Document of

The World Bank

FOR OFMICIAL USE ONLY

CZ 170 - lDc4Rqpwt No. R

MEMORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

IN AN AMOUNT EQUIVALENT

TO SDR 9.2 MILLION

TO THE

PEOPLE'S DEMOCRATIC REPUBLIC OF YEMEN

FOR A

TARIM WATER SUPPLY PROJECT

MAY 29, 1990

Thi documet bas a restricted dbtributon and may be used by recpients only In the vierformance oftheir offidal duties. Its contents may not otherwise be dbdosed withut World Dank authoriation.

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PEOPLE S DEMOCRATIC REPUBLIC OF YEMEN

CWRRENCY AND EOUIVALEINT NITS

(May 1990)

The official currency unit of the People's Democratic Republic of Yemenis the Yemeni Dinar (YD).

YD 1.0 - US$ 2.898US $1.0 - YD 0.345SDR 1.0 - US$ 1.304

GLOSSARY OF ACRONYMS

COCA - Central Organization for Control and AuditingDGLG - Directorate General of Local GovernmentICB - International Competitive BiddingPDRY - People's Democratic Republic of YemenPUC - Public Water CorporationSDR - Special Drawing Rights

GOVERNMENT FISCAL YEAR

January 1 - December 31

FOR OMCIAL USE ONLYPEOPLEIJ S DOCIORATIC REPUBLIC OP liYEEN

TARIM WATER SUPPLY PROJECT

CREDIT[ AND PROJECT SUNNARY

Borrower: People's Democratic Republic of Yemen

Beneficiaries: Public Water Corporation (PWC)Directorate General of Local Government (DGLG)Central Organization for Control and Auditing (COCA)

Amount: SDR 9.2 million (US$ 12.0 million equivalent)

Terms: Standard terms with 40 years maturity

Onlendina Terms: US$ 11.2 million to PWC for 25 years including7 years of grace at an interest rate of 8 percent

Financint Plan: IDA US$ 12.00 millionPVC/Government USS 3.15 million

Total US$ 15.15 million

Economic Rate of Return: Not applicable. However, a rate of return hasbeen calculated at 9 percent using tariffs asa proxy for benefits.

Staff A Mraisal Regort: Report No. 8362-YDR

NU: IBRD No. 21987

1 /Followixz the recent announcement regarding unification of the Yemen Arab RepibUc and PDRY, allreferences to PONY in the document should be takh to refer to the southern region of the newly formed Republicof Yemen.

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.

MEMORANDUM AND RECOOEEUDATION O- THE PRESIDENTOF THE IZTERNATIONAL DEVELOPMENT ASSOCIATION

TO TH ECUTIVE DIRECTORSON A PROPOSED CREDIT

TO THE PEOPLE'S DEMORATIC REPUBLIC OF YENENFOR A TARIM WATER SUPPLY PROJECT

1. The following memorandum and recommendation on a proposed developmentcredit to the People's Democratic Republic of Yemen (PDRY) for SDR 9.2 million(USS 12.00 million equivalent) is submitted for approval. The proposed creditwould be on standard IDA terms with 40 years maturity and would finance theforeign exchange cost of a Tarim Water Supply Project.

2. Background. Water is a scarce natural resource in PDRY. The ruggedtopography and scattered population distribution throughout the country posemajor constraints to the development of the water supply sector. About two-thirds of the country's 2.3 million inhabitants (or about 1.6 million people)have access to piped water supply, while the remaining population relies onindividual wells or public outlets. Sewerage systems are limited to the majordistricts in the capital of Aden and Al Mukalla, the two largest cities in PDRY,where service to about 350,000 inhabitants is provided.

3. The Government's development strategy has focussed mainly on satisfyingthe basic needs of the population, developing the productive base of the economy,strengthening basic infrastructure in transport and public utilities, improvingthe efficiency of public sector institutions, and manpower training. In thewater supply sector, the Government's objectives have been to provide watersupply to major urban centers, followed by improving access to water in secondarytowns and rural areas. About $130 million equivalent, or 8.5 percent of theinvestment program in the Third Five-Year Plan (1986-90) was allocated to thewater sector, and the same proportion of investment for the sector is envisagedunder the Fourth Five-Year Plan. Though the development of sewerage sector hasnot kept pace with investments for water supply, the Government is currentlyplacing increased emphasis on development of the sector in order to improvehealth and environmental conditions.

4. Rationale for IDA Involvement. IDA has supported the Government' sdevelopment strategy in the water supply sector through five water supplyprojects aimed at providing adequate quantities of potable water to major urbancenters and rural growth areas. Tarim is the fourth largest urban center in thecountry, where the quantity of water is insufficient to meet existing demand andthe quality of water is poor. IDA has played an important role in strengtheningPWC's organizational and operational capabilities through promoting soundtechnical, financial and operational policies. The experience gained fromongoing projects has been taken into account in the design of the proposedproject. In particular, adequate investigation of groundwater resources has beenundertaken and technical assistance has been included to further improve PWC'smanagerial capabilities.

5. Over the next decade, PWC plans to expand its water supply systems ingrowing urban and rural centers in order to provide service to more than 400,000new customers. This amounts to about a 60X increase over its current consumer

2

base of 650,000 customers. During this period of rapid expansion, continued IDAinvolvement would assist PWC to modernize and streamline management andadministrative capabilities, strengthen operation and maintenance proceduresand devise a manpower development plan in order to improve PWC's overallefficiency, while ensuring that prudent financial policies are maintained.

6. The proposed project represents IDA's first involvement in the seweragesector, thus providing an opportunity to initiate a dialogue on sectoralfinarcial and organizational policies. In addition, for the first time, IDAwoul, provide technical assistance to the Central Organization for Control andAuditing (COCA) with a view to strengthen the Government's accounting andauditing practices.

7. Project Objectives. The primary objective of the proposed project is toincrease the quantity and improve the quality of the water supply in the townof Tarim and adjacent villages. Other objectives are to: (i) improve PWC'smanagerial capabilities through establishing management information and inventorycontrol systems and devising a manpower development program; (ii) implement anintensive water metering program in order to monitor and control unaccounted-for-water and promote water conservation; (iii) enhance environmental and publichealth conditions through improving wastewater management; (iv) assess andrecommend financing options and institutional arrangments for the seweragesector; and (v) strengthen government accounting and auditing procedures whichwould benefit PWC and other public agencies.

8. Project Description. The project consists of three main components. PWCwould be the implementing agency for the water supply component which includes:(i) the drilling and equipping of a new borefield near Tarim; (ii) theconstruction of water storage reservoirs and a distribution system in Tarim andadjacent villages; (iii) the provision of water meters, tools, and operationalequipment; and (iv) technical assistance for construction supervision, theestablishment of management information and inventory control systems, devisinga manpower development program and training. The Directorate General of LocalGovernment (DGLG) would be responsible for implementing the sewerage sectorcomponent which includes: (i) a pilot wastewater demonstration project; (ii) afinancing and cost recovery study of the sewerage sector; (iii) updating ofsewerage designs; and (iv) training. The third component to be carried out byCOCA is a training program in accounting and auditing.

9. Project Cost and Financina. The total cost of the project is estimatedat US$ 15.15 million equivalent, including a foreign exchange component of US$12.00 million which amounts to about 79 percent of total project costs. Theproposed IDA credit of US$ 12.0 million equivalent would finance the entireforeign exchange component of the project; the balance of US$ 3.15 millionequivalent would be provided by PWC and the Government. Total project costsinclude taxes amounting to 5 percent of the cost of civil works and engineeringservices. Customs duties are not levied on imported equipment for developmentprojects in PDRY. A breakdown of costs and the financing plan are shown inSchedule A. Amounts and methods of procurement and disbursement and thedisbursement schedule are shown in Schedule B. A timetable of key projectprocessing events and the status of Bank Group operations in PDRY are given inSchedules C and D, respectively. A map covering the project area is also

3

attached. The Staff Appraisal Report No. 8362-YDR dated May 29, 1990 is beingdistributed separately.

10. Agreed Actions. The following main agreements were reached with theGovernment and PWC: (i) PWC would generate revenues before taxes sufficient tocover operating expenses, debt service requirements, increases in net workingcapital (excluding cash) and at least 10 of its annual average capitalexpenditures for the current fiscal year art the next two following fiscal yearsin 1990 and 1991, and 12% thereafter; (ii) PWC would not incur any additionaldebt unless projected net revenues are at least 1.2 times its projected annualdebt service, without prior consultation with IDA; (iii) consultants to assistPWC in construction supervision would be selected by March 31, 1991; (iv)consultants to assist in implementing management information and inventorycontrol systems would be selected by June 30, 1991; (v) PWC would commence, byDecember 31, 1990, a program to meter all water connections by December 31,1993; and (vi) PWC would commence a training program, based on the five-yearmanpower development plan, by December 31, 1991. Additional agreements reachedwith the Governmert were: (i) DGLG would employ consultants, by June 30, 1991to carry out the financing and cost recovery study of sewerage services, toupdate sewerage designs and to assist in the execution of the wastewater disposaldemonstration project; and (ii) by March 30, 1991, COCA and DGLG would commencetheir respective training programs. The execution of a subsidiary loan agreementbetween the Government and PWC for $11.2 million of the credit proceeds wouldbe a condition of credit effectiveness.

11. Benefits. The proposed project would provide an adequate quantity ofpotable water for about 53,000 people in Tarim and adjacent villages (including22,000 inhabitants at or below the poverty level), thus eliminating currenthealth hazards caused from tne poor quality of water and intermittent watersupply service. The project would also improve PWC's operational efficiencythrough implementing a comprehensive metering program aimed at reducingunaccounted-for-water and instituting water conservation measures. The provisionof technical assistance for establishing management information and inventorycontrol systems and devising a manpower development program would help tostrengthen PWC's managerial and administrative capabilities.

12. In the sewerage sector, the project would introduce low-cost technologiesfor wastewater disposal, thus improving sanitary conditions at an affordableprice and reducing the risk of structural damage to traditional mud-brickbuildings. It would also postpone the need for installing expensive conventionalsewerage systems. The cost recovery study for sewerage services would makerecommendations on the organizational structure and options for ensuring thefinancial viability and sustainability of sewerage systems. The project alsoaims to strengthen the accounting and auditing practices of the CentralOrganization for Control and Auditing through the provision of training.

12. Risks. PWC's implementation performance under completed and ongoingprojects has been very satisfactory. In light of PWC's substantial capitalexpansion program during the 1990s, continued support through the provision oftechnical assistance in construction supervision and training has been includedunder the project. In order to furth.er minimize the risk of implementationdelays, a more intensive level of IDA project supervision is envisaged during

4

the first three years of project execution. There are no umsqual risksassociated with the DGW sewerage sector component and training to COCA. Itshould be noted that the unification of PDRY with the Yemen Arab Republic wasofficially announced on May 22, 1990. The implications of the unification, whichcould result in a reorganization of the water supply and sewerage sector, arenot expected to have a significant impact on the scope or objectives of theproposed project, or to adversely affect its execution.

13. Recommendations. I am satisfied that the proposed Credit would comply withthe Articles of Agreement of the Association and recommend that it be approvedby the Executive Directors.

Barber B. ConablePresident

Attachments

Washington, D.C.May 29, 1990

5

Schedule A

I'S WOai PULC OF eTARIMI MM SUPPLY PROJECT

ESIPIAED COSTS AND FINACING PLAN

Estimated PJroet C8st.Local' Foreign Total.. .--US$ Million-

1. New Tarim Borefield 0.42 2.70 3.12

2. Primary TransmissionPipelines 0.31 1.37 1.68

3. Tarim DistributionSystem and Supply to 0.78 1.32 2.10Adjacent Villages

4. Storage Reservoirs 0.52 1.21 1.73

5. A.dministrative Sub-Center 0.14 0.08 U.22

6. Supply of OperationaalEquipment & Water Meters 0.08 0.78 0.86

7. Wastewater DisposalDemonstration Project 0.15 0.33 0.48

8. Training andTechnical Assistance 0.03 0.68 0.71

9. Construction Supervision 0.08 2.1k 0.74

Base Cost (May 1990) 2.51 9.13 11.64

Physical Contingencies 0.28 0.93 1.21Price Contingencies Ik 1.94 2.30

Total Project Cost 3.15 12.LL

Financing Plan:

Sources Local Forelgn TotalUS$ Million-

IDA - 12.00 12.002PWC/Government -3.15

Total 31 20

J/Includes taxes on civil works and engineering services estimated at US$ 0.43million.

2JEquivalent to SDR 9.2 million.

6

iw-9mozmuww-~~~~~~~~~I ani-

- (8$ MiUllon) …----1. Construction of Boreholes 0.62 0.82

(0.67) (0.67)

2. Construction of Major 7.33 - 7.33Pipelines, Reservoirs and (6.24) (6.24)Pumping Stations

3. (a) Materials for Secondary Pipelines, 1.88 0.41 2.29Reservoirs & Administrative Center (1.70) (0.41) (2.11)

(b) Construcuton of Secondary - 1.34 1.34Networks. Reervoirs and - (0.00) (0.00)AdmAinistrative Center

4. Operational Equipment - 1.17 11 7und waZur Meters - (1.07) (1.07)

S. Wasts-ater Disposal - 0.54 0.54Demonstration Project - (0.38) (0.38)

6. Training and Technical - 1.66 1.66Assistance including - (1.53) (1.53)Construction Supervision

Total 10.03 5.12 15.15

htge: Figures in parentheses are the respective amounts, in 8 milionequivalent, to be financed by MA. 'Other" covers een ultancy *ervices andprocurement of goods by international shopping in acerdance with IDAguidelines, as well as force account carried out with local resources.

C,~~~~~~~~ I , t of Y_m"w

1. Civil construction; supply 6.30 100Z of foreignand installation of mecbanical expendituresand electrical emuipment.

2. Supply of operational 3.00 100l of foreigneq4ipment, water meters exwpedituresdistribution pipes, fittings,construction materials and plnt.

3. PWC training, teohnical assistance 0.70 1002 of foreignand construction supervision, expenditures

4. COCA and DRGU Technical Assistance 0.80 200S of foreigneopernditures

5. Unallocated 1 2

Total

Rsntnysn IDA, DIElZZIr BY l5EE Lsn(USS~ N Flillion)R

1991 1992 1993t8IM is" i 199hnmual 0.59' 0.07 2.52 2.64 2.64 1.56 0.84 0.24Cumulative 0.59 1.56 4.08 6.72 9.36 10.92 11.78 12.00

1//Includes an initial deposit of S550.000 into the Special Account.

7

Schedule _

PEOPLE'S DEMOCRATIC REPUBLIC OF YEMEN

TARIM ATER SUPPLY PROJECT

Timetable of 4 ProcessIng zvenys

(a) Time Taken to Prepare Project: One Year

(b) Prepared bv: Government/PWC

(c) First IDA Mission: December 1988

(d) Appraisal Mission Departure: September/October 1989

(e) Negotiations: May 17-23, 1990

(f) Planned Date of Effectiveness: November 1990

(g) List of Relevant PCRs and PPARs: Water Supply Engineering Credit(PCR No.4322)

Greater Aden Water Supply Project(PPAR No.7582)

Al Nukalla Water SupplyRehabilitation Project(PCR No.7528)

8 SCHEDULE D

STATUS OF BANK GROUP OPERATIONSIN THE PEOPLE'S DEMOCRATIC REPUBLIC OF YEMEN

AS OF APRIL 30, 1990

Amubt inUSlS ilion(to" amcel atians)

Loas or Fiscal urdis- CtosingCredit No. Year Borrower Purpose ak IA bursed Date

Credits

21 Credits(s) closed 130.33

C12220-YDR 1982 YEMEN, PEOPLES DEM0ORATIC REP EDCATON III 6.00 1.32 06/30/90(R)C12740-IDR 1982 YEMEN, PEOPLES Dl0CRATIC REP FISHERIES III 6.00 1.21 06/30/90(5)C13460-YDR 1983 YEMN, PEOPLES DOCRATIC REP WADI WmwUT II 9.0t 3.05 06/30/90(R)CF0190-YDR 1984 YEEN, PEOPLES DOCATIC REP EDUCTIN IV 10.40 3.18 12/31/90(R)C14180'YOR 1984 YEMEN, PEOPLES DEMCRATIC REP WATER SLY II 7.00 .46 12/31/89(R)C15570-YDR 1985 YEMEN, PEOPLES DEMOCRATIC REP A5RIC. RESEARCH S EX 5.00 1.57 12/31/90C16170-YDR 1985 YEMEN, PEOPLES DEMOCRATIC REP HIGWNAYS IV 14.40 6.68 06/30/91(R)C17390-YDR 187 YEMEN, PEOPLES DEMOCRATIC REP GRATER llEN w. it 5.60 6.32 12/31/93C18230-YDR 1987 YEMEN, PECPLES DEMOCRATIC REP HIGIwAYS V 16.80 11.30 12131/91C19440-YDR 1989 YEMEN, PEOPLES DEMOCRATIC REP AL INALLA WATER 12.00 10.81 12t31/95C197ZO-YDR 1989 YEMEN, PEOPLES DEMOCRATIC REP HEALTH II 4.50 4.16 06/30/94C20450-YDR 1989 YEMEN, PEOPLE DEMOCRATIC REP HADRAIUT AGR.111 12.00 12.13 06/30/97C2OC-YDR 1990 YEMEN, PEOPLES DEMOATIC REP EMERCEtCY FLOW RECO 10.00 10.31 12/31/92

TOTAL mnber Credits a 13 118.70 72.50

TGTAL*m 249.03of which repaid 2.46

......... .................

TOTAL held by ank & IDA 246.57Amount sold

of thich repaid

TOTAL undisbursed 72.50

notes:.....................

Not yet effectiveNot yet signedTo%at Apxved, Repaqmnts, ard Outstanding balance represent both active and inactive Loa and Credits.

(R) indicates fonrolly revised Closing Date.(S) irdicates SAVSECAL Lon and Credits.

The Net Approved awd Sank Repa mts are historical value, all others are market value.

The Signing, Effective, wnd Closing dates are based upon the Loan Department offical data and are not takenfrom the Task 8udget file.

IBRD 219 B;SAUDI ARABIA Propo.J

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