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INU-32 FY88 ANNUAL SECTOR REVIEW WATER SUPPLY AND SANITATION. The Word Bank Policy, Planning and Research Staff. November PDF

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Public Disclosure Authorized The Word Bank Policy, Planning and Research Staff lnfrastuure and Urban Develo t Depatmenit INU-32 Public Disclosure Authorized FY88 ANNUAL SECTOR REVIEW WATER SUPPLY AND SANITATION
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Public Disclosure Authorized The Word Bank Policy, Planning and Research Staff lnfrastuure and Urban Develo t Depatmenit INU-32 Public Disclosure Authorized FY88 ANNUAL SECTOR REVIEW WATER SUPPLY AND SANITATION REot INU 32 Public Disclosure Authorized Public Disclosure Authorized November 1988 General Operatonal Review This Is a documt published informally by the World Bank The views and ineprtetom htewin are Ose of the autsor and Should not be dlributed to the Wodd Bank, to its afflated organizations, or to any hndmidual acting on their bed. Copyright 1988 The World Bank 1818 H Street, N.W. Washington, D.C All Rights Reserved First Printing December 1988 This is a document published informally by the World Bank. The World Bank does not accept responsibility for the views expressed herein, which are those of the authors and should not be attributed to the World Bank or to its affiliated organizations. The findings, interpretations, and conclusions are the results of research supported by the Bank; they do not necessarily represent official policy of the Bank The designations employed and the presentation of material in this document are solely for the cornvenience of the reader and do not imply the expression of arny opinion whatsoever on the part of the World Bank or its affiliates concerning the legal status of any country, territory, city, area, or of its authoities, or concerning the delimitations of its boundaries or national affiliation. The principal authors are Harvey A. Gamn and Affonso Zavala C. from the Infrastructure and Urban Development Department of the World Bank AOOREGATE PRODUCTION FUNCTION: THE CASE OF COLOMSBIA OCTOBER i98 CA I OF I Bank / i,-,,,e I t -- t.~~~~-~-2 /, ~ D-g6L, ~ -- FY88 ANNUAL SECTOR REVIEW WATER SUPPLY AND SANITATION INFRASTRUCTURE AND URBAN DEVELOPMENT DEPARTMENT The World Bank Washington, D.C. I I I~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~ FY88 Annual Sector Review Water Supply and Sanitation TABLE OF CONTENTS Page Introduction and Summary 1 Chapter I Chapter II Overview 7 Review of FY88 Activities in the Sector 13 Chapter III Special Issues 20 Chapter IV Special Topic: Achievement of Sectoral Expectations 23 Chapter V Recommendations 31 Annex 1 Annex 2 Annex 3 Annex 4 Water Supply and Sanitation Services and Investment Requirements The 1988 Operations and Prospects Sector Studies and Strategy Papers (FY88) by Region UNDP/WB Water and Sanitation Program Operational Support to the Bank and in Collaboration with the Bank I 1 INTRODUCTION AND SUMMARY The FY88 Water Supply and Sanitation Annual Sector Review focuses on the Bank's activities in the sector and recommends means of improving the Bank's performance (Chapters II, III, and V). As a special topic, this report also analyzes the Bank's achievement of expectations in the sector (Chapter IV). The central theme of the report, reinforced by the special topic analysis and consistent with related findings by OED, is that many of the core objectives in the sector-population coverage, the quantity and quality of service for those covered, the maintenance of service facilities, and the operational effectiveness and financial sustainability of institutions charged with providing service-are not being met or are being met more slowly than expected. There is considerable scope for improving performance in the sector. Although this report focuses on the Bank's role, it is recognized that the demand for a significant role for the Bank in the sector is largely derived from borrowing countries' own sense of sector requirements and their individual sectoral and macro constraints (Chapter I). It is unlikely that the Bank will provide more than 6 to 7 percent of the aggregate financial resources utilized for investment in the sector in any given year. The Bank's leverage in the sector must come, therefore, from a strategic understanding of the critical issues facing the sector and the ability to help borrowers select appropriate interventions for their resolution. Issues in the Sector What are these issues? The first, and perhaps the most obvious, is that the demand for water supply and sanitation services will continue to grow dramatically. The demand comes from the need to provide coverage for those currently unserved and for future populations, as well as the need to improve and expand currently inadequate or intermittent service for those with access to service. Less than half of the population in developing countries now have an acceptable water supply source and only about one in five people a satisfactory sanitation or sewerage service. Most of the unserved are poor: a fact that underscores the need to extend coverage while remaining sensitive to the costs and affordability of the services provided. Moreover, the growth in demand for services (like the availability of water sources) is not spread uniformly. Rather it is often highly localized. The expected continuation of substantial urbanization in most countries and the sheer size of the expected population growth, particularly in already large urban areas, highlight the importance of getting the most from existing facilities and planning for their expansion. By the year 2000, urban areas are expected to grow by about 850 million people out of a total population growth of about 1,100 million from 1985 to And, also by the turn of the century, nearly all of the largest urban areas in the world will be in developing countries. The 14 cities in developing countries expected to exceed 10 million each in population by 2000 will have to absorb over 80 million people from 1985 to Rural population, with only 40 percent coverage in adequate water supply and 20 percent adequate sanitation coverage in 1985, will grow by about 250 million by To the increasing domestic demand for water and sanitation services must be added the continuing growth in water demand for other uses-primarily agriculture and industry. 2 The second major issue is that the maruinal costs for meeting this demand are -enerallv higher due to constraints on water availability in the locations where it is needed and to the necessity for significantlv expanding investment for wastewater treatment and disposal. An increasingly binding constraint in many countries, given the dramatic increases in population and its growing urban concentration, is the availability of sufficient water resources to meet the growing demands for water in particular localities. The problem here is not an overall shortage of water--water consumption for all uses is less than a quarter of the actual freshwater available. Rather, the problem is water availability at an acceptable cost in places where it is needed and increased competition among different user groups for the available water. The cost of increasing domestic supplies to meet population requirements has steadily risen as it has become necessary to extend transmission lines to more distant sources, to pump and store water more extensively, and to treat water that often is more polluted or of naturally lower quality than previously used sources. Few countries have developed the institutions and mechanisms (e.g., a legislative and regulatory framework and appropriate water pricing for different uses) necessary to manage their water resources effectively. Indeed, in many countries the importance of effective water resource management is only now becoming apparent--even in countries where water has long been known to be scarce. The investment patterns in the sector have shown an understandable bias toward water supply relative to sewerage-sanitation investment in the past. However, there is a growing recognition that the provision of water creates an associated cost for adequate and environmentally safe collection and disposal of wastewater. If the cost is not borne in the form of providing appropriate treatment and disposal facilities, it will eventually be borne in the form of adverse health and living conditions and in the form of increased expenditure requirements to treat polluted water. Similarly, population and industrial concentration creates a requirement for organized, environmentally safe disposal of human and industrial waste. The current challenge is how much, how fast, and where to provide the necessary institutions and facilities to reduce the already mounting costs of limited attention to these matters. Setting such priorities, in the current macroeconomic situation, is especially difficult: since the costs tend to be larger, funding is more difficult to organize and the institutional requirements more complex even than those in water supply. The third major issue is that the financial resources required to meet these growing demands are seriously constrained at present. and are likely to remain so over the medium term. For many developing countries, overall economic growth is slow, real per capita income is flat or declining, and investment growth is slow. Moreover, in many countries both the share of income allocated to investment and the share of investment allocated to social sectors are decreasing. Existing debt burdens in many countries make overall borrowing riskier and increase the inclination to allocate borrowed funds to activities that can demonstrate high rates of return. The less-than-adequate financial performance of sector institutions also puts the sector at a competitive disadvantage for funds. The fourth major issue is the adequacy of sectoral institutions and the operational management and maintenance of existing facilities. With demand expected to increase dramatically, with supply becoming more costly, and with financing constrained, improved management in the sector is imperative. However, our experience shows that, too often, less service is provided than planned, service is often intermittent, facilities deteriorate faster than expected, large quantities of produced water are not sold, and, in a great number of cases, less payment for provided services is achieved than financing plans require. As shown in Chapter IV, Bank-supported water supply projects have fallen short of their expected results in a substantial majority of cases. Production, sales, and connection volumes were below expectations in 55, 84, and 52 percent of the cases. Targets for the reduction of unaccounted-for water were met in only 11 percent of reviewed projects. Less than one in ten projects met or exceeded expectations regarding cost coverage from sales revenue. 3 Inadequate service coverage; substantial differences in the levels of coverage, and in the institutional capacity to manage increased coverage, in urban and rural areas; overall financial constraints; and the requirements for improved water resource management (for all uses) present both borrowing countries and the Bank with a challenge to develop effective strategies for coping with macro and sectoral constraints as the demand for sector services increases. The less-than-satisfactory performance of sectoral institutions strongly suggests the need for improved management of the sector, improved operational management at local levels to get the highest level of service possible from facilities, and improved financial management to make the sector increasingly self-financing. The Sector in the Bank Over the years, lending in the water supply and sanitation sector has represented about 5 percent of total Bank lending. Exclusive of water supply and sanitation components in projects for rural and urban development, lending for the sector averaged 4.5 percent of Bank lending in the FY73-FY77 period, 5.5 percent from FY78 to FY82, and 4.4 percent from FY83 to FY88. By this yardstick, lending in FY88 (2.8% of total lending) was low. However, additions to the portfolio expected over the next three years would bring the share closer to the long-term averages. FY88 lending consisted of five projects--below the sectoral average of 12 projects. The size of the projects, on average, is substantially greater than usual ($107 million, compared with $65 million in FY87 and $41 million in FY86). Although, with such a small number of projects, it would be unrealistic to expect them to represent a comprehensive cross-section of the sector and its issues, each of them represents a positive response to important sectoral problems. They include sector-wide policies and priorities (Colombia), the extension of sector services to low-income populations (Brazil), improved maintenance and rehabilitation of existing assets (Uruguay), support for an efficient public company to take a broader sector approach to issues (Zaire), and the combination of water supply expansion with environmental improvement components (Turkey). Sector work in recent years has been low in comparison with many other sectors, but what has been done has been relatively well focused on major aspects of sectoral activity--strengths and weaknesses of sector institutions; the planning process and investment priorities; operation and maintenance problems; and direct fiscal constraints on the sector, tariffs, and cost-recovery policies. The major shortfalls in systematic attention have been in developing a strategic approach to: broader macroeconomic concerns (including sector financing), the legal and regulatory context (including possibilities for private sector involvement), effective demand and technology that is appropriate to demand (including use of low-cost approaches as well as cost-effective new sophisticated technologies), water resource management (in the context of strong competing demands and increased costs), wastewater reutilization, and protection of natural water bodies. Two important initiatives were taken this fiscal year to begin building strategic approaches at the regional level. LAC has built on its existing base of country sector work to produce a regional strategy paper, and Asia has conducted a systematic review of existing sector knowledge as a necessary preliminary step to creating a regional focus in the sector. Policy and research work in INUWS focused primarily on improving operational management and maintenance and on increasing efficiency in investment choices. What Should Be Done We conclude, from the analysis in this paper, that the demand for a Bank role in the sector is likely to both remain strong and expand. The Bank should attempt to do more in the sector by helping borrowing countries get increased returns from their investments and existing facilities, and by continuing to seek improved ways to more fully achieve expectations in Bank-supported sector loans and projects. 4 Although sectoral outputs are essential to both the health and productivity of the population and to the expansion of output in other sectors, sectoral activity can do little to directly alleviate macroeconomic constraints on growth in the near term. On the other hand, the sector can do--and should be encouraged by Bank loans and policy advice to do--a great deal more to become more financially self-sufficient, to address in a more systematic way important water resource and liquid waste management issues impinging on the sector, to improve the operational management and maintenance of existing facilities, and to establish priorities for new investment consistent with prevailing constraints on public investment in the sector. Toward these ends, we have made (in Chapter V) a series of specific recommendations for Bankwide priorities and actions to simultaneously address major sectoral issues in borrowing countries and increase the probability that Bank activities will meet expectations for sectoral enhancement. - These recommendations include: Water Resource and Sector Management (1) Increased focus on sector-wide policies in lending operations. (2) Upgrading of sector studies to support sector policy interventions and more comprehensive coverage by country and region. (3) Establishment of mechanisms to ensure better coverage and appropriate coordination within the Bank on water resource management issues. These mechanisms may include encouragement of country line managers to insure subsector coordination and consistency of Bank advice, as well as establishment of an Operations/PPR panel to identify issues and analyze them with a view to preparing a Bank issues paper on water resources. (4) To carry out assigned functions in the sector, TDs should prepare annual issues and features summaries for regional lending and sector work, and sector leaders should be named in each region. Management of Water Supply Institons (1) A renewed effort Bank-wide to improve both operations management practices and sectoral investments in developing countries. (2) Adoption of explicit national/local policies to upgrade the system's operations, reduce water losses, and maintain operating equipment capacity. (3) Increased focus on extending sector coverage to the mostly poor unserved at affordable service levels. More attention is required to technical options and the management of services (including the private sector and community institutions). Project Preparaon and Analysis (1) Renewed attention to demand forecasts, tariffs, and other user charges, as well as financial management to support improved financial sustainability of water supply and sanitation institutions. 5 (2) Project preparation and appraisals should be supplemented by more thorough risk analysis of expectations of critical outcomes and assumptions behind these forecasts. Moreover, we have recommended (in the FY88 Water Supply and Sanitation Sector Strategy Note) additional policy and research work needed to support the Bank's capacity to assist our borrowers in responding to the sector's major challenges: (1) rapidly growing demand; (2) availability of water resources; (3) increasing supply costs; (4) financial stringency; and (5) improved management of existing facilities. Future annual reviews will each provide an analysis of a topic of specific interest in the provision of local infrastructure services. We have recommended in the FY88 INUWS Strategy Note, therefore, special topics for the next three years as follows: (I) Sustainable and Reliable Financing for Local Infrastructure Services (FY89) This topic will be addressed by each of the INU Divisions--Water and Sanitation, Urban, and Transportation. The special topic report will consider financing mechanisms, sources of finance, and incentive as well as fiscal effects of alternative methods of financing for both capital and recurrent operations and maintenance costs. Although cost-recovery issues will receive attention, the intent is to go beyond these issues to trace the implications and effects of alternative financial approaches to infrastructure finance. (2) Water Resource Availability and Cost to Meet Growing Demand (FY90) Particularly in and around large urban areas, availability of usable water for domestic purposes at reasonable costs has become more problematic because of the growth in water demand for competitive uses, the reduced quality of available water, and the need to transport raw as well as treated water over longer distances. The basic approach to this topic will be case studies of water supply requirements, the evolution of supply costs, and competing uses in the environs of several large urban areas. Obvious candidates are Mexico City, Lima, Bogota, Amman, Istanbul, Calcutta, Bangkok, Shanghai, Lagos, Nairobi, and Abidjan. (3) Waste Management (FY91) As mentioned earlier, it is not surprising that investment patterns for water supply and sanitation have reflected an emphasis on water supply relative to sanitation in developing countries. However, the large amounts of waste generated in cities currently exceed the capacity for environmentally safe management despite the best-intentioned efforts of municipal authorities. The special topic report on these issues will be based on research discussion papers addressing such issues as: (1) assessment of Bank exp
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