 0.8 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7

DE8T SERVICE COVERAGE RATIO 1.3 1.7 z , 2.4 2.4 2.9 3.3 3.4 2.8 3.2 3.3 3.6

CONTRIBUTION TO INVESTMENT (M) 22.0 36.0 6wOI.a I 4. i O e o4- 020.0 30.0 30.0 30.0 30.0 30.0

ACCOUNTS RECEIVABLE/AVERAGE MTHLY SALES 4.3 3.9 2.9 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5

INVESTMENTS OTHER THAN PROJECT (CLURRENT CotS MILLION) 1,625 1,017 2,006 6,781 6,698 5,468 4,236 1,453 3,936 6,143 4,000 2,365

INVESTMENTS OTHER THAN PROJECT (CONST.1991 ColtS IL.) 1,625 812 1,380 4,165 3,741 2,827 2,028 644 1,616 2,335 1,720 771

PROJECT PERFOR4NCE -.1

BANK LOAN DISBURSED (1) 0.01 0.01 8.01 33.0x 60.81 84.51 93.71 100.02 0.0 0.0

ACC. PROJECT COST/TOTAL APPRAISED COST (1) 0.01 0.01 6.1% 30.51 58.61 83.11 93.0x 100.01 0.0 0.0

ACC. PROJECT COST/TOTAL REVISED COST (1) 0.01 0.0o 6.11 30.51 58.6x 83.11 93.01 100.01 0.0 0.0

ECONOMIC

AVERAGE ANllL INFLATION RATE (1) 19.01 28.7X 18.01 12.01 10.01 8.01 8.0x 8.01 8.01 8.01 8.01 8.01

AVERAGE EXCHANGE RATE (CoLS/USS) 91.60 122.40 135.60 142.30 148.70 153.20 157.80 162.50 167.40 172.40 177.60 182.50

zN Z

ma x

ni L

- 79- NJ~~ 79 ~ ~ ~ MJ~NNEX 14

COSITA RICA

SECOND WATER SUPPLY AND SEWERAGE PROJXECT

Allocation or Loan Proceeds

The proposed disbursement categories, the allocation of loan funds and the disbursementpercentages are as follows:

~~~~~Cakego~~~~~~~~~j .:.. (US$~~~~~~~~~ .. ......... ..... nc

1. CivU Works 2.0 30

2. Equipment and materials 15.0 65

3. Consul , technical assince, 6.0 100trainng and supervision of works

4. Unallocated 3.0

TOTAL 26.0

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ANNEX 15

COSTA RICA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

Estimated Loan Disbursement Schedul

Bank Fiscal Year Quirterly Disbursement Cumulatie- Disbursementand Quarter Ending -US$ nillion) - -USS million) - oUf Tota

FY 1994March31, 1994 .a/ 1.4 1.4 5June 30, 1994 0.0 1.4 5

FIY 1995September 30, 1994 0.8 2.2 8December 31, 1994 0.9 3.1 12March 31, 1995 0.9 4.0 15June 30, 1995 0.9 4.9 19

FY 1996September 30, 1995 1.0 5.9 23December 31, 1995 1.0 6.9 27March 31, 1996 1.0 7.9 30June 30, 1996 1.0 8.9 34

FY 1997September 30, 1996 1.2 10.1 39December 31, 1996 1.2 11.3 43March 31, 1997 1.3 12.6 48June 30, 1997 1.3 13.9 53

FY 1998September 30, 1997 2.1 16.0 61December 31, 1997 2.1 18.1 70March 31, 1998 1.3 19.4 75June 30, 1998 1.2 20.6 79

FY 1999September 30, 1998 0.9 21.5 83December 31, 1998 0.9 22.4 86March 31, 1999 0.9 23.3 90June 30, 1999 0.9 24.2 93

FYl 2000September 30, 1999 0.9 25.1 97December 31, 1999 0.9 26.0 100

I/ Represents the initial deposit in the special account plus retroactive financing of up toUS$0.3 million which would be provided for eligible expenditures incurred after September 30, 1992,but not before 12 months prior to loan signature.

- 81 -

ANNEX 16Page 1 of 5

COSTA RICA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

Project Implementation and Supervision

Staff nrut for Proiect Launch and Mid-Course Review

1. Given the project's comprehensive approach to sector reform and improvement of efficiencyand finances of key 3ector institutions, extensive and close supervision would be required, especiallyduring the first three years of project implementation.

2. A project launch workshop and yearly project review workshops will be organized, assistingthe staff of AyA and public sector reform authorities develop a common understanding of theproject's overall development objectives, operational procedures, coordination needs and potentialimplementation problems.

3. The tentative supervision timetable and required Bank staffing is the following:

Project Launch WorkshoD. Third Quarter 1993

Focus: reviewing and adjusting (as needed) implementation plan, identifyingand planning required coordination among AyA and public sectorreform authorities, project management, procurement, disbursementand auditing procedures and requirements. Technical assistance andappraisal of the 1993-1994 sector investment plan.

Duration: 3-5 days.

Participating Bank staff: -Task Manager-Sanitary Engineer-Financial Analyst-Institutional Development Specialist-Environment Specialist-Procurement Specialist-Disbursement Specialist

Time Required: 9 staffweeks

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ANNEX 16Page 2 of 5

Annual Project Implementation Review Workshop. Third quarter of years 1994-1995-1997-1998

Focus: Project progress review, identification of implementation problems andissues for the upcoming year.

Duration: 2-3 days.

Participating Bank staff: -Task Manager-Sanitary Engineer-Financial Analyst-Institutional Development Specialist-Environment Specialist-Auditing Specialist (year 1994)-Lawyer (year 1994)

Time Required: 1994 - 8sw/1995, 1997,1998 - 6sw

Mid-Term Implementation Review (Evaluation) - Third Ouarter 1996

Focus: Project Performance, identification of areas in need of adjustment.

Duration: 5 days.

Participating Bank staff: -Task Manager-Sanitary Engineer-Financial Analyst-Institutional Development Specialist-Environment Specialist-Macroeconomist

Time Required: 6 staffweeks

4. In sum, the Project Launch and Annual Project Implementation Review Workshops, and theMid-Term Evaluation would require a total of 41 staffweeks. In addition, two regular supervisionmissions (of two-weeks duration) per year, comprising the task manager and two specialists, will benecessary. Thus, total field supervision would amount to 113 staffweeks, and it is reasonable toassume that office supervision will amount to an additional 31 weeks, for a total of 144 staff weeksduring the life of the project, i.e. an average of 24 staffweeks per year.

5. During the first two years of project implementation, supervision efforts will focus onorganization and team development within AyA with a view toward strengthening the operationalcapacity of AyA's Planning Department. The Project Launch workshop will be followed byadditional supervision input to familiarize selected local staff with Bank's procurement, disbursementand auditing procedures and guidelines. It is expected that Bank staff will assist AyA and the otherpublic sector reform authorities in prioritizing investments as well as technical assistance needs.

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ANNEX 16Page 3 of 5

Proposed Agenda for Annual and Mid-Term Implementation Reviews

6. The annual project review-to be organized by AyA's Planning Department-- will take placeon or about September 30 of each year, starting in 1994, with the participation of AyA's PlanningDepartment, representatives of AyA's executing Departments, public sector reform authorities andBank staff. Annual reviews would provide an oDportunity to assess project and Borrower'sperformance against the annual implementation plans and agreed targets and would serve to updateand revise, as necessary. AyA's 1993-2001 investment program and financing plans and to reviewissues of overall proiect management with senior AyA's officials and public sector reform authorities.The result of the annual review would be the clarification of the following year's operating plan,identifying and agreeing on remedial actions required to address problems of changing circumstancesduring implementation. Thus the annual reviews and planning process will provide a tool for ongoingrefinements in project strategies and plans, consistent with the overall objectives of the project.

7. The mid-term review to be conducted on or about September 30, 1996 would follow the sameformat as the annual reviews but the analysis of project impact would be expanded, with additionalemphasis on the implementation of the regulatory framework, sectoral policies and AyA's efficiencyimprovements. In addition, the mid-term review will result in an agreed updated set of targets andindicators for years 1997 through project completion in 1999.

8. A summary of the areas to be addressed in the annual and mid-term reviews is presentedbelow. Special attention would be given to the review of the adequacy of AyA's water supply andsewerage charges and to the proposal and approval of tariff adjustments. Project and Borrower'sperformance will be measured monthly against those targets which constitute legally bindingcommitments: (i) operational and financial targets presented in Annex 12; (ii) key actions related tothe institutional strengthening program (Annex 11) and the unaccounted for water program (Annex 5)which are summarized in Section 5.1 and 5.2 of the SAR; and (iii) key actions for the protection ofthe Orosi pipeline (para 2.9 of the SAR). Noncompliance with these commitments would constitute adefault of the Borrower. In addition, the annual review will also evaluate project performance bytaking into account other targets and indicators which, though not as important as the key indicators,will provide a basis for assessing overall project and Borrower's performance and for identifyingareas where corrective action may be required (these targets and indicators are contained in Annexes5, 10, 11 and 13).

Institutional Strengthening

A. Sector-Wide Issues

(a) Sectoral policies and institutional framework: Progress in the establishmentof sound investment and cost recovery policies, the design and implementationof the institutional framework for the sector, prioritizing the GAM; and

(b) Regulatory framework: Progress made in implementing SNE's restructuringplan and action and time taken by SNE concerning approval of AyA's tariffrequests.

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ANNEX 16Page 4 of 5

B. AyA's Issues

(a) Corporate Planniny: Progress in: (i) the development and implementation ofa budgetary process with programmatic content following Government'sbudgetary reform; and (ii) the development and implementation of a long termcorporate plan;

(b) Financial Management: Progress in: (i) the development and implementationof an integrated accounting system; (ii) the reform of the water tariffstructure; and (iii) the development and implementation of sewerage rates tobe applied in the SJMA and other urban areas; and

(c) Decentralization and Private Sector Participation: Progress in: (i) thedevelopment and implementation of a decentralization model promoting majorprivate sector participation; and (ii) contracting with the private sector.

Unaccounted for Water (UFW)

(a) Metering: Progress in: (i) the procurement and installation of new meters; (ii) thereplacement of old meters; and (iii) the procurement and installation of macrometersto control water production in the SJMA;

(b) Commercial System: Progress in: (i) the definition, design and implementation of anintegral commercial system linked to the accounting system; (ii) development of acommercial management information system; and (iii) development andimplementation of special procedures for the control of consumers with high levels ofwater consumption;

(c) Consumers and Pipes Cadastre: Progress in: (i) the incorporation of illegalconnections to AyA's consumers cadastre; (ii) the development and implementation ofthe pipes cadastre;

(d) Operational Control of the SJMA Water Supply System: Progress in thedevelopment and implementation of an operational control system that will improvethe operational efficiency of the distribution system; and

(e) Replacement of Connections: Progress in the replacement of old connections in theSJMA.

AyA's Investment Program

Progress in implementing AyA's 1993-2001 investment program and revision of theplan in view of progress achieved in the previous year and possible changes in priority.

- 85 -ANNEX 16Page 5of5

Project Management and Coordination

(a) AvA's PlannIg Department performance: this will be evaluated with majoremphasis on its ability to coordinate AyA's executing Departments and public sectorreform authorities to achieve the project's objectives. The composition of thePlanning Department will be analyzed, in order to receive feedback from theexecuting Departments regarding its ability to adequately manage technical andadministrative issues; and

(b) Procurement and disburse: technical ability, soundness of judgement, andcompliance with Bank guidelines will be assessed taking into account actual projectperformance during the period under review. This analysis will indicate if there willbe a need to strengthen the specific areas under review. It will also serve the purposeof discussing with the executing agency Bank procedures and project objectives.

- 86 -

ANNEX 17Page 1 of 4

COSTA RICA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

National Water Suply and Sanitation Policy Statement

October 23, 1992DM-0977-92

Mr. Lewis PrestonPresident International Bankfor Reconstruction and DevelopmentWashington, D.C.U.S.A.

Dear Mr. Preston:

The Government of Costa Rica is negotiating with the World Bank aloan to continue the support for the development of the water and seweragesubsector of the country, which will be carried out by the InstitutoCostarricense de Acueductos y Alcantarillados (AyA).

As you are aware, the Government is streamlining and restructuring thepublic sector to improve its efficiency in general, specially in the provision ofessential services as water and sewerage.

For the Government of Costa Rica this subsector has a fundamentalpriority and this is reflected in the high levels of service coverage, specially inthe urban centers. Nevertheless, the Government is conscious that to maintainthese levels of coverage and improve the quality of service, as well as toaddress sanitation and environmental issues, new policies will have to beimplemented to continue with an orderly development of this subsector inaccordance with the public sector reforms.

The policies mentioned below are part of the general policies outlinedin the National Development Plan, specifically in the Infrastructure Program ofSupport to Strategic Production, the Sectoral Health Program and the PublicSector Reform Program. These policies are the ones that the Govemment hasdefined for the development of the subsector, and are considered important forthe development of the project that is presently being negotiated with the Bank.

- 87 -

ANNEX 17Page 2 of 4

1. Institutional Policies and Public Sector Reform:

1.1 AyA, consistent with the Public Sector reform policy to increase itsefficiency through the execution of the project being negotiated with the WorldBank, is and will continue maling efforts to achieve, mainly the followingobjectives:

(i) A more dynamic and decentralized organization as a way toimprove productivity and respond in a more agile way tooperational issues outside San Jose.

(ii) A bigger participation of the private sector to improveproductivity in the provision of water and sewerage services,primarily of the urban areas.

(iii) Improve the financial and commercial systems, and

(iv) A reduction of physical and commercial losses through theexecution of the Unaccounted for Water Program (UFW).

1.2 It will establish within the Health Sector, the Water and Seweragesubsector to be coordinated by AyA.

The subsector will include the public water and sewerage systems.Individual solutions like wells, latrines and septic tanks are not included in thesebsector, because in accordance with the law they are under the Ministry ofHealth's responsibility.

1.3 The Water and Sewerage Subsector will be integrated by:

- The Ministry of Health (MSP);- The Instituto Costarricense de Acueductos y Alcantarillados (AyA);- 'Ihe Instituto de Fomento y Asesoria Municipal (IFAM);- The Ministry of Natural Resources, Energy and Mines (MIRENEM); and- Other related institutions.

1.4 The Government will support the inter-institutional coordination in thesubsector, the Health Sector and other affected sectors, seeking majorefficiency and appropriate management in the provision of water and sewerageservices.

- 88 -

ANNEX 17Page 3 of 4

2. - Improvement and Expansion of Water and Sewerage Services

2.1 It is expected that by the end of the present decade, AyA will haveunder its management all the public water and sewerage systems operating inthe country, in accordance with terms outlined in its constitutive law.

2.2 The present coverage and quality of water supply service will bemaintained, and sewerage services will be increased, specially in the GAM andother urban areas.

3. Water Ouality

3.1 Contamination of water courses will be reduced, specially in the GAMand the Rio Grande de Tarcoles. Necessary actions for the integratedmanagement of the river basins will be taken.

3.2 The quality of water provided nationwide will be guaranteed, asestablished in the General Health Law in accordance with the guidelines of theMinistry of Health.

4. Financing

4.1 All the financial resources assigned by the State to the Subsector ofWater and Sewerage will be used to comply with the policies proposed initems 2 and 3 above.

4.2 Investments and costs of operation, maintenance and administration ofwater and sewerage systems of the country should be totally recovered.

In the case of rural populations of low income or for marginal urbanareas, the State, where justified, might establish a transparent subsidy.

4.3 The water and sewerage tariffs will be established to reflect in averagethe service costs, as well as to generate sufficient cash to contribute to theinvestment program as needed.

4.4 To fulfill the Subsector objectives, an investment plan for 1993-2001has been prepared, totalling US$293 million or about US$33 million/year, forwhich the following financing is foreseen:

(i) Internal and External Loans 59%(ii) Government Contributions 11%(iii) Internal Cash Generation 22%

- 89 -

ANNEX 17Page 4 of 4

(iv) Grants 5%(v) Communities and Municipalities

Contributions 3%

The above, without excluding that during plan execution other financingcould be available.

With the implementation of these policies, we hope to achieve a greaterdevelopment of the Subsector.

Yours truly,

Rodolfo Mendez Mata Carlos Vargas PaganMinister of Finance Minister of National Planning

and Economic Policy

(Translated from Spanish original)

- 90 -

ANNEX 18Page 1 of 2

COSITA RICA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

OUTLINE OF AvA's PERFORMANCE PLAN

1. The performance plan is the development or business plan of the Institute, for the periodof 1991-1992 (actual) and 1993-2001 (projected). It includes the different programs that the Institutewill carry out in order to achieve the operational and financial targets shown in Annex 12 of the SAR.The actions under the different programs are grouped into: (i) operational program; (ii) investmentprogram; and (iii) debt service program. The contents of the plan includes: (i) background;(ii) objectives; (iii) goals; (iv) programs to be developed (the above mentioned); and (iv) financialprojections.

2. The contents of each of the chapters is described below:

(a) Background

This chapter includes AyA's background information.

(b) Qbjectives

This chapter describes the principal objectives that the Institute will pursue during theplanning period. The objectives are consistent with the goals and programs proposed inthe next chapters.

(c) IQal

The financial and operational targets to be achieved during the planning period(Annex 12) are described under this chapter. In addition, AyA has determined itsmonitoring indicators through which it will evaluate the implementation of the differentprograms (See Monitoring Indicators - Annex 13 of the SAR).

(d) Prggrams

A description of the following programs is included in this chapter:

Qrational Program. It includes all the actions to be developed by AyA in orderto operate and maintain the water and sewerage systems currently under itsadministration, to improve its efficiency, and to achieve its financial self-sufficiency. This program also includes all actions related to the water qualitycontrol program, decentralization, resources optimization, increase of privatesector participation, etc.

- 91 -

ANNEX 18Page 2 of 2

It includes all investment project planned to be executedwith diffeent financial resources and summarized in Annex 6 of the SAR.

Debt Service Proam. It covers all the Institute's debt obligations, including therefinancing of US$33 million to the Ministry of Finance.

(e)

Under this chapter, financial projections have been prepared showing the financialresults of the execution of the above mentioned programs. These projections are shownin Annex 6 of the SAR.

3. AyA ha prepared its performance plan u a condition of negotiations. Progress in theimplementation of this plan will be submitted by AyA to the Bank every semester (due August andFebruary of each year).

- 92 -

ANNEX 19Page 1 of 2

COSTA RICA

SECOND WATER SIJPPLY AND SEWERAGE PROJECT

Decentralization and Private Sector Participation

Terms of Reference

Background

1.1 AyA's responsibility is to provide water and sewerage services to the population.Since these services need to be provided in different urban and rural centers, thedecentralization of management is mandatory, so as to have an agile and responsivemanagement of day to day operations.

1.2 On the other hand, AyA has experienced growth in all its functional areas. This isdue to the fact that it has incorporated more water and sewerage systems all over thecountry; at the same time, AyA is trying to improve its efficiency by attracting private sectorparticipation together with decentralization of operations as a way to improve productivity.

1.3 These terms of reference attempt to analyze the decentralization process to be appliedin AyA together with major private sector participation as a way to improve efficiency. Bothaspects have been outlined by the Central Government, as strategies of the Public SectorReform Program.

General Obiective

1.4 To improve AyA's efficiency through decentralization and major private sectorparticipation.

Specific Objectives

1.5 The specific objectives are: (i) to define, nationwide, the activities to be decentralizedand to be contracted with the private sector; (ii) to formulate a Decentralization Programwith the definition of its action plan; (iii) to formulate a Private Sector Participation Programwith the definition of its action plan; and (iv) to formulate a Training Plan for theDecentralization Program.

- 93 -

ANNEX 19Page 2 of 2

Scope of Work

1.6 Definition of the activities or functions to be decentralized; definition of areas orfunctions that could be contracted with the private sector, and analysis of the conditions to begiven for the possible contracting; definition of priorities in decentralization and contracting;identification of necessary resources in order to make decentralization and private sectorparticipation possible.

1.7 In the Private Sector Participation Program, activities to formalize contractual serviceswith the private sector will be identified and scheduled for their implementation. TheProgram has to take into account the general contracting policy, defined by the CentralGovemment, as well as the necessary resources for its execution. It will include the actionplan with the activities that will have to be carried out by the different units of AyA toachieve results with Project execution.

1.8 Under the Decentralization Program, activities to formalize the decentralizationprocess will be identified and scheduled for their implementation. This Program has toconsider the regional division established by the Central Government and also the systemsthat AyA has in operation in each region. It will also take into consideration, themanagement setting to be applied in the regions. It will contain the action plan with theactivities that will be carried out by the different units of AyA to achieve results with Projectexecution.

1.9 The training plan for the Decentralization Program has to establish the necessarytraining activities that will permit the staff of the different regions to perform the newactivities to be transferred from Headquarters.

1.10 The decentralization model including activities or functions to be decentralized, aswell as areas or functions to be contracted with the private sector would be completed byJune 1994 and a follow-up action plan would be submitted to the Bank by September 1994and implemented thereafter.

Organization

1.11 A working group will be established for each of the subcomponents, i.e. theDecentralization and Private Sector Participation Programs. These groups will receivetechnical assistance as follows: (i) an external consultant for 12 months with expertise inorganizational models who will be in charge of formulating the general model ofdecentralization and private sector participation, together with the correspondentprogramming; (ii) two local consultants for 30 months who will help with the formulation ofeach of the programs and their implementation; and (iii) one local consultant, expert in legalmatters, for six months, to contribute with the other consultants in all legal aspects that fallinto the contractual services process with the private sector.

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ANNEX 20Page 1 of 3

COSTA RICA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

Institutional Framework and Sectoral Policies Analysis

Terms of Reference

Background

1.1 AyA has the responsibility for water supply and sanitation services in the country andhas, therefore, established its own policies.

1.2 Nevertheless, the Law authorizes AyA to gradually incorporate into its administrationmunicipal systems, in accordance with resources availability. Until this occurs, there will bein the country, water systems managed by municipalities. In addition, other institutions alsoplay an important role in the sector, such as the Instituto de Fomento Municipal (IFAM),which assists local governments with concessionary loans and technical assistance, and theMinistry of Health (MSP).

1.3 The Government has created under the Health Sector, the Water and SewerageSubsector, coordinated by AyA. In this way, Govemment is expecting to coordinate allefforts to support the provision of the water and sewerage services, as well as to improveproductivity.

1.4 In addition, the National Development Plan specifically in the Infrastructure Programof Support to Strategic Production, in the Health Sector Program and in the Public SectorReform Program, considers specific policies for the water and sewerage subsector. Thesepolicies have been communicated to the World Bank by a letter from the Minister ofPlanning to the President of the World Bank (Annex 17).

1.5 With these defined policies, it is necessary to establish the adequate organizationalframework and procedures to implement them. Thus, the purpose of this component is tostudy and implement the adequate organizational framework and procedures.

General Qbjec

1.6 To define the organizational framework and procedures to be followed by the Waterand Sewerage Subsector.

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ANNEX 20Page 2 of 3

Specific Objectives

1.7 The specific objectives are: (i) to formalize, within the legal framework, the creation,under the Health Sector, of the Water and Sewerage Subsector, to be coordinated by AyA;(ii) to determine the organizational framework and procedures to be followed by theSubsector in order to apply the new policies given by the Government; (iii) to define the wayin which such mechanisms will be applied and the time period to introduce them in theGAM; (iv) to define the same for the rest of the country; and (v) to prepare the action planto implement the above mentioned activities and execute the actions until the process hasbeen completed.

Scope of Work

1.8 To propose the formal creation of the Water and Sewerage Subsector with itsorganizational framework and procedures, the objectives and sectoral policies will beanalyzed and those of each institution which are part of the Subsector or related to it in anyway, taking into consideration the present legal framework and proposing the relevantchanges if it were the case.

1.9 To define the application of the outlined policies in the GAM, as well as in the rest ofthe country, the responsibility of each of the institutions that play a roll in the Subsector willbe analyzed. In addition, the way and time in which AyA will take control of the water andsewerage systems that are still under local government administration will have to be defined.

1.10 For the previous, AyA's investment plan and the cost recovery policy will be takeninto consideration.

1.11 An action plan to implement the above mentioned activities will be developed,defining the time and the necessary resources. Finally, the mentioned plan will be executed.

1.12 The study of investment and cost recovery policies will be completed by December1994 and a follow-up action plan will be submitted to the Bank by March 1995 andimplemented thereafter.

1.13 The study of the institutional framework for the GAM will be completed by June1994 and a follow-up action plan will be submitted to the Bank by September 1994 andimplemented thereafter.

1.14 The study for the institutional framework for the sector will be completed byDecember 1994 and a follow-up action plan will be submitted to the Bank by March 1995and implemented thereafter.

_ ~ ~ ~ ~ ~ ~ ~ - - - - - - - -_-- - - -

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ANNEX 20Page 3 of 3

Organization

1.15 A working group will be established for the execution of these tasLs, integrated byGovernment authorities in charge of the Public Sector Reform and of AyA, who will carryout the analysis and develop the mentioned action plan. The group will receive technicalassistance of an intemational consultant during 7 months. In addition, a local consultant,expert in legal matters, will be assigned to this group for 2 months to contribute with alllegal matters.

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ANNEX21Page 1 of 5

COSTA RICA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

eENVIROMENTAL ASSESSMEN1

INTRODUCTION

l. This annex presents a summary description of the enviromnental impact assessment of theProject prepared by AyA. The assessment puts emphasis on: (a) the condition of the study areaand its relation to the water quality of the recipient bodies and (b) the impacts which may takeplace during the construction and operation of the proposed project.

2. The execution of the Project is programmed to be carried out simultaneously with thepreparation of the feasibDity studies and design of the sewerage and treatment infrastructuredefined in the PLAMAGAM project. These studies are expected to be completed by 1996 andwill be financed by IDB/OECD funds.

Water Supply and Sewerage Systems

3. The SJMA distribution network is composed of 390 km of pipes larger than 150 mm and 760km of small diameter pipes. There are also 26 storage tanks and 8 pumping stations inoperation. The average water production capacity of the SJMA Is 4.4 m'/s with differencesbetween the dry and wet season of 10%. This water production capacity is not sufficient tomeet the peak daily demand, which is estimated to reach 4.6 m31s by 1996.

4. The SJMA sewer system includes 132,000 connections, which serve about 600.000 inhabitants,representing 74 % of the city's total population. The main sewer system runs parallel to thenatural drainage pattern of the valley and discharge outside the urban area to the Torres andTiribi rivers, which flow into the Virilla and ultimately into the Rio Grande de Tarcoles. Itconsists of PVC and concrete pipelines with diameters ranging from 300 to 1370 mm and atotal length of 140 km. There are also 7 sewage pumping stations, but there is no sewagetreatment in the SJMA.

5. Due to the overflow of several rivers and the constant earthquakes, many bridgescommunicating networks and sub-collectors with major collectors have been destroyed. Thesebroken segments in the main sewerage system, the existence of pumping stations out ofoperation because of inadequate maintenance and unconnected sector sewerages give rise to alarge number of discharges of untreated sewage within the city limits.

PROPOSED PROJECT

6. The SJMA Water Supply Component includes the installation of 19 km of primary distributionpipes (larger than 300 mm) and 57 km of small diameter pipes, the construction of storagetanks (21,500 m3) and pumping stations and the drilling of four deep exploratory wells inCampos Norte and Potrerillos. The Operations and Maintenance Component includes the

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ANNEX21Page 2 of 5

rehabilitation of the Orosi pipeline, which supplies water to 50% of the SJMA. Thiscomponent amounts to almost 33% of the total project cost.

7. The SJMA Sewerage Rehabilitation Component includes the expansion and connection ofsewerage in several sectors of the SJMA, the reconstruction of bridges and pumping stationsand the reorganization of the maintenance capacity of AyA. These works consist of:

(a) The connection to main sewers and the expansion of small sanitary sewer networkscovering 6,500 households, the restoration of six bridge collectors and 7 pumpingstations. The works include reconstruction of bridges, building of access channels to thepumping station, preliminary treatments (window bars/crushers) and other minor works,such as protection from overflows, security fences and rain evacuation. Also included isthe renovation of the electro-mechanical equipment of the pumping stations, electriccontrol systems, lighting of the facilities and, in some cases, purchase of electrictransformers.

(b) The construction of low-cost sewerage in Los Guido, La Pax and Capri settlements andthe construction of a main sewer which will transport these wastewaters and those fromthe town of San Miguel Higuito de Desamparados to the Tiribi collector. It consists ofthe construction of 30 km pipelines with diameters ranging from 150 mm to 650 mm.

MAIN ISSUES

Water Pollution

8. The major surface water pollution problems in the SJMA basin are caused by discharges ofuntreated domestic wastewaters, coffee mill wastewaters and agricultural drainage. A largeproportion of these discharges is made with little or no previous treatment and the industriesthat treat their wastewaters, do it in a very deficient way.

9. Some of the rivers, such as the Ocloro, the Maria Aguilar, the Tiribi and the Torres,experience very poor water quality conditions all year round. Other rivers, such as theQuebrada Rivera, become anaerobic during the dry season when their flow considerablydecreases. During this season the ecological problems aggravate because of the great amount ofpolluting residues discharged by the coffee mills. Based on field data and statistics, it can beestimated that the SJMA sewer system handles the following flows and that most of the load isdischarged within the urban area:

SOURCE FLOW ORGANIC LOADm3/d kg/d

- Residential areas 9,386.00 2,868.00 (15%)- Industrial areas 2,830.00 3,083.00 (15%)- Coffee Mills 3,603.00 14,415.00 (70%)

TOTAL 15,819.00 20,366.00 (100%)

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ANNEX21Page 3 of 5

10. A "Programa Macro para el Control de la Contaminacidn del Agua en la Cuenca del rio Grandede Tarcoles" (Macro program for the control of water pollution in the Rio Grande de Tarcolesbasin) has been launched to solve the problem of the industrial and coffee mill wastewaterdischarges. Under this program, actions have been agreed by AyA, the Costarrican CoffeeInstitute (ICAFE), the Central American Industrial Technological Research Institute (ICAMTI)and the German Technical Cooperation Institution (GTZ) to undertake improvements in theindustrial processes, to optimize water consumption and to implement a technical andeconomical plan for the reduction of the pollution load in the coffee mill industry. At present,a pilot treatment plant has been constructed and is being operated and monitored by ICAFE.

Human Environment

11. The total population which will be directly affected by the works included in the firstsubcomponent (connectors and small network expansion) is estimated to be 32,430 inhabitants(6,500 connections) distributed throughout the Metropolitan area. The third subcomponent (lowincome sewer system in Los Guido and neighboring areas) will now allow service for up to27.000 inhabitants (5.400 connections), but a maximum of 10.000 families are expected toreside in the low income housing development project of Los Guido.

12. The population directly affected by the first subcomponent (connectors and small networksexpansion) has an average income corresponding to 'middle' and 'upper' levels, as it exceedsc40.000 per month (around $350). This figure represents an income level that is almost 100%more than the current minimum wage established by law, which is 21.210 colones. In the caseof low income sectors, such as Los Guido, La Pax and San Miguel Higuito, covered by thethird subcomponent, more than half of the economically active population of the area isdistributed within the range of 10.001 to 15.000 colones. The relative distribution of incomelevels, based on a sample taken at the beginning of 1990, when the minimum wage was 14.900colones, is:

Income Population %(in C)

0 - 5000 4.765001 - 10000 33.3310001 - 15000 50.4715001 - 20000 9.5220001 - 25000 0.95

IMPACTS DUE TO THE PROJECT

13. All wastewaters from the SJMA are now discharged into the rivers without any previoustreatment. During the dry season, the flow of many of these rivers is very low and consistsalmost exclusively of raw sewage which is not intercepted by the main sewers. Therefore, theurban segments and other sections of these rivers have become an unbearable environmentalnuisance and will continue to be so unless this project is carried out.

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ANNEX21Page 4 of 5

14. The first and second subcomponent (connectors, pumping stations and network expansion)would reduce the organic load currently being discharged from residential areas within the citylimits by 62%. The improvement of the aesthetic conditions of the surface drainage system inthe SJMA will upgrade the value of the properties located next to these rivers and will allowtheir use for recreational purposes.

15. The proposed works will reduce the sources for gastro-intestinal, skin and ophthalmicinfections. Given the fact that children are usually affected by this kind of illnesses and thatthose living next to these polluted rivers and in the Los Guido area usually have a very lowincome, the projects benefits will primarily reach the young and poor segments of thepopulation.

16. In order to ensure the normal operation of the sewerage network a preventive, corrective andrestoration maintenance program will be executed. Also, a record of attended obstructions willbe kept. The official user register will be reviewed and a strict control on illegal connectionsand on the connections between the sanitary sewer system and the drainage system will beimplemented.

17. Taking also into account that the water supply system will be expanded within the SJMA andthat distribution will be improved without increasing total supplied flows, this project willproduce more direct and indirect benefits than negative effects.

18. The actions required to reduce the negative impacts which could occur during the constructionof the works are simple to put in effect and can be simply added to specifications andconstruction procedures. Each work will have its own constructive and security plan which willminimize these possible negative impacts through actions such as the reforestation of affectedareas, the removal of construction materials and the aesthetic treatment of the site.

19. The works included in the project, complemented by the programs of supervision of industrialand coffee mill discharges, will permit the recovery of the rivers and creeks that run within theurban area. They are also essential for the success of the treatment works planned in thePLAMAGAM project for the complete recovery of the Rio Grande de Tarcoles river basin.

20. The gradual recovery of the original ecosystem of the rivers will allow a better operation ofhydroelectricity generation plants. It will also benefit the usage of water for agriculturalpurposes and improve the occupational health of those activities which employ untreated riverwater

CONCLUSIONS

21. The positive environmental effects of the proposed project for the inhabitants of the SJMA willbe greater that the negative ones that could be generated during the implementation andoperation of the project. There will be an improvement in the quality of water and sewerageservices, particularly in low income housing settlements, which will result in a generalimprovement of the sanitary conditions in the SJMA

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ANNEX21Page 5 of 5

22. Through project execution, it is expected that AyA's Unit for the operation and maintenance ofthe sewerage system will be reorganized and equipped adequately to improve its efficiency andeffectiveness. The definition and execution of preventive, corrective and restoring maintenanceprograms will permit the extension of the life span of pipelines, structures, installations andequipment and the reduction of magnitude and frequency of the negative impacts of the systemfailures on the surface waters.

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ANNEX 22Page 1 of 3

COSTA RICA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

Pyment Agreement Between the Ministry of Finance and AyA

on the Refinancing of AyA's Debt

We, Rodolfo Mendez Mata, married one time, a civil engineer holding identitycard No. 1-264-658, resident of San Jose, in his capacity as Minister of Finance, inaccordance with Presidential Decree No. 20841 of November 11, 1991, published in theGaceta, No. 224 of November 22, 1991, and Mario Fernandez Ortiz, an adult, of CostaRican nationality, civil engineer, domiciled in San Jose, identity card No. 1-223-394, in hiscapacity as Executive President with unlimited powers of attorney in the courts and outsidefor [the Instituto Costarricense de) Acueductos y Alcantarillados (Costa Rican Water andSewerage Institute), as registered in the Public Register, Individuals Section, Volume 87,p.99, entry 290, hereby agree to enter into this payment agreement, which shall be governedby the following provisions.

WHEREAS

1. The Ministry of Finance ("the Ministry"), as a result of the guarantees granted inaccordance with Law No. 6426 of May 22, 1980, published in the Gaceta, No. 109 of June10, 1990, temporarily assumed responsibility for payments due by Acueductos yAlcantarillados, ("AyA" or "the Institute") to the International Bank for Reconstruction andDevelopment (IBRD) and the Commonwealth Development Corporation (CDC) in 1991 and1992;

2. AyA has fallen behind in its obligations to the Ministry, in accordance with thepayment agreement signed on December 6, 1988 between both institutions (Agreement No.1),

IT IS NOW HEREBY AGREED AS FOLLOWS:

Both contracting parties agree to enter into this payment agreement, in accordance with thefollowing articles.

Article 1. It is hereby determined that the Ministry has paid the IBRD and the CDC, invirtue of sums owed by AyA in 1991 and 1992, a total of US$10,319,297.68, as shown inAnnex No. 2.

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ANNEX 22Page 2 of 3

Article 2. An integral part of this agreement are the unpaid amounts owed by AyA to theMinistry, as a result of the agreement of December 6, 1988, the balance of which atDecember 31, 1992 is US$23,102,351.04, as shown in Annex No. 4. This amount is theremaining balance after subtracting the invoices in respect of floating debt owed by theMinistry to AyA as of December 1991, in accordance with Article 18 of Law 7131. Thisarrangement may continue to be used as long as reciprocal debts exist.

Article 3. With the Ministry's approval, AyA agrees to repay the debt under thefollowing conditions.

(a) Amount: US$33,421,648.72, as shown in Annex No. 1;

(b) Term: The debt shall be repaid within a term of 15 years, including fouryears of grace. Repayments of the principal shall begin on March 30, 1997 and end onDecember 30, 2007, as shown in Annex No. 5 hereto;

(c) Interest: AyA agrees to pay an interest of 1 % per annum on the debt coveredby this agreement. Interest shall begin to accrue as of the effectiveness date of thisagreement and shall be calculated on the amounts owed to the Ministry based on a 360-dayyear. Payments of interest shall begin on March 30, 1993 and end on December 30, 2007,as shown in Annex No. 5 hereto;

(d) Currency: The debt is denominated in US dollars. The amount due shall bepaid in the equivalent of Costa Rican colones calculated at the reference selling exchange rateprovided by the BCCR for the dates on which AyA makes the payments to the Ministry.The debt may be converted into Costa Rican colones, provided this is mutually agreeable toboth parties;

(e) Payments: The debt shall be paid in consecutive quarterly payments, insofaras possible in equal amounts, in accordance with the payment schedule shown in Annex No.5.

Article 4. AyA agrees to assume responsibility for all its debt service with the CDC andIBRD as of 1993. It shall also pay the Ministry in accordance with the provisions hereof.

Article 5. AyA shall notify the Public Credit Department within the Ministry of Financeof the payments it makes pursuant hereto and shall send a copy of the deposit receipts so thatthe current balances can be determined.

Article 6. As a guarantee of the timely payment by AyA to the Ministry, the latter ishereby empowered, in the event that AyA falls behind on the payment of any of itsobligations, to withhold budget allocations to the Institute, until such time as it catches up onits payments.

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ANNEX 22Page 3 of 3

Article 7. The Controller General of the Republic shall not approve the AyA budget foreach year of the life of this agreement unless it includes the debt service AyA owes to bothits external (IBRD and CDC) as well as internal (Government) creditors. Nevertheless, ifAyA finds itself unable to adjust its rates, preventing it from making the payments on suchdebts, it shall be empowered to suspend service payments on those debts until the situation iscorrected.

Article 8. This agreement may be amended by mutual agreement between the parties,and any alteration shall be made via an addendum or an exchange of correspondencespecifying the acceptance of both parties.

Article 9. This agreement shall enter into force on the date of its counter-signature by theController General of the Republic.

In faith whereof, this agreement is signed in two original copies in the city ofSan Jose, on October 30, 1992.

/s/ Rodolfo Mendez Mata Mario Femandez OrtizMinistry of Finance Executive President

Costa Rican Water and Sewerage Institute

(Translated from Spanish original)

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ANNEX 23Page 1 of 2

COSTA RICA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

List of Documents and Data Available in Proiect Files

1. Current Legislation.

2. Costa Rica - Evaluaci6n Nacional del Decenio Internacional del Abastecimiento de AguaPotable y del Saneamiento 1981-1990, AyA, 1990.

3. Anuario 1989, AyA, April 1990.

4. PLAMAGAM - Plan Maestro de Abastecimiento de Agua Potable de la Gran AreaMetropolitana, Informe Final - Resumen Ejecutivo, Tahal Consulting Engineers Ltd., January1990.

5. PLAMAGAM - Plan Maestro de Abastecimiento de Agua Potable de la Gran AreaMetropolitana, Informe Final, Tomo 1, Resumen Ejecutivo, Tahal Consulting Engineers Ltd.,January 1990.

6. Memoria Tecnica del Proyecto de Tanques y Redes del Acueducto Metropolitano de San Jose,Anexo 1-2, AyA.

7. PLAMAGAM - Plan Maestro de Sanearniento y Alcantarillado Sanitario de la Gran AreaMetropolitana, Informe Final, Tomo 1, Resumen Ejecutivo, Tahal Consulting Engineers,Ltd., January 1990.

8. Segundo Proyecto de Agua Potable Para Costa Rica, BIRF - AyA, Direccion Ingenieria,January 1992.

9. Segundo Proyecto de Agua Potable Para Costa Rica, BIRF - AyA, May 1992.

10. PLAMAGAM - Plan Maestro de Abastecimiento de Agua Potable de la Gran AreaMetropolitana, Proyecto de Tanques, Redes y Medidores del Acueducto Metropolitano Obrasa Financiar con el Banco Centroamericano de Integraci6n Econ6mica (BCIE), AyA, April1991.

11. Operacion de Cr6dito con el Banco Interamericano de Desarrollo (CR-1 17), Resumen delPrograma, AyA, April 1991.

12. Perfil Proyecto de Perforaci6n de Cuatro Pozos de Investigaci6n y Producci6n Campos dePozos Norte y Potrerillos, Terminos de Referencia, March 1992.

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ANNEX 2.3Page 2 of 2

13. Informe Final del Estudio de Optimizaci6n de Sistemas del Acueducto de Coronado,Volumen 1, Direcci6n de Operaciones, Departamento de Optimizaci6n de Sistemas, AyA,May 1987.

14. Composici6n Estimada de las Perdidas en los Sistemas Administrados por el InstitutoCostarricense de Acueductos y Alcantarillados, AyA, 1990.

15. Estados Financieros Auditados de 1989 y 1990, Informe de Auditores Independientes, HerreroVillalta Asociados, November 1991.

16. Reporte de Rendimiento de la Tarifa Actual, AyA, June 1991.

17. Propuesta Tarifaria para el Servicio de Acueducto y Alcantarillado, Divisi6n de AnalisisFinanciero - Comercial, AyA, December 1991.

18. Decreto de autorizacion de incremento de tarifas, SNE, May 1992.

19. Concurso Internacional de Precalificacion de Empresas Consultoras para la Elaboraci6n de losDisefios Finales del Proyecto de Saneamiento y Alcantarillado Sanitario para la Gran AreaMetropolitana, Direccion de Ingenierfa, Divisi6n de Estudios y Proyectos, AyA, February1992.

20. Estudio de Impacto Ambiental del Proyecto Agua y Sanearniento para el Area Metropolitana,Volumenes Nos. 1 y 2, AyA, Direcci6n de Ingenierfa, May 1992.

21. Borrador del Convenio de Asistencia Tecnica entre la Organizacion Panamericana de la Salud(PAHO) y AyA, February 1993.

22. AyA's Performance Plan, 1993-2001, March 1993.

23. Manual de Organizaci6n y Funciones de la Oficina de Planificaci6n, AyA, February 1993.

24. Acuerdo de Pago entre el Instituto Costarricense de Acueductos y Alcantarillados y elMinisterio de Hacienda, Ministerio de Hacienda, October 1992.

25. Maps of the SJMA water and sewerage systems.

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