============================================================================= RED CIENTIFICA PERUANA ============================================================================= This section is from the document '/PIC/pid/pid/perpa123.txt'. Project Name Peru-Lima Water Sector Restructuring and Rehabilitation Project Region Latin America Caribbean Sector Water Supply Project ID 6PERPA123 Implementing Agency SEDAPAL Monterrey 281, Surco Chacarilla del Estanque Lima, Per£ Contact: Ing. Antonio Castilla Tele: (51-14) 63555 Fax : (51-14) 370-884 Date Prepared Projected Board Date July 15, 1994 1. Introduction. The Bank is considering a US$150 million equivalent loan to the Government of Peru to help finance a water sector restructuring and rehabilitation project. The project would be implemented by Lima's water supply and sanitation agency, which would also provide about US$50 million equivalent in counterpart funds. The contents of this PID are subject to change, and the components described may not necessarily be included in the final project. 2. Background. Less than 60% of the people in Peru live in dwellings connected to safe public water supply systems and only about 45% have access to safe sanitation. The quality of the services received by the population has deteriorated steadily during the last two decades, particularly during the second part of the 80s. Water service is provided on an intermittent basis even in major urban centers. In Lima, water pressures in 70% of the districts are below the minimum recommended pressure. In urban centers other than the three major cities, about 30% of the population has water service less that 10 hours a day and only about 20% has service more than 20 hours a day. The quality of water delivered continues to deteriorate, particularly in small and medium size cities for lack of chemicals and control laboratories. Facilities have suffered a serious deterioration due to lack of appropriate maintenance and investment. Service coverage, reliability and quality levels are having an adverse effect not only on population health but also on the overall economy as well. Morbidity of water borne diseases increased 2.2 times from 1980 to 1985. Unreliable services have forced many industries and households to build storage reserve and pumping facilities at great economic cost as the scale economies of these services are not captured. And to compound the problem, the ongoing cholera epidemic has increased considerably the demands on both water and sanitation systems. For instance, the raw water arriving at La Atarjea--the water treatment plant for about 75% of Lima's supply, is currently contaminated with cholera. 3. The regionalization process initiated in 1989 has radically transformed the sector institutional organization, shifting responsibilities from the central government to the regional and local level. The Servicio Nacional de Agua Potable y Alcantarillado (SENAPA) had transferred its subsidiary companies and operational units to the municipalities, with the exception of the Servicio de Agua Potable y Alcantarillado de Lima (SEDAPAL) and the water company of Trujillo. However, the implementation of the new legislation is not yet complete and has created plenty of confusion. The transfer of some water and sanitation systems has been done in haste without due concern for maintaining continuity in all phases of operations, including commercial and financial systems. While some municipalities have conserved and strengthened the systems' original organization, others have limited themselves to accepting the systems without taking any initiative to create independent and autonomous entities. The Water and Sewerage Rate Regulatory Commission (CORTAPA) has practically ceased to operate. Under a reorganization process that started in December 1991, the Ministry of Housing and Construction (MHC) is now being eliminated and most of its functions--including its responsibility for the water and sanitation sector, transferred to the Ministry of Transport and Communications. A new Ministry of the Presidency will be responsible for SEDAPAL. The urgency of restructuring and rehabilitating the sector is clear. The reformulation of sector organization and objectives should place primary emphasis on improved efficiency, through the use of commercial practices in all entities, regulatory arrangements which foster competition among service providers, and increased private sector participation. 4. Project Objectives. The main objectives of the proposed project are: (i) to reduce the government role in the Peruvian water sector to regulatory and strategic planning functions, eliminating its current complete control of SEDAPAL's management; (ii) to induce a large scale privatization of Lima's water and sanitation services; and (iii) to improve Lima's environmental and health conditions, through the rehabilitation and/or expansion of water supply and sewerage services. To achieve these objectives a three-phased approach has been formulated. The first phase, to be funded with the proceeds of a Japanese Grant and the Structural Adjustment Loan (SAL), will: (i) set in place a new legal and regulatory framework for the sector; (ii) change SEDAPAL's statutes to guarantee its management and operational autonomy; and (iii) approve a new national tariff law for the sector based on the principles of economic efficiency, financial self-sufficiency, and distributional equity. The second phase, to be financed with the Bank Loan, will: (i) support the reforms introduced in phase one; (ii) create a Lima Water Authority with the participation of the municipalities and the regional government; (iii) reorganize SEDAPAL into 5 self- accounting units operated on commercial principles; (iv) grant management and service contracts for specific functions; (v) complete the preparatory work for large scale involvement of the private sector; and (vi) initiate the rehabilitation and/or expansion of water supply and sewerage services. In the third phase, a full reliance on market mechanisms, including private sector participation, will be orchestrated and put in place. 5. Project Description. The proposed project has been designed as follows: during an initial phase of 12 to 18 months--to be launched as soon as the Japanese Grant or the SAL become effective, the Bank loan should be prepared and approved. During the second phase, with a duration of about 3 to 5 years depending on the speed towards full scale private sector involvement, the project should be completely implemented. The project would consist of: (i) an institutional component to finance actions and studies focusing on completing sector reforms initiated in phase one; (ii) a rehabilitation component which would help finance the critically damaged infrastructure and remove some carefully selected major bottlenecks; (iii) a cholera prevention component which would help finance urgently needed infrastructure for safe disposal of sewage into the ocean; and, (iv) actions and investments to improve service quality and coverage in the large slums areas of the city of Lima. The institutional component would provide resources for: (i) studies and actions to complete sector restructuring; (ii) training and technical assistance for the Lima Water Authority; (iii) preparation for bidding the management contracts; and (iv) preparation of bid documents for a large scale private sector involvement. 6. Project Implementation. The borrower will be the Government of Peru. The executing agency will be Lima's Water Supply and Sanitation Agency, after approval by the Government of SEDAPAL's statutory reform, in terms satisfactory to the Bank. Selection criteria for subprojects would include use of least-cost solutions, carefully selected per-capita investment ceilings, and long-run average incremental costs (LRAIC). The Project's execution period would be 1993-1997. 7. Benefits. The project's rehabilitation and/or expansion of water supply and sewerage systems would directly benefit Lima's population. The project's institutional component would assist sector authorities and agencies to update and strengthen their policies and operational systems, which in turn will permit the urgently needed extension and efficient operation of water systems on a commercial and financially sustainable basis. Contact Point - Public Information Centre The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202)458-5454 Fax No.: (202)522-1500 ________ Note: This is information on an evolving project. Certain components may not necessarily be included in the final project.  .