Document of

The World Bank

FOR OFFICIAL USE ONLY

Repot No. 7021

PROJECT PERFORMANCE AUDIT REPORT

LESOTHO: SEVEN TOWNS WATER SUPPLY PROJECT

(CREDIT 887-LSO)

November 23, 1987

Operations Evaluation Department

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

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gCm owlCA - eLYTHE WORtL BIANK

Wasnton. D.C. 20433U.S.A

01k. d of 0smcbv &u

November 23, 1987

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Performance Audit Report or Lesotho: -Seven Towns Water Supply Project (Credit 887-LSO)

Attached, for information, is a copy of a reportentitled Project Performance Audit Report on Lesotho: Seven TownsWater Supply Project (Credit 887-LSO)" prepared by the OperationsEvaluation Department.

Attachment

This docunent has a resticted distribution and may be used by recipnts only in the performanceof their official dutics Its contents may not otherwise be disclosed without Wodd Bank*uhrzto

gm rn fiKIL VWE RELY

PtOJECT PRFOUIANCE ADIT RlPORT

LESOTHO& SEVEN TOWS WATER SUP1T POJECT(tMEDIT U 7-L6O

TABLE 0 COTENTSPace No.

Prefae- ............o...o..00o......................................... 1

Basic Data ghost Li............ ..................................... iiEvaluation Suimary ....... .... iv

Pro1ect Performance Audit Memorandum

A. Background ..................... 13. Project Objectives 2...............*** .............. 2C. Project Revision and Implementation ........................... 2D. Project Costs and Procurnemnt ................................. 3E. Performanec of Consultants nd Contractors .................... 4F. Performance of the Implementing Agency ........................ 4

Institutional Performnce ............. ...................... 5Financial Performance .................. * 5

G. Bank Performznce ......................................... *.... 5H. Supplementary Coinents 000000000000 0000000000 7

Operation .......................... 7Institutional Financial Achievements .. *.........* ........... 7Training .7... ..................... ... 7Public Health Education ..................................... 8

I. Conclusions ......................................... 8

ATTACHMENTS A & B - Comments from the Executing Agencyand the Borrower 9............................ 9

Prolect Comnletion Report

I. Introduction .*00000 0...................................... 11II. Project Preparation and Analysis ............................. 14IIT. Project Implementation, Operations and Cost ........ .......... 16IV. Operating Performance .....****21............................ 21V. Financial Performance ....... ................................. 22VI. Institutional Performance ***0000000***o 0000000000000000000000 27VII. Project Justification 0000000 ................................. 28VIII. Conclusions 000000 *************,*****o***ooooo**,o*o**oooooo** 30

This document has a dest.icted distsabution ohd rwy be usod by edwpionut onrl in the petoman.e! ~~~~~~of their official dutiesfi Its contents may not otherwse be dibtbsod without Wotl Bank authriton.

Table of Contents (Continued)

Pato No.

ANNMSE

1. Wat-r Supply and Sanitation Coverage, 1980-1990 ... 9.........0.*. 312. Description of the Physical Project Components .... ............. 323. Evaluation of Project Cost Etimate ............................ 414. Project Cost stimates .4..........4.............. .......... ... . 4S. Implementation Schedule ..... 45.........* ....................... . 456. Operating Results and For--cats ..... ......... ................... 467. Compliance with Credit Conditions .............. . ............... 53

PROJECT PEIFOIMANCE AUDIT JIPOMt

LESOTHOt SEVEN TOWNS WATRR SUPPLY PROJECT(CREDIT 887-LSO)

MIJACS

This report presents the results of a performnce audit of theSeven Towns Water Supply Proj et for which Credit 887-LSO of US$6.0 million tothe Kingdom of Lesotho vas approved oo March 20, 1979. Tho Credit Agreementwas signod on April 6, 1979, becae effective a yer ant a half later, onOctober 30, 1980. The Closing Date was originally September 30, 1983. It was*xtended to December 31, 1984, but final disbursement took place July 10,1985.

The Project Performance Audit Report consists of a Project2erformance Audit Memorandum (PPAM) prepared by the Operations EvaluationDepartment (OED) and a Project Completion Report (PCR) prepared by the WaterSupply and Urban Development Division of th Eastern and Southern AfricaRegion. ORD has reviewed the PCR, the Appraisal and President's Reports, endthe transcripts of the meeting of the Executive Directors when the credit wasapproved, Bank staff familiar with the project have been interviewed to theextent possible, and documents in the Bank Group file have ben r-eviewed.Further, arL O D mission visited Lesotho in February 1987, inspected four ofthe seven constructed facilities, and had discussions with the higher officersof the Water and Sewerage Branch (W33) of the Ministry of Water, Energy andMining (MINWEM), and other Government - officers involved «n projectimplementation end administration.

The PPAM generally agrees with the findings of the PCR. Howover,the PPAM provides Supplementary Coments on project achievements,institutional improvemont, including manpower development and training, andpublic health education.

Following standard ORD procedures, copies of the PPAR were sent tothe Borrower for their coments. These coments have been reproduced asAttachments A and 3 to the report.

PROJECT PERIOUMCE AUDIT B1IC DATA S T

LISOTHOs SEM TOIuS VATR SUPmY PROJICTtCURDIT S77-LS0)

US PE TA

Appraisal Actual orARtIMc Curren Eattao

Total Project Cost as appraised CUSS al1.) 6.96 V/ATotal Project Cost, as revised (USS all.) 6.89 5.79

Underrun (S) - 162Credit Junt (USS sillios) 6.00 6.00

Asount Disbursed 6.00 5.05Date Physical Components Completed 09/83 06/84Proportion Completed by Above Date (2) 50S 1002Proportion of Tin. Overrun (2) - 25ZEconomic Rate of Return (2) N/A N/AFinancial Performance Below expectationInstitutional Perfornanc* Acceptable

OTHER PROJECT DATA

Item Original Actual orl Revisions vi Estimated

First Mention in Files 1971Goverrment's Application 03/29/78Issues Paper 06/06/78Decision Memorandum 06/23/78Negotiations 01/23-24/79Staff Appraisal R port 03/01/79Board Approval 03/20/79Credit Agreement Date 04/06/79Effectiveness Date 07/05/79 10130180 10130180Closing Date 09/30183 12/31/84 12/31/84 1-Borrowers Kingdon of LesothoExecuting Agency: Water and Sewerage Branch (WSB) of the

Ministry of Water, Energy and MiningFiscal Year of Borrower: April 1 to March 31

fit

MissloF Deta

Date t uiber of No. of Nan- Date ofNOITV. Pcrrsonsr O L,k WboWt Abot

Identification 1971 ~Preparation 11177Appraisal 05/78 A I 6 06/06/78

Sub-total 2 6

on3 1 02180 2 1 2 04,01,802 12180 1 1/2 1/2 02/121613 03181 2 2 4 06/18/814 11l81 1 1 1 03118/825 04182 1 1 1 05/19/826 12/82 1 1 1 01/211837 05183 2 1 1 06120/838 12183 1 1 1 01127/849 06184 2 1 2 07/24/8410 03185 1 1 1 04/24/8511 ' 06/85 2 1 2 07/15/85

Subtotal 11 1/2 17 1/2

Total '3 112 23 1/2

CUMULATIVE DISBURSEMENTS

Fiscal Year 1980 1981 1982 1983 1984 1985

Appraisal Estiaat* (USS million) 0.42 3.24 5.10 5.85 6.00 -Actual (US$ mdllion) - - - 2.88 3.96 5.05Actual a Z of estimate - - - 49.2 66.0 84.2Actual as 2 of original amount - - - 48.0 66.0 84.2

STAFF IN-PUT (man-weeks)

PT 1978 1979 1980 1981 1982 1983 1984 1985 1986 Total

Pro Appraisal 2.1 .4 2.5Appraisal 15.7 30.3 46.0Negotiation 8.1 8.1Supervision 1.5 13.8 13.4 9.0 7.0 5.7 6.4 3.3 60.3Other .3 .0 ..1 4Total 17.7 40.6 13.8 13.5 9.0 7.0 5.7 6.5 3.3 117.3

IV

PROJECT PEUPORMANCE AUDIT REPORT

LISOTHO: SEVEN TOWNS WATER SUPPLY PROJECT(MCDIT 887-LSO)

Z g~~~~~~~~~VALUATION 8SOMARI

- X~NTRODUCTION

I. The DA Credit of US$6.0 million to the Kingdom of Lesotho wasapproved by the Bank on March 20, 1979. It was IDA's first credit to theKinSdom of Lesotho in the water supply sector.

1i. The project originated from various studies, the two most Importantof which, includeds (1) surveys and outline plar of extension of watersupplies for 11 towns, which were carried out in 1971 and were financed byUNDP, with tho lank acting as executing agency and (2) the 1974 FederalRepublic of Germany's financed pre-investment studies for water supplies for13 towns. In 1977, KfW appraised a project which included only 6 of the 13towns. In early 1978, the Governaent requested the Bank's assistance infinancing improvements in the remaining seven towns. The project was preparedby th Government with assistance by consultants, and appraised in the flcdby an IDA aission in May 1978.

The Proiect and Its Oblectives

iii. The project was designed to provide water supply to about 20,000 newconsumers, most of whom were to be among the poorer segment of the towns'population. It also aimed at improving services to 21,000 current consumersthrough control of vater quality, and enhanced access through provision foradditional public stndpipes. Project's objectives included also the strong-thenig of WSB, the sector entity, through the provision of consultants forthe design of a commercial accounting system, including a tariff study andproposals for a phased introduction of tariff changes.

iv. The Development Credit Agreement was signed on April 6, 1979, andthe original date of effectiveness was July 5, 1979. Due to the delay infilling the positions of a Chief Executive Engineer and a Financial Con-troller, the Credit became effective only on October 30, 1980.

Implementation Experience

v. In addition to a slow start-up, project Implementation was hinderedby the Inaccuracies of WSB's consultants' pre-investment studies, preliminarydesigns and cost estimates upon which the project was appraised in May 18,1978. There was a 300S cost escalation when new cost estimates were workedout AA August/September 1980. As a result, the Gov-rnment Informed theAssociation of its decision to reduce substantially the scope of the project.The revised project included new water supply schemes for two of the seventowns (Leribe and Teyateyaneng), but only *xtensioalrehabilitation works were

to bo carrdod out in the remaining five towns (Mafeteng, Hohale's Hoek,Mokhotlong, Quthing and Roma).

vi. Following IDA's formal approval of the revised project, construction.works for th schemes in Leribe and Teyateyaneng began in January 1982, i.e.-two years later than originally contemplated. VSB*s engineering consultantsprepared detailed engineering designs and bid documents and were entrustedwith the responsibility for the supervilsion of construction works for the twoschemos. In spite of late start-up, constructlon work ws" completed in August1983, ahead of the contract completion tim (PCR, para. 3.06).

vii. Detailed enginering design for the five rehabilitation schemes wereprepared by WSB, and construction works which were carried out by forceaccount began in the middle of 1982. Progress made at the beginning proved tobe satisfactory, but slowed down considerably, after the installation of theschemes' networks. Construction work in Mafeteng, Mohale's Hoek and Quthingwere completed in December 1984, a little more than a year later than theoriginal closing date of September 1983. Due to the remoteness of the town ofHokhotlong, and to WSB1's inability to carry out construction work in all fiveocowuns at the same time, the completion of the schemc in Mokhotlong wasachieved in July 1985.

Results

Viii. The physical objectives of the originally designed schemes for thetowns of Leribe and Teyateyaneng were achieved on time, and within the revisedcost estimates (PCR, para. 7.01). However, at the time of the audit missionin Lesotho in February 1987, the well pdint of the Teyateyaneng-scheme was outof service, and two of the adjoining intake pumps were damaged, and apparent-ly, beyond repair (PPAM, para. 22).

iX. The construction objectives of the revised projoct for the remainingfive towns were accomplished. The revised project for these towns amounted toextension of the systems' networks and rehabilitation of the sources ofsupplies" intakes, and existing treatment facilities. The implemented schemescontributed to improving water quality, and brought water closer to theconsumers, thus reducing the number of people who depended on unsafe watersupply (PCR, para. 7.01).

x. Institutional objectives were partially achieved. Although WSB'smanagerial efficiency, along with the billing and collection operationsimproved substantially and accounted for a reduction of the Agoncy's operatingdeficit from M. 1.4 million in 1981 to M. 0.27 million in 1984 (PCR, para.7.02), the commercial accounting system, which proved to be incompatible withthe government's own accounting system, was not implemented.

xi. Similarly, financial objectives fell short of expectations for avariety of reasons, the most important of which include: understaffing ofWSB's accounting department; unsuitability of WSB's non-commercial accountingpystem, whereby, for instance, WSB prepares payment vouchers, but the respons-ibility to pay and record expenditures, rests with other government agencies;likewise, while WSB prepares the bills for water and sewerage services, othergovernment departments are in charge of revenues collection. The inaccuraciesof data which these agencies generate, allied to the unduly delayed production

vl

of such data, defeat any attempt to reconecle WS'r3s *counts with those ofother government agencies. It is unlikely that the situation will improveunless WS3 is empowered to develop and Implement a eoprehensive coumrcialaccounting system, and to exerese full control over tho system's components.

xii. Paragraph 6.04 of the PCR states that considerable progress ha beenmade in training local personnel, with an avorage of 8 man-years training perannum being provided. However, project files failed to provide any meaningfulliformation on training neted, and the pertinence and suitability of trainingprogrms. The audit's review of proj3et documentation confirm that the Bankunder this project generally limited its role to calling attention to theImportance of these components In the appraisal report.

Sustainability

xiii. The major institutional and financial probl es revealed at appraisalhave not been fully resolved. For benefits to be enhne-td and sustainedthrough follow-on projects, the Government votld need to develop a nationallong-term water supply pricing policy. In addition, the Government would needto confer sufficient autonomy and authority to WSB to achieve financialviability, i.e. to generate, over a period of yesa, rovenues sufficient tocover operating expenses, depreciation and a reasonable return on the ssetsused for WSB's services.

Findings and Lessons

xiv. The initial project was appraised on the basis of pre-investmentstudies carried out by consultants, with assistance from kfW who financed thepreparation ofs (a) long-range 15 to 20 ytars plans for water systems develop-mant, and (b) engineering and feasibility studies, considering first phase (5to 10 years) development for the project towns. Operational, financial,accounting, managerial and other institutional matters were also to beinvestigated (SAR, para. 3.01). In July 1980, it was established that thepreliminary studies contained substantial inaccuracies, particularly, withregards to cost estimates. New estimates were prepared in August/September1980, showed a cost escalation amounting to about 3002 (PCR, para. 3.02).

xv. The oxtension/rehabilit-tion works carried out by force account infive of the project towns were a successful operation.

xvi. Overall, the project proved to be a useful learning experience forWSB. It was successful in terms of construction activities. This, however,must b- viewed in the context of a project whose scope wos substantiallyreduced. Institutional development objectives were only partially achieved.More importantly, it is unlikely that WSB will recover from its financialdifficulties any time in the near future without being granted adequate opera-tional autonomy.

1

ROJsCT PERORWNCE AUDIT MD"ORANDU#

LES9TH0 SEVEN TOWNh WAT SUPPLY PROJ.CT(CEDSIT S87-LSOI

1. aRJCTSMMI

A. ^ck rou.d

1. Located clo - to the Southerly extremity of the African continent,Lesotho, with an area of about 12,000 square silos, o completely surroundedby the Rpublic of South Africa (RSA). At appraisal, Lesotho's population wasestimated at 1.2 dillion, growing at a rate of 2.21 por annu. The urbanpopulation of the capital city, Maseru, amounted to about 40,000 people. Thecountry is mountainous, and nearly 752 of it ranges from 6,000 to 11,000 feetin ground surface elevation, and only about 132 of the country's lend area issuitable for crop cultivation. Soil erosion Is extesive, representing one ofLesotho's major environmental problem.

2. Poor health and sanitary conditions allitd to poor hygienicpractices, account for substantial incidence of vater-borne diseases such as,diarrhea, typhoid, hepatitis, infectious skin and eye diseases.

3. The country's economy is dominastd by subsistence agriculture andlivestock rearing and constitute the main economic activities for ibout 902 ofthe resident population. It Is also characterized by a critical dependence onSouth Africa. In the early 70Ws, about 165,000 Basotho workers, I.A., abouthalf of the country's male labor force, were estimated to be employed in SouthAfrica, as migrant orkers. Between 1970 and 1977, due to rapidly risingwages, the number of Basotho workers In the mines was estimated to haveinareased by 40,000, and remittances of migrant workers accounted for over 50percent of GNP. Lesotho is a member of the lend Monetary area and over 602 ofthe Goverament's revenues are derived from receipts from duttes and taxescollected by the Southern Africa Customers Union (SACU) on behalf of themember countries. Industrial developmnt is limited by the small size of thedom-estic market, lack of raw materials and resources (other than water), theproximity to highly industrialized South Africa, and the shortage ofentrepreneurial, managerial and technical manpower. In its Second NationalDovelpment Plan (1975/76-1979180, the Government proposed to expand thecountry's industrial base through strengthening the Lesotho NationalDevelopment Corporation.

4. Lesotho's water resources are substantial, amounting to an averageannual total of some 4,500 million =3, of which surface water represents over99S. Surface sources are commonly used for urban water supplies, but due totheir high turbidity, and fecal contamination, they require treatment.Springs and boreholes are the main sources of supply in the rural areas. Thereare no economically feasible proposals for the local exploitation of Lesotho'sabundant water resources of which less than 1% is currently utilized. In

order to obtain benefltr from hat Is, in fact, Lesotho's only significantnatural resource plans have recently been drawn up to export water. IDACredit No. 1747 was approved on December 11, 1986 for SDR $8.0 uillion to helpfinance engineering design work for the Lesotho Highlands Water Project. This_project, In its ultimate phase, will deliver up to 70 m3 Isec of water to theRepublic of South Africa. The resulting royalties will About double Lesotho'sGDP.

5. At the time of project appraisal, about 132 of the country's ruralpopulation and 63S of the urban population had access to safe watcr. InMareru, approximtely 652 of the population wa served by piped water supply.Government Developmont Plan covering the period 1980-1990, projected theprovision of safe water to 1002 of urban population and 602 of ruralpopulation.

6. The provision of water supply In urban areas is the responsibilityof the Water and Sewerage Branch (WSB) of the Ministry of Water, Energy andMining (MINWEM). In rural villages, the same responsibility rests with theVillago Water Supply Sectic (VWSS) of the Ministry of Agriculture (MOA)Urban and Rural sanitation/wsto disposal are the responsibilities of theMinistry of Interior and the Ministry of Health respectively.

B. The Proiect and Its Ob1ectives

7. The project covered seven towns, and its main objectives were to (i)provide public water service to 20,000 new consumers who, in the past, reliedon unprotected sourcs; and (ii) improve the reliability and quality of watersupplied to some 21,000 existing customers. In addition, the ptoject providedfor the strengthening of WSB, the executing *gency for the project. Projectcomponents includeds (i) construction of new water supply systems; (ii)Improvement and extension of existing systems; (iII) provision of equipment,vehicles, spare parts; (lv) strengthening the managerial capabilities of WSBthrough the design and implementation of a commercial accounting system and atariff structure; and (v) consulting engineering services for pre-investmentstudies for future extensions of the water supply systems in tha sevenselected towns.

8. In order to improve public health in the project area, and to fosterthe practice of personal and community hygieno, the appraisal missionemphasized the need for a complementary public health education program,together with the construction and operation of the water supply schemes.Although the project did not provide funds for the program, it was agreed, atappraisal, that GOL will keep IDA informed of the steps taken to improvepublic health education and to take the Association's views into considerationregarding such steps.

C. Prolect Revision and Implementation

9., The date of the credit offectiveness was extended from July 5, 1979to October 30, 1980 due to the delay in the recruitment of the Chief ExecutiveEngineer and the Financial Controller, thus causing an initial delay in thestart of the project implementation. More importantly, however, in 1981, a

3

project revision became necessary when it became clear that, the cost of theproject as designed was likely to come out at about four times the estimatedamount set forth in the SAR and that the Government would not be in a positionto mobilize the additional funds required. The main reasons for the costincreases weres (i) poor preliminary design; (Ui) underestimation of unitconstruction costs; (iiI) contractors premium for small, remote jobs and (iv)underestimation of price contingencies. (For detailed analysis, see PCR,Annex 3). This revision further contributed to delaying the start of construc-tion In Leribe and Tey-t-yaneng to January 1982, i.e. two years behindschedule.

10. The scope of the revised project included the construction of watersupply system in two of the seven towns, and only rehabilitation works forthe systems in the remaining five, thus implying levels of service in thesefive locations lower than in the other two; the technical assistance componentof the original project remained unchanged. There was no need for additionalfinancing, since the revised cost estimates for the reduced project were aboutthe same as those estimated at appraisal.

11. Following the scaling down of the project, and IDA's agreement tothe revised project proposal in early 1982, WSB assumed responsibility toprepare final engineering designs for the five towns in which extension/rehabilitation works were to be carried out. Considerable further implementa-tion delay was experienced for a variety of reasons, including the replacementof the Project Engineer and the site engineers, and frequent breakdowns ofvehicles and other mechanized equipment. All schemes, but one, were finallycompleted in December, 1984. The Mokhotlong scheme was completed a yearlater.

D. Pro lect Costs and Procurement

12. At appraisal, the total project costs were estimated at US$6.96million, and the estimated total costs of the much reduced revised projectwere US$6.89 million. Actual costs amounted to US$5.79 million, hence a 16Zcost under-run with respect to the 1981 revised estimate which were due to:(a) savings on the water schemes in Leribe and Teyateyaneng; (b; deletion ofthe tariff studies, and (c) exchange rate fluctuations.

13. Estimated eost of the revised project and the actual cost on comple-tion are sumnarized in the PCR (para. 3.17) as follows:

Cost of Revised Proiect

_aloti (000) USS (000) *IIncreasej Increasel

Estimate bI Actual Deureggg S gati .t. b/ Actual Decres-e S.

LocalCurrency 2,095 5,209 +3,114 +149 2,200 4,495 +2,295 +104

Foreigntxchange 4.465 .2LM -1,265 -_a 4.688 1L. -3390 - 72

Total 6,560 6,409 - 151 -2.3 6,888 5,793 -1,095 -15.9

I The US dollar equivalent of the revised coet estimate was based on theexchange rate prevailing In January 1982, namely US$1.00 - Maloti 0.952.The actual cost are based on disbursement records (varying exchangerates).

bI Including contingencies.

14. Disbursements lagged behind the projected disbursement profile byabout three years in line with the implementation delays. Nevertheless, dueto the significant reduction of the project scope the IDA ciedit of US$6 .0million proved to be adequate to cover actual foreign exciange costs and theenhanced proportion of local expenditures. In fact, US$947,882.47 wascancelled on July 10, 1985.

j. Performance of Consultants and Contractors

15. Initially, the engineering consultants performed poorly, as theirpreinveJtment studies contained substantial miscalculations and inaccuracies.Nevertheless, after the revision of the project, their services were retainedto prepare final engineering designs and bid documents, and to supervise theconstruction works in Lerib- and Teyateyaneng.

16. Accounting consultants designed a commercial accounting system, andtheir performance is rated satisfactory in the PCR. The audit will notquarrel with this rating, but has difficulty in expressing full concurrence,since the accounting system proposed was implemented only to a limited degreebecause it was largely incompatible with the government's accounting system.

17. The performance of the civil worka contractor w" satisfactory.

F.- Performance of the Implementint Atency

i8. Despite delays in the execution of the expansion/rehabilitationworks, WSB's performance in the preparation of detailed engineering designs

5

*nd th implementation of these works was satisfactory. Similarly, althoughproject progress reporting did not com up to expectation during the initialyesrs of project implementation, the situation greatly improved from mid-1983.

Institutional Performance

19. At appraisal, WSJ vas headed by a Chief Water and Sewerage Engineer,who had limited authority end responsibility over personnel and accountingmatters. Staff recruitment, compensation, transfers, and dismissals weremainly handled through the Personnel Department of the Ministry of Works,which followed unifors government personnel practice. Accounting staff wereemployees of the Ministry of Finance, who followed government accountingpractices, which were inappropriate for effective commercial management. WSBfunctioned, therefore, as a branch of the Ministry of Works, and not as apublic utility, though one of the objectives of the AfD? operation, withwhich IDA concurred - was to have WSB become a utility. However, duringproject implementation, WSB improved its organizational structure to includte,in addition to a Chief Engineer and a Financial Controller, one officer eachin charge of administration and manpower training and it functions efficientlyin areas over which it has direct control.

Financial Performance

20. In accordance with the stipulations of the Development CreditAg=eement, WSB was required, Inter alias (i) to establish for its services,annual financial performance standards based on the outcome of a tariff study,provided for by the project, including the requirement to produce revenuessufficient to cover all operating expenses, and to generate a reasonable rateof return on its assets; and (ii) to introduce a comercial accounting systembased on the recommendations of the accounting consultants. Eventually, thetariff study was deleted from the IDA-supported project, and incorporated inthe loan agreement signed between the African Development Fund (AfDF) and theGovernment. This agreement required that WSB should be transformed into apublic utility corporation within two years after the loan signature. Thecommercial accounting system designed by consultants, was implemeuted only inare"s where WSB exercised direct control, such as, billing and collection,stores control and, to a limited extent, financial administration. Thereasons for not Implementing the commercial accounting system in full aredetailed in paragraph 5.01 of the PCR. Financial results are given inparagraphs 5.02, 5.03, 5.04 and 5.05 of the PCR which shows that WSB'srevenues did not cover its overall operating cost. The situation was of courseeven worse in the small town operations (PCR, para. 5.10), a result that wasqualitatively expected at appraisal but not to the quantitative extent itactually occ4rred.

G. Bank Performance

21. It is evident that the consultants who carried out the engineeringstudies on which IDA based its project appraisal were definitely unfamiliarwith the local economic environment. Indeed, although between 1976 and 1979there were marked increases in baseline costs in Lesotho, it is difficult to

6

explain the magnitude of the discrepancies that appeared within three years ofthe appraisal *stimat- (PCR, para. 3.02) without assuming that they usedthoroughly erroneous information. Further, It seems that IDA relied too muchon the consultants, though its staff could have been expected to have ajudgment of its own, as the Association had been involved in the water supplysector of Lesotho since 1971, when it acted as executing *gency for UNDP (PCR,para. 1.09). Obviously, IDA only become aware of a problem during the secondhalf of 1979, when it reacted by requesting the consultants to prepare a fullyupdated cost estimate that reflected delays in the project timetable anddesign changes. IDA's request wv only met in August 1980.

22. In order to overcome the situation created by the existence of anineffective accounting system at WSB at the time of appraisal, the IDA creditprovided financing for consultant services for the design of a commercialaccounting systm. This was accomplished satisfactorily, but the system asdesigned, proved to be incompatible with the government's own accountingsystem, and, therefore, w"s not implemented in full. As no compromisesolution could be found, the issue was left to be tackled at a later stage, byan AfDF financed project, the primary objective of which, is to transform WSBinto an autonomous public utility corporation. While the introduction of acommercial accounting system, by itself, was a desirable objective, Bank staffshould have recognized that, given WSB's position as a government department,it was unrealistic to expect such a system to operate effectively within thelarger government cash accounting system.

23. The Bank's appraisal mission should be commended for calling atten-tion to the importance of public health education, taking into accourt therural and other socio-cultural characteristics of tho project -area. However,there were no IDA funds available to carry out public health educationactivities; Instead, the appraisal mission emphasized the need for GOL to takeappropriate steps through other activities, such as those of a USAID supportedrural development project which was to include an important health educationcomponent. While this project has been delayed, the GOL in 1983/84 formulateda comprehensive water supply/sanitation "sectoral Action Plan" with theassistance of WHO which includes an extensive "community Hygiene Project'.Bank staff had contributed to the review of the Action Plan.

24. Similarly, the Bank's role in respect of training was limited,although the lack of trained manpower, at both the professional and technicallevels, was recognized to be, at appraisal, an issue, which, if not dealtwith, could threaten the sustainability of the project's expected benefits.Paragraph 6.04 of the PCR asserts that considerable progress has been made intraining local personnel, and the success of the training effort is expressedin terms of an average of 8 man/years training per annum. The project's filesfail to provide information on training needs and programs, the pertinence andrelevance of the latter, nor do they indicate whether the training activitieswere carried out locally in accordance with a comprehensive training plan.The audit's review of the project's documentation suggests that the Bank'srole was limited to calling attention to the importance of training in thedppraisal report. Paragraph 6.05 of the PCR indicates that a ManpowerDevelopment Study for the water and sanitation sector was carried out outsideof the project scope and was completed in 1984. Bank involvement was limited

7

to the Informal review of the study which contained us-ful reco endations andprovisions, in particular a manpower suecession plan* for the intendedwlocalisationu of WSB positions.

B. Supplementary Comients

Osr*tion

25. The audit agrees with the findinag and conclusions of the PCR (para.8.01) in respect of project achievemnts. Bwever, at the time of the auditmission in February 1987, the well point of the Toyatayanang water supplyschem* was out of service, and two of the adjoining Intake pumps were damaged,apparently, beyond repair indicating possible serious saintenance pioblems.Temporary arrangements have been usde to pimp raw water directly to the treat-ment facilities to ensure the continuity of supply to the population and newsources of supply are being investigated. Other system supported by theproject are reported to function satisfactorily.

Institutional Financial Achievements

26. Initially, project success was predicated upon adequate *ngineeringconstruction works to meet consumer's needs, as well as upon instituti nal andfinancial improvements. Accordingly, provilson was made for consulting servi-c-s for the design and implementation of a commercial accounting system, andfor a tariff study to recomend a water supply and sewerage pricing policy,and make proposals for a phased introduction of tariff changes (SAR, para.3.09 and 3.10). The report of the accounting consultants was completed in1981.

27. Similarly, the initial project included a component for the prepara-tion of preinvestment studies for further extension of the water supplyschemes in each of the seven towns (SAR, para. 3.11 and PCR, para. 4.04).This activity was deleted to become part of the AfDb's project which wasappraised in October 1982 (PCR, para. 4.04). AIDE required, as a condition ofthe project, that WSB be transformed into a Publie Utility Corporation. IDAsupported this proposal and recomend*d that the proposod tariff study shouldbe carried out and as part of the broader *transformation' study.Accordingly, the tariff study was deleted from the IDA project and was incor-porated in the AfDB project but under separate EEC financing. The transfor-mationmation study, under terms of refearnce prepared by an IDA financedconsultant, was completed in May 1986.

Training

28. At appraisal, training was recognized to be an activity deservingattention. The appraisal report identified local training institutions inwhich training could be undertaken; It also emphasized the need for a detailedidentification of the skills required to carry out WSB's functions, an assess-mant of when they will be required, including the identification of thesources and amount of funds to implement a training program. The projectbudget did not include a training component and a training program was to be

a

implemented by bilateral assistance and providing an average of 8 rn-yearstraining per annum (PCR, par&. 6.04).

Public Health Education

29. The appraisal report asserted that the effectiveness of the improvedwater supply schemes in raising the public health level In the project townsIs also dependent upon other factors, such as, th. level of personal hygsinepracticed at comanity and household levels (SAR, par&. 4.01), indicatingfurther that Improvement in the area should be brought about by other organi-sations and programs, which arte mainly concerned with public health and otheraspoets of consnity development. The audit found no evidence that eo-ordina-tion with such organizations on programs did take place during project implem-entation.

I Conclusions

30. The audit concurs with the conclusions of the PCR to the effectthats (i) the project was poorly prepared by consultants, and projectappraisal was based on studies which wert later proved to contain substantialInaccuracies; (ii) the preparation of detailed engineering designs for thefive towns rehabilitation schemes was carried out satisfactorily by WSB, andthe iplementation of the schemes through force accounts was a successfuloporation; (iiI) WSB's Institutional and financial performance at WSB wasconstrained by its lack of autonomy, and the inappropriateness of theconmercial accounting system, which conflicted with the government's ownaccounting system; (iv) improved management at WSB contributed to thereduction of operational deficits; (v) financial viability is not likely to beachieved as long as WSB continues to operate as a non-commercial entity underthe Ministry of Water, Energy and Mining without managerial and financialautonomy.

9 ATTACIagNT A

ZCZC D)ST0279 WU1044 C0MMENTS FROM THE EXECUTING AGENCYOEDD2REF S TCP 0*9*

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TO: THE WORLD BANK

FROMS WATER DRANCH MHASERUv LESOTHO

DATF.1 29TrH OCT . 19Yt7 TLX NO1 12/10

ATT MRS . ALEXANDIER NOWICKI

RE: PROJECT PERFORMANCE AUJBIT REPORTSEVEN TOWNS WATER SUPPLY PROJECT (CREDIT 887-LS5O)

YOUR LETTER OF 1ST OCTOVER, 1987 REFERS.

WE HAVF CAREFULLY STUDIED T11E PROJECI PERFORMANCEAUDIT REPORT FOR THE ABOVE-MENTIONED PROJECr.

WE HAVE FOUND I T ACCEPTABLE TU US AND WE DO NOT HAVEANY CommENTs ro MAKE.

RE(;ARDS

H.F. SAMPSON ACTING DIRECTOR

4253 WAtER LO21998J 0827 791087017101/7 044

=10290707

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MINJSIRY OF FVINANCE MAOERUu LESOTTIO HERE

TO I THE WORLD BANK / WASHINGTON DsC.

5TH NDVFMDt.k, 1987

RE. : PROJECT PERFORNANE AUDIT REPORl ON LESOTHI) $tEVENTOWNS' WATER SUPPLY PROJECT (CREDITH 087-I19O)

REFERENCE YOUR l.ETTER OF OCTODERP 1, 1987 ON ABOVE SU.JIEClSTOP WE DO NOT, AT THXX $TAOE HAKE ANY 1.l)MHENTS ON THEPPA REPORT.

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LESOTHO

SEVEN TOWNS WATER SUPPLY PROJECT (CR EDIT 897-LSO)

PROJECT COMPLETION REPORT

I * NTRODUCTION

Country Bac!%round

1.01 Lesotho, with an area of 30,344 sq. ke, is situated close to thesouthern extremity of Africa and is entirely surrounded by the Republic ofSouth Africa (RSA), with which It sust co-exist, notwithstandingideological diffferences. The country is dominated by the highest part ofthe great plateau of southern Africa and nearly 752 of the elevation rangesfrom 1,800 to 3,300 m above sea level. Lowlande, situated in the west andsouthwest, are associated with the three principal southwest flowingrivers, namely the Mohokare (Caledon in RSA), the Makhaleng, and the Sengu(Orange in RSA).

1.02 The climate, despite the sub-tropical latitude (about 300 south),is moderate due to Lesotho's nigh elevation. The topography stronglyinfluences the distribution of rainfall which amounts to 8nO mm per yearin the western part of the country and up to 1,200 mm in the highlands.Frequent heavy downpours create serious soil erosion, one of Lesotho'smajor environmental problems.

1.03 About 132 of the land in Lesotho is suitable for crop farming,but only 0.4S has high potential. Due to the climate and poor land qualitycrop production is a high risk occupation. Livestock raising is thecountry's principal agricultural activity, but overstocking and inadequateherd management have led to overgrazing, widespread soil erosion andlimited production. However, agriculture is still an important sector ofthe domestic economy, providing employment and contributing partially tothe income of up to 702 of the population of 1.4 million.

1.04 The most significant characteristic of Lesotho's economy is itsheavy dependence on South Africa where more than 95 percent of its importsoriginate, as do all of its electricity and most of its foreign investmentand tourists. Over 60% of the male labor force is employed in South Africa(mainly in mining). Remittances of migrant workers constitute over 50percent of Lesotho's GNP, and over 60 percent of Government revenues arederived from receipts from taxes and duties collected by the SouthernAfrica Customs Union (SACU) on behalf of the member countries. I/Development of a modern industrial sector is limited by the small size ofthe domestic market, lack of raw materials, the proximity of the highlyindustrialized South African economy, and a shortage of skilled

1/ South Africa, Lesotho, Botswana and Swaziland.

12

entrepreneurial, managerial and technical manpower. Consequently,manufacturing contributes little more than six percent of value added inthe economy.

1.05 Despite constraints to Its development, Lesotho's economy grewrapidly in the 1970's. Real GNP rose by *bout seven percent per annumduring the mid-to-late 1970s, and as a result of increasing employment andwages for Basotho In South Africa, real GNP expanded by about nine percentper annum. The gains in domestic output were the result primarily of largeincreases in public investment and In the provision of governmentservices. The project, aimed at improving the water supply facilities andservice levels in the major population centers, was also conceived in thisperiod.

Project Background

1.06 Lesotho's water resources are substantial, although availabilityis constrained significantly by location and season. The total annualresource has been estimated to be 5,500 million s 3 , of which surface waterrepresents over 99%. However, due to more extended durations of flows andgenerally better and more uniform water quality, springs and boreholes arewidely used in Lesotho to meet domestic water demands in rural areas. Dueto high turbidity, suspended solid concentration and pollution in the moredensely populated areas, surface sources normally used only for urbansupplies involving relatively large quantities, and for which watertreatment is provided.

1.07 Little use (less than 1%) is made of the total water resource inLesotho, due to the country's limited potential for agriculture, industryand energy consumption. Allowing for increased water consumption resulting

from normal population growth and additional use for industry andirrigation, available water resources far exceed future requirements.Agreement has recently been reached between Lesotho and RSA on exporting aportion of Lesotho's surplus water resource (approximately 2,200 millionm3/year) to RSA. 2/

1.08 GOM's water-sector objectives and development strategy, asreflected by the first and second five-year development plans(1970/71-1974/75 and 1975/76-1979/80, respectively), included surveying thecountry's water resources and projecting future water needs. Althoughthere were no stated objective as to levels of service or percentage ofpopulation to be served by target dates, the plans provided for theconstruction of water supply facilities to serve 13 major populationcenters and about 200 villages during the plan period. The sectorexpenditures represented about 6% of the total public investment, whichalso included the extension and improvement of water supply and sewerageworks in the capital city of Maseru.

1.09 The Bank's involvement in the water supply sector dates back to1971, when it acted as executing agency for UNDP, which financed the

2/ Lesotho Highlands Water Project.

13

preparation of water supply studies for 11 towns. Following thesepreliminary studies, KfW agreed to finance more detailed pre-investmentstudies which included (a) the preparation of long-range (15 to 20 years)plans for water system developoment; and (b) engineering and feasibilitystudies for 12 towns. 3/

GOL financed the studies for the 13th location, the university town ofRoma. The consultants' work was completed in 1977 and KfW appraised aproject in November 1977 that, due to limitation in funds, included onlysix of the 13 towns. 4/ GOL requested the Bank's assistance in financingisprovesents in the rieaining seven towns in March, 1978.

1.10 The even towns project was appraised by the Rank in June, 1978and later revised in January, 1982. The work covered by the revisedproject was about 90% completed by the revised Credit Closing Date ofDecember 31, 1984, but due to late submission of withdrawal requests thelast disbursement was made on July 10, 1985.

1.11 This Project Completion Report is based on information obtainedfrom the Appraisal Report (No. 2230-LSO), President's Report (No.P-2461-a-LSO), supervision reports, a project completion report prepared byWSB, Lesotho's Third and Fourth Five-Year Development Plans, InternationalDecade for Water Supply and Sanitation Development (IDWSSD) Position Paper-of the National Steering Committee, and the WSB Transformation Study.

The Sector

1.12 At the time of the appraisal of the proJect, approximately 13% ofthe rural population and 63% of the urban poulation had access to safewater. In Maseru about 65% of the population was served by piped watersupply. The actual and planned coverage during the Third and FourthDevelopment Plans are shown in more details in Annex 1.

1.13 There has been no basic change in the sector organization duringthe project Implementation period. The creation of a new Ministry ofWater, Power and National Resources, in which water supply activities wouldhave been concentrated, did not take place as planned and the sector isstill handled by four ministries. However, at the start of theInternational Drinking Water Supply and Sanitation Decade, a NationalSteering Committee was formed which substantially improved the planning andcoordination of sector activities both at policy and operational levels.

1*14 The sector is divided into four sub-sectors detailed below:

a) The provision of water supplies for villages, utilizingtechnical assistance and self-help labor, is undertaken bythe Village Water Supply Section (VWSS) of the Ministry ofAgriculture (MoA), previously under the Ministry ofCooperatives and Rural Development (MCRD). The

3/ Butha-Buthe, Leribe, Mafeteng, Mohale's Hoek, Quacha's Nek, Outhing,Teyateyaneng, Mapoteng, Morija and Peka.

4/ Butha-Buthe, Mapoteng, Maputsoe, Morija, Peka and Quacha's Nek.

14

Environmental Health Section (EHS) of the Ministry of Health(MOH) continues, as part of its regular activities, toencourage and assist the protection of springs where pipedsupplies do not exist.

b) The protection of public health and anitary disposal ofsolid wastes is the responsibility of the EnvironmentalHealth Section of the MOH. 'IOH has recently undertaken athree-year Pilot Rural Sanitation Project which has laid thefoundation for future district-based projects utilizing theservices of health assistants and village health workers, incooperation with MCRD.

c) WSB administers the supply and distribution of drinkingwt-er in the urban district centers and to all urban areasas defined in the Land Act of 1979.

d) The Ministry of Interior (MOI) is responsible for wastedisposal in urban areas. It operates refuse collection andbucket latrines emptying services in all district centers(but not all the newly-gazetted urban areas). MOI now hasan Urban Sanitation Improvement Team (USIT) which isencouraging the installation of improved-types of pitlatrines and phasing out the bucket latrine system. MOI Isalso legally responsible for public waterborne sewerage,where it exists, (at present, only in Maseru and ThahaTueka), but the day-to-day operation of these services hasalways been delegated to WSB since that organization has theappropriate technical staff.

II* PROJECT PREPARATION AND ANALYSIS

Origin

2.01 The project originated with a formal request from the Governmentof Lesotho in March, 1978 for a development credit to help finance theimprovement and extension of water supply systems in seven towns andstrengthening of the administrative capabilities of WSB.

2.02 The project was identified from a number of preliminary studieswith some of which the Bank had close association. These studies includedsurveys and outline plans of extension of water supplies for 11 towns in1971 (pars. 1.09). The results of these studies Indicated that each of thetowns studied required extensive additions to existing water supplies.However, the studies were only preliminary in nature and hence did notprovide sufficient details for project appraisal. Furthermore,institutional needs were not investigated.

freparation and Justification

2.03 Project identification and preparation took place from 1974through 1977 with the assistance of KfW which financed the preparation oflong-range development of water supply schemes in the secondary towns andthe feasibility and engineering studies for a first-phase (5 to 10 years)development (see also para. 1.09).

15

2.04 The objectives of the project were to provide water supplies toabout 20,000 new WSB consumers in seven towns by 1986 and to improveservice to 21,000 current consumers through better control of water qualityand enhanced access through provision of additional puiblic *tandpipes. Theproject also included provision for strengthening a key-institution (WSB)through the appointment of consultants to design and impleoent acomereially-oriented accounting system and recotmend changes in the tariffstructure; and through appointment qualified and experienced ChiefExecutive Officer (Director), Financial Controller and two additional watersupply engineers.

2.05 The project had many of the characteristics of a rural watersupply project due to the small size and nature of the project towns.Common with slmilar projects, the economic rate of return (ERR) wasestimated to be negative, in spite of the planned improvement in the tariffsystem, billing and collection and the gradual introduction of acomercially-oriented accounting system. As the ERR does not includeshealth and amenity benefits, as well as consumers' surpluses, which are notpossible to quantify for projects of this nature, the project'sjustification was based on non-financial benefits.

Project's Role in Long-Term Plan

2.06 The project had a significant role in the WSB's long-term planthrough:

a) contributing to the institutional development to l'SB; and

b) providing the technical base for further extensions of thewater supplies In the secondary towns as provided in theFive-Year National Development Plans of Lesotho.

Project Description

2.07 The project as described in the Development Credit Agreementincluded the following:

Part A: Improvement and extension of existing water supply systems and/orthe construction and installation of new water systems, andacquisition of equipment, vehicles and spare parts, to meet waterdemands projected for 1986 in the towns of Leribe, Mafeteng,Mohale's Hoek, Mokhotlong, Quthing, Roma and Teyateyaneng.

Part B: Strenghtening the administrative capabilities of WSB through thedesign and institution of a comRercial accounting system,undertaking a tariff study for the water supply and seweragesectors including inter alia the tariff structure, as well as therecommendations of methods to implement appropriate changes insuch structure and level, and the phased introduction of tariffchanges, all with the assistance of consultants and experts.

16

Part C: Pre-investment studies for further extension of the water supplysystems in the towns listed in Part A:

2.08 A more detailed description of the project components wasincluded in the Staff Appraisal Report. This is presented in the revisedproject (see para. 3.03 and Annex 2).

2.09 During the Implementation period, a major revision of the projectscope, especially Part A of the project, became necessary, due to projectcost escalation. The revision and its impact on the project as a whole arediscussed in the next chapter of this report.

III. PROJECT IMPLEMENTATION, OPERATION AND COST

Credit Effectiveness and Project Start-up

3.01 The Development Credit Agreement was signed on April 6, 1979.The original date of effectiveness (July 5, 1979) was revised and theCredit became effective on the revised date of October 30, 1980. The delaywas caused by difficulties in filling the posts of the director and thefinancial controller.

3.02 Project appraisal was based on WSB's consultants' pre-investmentstudies, preliminary designs and cost estimates. These studies and reportscovered the water supply extensions in 13 towns, of which KfW agreed tofinance six and IDA the remaining seven (see paras. 1.09 and.2.03). In theperiod between the signing and effectiveness of the Development CreditAgreement, the KfW loan had become effective and final designs and biddocuments for the KfW project were completed by the consultants. When bidsfor the civil works contract for the KfW project were opened in July 1980,the inadequacy of the project cost estimate became clear and new estimateswere prepared in August/September 1980 which had shown a cost escalationamounting to about 300%. An account of the evaluation of project costestimates is given in Annex 3 to this report.

Revision

3.03 As a result of project cost escalation and the inability of theGovernment of Lesotho to raise additional funds to meet the projectedincrease in project costs, the Govertment was faced with the inevitabledecision to cut back drastically the,scope of the project. In January1981, the Government informed IDA of its decision to reduce the project toinclude the proposed water supply schemes for only two of the seven towns(Leribe and Teyateyaneng), together with rehabilitation works for thesystems in the other five towns and the technical assistance that wasoriginaliy agreed upon. The revised estimated cosa of the curtailedproject was about the same as the estimated cost of the original project,made at the time of the appraisal and therefore additional financing wasnot required. IDA agreed in pricinple to the proposed restructure of theproject on May 8, 1981, but requested additional information the proposedcontract for the works at Leribe and Teyateyaneng and the rehabilitationand improvements planned for the other towns. By mid-January 1982, IDAreceived the required information, which comprised:

17

a) evaluation of tenders and a recommendation for award ofContract No. I for construction of the Leribe andTeyateyaneng project;

b) details, Including estimated cost, for the work to becarried out in the other five towns; and

c) revised project cost estimates.

3.04 According to the proposal, original water supply objectives forLeribe and Teyateyaneng would be met, although at a higher cost, and theworks proposed for the other towns would meet 1986 water demand, but withlower standards of water supply service than originally planned. Detaileddescription of the revised project is given in Annex 2, evolution ofproject cost estimates in Annex 3, and the project cost estimates(appraisal, revised and actual) in Annex 4.

3.05 The proposal was reviewed by IDA, .nd GOL was advised on January19, 1982, that IDA formally approved the revision and no modification ofthe Credit Agreement was considered necessary. Subsequently, on January19, 1983, at the request of GOL, Schedule I of the Development CreditAgreement was modified to permit disbursement of credit funds against laborcosts incurred under works carried out by force account for therehabilitation of the water supply schemes in five towns.

Implementation Schedules

3.06 The slow project start-up, the recognition of the cost escalationbefore the actual commmencement of the implementation and the consequentrevision of the physical project components had an adverse effect on thetimely implementation of the project. Construction of the full schemes forLeribe and Teyateyaneng began only in January 1982, two years behindschedule. Good progress was made throughout the entire construction periodand works in both towns were completed ahead of contract completion time,by August 30, 1983.

3.07 Following the project revision, WSB started to work on thedetailed engineering designs, 'in house' for the five rehabilitationschemes. Construction, which was carried out by force account, commencedin the middle of 1982. Works at Roma started first but had to besuspended at the end of the university recess. Works at Mafeteng, Mohale'sHoek and Quthing were commenced simultaneously and progress was reasonablein the beginning but slowed down considerably after completion of thereticulation components. The reason for the delays were manifold: therewas a change of the project engineer in the early stages and thereafter thesite engineer had to be replaced twice. Another major problem was theprocurement of materials when numerous small articles had to be purchased4roi the construction of the staffhouses. Frequent break-downs of theequipment and vehicles, however, contributed mostly to the much delayedcompletion which was finally achieved in December, 1984.

3.08 At Mokhotlong, construction commenced in early 1984 and progresswas hampered from the beginning hy the fact that works were still

18

continuing In the other towns. Although the well organized direct laborforce of WSB produced good quality works, it was too small to handleefficiently the works at all location at the same time. The remoteness ofthis town was also a major factor in the problems that were experienced andresulted in poor communication and transport facilities, as well as theunavailability of most materials and spare parts. Therefore, theanticipated completion of the project, which was set at July 1984, couldnot be met and had to be extended for a full 12 months.

3.09 Due to the revision and change of the physical projectcomponents, the Implementation schedule (bar chart) as shown in the SAR,cannot be directly compared to the actual Implementation. Hovever, theimplementation schedule as provided in Annex 5 shows, besides the originalschedule, the actual implementation periods by location.

Procurement

3.10 The consultants were first retained by WSB in 1974 to prepare preinvestment studies for 13 secondary towns and later to prepare the detailedengineering designs and bid documents. As a result of project revision,however, detailed designs for the rehabilitation works in 5 towns (underthe IDA project), were prepared 'in house' by WSB. The consultants werealso retained for the construction supervision of the works under ContractNo. 1 (Water Supply for Leribe and Teyateyaneng). For the constructionsupervision of tle rehabilitation works independent consultants (siteengineers) were retained by WSB.

3.11 Design and bid documents of Contract No. 1 (Leribe andTeyateyaneng Water Supply Schemes) were completed in May 1981, and issuedto prospective bidders on May 20, 1981. The original date for bid openingwas July 28, 1981, but this was subsequently postponed to August 11, 1981at the request of the bidders.

3.12 Although allowed in the conditions of the Credit Agreement, theBorrower did not elect to grant a margin of preference to domesticcontractors. Eight addenda and one circular letter were issued during thetender period. Most changes made by the addenda were to items in thespecifications and the bill of quantities.

3.13 Five firms took the tender documents and four submitted bids.The Report on Tenders prepared by the consultants is dated August 31, 1981,and was received by WSB on September 2, 1981. No tenderer submitted atender free of errors. However, these defects were not serious enough todisqualify the tenderers. The evaluation of tenders and the recommendationto award the contract to the firm with the lowest evaluated tender wasacceptable and the contract was awarded on January 21, 1982, for the sum ofM 4,471,000.

3.14 Works under contract No. 1 commenced in January 1982, and werecompleted on schedule. No claims were made and final total cost wasM 4,270,863, 4% less than the contract sum.

3.15 The rehabilitation works in the five towns were carried out underforce account (see para. 3.07) by WSB's direct labor unit, established

19

specifically for this purpose. Schedule I of the Development CreditAgreement was amnded to Include labor costs under works carried out byforce account (see para. 3.07). Ths rehabilitation works by the directlabor unit were of satisfactory quality.

3.16 In accordance with Section 3.02 (a)(ii) of the Developmnt CreditAgreesent accounting consultants were employed to review WSR's accountingsystem and to prepare an accounting manual. The consultants began to workIn December 1980, and submitted their final report on August 3, 1981.Their work also includ3d training of personnel of WSU's accountingsection.

Cost and Disbursement

3.17 Due to the inaccurate original cost estimate, enhanced by theslow project start-up, the project ws revised in 1981 (see paras. 3.03,3.04 and Annex 2). Detailed cost estimates of the revised project areshown in Annex 4, and sumarised a follows:

PrOmet oons

'jod (OOD) US$ (000) a/Rsieds M=ect Chwge Rtlaed PndctChg

: - y -~E~ ~ id liit S F -1 it. S

1>cal oarteny 2,095 5,209 +3,114 +149 2,20 4,495 +2,25 +304F!bwe.Exib ge 4,465 11,2 -3,265 -73 4,688 1,2% -3,390 -72

Total 6,560 6,409 -151 -3.3 6,888 5,793 -1,095 -15.9

aj US dollar equivalet of the revid cost tvaste wam baud on tbe e,4N,e rate pe,aiitg in Jieary1982, ns"ly US11O) - Mloti 0.952. The actual ot ae blsmd on disbunreimt nirds (vary1i cwha¢rerates).

bl Dxnflulig oxelqgpxies.

The actual costs in Maloti are well in line with the revised projectcosts. The cost under-run in US dollars is due to savings on Contract No.1, the deletion of the tariff study, and to exchange rate fluctuationsenhanced by larger ratio of local to foreign costs than originallyexpected.

3.18 Cumulative disbursements are shown on the Basic Data Sheet(p,(v).). US$4.44 million was disbursed from the Credit of US$6.0 millionby the revised Closing Date of December 31, 1984. WSB chose not to requestdisbursement for some of the local expenditure amounting to aboutUS$740,000 equivalent.

20

3.19 The final amounts disbursed against each oategory are as follows:

-- US Dollars-RevisedSchedule I. Actual

1. (a) Civil works (excluding works carried outunder force account) 4,100,000 3,200,590.65

(b) Civil works labor carried outunder force account 250,000 314,465.62

2. Materials, equipment, vehiclesand spare parts 500,000 579,506.09

3. Consultant's and specialist's services 1,000,000 957,555.16

4. Unallocated 150,000 -

Total 6,000,000 5,052,117.52

The remaining amount of US$947,882.48 was cancelled on July 10, 1985.

3.20 The original SAR disbursement profile was 4 years, custom iadefor the project. This was justifiable considering the small size of theproject. However, due to initial delays in project start-up and therevision of the physical project components as a result ofprice-escalation, the length of disbursements was 5.5 years. 5/ Aftercommencement of physical implementation, the rate of disbursement wassatisfactory: the total credit was disbursed within two and a half years.

Operations

3.21 As it has been discussed under paras. 3.03 and 3.04, only theLeribe and Teyateyaneng sub-projects were carried out as originallyplanned. Both schemes were substantially completed on schedule (August 30,1983), fully commissioned in early September 1983 and, apart from a fewminor mechanical problems, have operated satisfactorily. Higher manganeselevels than expected have, however, been identified in the water. Theseare being monitored by WSB to determine whether some form of manganeseremoval would be necessary at a later stage.

3.22 The rehabilitation works for the other five sub-projects weredesigned 'in house' by WSB, and reflected the proper application of'appropriate technology'. The quality of the rehabilitation works wereoutstanding and the rehabilitated plants have been operated on anacceptable professional level.

5/ Implementation and actual disbursement commenced only in 1983 and thelast disbursement was made on July 10, 1985.

21

Performance of Consultants and Contractors

3.23 WSB's engineering consultants were originally retained to carryout all enginvering required under the project. The extensive revision ofthe project became necessary partially due to the less than satisfactorycost estimates and engineering in the early stages of the pre-investmentstudies and detailed design. Although these were later corrected and theconsultants finalized the engineering designs and bid documents for Leribeand Teyateyaneng, WSB decided to carry out the designs of therehabilitation works 'in house'. The consultants, however, were retainedfor the construction supervision of the works in Leribe and Teyateyaneng.

3.24 Accounting consultants were appointed to design a comierciallyoriented accounting system for WSB and to provide training for thepersonnel of WSB's accounting section. The consultants performance wassatisfactory, although for other reasons, their study and recommendationsdid not have the desired impact (see para. 5.01).

3.25 The performance of the civil works contractor was entirelysatisfactory. All works were completed in good quality, on time and withinthe contract price.

?erformance of the Borrower and the Implementing Agency

3.26 The Borrower is the Kingdom of Lesotho, and the Minister ofFinance has been designated as the Borrower's representative. Theexecuting agency for the project was WSB. :

3.27 Credit effectiveness (originally scheduled for July 5, 1979) wasrevised due to delays in complying with the conditions of effectiveness(see also para. 3.01). The Borrower's performance concerning the projectrevision was satisfactory. WSB's performance in handling the design of therehabilitation works was outstanding and the physical implementation of theproject, though some delays occurred in the execution of the rehabilitationworks carried out by direct labor, was also generally satisfactory. Thefinancial and institutional performance of WSB is dealt with under ChapterV and VI.

3.28 Project progress reporting in the initial stages was not fullysatisfactory, but it gradually improved during the implementation period.Fully satisfactory and regular reporting was made from mid 1q83.

IV. OPERATING PERFORMANCE

Market

4.01 Water requirements (demand and production) for the sub-projectsare shown in Annex 2. Out of the total estimated population in 1986 (inall 7 towns) of 41,000, the revised project provides water to about 20,000new consumers. Average per capita consumption is about 100 to 120 litresper day (including institutional consumption). However, service levels andreliability of supply were reduced in the five rehabilitation schemes.

22

Project Role

4.02 Besides providing and/or improving safe water supply to most ofthe population in seven secondary towns, the project was designed to assistthe Water and Sewerage Branch in strengthening its institutional andfinancial management. The project also provided a base for furtherpre-investment studies for the preparation of a follow-on project forfurther extensions of the water supply systems in the seven towns.

Project Spin-off

4.03 As a result of the employment of a director and a financialcontroller as stipulated in the Development Credit Agreement, WSB'soperational performance improved significantly. The direct labor unit,established for tlhe implementation of the rehabilitation schemes, was wellorganized.

4.04 The project included a component for the preparation ofpre-investment studies for further extension of the water supply schemes inthe project towns. As these studies were to be covered under an AfricanDevelopment Fund (AfDF)-assisted project, appraised in October 1982, thisproject component was deleted from the IDA-assisted project. AfDFindicated that one of its conditions would be the transformation of WSBinto Public Utility Corporation. IDA supported the idea and, using aBank consultant, assisted WSB to draw up the terms of reference for thetransformation study. As the transformation study also included a tariffstudy, this project component was deleted from the IDA-assisted project.

V. FINANCIAL PERFORMNCE

Accounting System

5.01 Section 4.02 of the Development Credit Agreement provided for WSBto introduce accounts on a commercial (accruals) basis, and to revalue itsassets by April 1, 1978. Although accounting consultants designed a systemin 1981 (see para. 3.16), no commercial accounts have been produced.While understaffing of the accounts department of WSB at the senior andsupervisory levels has been a problem in producing commercial accounts,there have been more fundamental problems, namely the set-up of WSB'saccounting within the government system. For example (i) WSB makes outpayment vouchers but thereafter other government accounting offices pay andrecord expenditure; (ii) WSB does not own vehicles and equipment but hiresfrom government pool, and consequently, it has no control over either theamount or the timeliness of the bills; and (iii) while WSB raises bills forwater and sewerage charges, various government offices and departments areresponsible for cash collection. In theory, it should be possible toreconcile WSB's accounts with the other accounting sections of theGovernment but this assumes that the other accounting sections are up todate, accurate, reliable and interested. Unfortunately, they do not appearto be. Consequently, reconciliation produces a plethora of unresolveddifferences. Until full accounting control is given to WSB, even it isstill on the government cash system, production of commercial accounts willbe an unrewarding exercise out of proportion to expected benefits. Thefinancial controller, under these restricting circumstances, concentratedhis limited resources on improving WSB's revenue collection and storescontrol (as they have been addressed in the accounting study). He has

23

produced annual accounts from the various sources of Government accounting,to a reasonably high standard. Taking one year with another, they providea reasonable proxy for the results had the accounts been produced on anaccrual basis. A major deficiency of the accounts is the absence of ameaningful assets and liabilities position. An encouraging feature of theaccounts, as produced, is that Government and parastatals have a goodrecord of paying their water bills (by interaccount transfers).

Financial Results

5.02 As descrlbed in the previous paragraph, WSf has not operated asan accounting entity but as a branch of the Ministry, Energy and Mines, andaccounting has remained on a cash basis. While there has been significantimprovement in controls over uncollected revenues or accounts receivable,there is inadequate information on debtor, creditor or inventory levels.

Capital expenditures are brought together from various sources in thegovernment accounts and fixed asset ledgers and controls do not exist.Production and consumption data is recognized by WSB's management as beingan approximation. The consumption data reflect the actually billedconsumption collected in the month or year - rather than the actualconsumption for the period.

5.03 In order to provide a picture of WSB's financial situation,however, financial statements were prepared for the years comprising of theproject implementation period (see Annex 6). These financial comparisonsand projections are based primarily on the best inrformation ZISB has beenable to provide, but the quality of this information is limited by theinadequacies of the records and the inexperience of WSB's personnel.

5.04 The Income Statement and Balance Sheet compare the actual resultsand latest forecast with the original appraisal report for the years1979-1986. A forecast for the years 1987-1990 has been prepared and isalso included. A comparative cash flow statement was omitted, as there wasinsufficient data for its preparation for the years 1979-1983. The IncomeStatement and Balance Sheet have been prepared on the same basis as theappraisal report - namely as though WSB is functioning as an autonomousentity.

5.05 A review of the data in the income statement indicates that overthe period 1982-1985, actual physical sale of water amounted to only 77% ofthe forecast in the appraisal report (the appraisal report forecast salesof 3,594 million gallon 6/ versus an actual sale of 2,783 million

6/ Imperial gallon.

214

gallons). There appear to be several reasons for this:

a) Ul projects appear to have been completed about 2 yearsbehind the schedule In the Appraisal Report. The SevenTowns project itself was scheduled for 89% comj._;ion byMarch 1983 (see Appraisal Report, Annex 6), whereas actualcapital expenditures by that date amounted to 4.1 millionMaloti out of a total of 6.7 uillion Maloti - or 61Xcompletion.

b) Physical sales billed and collected were at lower levelsthan projected in the years up to 1981, due to deterioratingcollections of accounts. This situation was corrected bythe appointment of a director and a financial controller in1981 who instituted a drive to improve collections.

c) The result of the above was that the major increase inphysical sales (forecast in the Appraisal Report to occur in1982) did not occur until 1984 in which year sales of 765million gallons or 3,473,000 a3 were approximately equal tothe sale of 787 million gallons which the Appraisal Reporthad forecast for 1982.

Tariffs

5.06 Section 3.02 (b) of the Development Credit Agreement requiredthat a tariff study should be prepared by June 30, 1980. Due to. (a) delaysof credit effectiveness (October 30, 1980); and (b) lack of reliable-revenue and expenditure figures on which to base an estimate of thecovenanted tariff requirements, i.e. to modify the level and structures ofthe water and sewerage tariffs to produce adequate revenues to cover atleast operating expenses (including provisions for maintenance anddepreciation), the tariff study was deferred to a later date. In May 1982,it was agreed that it would be timely to appoint tariff consultants.However, considering that the draft loan agreement between the AfricanDevelopment Fund and GOL for the financing of the 'Four Centres WaterSupply Project required that within two years of loan signature WSB wouldbe transformed into a public corporate body with full judicial andfinancial autonomy, it was agreed, inter alia, that the tariff study shouldnot be undertaken prematurely and in isolation but should be incorporatedin the transformation study, financed separately by EEC (see para. 4.04).The transformation study was carried out in 1985/86 and the final reportwas submitted by the consultants to WSB in May 1986. 7/

7/ -Almost one year after the IDA project completion mission in June1985. Its conclusions about the inadequacy of the present tariffs arewell in line with the conclusions of the IDA project completionmission. Some of their findings were being used in preparation ofthis report.

25

5.07 Lesotho currently operates a pricing policy which seeks torecover only operational costs directly from the consumer by way of waterand sewerage charges. Water Is charged on the basis of volume used. Thesame tariffs are applied in the capital, Maseru, and all the othersecondary towns. Sewerage is charged by eans of fixed charges related ..othe number of toilet units (points) within particular premises. Thefollowing table shows the tariff rates.

Water Tariffs

Appraisal Report ActualMaloti per Thousand Maloti per Thousand R4lot per

Imperial Gallon Imperial Gallon Thousand m3

1981/82 1.50 1.50 0.331982/83 1.50 2.00 0.451983/84 2.24 2.00 0.451984/85 2.24 2.00 0.451985/86 a/ 2.24 2.44 0.55

a/ In December 1986 the tariff was increased to M 0.65 per a3 fordomestic consumers and M 0.75 per m3 for all non-domestic consumers.(Source: Transformation Study).

While tariffs have generally increased at the rate envisaged in theAppraisal Report, the combinatian of lower seles volumes and higheroperating expenses has meant that the tariff levels have been inadequate tosecure profitable operation (see paras. 5.08 and 5.09).

Expenses

5.08 1982 was the first year for which reasonably reliable expenses(on a cash basis) were available. These were produced by the financialcontroller who was also very familiar with the GOL's accounting system.The total operating expense of M 2,009,000 for 1982 compares with theAppraisal Report forecast of M 1,146,000 - i.e. the actual was 752 higherthan the Appraisal Report. It is apparent that lack of adequate data atthe time of its preparation resulted in the appraisal report grosslyunderestimating the operating expenses for the WSB. Actual expenses werehigher in the categories of employment (due to substantial overmanningwhich has not yet been corrected), transport (due to the rate structure ofthe Government vehicle pool and significantly higher petrol prices) andothers, which includes significant cash expenditures on minor equipmentpurchases which are expensed rather than capitalized. This pattern hascpntinued through 1985.

Operating Earnings

5.09 As a consequence of the above, the WSB has never broken even atthe operational level - before depreciation and interest expense -although, as the result of improved management, there was a significant

26

trend towards a reduction of losses from 1,435,000 Malotis in 1Q81 to270,000 Malotia in 1984.

The Effect of the Secondary Towns Water Supply

5.10 There is a sajor strategic factor impacting on the financialperformnce of WSB (besides the overmanning issue) - namely, the economicsof water supply to the 13 small towns, of which this project is a pert. In1984, the operating deficit of 270,000 Maloti wes distributed as follow.

000 Maloti tarnings (Deficit)

Maseru Water 372Maseru Sewerage (154)Small TOwns (402)New Connections 29

(165)Special Expenditures (105)

(270)

Merely to achieve cash break even at the operating level in the small townsin 1984 would have required an overall 135.71 tariff increase for the smalltowns which presently are charged the same tariff as Maseru. Thus theexpansion of water supply in the small towns will lead to an ever-worseningfinancial contdition for WSB mnless the expansion is accompanied by anexplicit policy decision with respect to tariffs or Governmentsubsidiastion designed to deal with the above disparity between revenuesand expenses for small towns water supply. The need for such policydecisions will be unavoidable if WSB is to function as an autonomousentity.

Depreciation

5.11 Depreciation is not charged in the Government books. Theprovisions made in both the Appraisal Report and the 'actualr of theProject Completion Report are therefore "notional", and are both based on adepreciation rate of 2.52 applied to revalued assets in service. The lowerdepreciation provision in the completion report is due to the previouslymentioned delay in bringing assets into service.

Interest Charged to Operations

5 12 Interest charged to operations represents the interest payable onloans relating to assets once they have been placed in service. In 1985,this amounted to 533,000 Maloti versus the appraisal forecast of 542,000Maloti. Approximately 450,000 Maloti is related to the 'DA credit.However, GOL is not actually charging any interest to WSB; therefore, theinterest shown is "notional". Thus, Govarnment is concealing from itselfthe true extent of WSB's deficit. The uncollected interest represents ahidden loss of revenue to Government.

27

Rate of Return

5.13 All towns served by the Seven Towns Water Supply project hadsignificant operating cash deficits (see follciing Table) in 1934 whichhave increased in 1985. These deficits will continue unless tariffs areadjusted significantly upwards i:n real terms. Therefore, while the capiTUlinvestment data does not perit an indiviu-ual computation, it is quiteapparent that the economic and financial return on the Seven Towns WaterSupply Project is negative.

Analysis of Actual Operating Deficit, 1984

-MalOti (000)Direct Operating Allocated Net

Town Revenue Expense Cash Deficit Overhead Deficit

Teyateyaneng 53 69 (16) 33 (49)Leribe 61 62 (1) 30 (31)Mohale's Hoek 43 82 (39) 39 (78)Mokhotlong 15 27 (12) 13 (25)Mafeteng 50 68 (18) 33 (51)Quthing 14 44 (30) 22 (52)Roma - not available - under University administration

5.14 A negative rate of return was anticipated in the Appraisal Report(see para. 4.05):

" The project has many of the characteristics of a rural watersupply project due to the small size and nature of the Projecttowns. As indicated in para. 6.07, Project water consumers,together with WSB consumers located elsewhere, would pay a tariffbased on the recovery of cash operating costs and debt service.The internal financial rate of return ......would be negativea/...

a/ Ranging from -4.7% in Mafeteng to 1.7% in Teyateyaneng.

VI. INSTITUTIONAL PERFORMANCE

Management and Organizational Effectiveness

6.01 WSB's organizational structure was modified since the appraisalof the project. Proposals for the modifications were prepared by WSB'smanagement and were discussed and reviewed by the WSB's parent ministry andby the Office of Management Service of the Cabinet (Personnel). Therecommendations have been implemented and the structure now represents a

28

'model' approach which, with minor changes also represents an appropriatestructure for use in a future public corporation. The transformation study(completed in May, 1986) again reviewed the current structure in detail andproposed a further up-date of the organization chart, with a futuretransformation of WSB into a public corporation in mind.

6.02 The current organization structure has four members of staffreporting to the General Manager - the chief engineer, the director ofadministration, the financial controller and the manpower developmentoffices. The Inclusion of the manpower development office reflects thecurrent high priority attached to training.

6.03 WSB operates efficiently in those functions where management hasdirect control. Administrative, maintenance and accounting functions areless satisfactory, resulting from lack of autonomy either in respect ofthe functions themselves, or in the ability to hire/fire employees and toset conditions of service. The accounting system is separately commentedon in para. 5.01.

Manpower Development and Training

6.03 There is currently an imbalance in the distribution of manpower.It is evident that a number of vacancies exist within the structure, thefilling of which is critical to improving efficiency. Besides the need tofill the presently vacant post of the chief engineer and strengthening theaccounts department, serious shortfalls exist in sub-professional(technical) levels. A surplus of labor-exists in the semi-skilA:ed andunskilled categories.

6.04 Considerable progress has been made in training local personnel,with an average of 8 man-years training per annum being achieved. Thiscurrent level of training should be at least maintained and where possible,accelerated, with priority given to operator and supervisor training.

6.05 A Manpower Development Study for the water and sanitation sectorwas carried out outside of the project scope. This study, completed inFebruary, 1984, contains very useful recommendations, inter alia, amanpower succession plan which is required for the intended localization ofWSB's staff.

VII. PROJECT JUSTIFICATION

Project Achievements

7.01 The project was originally designed to extend and improve watersu?ply services in the seven project towns, providing safe water to some20,000 new consumers and raising the reliability and service level for theexisting customers. It became obvious in 1982 that due to a priceescalation of about 300%, the project scope had to be drastically reduced.As a result of the project revision, the original project scope was carriedout only in two towns and in the other five the works were reduced to someextension of the reticulation systems and rehabilitation and upgrading ofthe existing source works and treatment plants. However, the revised

29

project still considerably improved the quality of the water In the fivetowns, and brought the water nearer to the customers, thus reducing thenumber of population dependent on unsafe sources. The economic rate ofreturn on the project is negative, but it was justified on unquantiflablesecondary benefits. The physical components of the revised project wereimplemented a designed, on time and within the revised cost estimate.

7.02 The planned institutional lmprovements were only partiallyachieved. WSB's organixation was remodeled and the impact of theappointment of a director and a financial controller on the operationalefficiency of WSB is undeniable. However, the isplementation of thecouercially-oriented accounting system was not achieved, due mainly to itsincompatibility with the government accounting system. However, thefinancial administration considerably improved within the limits of theexisting system. Billing and ^ollection also improved and due to improvedsanagement the operating deficit was reduced during the implementationperiod from M 1.44 million in 1981 to M 0.27 million in 1984.

7.03 Financial results, however, are below expectations. Although thetariffs have generally risen at the rate envisaged at the time of theappraisal, the combination of implementation delays and conseuqently lowersales volumes and higher operating expenses than foreseen prevented theprofitable operation of WSB. It is unlikely that this situation willchange fundamentally unless government changes its pricing policy. It mustbe noted, however, that WSB's operations in Maseru produce positiveoperating earnings.

Bank Performance

7.04 The project was the fir,'t Bank operation in the country's watersupply sector and as such was expected to be difficult. Some of thedifficulties were foreseen at appraisal and measures were taken, such asthe appointment of a director and a financial controller. However, WSB'sinexperience in implementation of similar projects in the country,enhanced by external economic factors and inaccuracies in thepre-investment studies led te a 300 percent cost-escalation which requiredan extensive revision of tle original project. This experience indicatesthat it is important that Bank staff be closely involved in projectpreparation and be thoroughly familiar with country and sectorcharacteristics.

7.05 The project revision was carried out in a thorough and acceptablemanner. The institutional aspects of the project were not modified. Itshould be noted, however, that the condition of introducing a commercialaccounting system was unrealistic.

7.06 The average interval of about 5+ months between supervisionmissions was the minimum required to adequately follow-up the problemissues WSB was and has been facing. The relationship between the Bank andthe executing agency was frank, but pleasant.

30

VIII. CONCLUSIONS

8.01 The project was not adequately prepared and the appraisal waspremature, which led to a major cost escalation and project revision, whichin turn caused a considerable delay in the Implesentation of the project.The revised project was successful in achieving the physical targets. Dueto good management, the rehabilitation works by force account was asuccessful operation.

8.02 The instltutional performance of VSB was acceptable, consideringthe limits of autonomy within which 1S1 had to operate. The introductionof the coercially oriented accounting system was not achieved (thoughsome of the recommendations in the accounting study like improved storecontrol, wer^ carried out well). Retrospectively, owe of the conditions,specifically the Introduction of the comercial accounting which has beenincompatible with the government accounting systeu was not realistic.Similarly, the condition of taking over the operation of the water supplyin Roma, which provides water almost exclusively, to the university was notpractical. It has been operated by and under the university'sadministration and would have only aggravated W8B's manpower problems.

8.03 It is present Govarnment policy that it seeks to recover onlyoperation and maintenance costs of the water supply services. The tariff-levels (increases) during the project cyle were not adequate to achieveeven this target, mainly due to the very high incremental cost of water inthe secondary towns. The same tariffs applied in Maseru and in thesecondary towns means a high level cross-subsidy. The strengthenedtechnical and financial coftrol due to improved management substantiallydecreased the operational deficit. WSB is comnited to work further towardsthis goal, but the situation is not likely to substantially improve withoutfundamental change in government pricing policy.

31

SIM WM WM Smx PnWE? (CR 887-1M)

, SNI AMN SATICU 0WMA, 1980-1990

1960 1985 1990Ac tux Atml proartd

100 i o F~ % 1000 1pi1Aatcai I

1al 1,331 100 1,496 100 1,676 100

Urbm 127 10 187 12 244 15*1ural 1,204 90 1.309 88 1,432 85

Total Water 239 1s 401 27 -I,106 66Urban Wate 8) 63 121 65 244 10DRurab Water 159 13 410 31 864 60

mt smttal 160 12 185 12 856 51

Urbin ttat 28 22 41 22 195 80lbealSs itatom L32 11 196 15 544 38

AUNNI!t 232 Page 1 of 9

LESOTHO

SEVEN TOWNS WATER SUPPLY PROJECT (CR 887-LSO)

PROJECT COMPLETION REPORT

Description of the Physical Project Components

I. General

1.01 As described in the Credit Agreement, the project includedlmprovement and extension of existing water systems and/or construction andinstallation of new water systems, to meet water demands projected for 1986in each of seven towns. The Staff Appraisal Report and the consultants'reports describe those estimated water demands as being the "medium"projections based in part on the assumption that the average population.growth rates in each town between 1966 and 1976 (ranging from 2.2Z per yearto 5.3X per year) would continue until 1996 In the existing water serviceareas In each town and in areas to which the water distribution systemswould be extended. It was assumed also that there would be a gradualincrease in the quality of domestic water service (and per capitaconsumption) until by 1996, when only 101 of households would be served bypublic standposts, 70% by on-plot taps outside the dwellings and 20% byInside taps. Allowances were made for increased water use for commerce andIndustry and by institutions (hospitals, schools and prisons).

1.02 Criteria used originally for functional design of the improvedwater systems to meet the projected water demands for each town icluded thefollowing:

(i) peak daily demand (maximm demand over a 24 hour period)ranging from 1.8 to 2.0 times average daily demand;

(11) peak hourly demand in distribution system equals 2.0 timespeak daily demand;

(iii) all new works to be compatible with most economic schemes tomeet projected demand in 1996;

(iv) water sources to be capable of meeting peak daily demand In1986 (if existing source) or 1996 (if new source) with 5Srisk of failure - i.e., water use restrictions would beacceptable in event of drought more severe than anticipatedin one year out of twenty;

(v) source works, treatment plants and pumoing stations to havecapacity equal to 1986 peak daily demand;

33 ANNEX 2PTiT2Of 9

(vi) transmission and trunk mains to have capacity for 1996 peakdaily demand;

(vii) distribution storage capacity to be equal to 24 hoursrequirements on peak days In 1986; and

(viii) public standposts in built-up areas to be within 150 a ofdwellings.

1.03 The sub-projects, as planned originally and as developed by theconsultants in the final designs, conform generally to acceptable economicand engineering practice and are not extravagant. However, faced with highcosts and financial constraints, less expensive means of meeting short-termwater supply demands (through 1986) for five of the towns were needed.

1.04 The rehabilitation/improvement sub-projects in these towns wererevised to meet basic water supply needs projected for 1986, but thequality of the service was lower than planned originally. The expansion ofthe water supply systems, both in delivery capacity and in area coverage,was reduced, allowing more risk of periodic restrictions on water useduring dry periods, and lower distribution pressures during periods of peakdemand, and slowing down the pace of the conversion from public standpipesto on-plot domestic water supplies.

1.05 The paragraphs which follow describe the major changes-'from theoriginal design of each sub-project and compare the expected water servicelevels of the original and revised sub-projects.

34~ 3k P g 3 of 9

Il. Description of sub-projects

2.01 X feteng

1986Estisated With ProposedActual for Original NehabIlitation

1976 Plan and ibprovments

Total Population InService Area 4,045 5,300 6,510

Production Capacity (m3 /d)

Msxim 1,105 - 1,260Average 232 740 600Reliable 770 1,400 770

Average Supply

Domestic a/ (-3/d) 92 226 *227(Per capita (lcd) (23) (43) (35)

Commercial (o3/d) ) ) )industrilal (m3/d) ) 64 ) 382 ) 146Institutional (m3 /d) ) ) )

Unaccounted for (m3/d) 76 128 93 b/

Total (- 3/d) 232 736 466

Peak Day Demand (o3/d) - 1,400 932

*/ For total population in service area.b/ Assuming 202 of total average supply.

2.02 The principal change in design for Mafeteng was modification ofthe existing treatment works and transmission main rather than replacingthem and postponement of additions to treated water storage and of somerepairs to the Scot's Vlei Dam. An addition was the extension of thqdistribution system to two adjacent villages which accounts for theIncrease in population from the original plan as shown in the table above.

2.03 The average water availability for per capita domestic use - 35lcd for the total population In the service area Is about 502 more than

,provided in 1976 and is about the same as the estimated use with outsidetaps at each dwelling. Maximum production capacity is adequate to coverpeak daily requirements, but reliable dry weather yield would he only about1.65 times average daily use, indicating that there could be water userestrictions for as long as a month in dry years. Water available forcommercial and industrial use are adequate for projected 1986 requirements,but requirements for institutions fall short of projected needs - a 652increase from 1976 rather than the 8 fold increase that was forecast.

AM=X 235 Pap4 of 9

2.04 Mohale's Hoek

1986Xstiated With ProposedActual for Origital Rehabilitation

1976 Plan and Iuprovem.nts

Total Population InService Area 4,200 7,600 6,200

Production Capacity (m3 /d)

Maximum 1,720 2,100 1,720Average 288 930 475Reliable 300 1,800 300

Average Supply

Do*estic a/ (m3/d) 165 350 250(Per capita (lcd) (39) (46) (40)

Commercial (m3/d) 20 27 30Industrial (m3/d) 0 70 0Institutional (m3 /d) 47 322 100

Unaccounted for (m3 /d) 56 161 95 b/

Total (m3/d) 288 930 475 b/

Peak Day Demand (m3 /d) 580 1,770 950

a/ For total population in service area.b/ Assuming 20% of total average supply.

2.05 The proposed rehabilitation and improvement program for Hohale'sHoek was limited to distribution extensions to two villages. There was noextension of water production, treatment, transmission or distributionstorage capacities as planned originally.

2.06 The water supply system at Mohale's Hoek has now adequatecapacity to meet 1986 requirements during normal weather conditionsprovided the distribution system is not overextended, the level of domesticseivice is not raised significantly and no industrial demands are placed ont'he system. Domestic demand averaging at least 40 lcd - consideredadequate for on-plot outside tap residential service in Lesotho - for thetotal population in the service area could be met. Commercial waterrequirements as projected for 1986 could be satisfied. Water available foruse at institutions, while low, would be twice the asount provided in1976. The principal problem would be during dry periods occuring every 5

ANNEX 236 TRgeS of 9

to 10 years, when, for periods of a month or more, water use might have tobe restricted to about two-thirds of average daily requirements.

2.07 Mokhotlong

1986Estimated With ProposedActual for original Rehabilitation

1976 Plan and Improvements

Total Population inService Area 807 1,830 1,830

Production Capacity (m3/d)

Maximum 310 600 310Average 79 208 208Reliable 205 420 310

Average Supply

Doaestic a/ (X3/d) 32 79 79(Per capita (lcd) (40) (43) (43)

Commercial (m3/d) 4 5 - 5Industrial (m3/dl 0 0 0institutional (W3/d) 15 88 88

Unaccounted for (m3/d) 28 36 36

Total (m3/d) 79 208 2OR

Peak Day Demand (m3/d) 160 420 420

a/ For total population in service area.

2.08 Changes between the original plan for Mokhotlong and therehabilitation works and improvements under the revised project is mainlythat the existing water treatment facility was rehabilitated and improvedbut not expanded. Under normal conditions, the original projections ofaverage water demand for 1986 probably could not be met even in a normalrainfall year because of the constraints in the treatment and transmissionfacilities. Consequently, during the month of maximum demand there wouldbe daily periods of low pressure or service interruptions in some parts ofthe distribution system.

ANNEX 2Pge 6 of 9

37

2.09 Quthing

1986E8timated With ProposedActual for Original Rehabilitation

1976 Plan nd improvements

Total Population inService Area 1,590 3,870 3,430

Production Capacity (m3/d)

Maximum 400 600 600Average 88 302 268Reliable 300 600 400

Average Supply

Domestic a/ (m3/d) 27 132 134(per caplta (lcd) (17) (34) (34)

Commercial (m3/d) 9 12 12Industrial (m3Id) 0 0 0Irstitutional (m3 /d) 22 106 68

Unaccounted for (m3/d) 30 52 54 b/

Total (m3/d) 88 302 268

Peak Day Demand (m3/d) 180 600 530

a/ For total population in service area.'W/ Assuming 202 of total average supply.

2.10 Under the revised project of the Quthing water supply system, theintake and treatment plant were repaired and remodeled to a lesser degreethan proposed originally; reliable capacity is about 300 m3 /d. Thefacilities proposed for transfer of water from the Sengu Rivet to theQomoqomong River during low flows were omitted. Existing distributionstorage was rehabilitated but no additions were made.

2.11 The revised scheme would meet the same water demands projectedfor the average day in 1986 as was planned in the original project exceptthat water available for institutional use would be three times the 1976*upply rather than five times. However, the new scheme probably would notmeet projected peak daily demands during the maximum month; at such timeswater use would have to be restricted to about 75% of the demand. On theother hand, Quthing appears to have less growth potential than indicated bythe demand projections. One shortcoming in the revised scheme is a lack ofattention to repair of tubewells required as standby sources to meet peakdemands under some circumstances.

AIWEX 238 Page 7 of 9

2.12 Rosa

1486satimated With ProposedActual for Original Rehabilitation

1976 Plan and Improvements

Total Population inService Area 3,900 */ 6,540 */ 5,500

Production Capacity (u 3 /d)

maxima 1,480 - 1,480Average 322 1,400 890Reliable 585 - 1,340

Average Supply

Domestic a/ (s3WA) 28 c/ 313 125 cl(Per capita b/ (lcd)) (7r (48) (23)

Commercial (m3/d) 1 2 1Industrial (m3/d) 0 16 nInstitutional (m3 /d) 222. 790 - 607

Unaccounted for (m3/d) 71 235 154

Total (u3/d) 322 1,356 R87

Peak Day Demand (*3/d) - 2,580 1,685

a/ Excluding student population at Lesotho National University whichtotaled about 1,000 in 1976 and is projected at 2,100 by 1986.

b/ For total population in service area.cl Numerous private tubevell supplies in Rosa not included.

2.13 The major components of the original plan for development ofRosa's water supply aystem were a dam on the Ohobosheaneng River and a newtreatment plant. Plans for these works have been shelved indefinitely.The revised scheme involved use of a nearby soil conservation reservoir tosupplement Roa 's surface water supply during dry periods, and therehabilitation of the existing treatment works.

2.14 The revised Roma sub-project is expected to satisfy average 1986daily requirements of the university and of the population which uses thesame supply, but at a lower standard of service than the originalobjective. Peak daily water demands in 1986 probably would not be met withthe revised scheme, requiring water restrictions to reduce peak demands byabout 20% during a period of about one month.

ANNEX 239 Page 8 of 9

2.15 Leribe

; The proposed water supply extension works for Leribe town wereincluded in the revised project as originally planned. However, during thedetailed engineering design phase some changes were made. The actual workscomprised the following:

(a) a wellpoint installation, comprising 32 no. wellpoints andassociated riser pipes, collector and header mains;

(b) an intake lower on the Elotse River (13 a high, 6 a internal; diameter), to house 4 no. low lift pumps;

(c) a high lift pumping station for 3 no. pumps (28 litres/seccapacity each) with all ancillary works;

(d) 3.5 km rising main from the pumping station to the servicereservoir (200 mm dia., AC), including all necessarystructures;

(e) reinforced concrete service reservoir, of 500 m3 capacityand an elevated steel water tank of 55 m3 capacity,including all associated pipeworks, valves, chambers, etc.,and also modifications to existing masonry reservqirs;

(f) reticulation system (9.5 km total length, diameters from 50an to 250 mm), including all necessary structures andstandpipes; and

(g) supply and installation of electrical and mechanicalequipment.

2.16 Teyateyaneng

The proposed water supply extension works for Teyateyaneng townwere included in the revised project as originally planned. However,during the engineering design phase some modifications were made. Theactual works comprised the following:

(a) a wellpoint installation comprising 48 no. wellpoints andassociated riser pipes, collector and header mains;

(b) an intake tower on the Phuthiotsana River (9.5 m high, 6 minternal diameter), to house 4 no. low lift pumps;

(c) a new booster pumping station, located on the existingpumping main to house 3 no. pumps (22 litres/sec. capacityeach) with all ancillary works, and modifications to theexisting high lift pumping station at the treatment works;

(d) extension to th. existing rising main (600 m, 150 a, AC)including all necessary structures;

ho ANNEX 2Page 9 of 9

(e) reinforced concrete service reservoir of 810 o3 capacity andan elevated steel water tank of 130 a capacity, includingall associated pipeworks, valves, chambers, etc.;

(f) reticulation system (11.5 km total length, diameters from50 S to 100 us), Including construction of all necessarystructures and standpipes; and

(8) supply and installation of electrical and mechanicalequipment.

141 ANNEX 3Page i of 3

LESOTHO

SEVEN TOWNS WATER SUPPLY PROJECT (CR 887-LSO)

PROJECT COMPLETION REPORT

Evolution of Project Cost Estimates

1. The first cost estimates appeared In two reports dated December1977 and prepared by WSB's consultants. These estimates were based onMarch 31, 1976 prices and the assumed 2 years construction period1978-1980. According to admissions made later by the consultants, therewas in 1976 "very limited information available on construction costs forthis type of work outside of Maseru. This made it difficult to maintain acomparative check on the estimated costs."

2. During appraisal (May 1978) of the IDA financed Seven Towns WaterSupply Project, baseline costs as of March 1979 were established using the:March 1976 estimates and inflation factors developed by the consultantsbased on historic construction cost indices for the Southern Africa CustomsUnion Area. The implementation timetable assumed that procurement andconstruction activities would start mid-1979 and end mid-1982; The pricecontingency factors were based on construction cost trends inSouthern Africa at that time and were higher than those shown in theCentral Projects guidelines for price contingency factors at the time theIDA Credit was made.

3. No further information on cost estimates for either the KfW orIDA projects became available until late 1979. In a July 1980 report ontenders for the Project financed by KfW, and in their letter of August 15,1980 to WSB on the same subject, the consultants wrote that the estimatesfor the KfW six towns project as given in the December 1977 reports hadbeen updated and submitted to WSB in October 1979. The updating tookaccount of inflation (construction period 1980-1982 rather than 1978-1980)and "certain design changes" since 1976. About the same time, the XfWfinanced consultants also did some work on new estimates for the IDAfinanced Project. A Bank supervision mission in November 1979 reportedthat the consultants had reviewed the designs for some of the towns coveredby the IDA project and had prepared an interim revised estimate of costs.Following the mission, IDA wrote to the consultants requesting a fullyupdated cost estimate that reflected delays in the project timetable anddesign changes. This request was repeated in further correspondence, butwas not met until late August 1980, and then only partially. The reason

* given for the delay was continued uncertainty about technical design.

4. The report and correspondence of July and August 1980 relating tothe costs of KfW's 'Six Towns' Project made it clear that the October 1979cost-revisions had not been of the type normally expected in advancedstages of detailed design. In the July 1980 report, the consultants wrote,"Following discussions with the Employer, an accurate estimate of cost of

ANNEX 342 Page 2 of 3

the civil works was never prepared by the Engineer." Also, in the August15th letter the consultants stated, "As you are aware, we did not do adetailed estimate of the cost of the works based on the tender documentsand the full bill of quantities. This was with the agreement of KfW and inthe expectation that a sufficiently large number of tenders would bereceived to ensure that several would be fully competitive and provide across-check on tendered rates for the principal items.'

5. Although the cost estimate revisions In October 1979 were notthorough, they already indicated subatantial cost increases for both theKfW and the IDA financed projects. For the KfW project, the estimatedincrease in baseline costs since 1979 was about 302 at 1979 prices andabout 501 at 1980 prices. Design for the IDA project was much lessadvanced than for the KfW project, but the Interim estimates already showeda cost increase of about 252. In accordance with WSB, the consultantsconceded that the 1976 estimates had seriously underpriced certain items,including pumping stations and dams, and excavation in rock had beenomitted from pipeline estimates. The October 1979 estimates were supposedto correct these deficiencies and to reflect design changes introduced withthe approval of WSB.

6. No further costing was done until the bids for civil works forthe RfW project were received in July 1980. The bid prices revealed theinadequacies of the October 1979 estimates. The lowest bid, beforeallowances for variation of prices, was about 150% of the liaseline costthat had been estimated at 1980 prices and about 2252 of the original 1976baseline cost. The second and third bids were about 202 above the lowestbid. These bid prites precipitated considerable review and analysis ofwhat had gone wrot-g and prompted the preparation of new cost estimates forthe IDA project. These were received by IDA in October 1980, at about thetime the Credit became effective.

7. The new (August/September 1980) cost estimates for the IDAproject were developed from the consultant's analysis of data from thecivil works bids. The analysis included studies of the principal ratesoffered by the bidders, both in relation to each other and in relation tocontract rates for civil works-in-progress in Maseru. There were alsoconsultatations with firms of quantity surveyors operating in Lesotho. Therevised estimate of total capital costs, before allowances for pricecontingencies, but inctuding engineering and physical contingencies, wasabout 3802 of the appraisal estimate. The revised estimates of the totalproject, including the institutional component and engineering for Phase IIand prica contingencies, expressed in local currency was about 2R5% of theappraisal estimate. Expressed in US dollars, the revised estimate ($33.3millions) was approximately 380% of the appraisal estimate due to a 25%decrease in the relative value of the US dollar compared to the Maloti.

8. A number of reasons were given by the consultants for the largedifferences between the original cost estimates (as updated for the projectappraisal) and the latest estimates. These boil down to the following:

Mi) errors and omissions in the preliminary designs andestimates (e.g., inadequate flood protection at intake worksand pumping stations, underestimation of rock in pipeline

43 ANNEX 3Page 3 of 3

excavation and faulty location and sizing of the dam for thescheme for one of the towns);

(ii) design revisions with the approval or at the request of WSB,zone of which could cove under (1) above;

(i) underestiuation of original baseline unit constructioncosts; and

(iv) underestimation of escalation In construction costs between1976 and 1980.

9. An indication of the apportionment of the Increased costs whichrelate to the various factors listed In paragraph 8, obtained from figuresprovided by the consultants, show that items (i) and (ii) resulted in anincrease equivalent to about 80% of the baseline costs including relatedallowances for physical contingencies. Underestimation of the originalbaseline estimate (item iii) was due partially to the lack of applicablecost experience in Lesotho for works of this type. It is possible, but byno means certain, that more research and consultation with contractors atthe time of the pre-investment studies would have produced a more realisticevaluation of costs for a project involving several relatively small jobsat widely scattered sites. For example, a contractor type estimate mighthave been better than one which depended entirely on estimated quantitiesof work and unit prices. From the XfW project experience, tfe c6nsultantscame to the conclusion that in bids for this type of project contractorsmay include a mark-up of 302 or more for mobilization and obligations notcovered in usual bills of quantities.

10. With regard to item (iv) in paragraph 8, the consultants werecaught by drastic changes in the Republic of South Africa's constructionindustry - upon which Lesotho is largely dependent - between the early1970's and 1980. At the time of the original estimates, there was ageneral shortage of construction work in RSA, contractors were particularlycompetitive and there was considerable interest in work in othercountries. However, a construction boom beginning in 1978 soon took upslack capacity and resulted in sharp increases in contractor prices.During 1978/79, bid prices increased about 161, and in 1979/80 they roseabout 23X, substantially more than the increases in labor and materialcosts. Furthermore, interest declined in small jobs outside RSA. Theoriginal costs for the project were developed during a time of relativeprice stability. Annual escalation factors in the order of 81 to 10X to1982 were used in the project cost estimates. Actual costs escalated atleast 501 faster over the same estimating period, resulting in anadditional overall Increase in project costs of at least 30%.

I.

us man im (@574*Wiw -

______ ? CE) pt r)_ - - _ CE) 2

A. e _ ((4U Vb ad bdAtt)

1mrt 469 340 1,422 2,21 3,1I3 24A 1.77 I 1 4.4 4,7 km 23M

bp_meu 372 418 1,432 2,I9 1,060 2 I.M 1* IUhbtuW 59 Go 2,494 3,56 1.400 310 208 43)

obw1.6 mu 7313 E1l 2,B0 2,0 3 1,317 I5 i 2,S)

It*elom 391 449 2,05D 2,93 1,5 424 ,45 So ) Go 45a lots 85

Qldtf3 519 5SW I,7 2,537 1,2S5 242 1,9W0 325)

uiw9S3 1.1( SAM 53 2iD 19 * J 12 37.1) -

Sb-to 4,021 4,46 3,032 21,496 11,011 274 1,0 us SAM SAM Si"6 401

3ghintu hr (A)t

anto 24Q 32 1,832 2,421 15371 GM 2,30 Tic so0 387 Su 44

Sq.vti 154 17? jJ,o jn 90 n3 Io n -no _ 4 453 417 364

9ul_~ 416 478 2,910 4,16 2,4% 0 3,85 m 33 R,A2 u 3,6

hal (A) 4*,4 5,10. 17,932 23,657 13,505 Y% 30353 4(3 6O2 Gem 4,12 5,734

S. butlt'gla pal Iigo"

kCCAttb9tdy 56 110) 300 143 4 4 23 10 a I a 79

T tff study 38 21 2D 23 2 11 8 38 3D 21 U #1 .

10tal (3) 114 131 120 I7 6 5 41 3 107 1U2 O 79

C. PzsWmt ra mt. 11

Oumalt1 urt-i 78 93 1tO 31t 22 26 2S 3 go A 2

D. Cmtr

%tuIca1 3s 423 132.8 13,8 754 13S l.23 1) y N ffrk. 410 1.012 3J° SAN 2.N 36 -J - -

Tal (D) 1,422 1,633 5,13S 7,347 3,716 261 3,712 32)

TM 1m1 01 6,0! 6,960 22,3C0 33,291 17,249 265 2,331 37 65D k, 4,69 37% I_- - - - - ---- I

As d M mH , 1981.As bof ay 111,3 M.

u/ admlhg camt of .Pt. ad cost cf lAr ad _eldca ot wr. carid ott by t. *m-t.7/ Nytcal ad ,ik OcMAt U totalg dAt Mlatt 950,000 e tacluld ta ft at_ bhr deI t=l b *Aeb tcty rwb.

'j twIttiff stuty ad tte Roa It. 3gSqg mm ddefrid to tie fdlawa VMoj LIasi by tie Atrkm tlv It %EL

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46 ANNEX 6Page 1 of 7

LESOTHO

SEVEN TOWNS WATER SUPPLY PROJECT (CR 887-LSO)

PROJECT COMPLETION REPORT

Operating Results and Forecasts

Notes to Financial Projections and Prior Year's Pesults

I. INTRODUCTION

1.01 WSB has not operated as an accounting entity but, as a branch ofthe Ministry of Water, Energy and Mines. Past revenues and expenditures(particularly up to 1982) are not reliably determinable. Accounting is ona cash basis. While there has been significant improvement in controlsover uncollected revenues or accounts receivable, there is inaacquateinformation on debtor, creditor or inventory levels. Capital eipendituresare brought together from various sources in the Government accounts, andfixed asset ledgers and controls do not exist. Production and consumptiondata is recognized by management as being au approximation. Theconsumption data shown is actually the billed consumption collected in themonth or year - rather than the actual consumption for the period.

Consequently, the financial comparisons and projections are based primarilyon the best information WSB has been able to supply the mission, but thequality of this information is limited by the inadequacies of the recordsand the inexperience of WSB' s personnel.

1I. INCOME STATEMENT

Revenues

2.01 The years 1981 through 1984 reflect actual cash collections. Theyear 1985 represents the actual collections, subject to final year-endadjustment.

2.02 The year 1986 represents the revenues budgetted by WSB on thebasis of the revised tariff rates of M 0.55/m3 instituted on February 1,1985. It would appear that the budgetted sales volume is slightly lowerthan is likely to be achieved, given the system expansion underway.

2.03 The years 1987-1990 have been derived from physical demandforecasts supplied by WSB's engineering department, which have beenextracted from the forecasts prepared by consultants for the variousexpansion schemes - i.e. 4 towns, Maseru Phase I1, and the 13 towns. Theseforecasts have been reduced by 25% to obtain forecast billable consumption(representing 15% for system losses and uncollected accounts, and 10%financial reserve on the physical forecast, consistent with 1985 and 1986experience). Tariffs have been assumed to increase at the assumed forecast

47ANNEX 6Page 2 of 7

inflation rate of 10% p.a. No recognition has been given to the clear needfor an additional tariff increase in 1985 in the order of 30%, to achievefinancial viability and to meet the terms of the IDA credit's covenants.

2.04 Sewerage revenues for 1986 are as budgetted by WSB. From1987-1990, a physical increase of 2% p.a. is projected plus 10% p.a. fortariff adjustments in line with inflation.

Operating Expenses

2.05 A 102 annual inflation provision has been allowed for allexpenses from 1986 forward, in addition to any real, physical increasesoutlined below.

Employment Costs

2.06 With approximately 400 personnel engaged in recurrent operations,the Branch is overmanned. No overall increase in personnel is thereroreenvisaged prior to 1990. Growth in physical volume averaging9-10 p.a. can be accommodated by redeployment of personnel, or by limitedrecruitment offset by natural attribution.

Power, Oil and Chemicals

2.07 Consumption is increased proportionately to production,,utilizing the average of the 1983-86 period.

Trarsport and Maintenance Costs

2.08 These are maintained at 1986 levels.

Depreciation

2.09 This is calculated on the average revalued assets in operationfor the year, at a rate of 2.5% per annum.

IIT. BALANCE SHEET

Fixed Assets

3.01 Fixed Assets recorded are not kept by WSB. The fixed assetsessentially represent an estimate derived as follows:

For 1979-85:

(a) The 1978 position, as shown in the Appraisal Report (whichitself was a revaluation of the 1976 physical inventoryundertaken by Binnie Shand Lesotho) was assumed to be valid.

(b) Additions consisted of major projects - i.e., Maseru PhaseI, 6 towns and 7 towns - as they came into service. Thevalue was as given by the Director of WSB and derived fromthe Government accounts for each project followingcompletion.

48ANNEX 6Page 3 of 7

(c) Revaluations of fixed assets and accumulated depreciationwere made annually using Lesotho construction price indexesprovided by Binnie Shand Lesotho.

For 1986-90

(a) Fixed Assets additions have been based on the WSB Director'sestimation on when projects will be placed in service.

(b) An inflation rate of 10% p.a. has been used for revaluation.

Accounts Receivable

3.02 These have been based on balances provided by WSB for the years1983 through 1985. Figures were not available for the years 1979 through1982. For the years 1986-90, the average ratio of receivables to revenuesexperienced in the years 1983-85 was used.

Accounts Payable

3.03 The sundry creditors figure provided for 1985 was used as thebasis for estimating future years.

Loans

3.04 The KfW finance for the 6 Towns Water Project was reconstitutedas a grant, and is therefore considered as a GOL equity contribution toWSB. The ADF financing for the Maseru Phase I Water Supply has beenon-lent to WSB at a 0.752 interest rate. The IDA credit has beenconsidered as on-lent to WSB at 7.52 annual interest rate. ApproximatelyUS$5.1 million has been disbursed, equivalent to M 5.9 million at actualexchange rates.

3.05 For 1986-90, the 4 Towns Water Project is being financed by OPECat 1.02 p.a. interest and ADF at 0.75% p.a. interest. The Maseru Phase IIwater supply is assumed to be financed by ADB and ADF at a composite rateof 4.92 interest p.a. For these loans the interest is charged to an IDC(interest-during-construction) account and then capitalized into FixedAssets upon project completion.

IV. CASH FLOW STATEMENT

4.01 The virtually total absence of available meaningful actualfigures for income and expenditure for the years 1979 and 1980, togetherwith the absence of information with respect to accounts receivable,inventories and accounts payable makes the production of a comparative cashflow statement for the period 1978-1985 virtually meaningless.

* .

MMAND saU MM

WOOD

1978 1979 1980 1981 1982 1983Fslint A4w zktw _ kbm 1_E~ 17~

Plant in Operation I,68W 14,683 13,165 16,014 14,810 17,465 16424 29,862 18,970 39,291 22,138

tees Deprectitfon 4,126 4,827 10,802 5,645 12,492 6,571 14,244 7,754 16,849 9,316 20.079

Not Plant 7,556 9,856 2,363 10,369 2,318 10,8 2,180 22,108 2,121 29,975 2,099

Wazk in Prcgrems 1,062 472 1,262 3,683 1,662 10,008 4,162 4,097 11,662 25 19,362Interest Dwimrg Oxstruction - - - - - - - - - - -

Cash and Banks - 122 - 12 - 136 - 154 - 219 -

Aocounts Rceivable 56 88 - 144 - 18D - 234 - 260 203

bineitories 50 58 - 68 - 80 - 94 121 109 119

Total Oarent Asmts 106 268 - 340 - 396 - 522 - 60B 322 o

8,724 10,596 - 14,392 - 21,298 - 26,727 - 30,6D8 21,743

Eqdty (apital 8,108 9,519 - 9,807 - 10,395 10,861 - 11,142 10,138

betaline Farnis(Hlstorical) - (496)1 - (849)] - (1,201)1 (2,803)1 (1,634) (3,656) (2,395) (4,180)

(Replac t) - - I - - I - - 1 (129)3 - (34) - (81*7)

Revaluation serne - 680 318 1,567 613 2,0 865 .j31 J, 5,A71 1.700

8,101 9,703 - 10,525 . - 116% - 12,721 - 14,213 6,78

log 1Tm Debt 559 826 759 3,789 M , 959 9,501 2,759 13, 8,259 16,265 14,959

AcJosts Payable 57 67 - 78 - 91 - 06 - 12oenraftu - - - - - 12 - - - _ -

57 67 - 78 - 103 - 106 1 -

8,724 10,596 - 14,392 - 21,298 - 26,727 - 30,408 21,743

b1.uR Stinalfince Sh t

1984 l9B5 196_ 1W 19x is" 1990- JkAl mi Bht. Atuwl 4A 1 _ ' _ =Dss It _

Plant in operstin 43,132 24,108 47,024 43,239 51,266 59,333 65,266 71,793 91472 100,619l*s Dqtedetlmia 11,184 22%66 13,318 25,455 15,746 29,= 33,70 3"& 4 ,785 51,665

bet Plaot 31,948 1,742 33,706 17,784 35,52D 30,050 31,496 32,935 46,687 48,954

Naik In Pgrem 50 23,162 50 10,562 50 3,262 13,962 25,962 21,962 26,962Interest DA-lIg nuttuctitm - - - 3 - 41 75 765 1,765 2,615Cmh and enis 218 - 255 - 296 - - - -

koctaxt Raeiwdle 400 235 436 271 476 334 416 495 St2 6bTntoris 127 110 149 13D 174 140 175 20D 250 300

Tbeal OCznrnt bAsts 745 345 840 .401 948 474 59 69 832 996

32,743 25,249 34,596 28,750 36,518 33,827 46,126 60,357 71,246 79,7

luty (wital 11,211 12,509 11,221 17,168 11,221 21,066 22,39 24,657 D,517 30,166RIetd Edwnh

(Historlcid) (3,145) (4,451) (4,045) (4,881) (S,096) (5,173) (5,32D) (5,261) (4,7) (4,323)(bplaeit) - (1 529) - (2,904) - (4,719) (6,09) (9,D55) (11,607 (14,621)

Rasabatluln beeram 8,169 1,961 11,044 2,245 14,0L7 40Q6 7,01 10.U11 137 16.142

16,235 8,490 18j22D 11,628 2D,262 15,262 17,826 20,522 24,40 29,364

tlo Tem Dett 16,343 16,759 16,165 17,100 15,969 18,600 26,8W) 39.1D0 46,100 S0,340Accnts Payable 146 - 171 22 200 25 30 35 40 45 so

Overdrafts 19 40 - 147 - -

165 _ 211 22 347 25 30 35 40 f

32,743 25,249 34,596 28,750 36,518 33,827 46,126 60,337 71,. 9,709-~~~_ _- -- -- *: -:

WmIU AM/ MR EN3trooo~~~~~~~~~~~~~~~~~~~~~~t

1979 1980 1981 1962 1983A4 m -4l waa &tu l jt'f1 JtaAi

Year Be MNardh 31

NEr Sn (I) 393 467 592 787 S12 865 625

10 - - - - 2647 2043

Yea-yr growth X 18.8 26.7 32.9 9.9 74

OPRKG RSM

skte 4pply 393 700 see 1,180 873 1,297 1,297

Smmre 138 162 19D 222 99 26 236

New Oxuuttm + Odta - - 83 - 92

531 N,. 862 N.J* 1,078 643 1.44Q 1.155 1,556 1,607

3qloyment 282 333 390 456 8m 534 950Tmmport 80 94 109 1i 323 1SD 310

Cttuuicals 66 79 101 135 124 161 123

power & Pul 152 182 232 310 218 369 263

AllOther 73 86 99 117 4_ 4 137 485

656 N.A 774 L 931 2,0 1,146 7l 1,33 2.131

Eanhxgs (Deficit) (125) 88 147 (1,435) (256) (854) 27 (224) .w

Depreciatson 330 311 384 350 418 390 592 442 864 514

Net. Income Before Interest (455) (296) (271) (1,825) (336) (1,296) (657) (1,038) *

biterest Cmrgo ID CPS 41 57 81 _ 97 11 101 36

Net iie (IceS) (496) N.L. (353) N.. (352) (1,825) (4M) (1,307) (761) (1,074)

-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~..

WMAD 'SDWE

ltm steoi

1984 1985 1986 1987 1968 19t9 1990

sWaeal ktal J k ds ptudlal _l Rs4t b _ _'

Year Ended March 31

rET SALES (1I) 934 765 1,0I8 811 1,088 850 934 1,093 1,198 1,33

10 3,476 3,689 3,861 4,517 4,968 5,448 5,968

Year-on -year growth 2 8.0 22.4 8.0 6.1 8.0 4J 17.0 10.0 9.7 9.5

Water Supply 2,092 1,564 2,257 1,661 2,437 2,124 2,728 3,305 3,938 4,8D5Sewerage 307 310 360 32D 423 535 59 671 752 842

N.ew 0xectiow + Otbts 1 193 - 257 - 172 20D 220 240 270

2,399 2,067 2,617 2,218 2,860 2,831 3,57 4,196 4,930 5,917 ,

OPERATIM EVEl

bErloy ent 625 1,033 731 1,266 855 1,712 1j883 2,071 2,278 2,5067tTneport 175 366 2D5 378 240 415 457 502 552 6G8Chenicals 189 83 221 288 256 81 237 287 343 418

Power & Fuel 431 308 50'4 511 590 445 627 760 906 1,105

All 0ther 160 547 187 205 217 470 470 517 568 625

1,580 2,337 1,848 2,6 2,168 3,123 3,674 4,137 4,647 5,262

Earnitrs (Def1clt) 819 (270) 769 (430) 692 (292) (147) 99 283 655Depreciatfrm 1,030 578 1,127 842 1,221 1,282 1,557 1,713 2,041 2,401 W

Net. Income Before Intereat (211) (848) (358) (1,272) (529) (1,574) (1,704) (1,654) (1,758) (1,746) * .

Interest Charged to CFS 539 77 542 533 522 533 533 533 511 613

Net !'xmn (toss) (750) (925) (900) (1,8D5) (1,051) (2,107) (2,237) (2,187) (2,269) (2,359) %- -_ _ -_ _ __

S~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~"

53

ANNEX 7Page 1 of 2

LESOTHO

SEVEN TOWNS WATER SUPPL't PROJECT (CR 887-LSO)

PROJECT COMPLETION REPORT

Compliance with Credit Conditions

Credit Agreement

Section 3.01(b) required Complied with as condition ofBowrrower to appoint a Chief Credit Effectiveness.Executive Officer, a FinancialController and two qualifiedengineers.

Section 3.01(c) required Borrower Complied with as conditions ofto make proceeds of Credit Credit Effectiveness.available to WSB under terms ofand conditions approved by theAssociation.

Section 3.02(a)(ii) required the Consultants completed theirBorrower, through WSB, to employ assignment in June, 1981.'-accounting specialists to assistWSB in designing and institutingcommercial accounting system aswell as identifying WSB'sstaffing needs.

Section 3.02 (b) required a Bank has agreed that the tarifftariff study to be completed by study should not be undertakenJune 30, 1980 with the assistance prematurely and in isolation, butof consultants whose be incorporated in the study ofqualifications, experience, and transforming WSB into a publicterms and conditions of corporation. This study (financedemployment are satisfactery to by EEC) was completed in May, 1986the Association. (see paras. 4.04 and 5.06 of this

report).

Section 4.01 required the water Not complied with.Supply assets operated by theNational University of Lesotho atRoma to be transferred tojqrisdition of WSB by March 31,1980 or such other date as theAssociation may agree.

Section 4.02 required WSB to This conditions was not fully metestablish financial reporting and (for details see para. 5.01 of thisrecords along commercial lines. report).

ANNUX 7Paeg 2 of 2

LESOTHO

SEVEN TOWNS WATER SUPPLY PROJECT (CR 887-LSO)

PROJECT COMPLETION REPORT

Compliance with Credit Conditions

ANNEX 7Page 2 of 2

tJ

Section 4.08 required the Not done as commercial accountsBorrower to revalue its fixed were not prepared, and WSB assetsassets annually under methods were not separated from its parentacceptable to the Association. Ministry.

i Section 4.09 required WSB not to In early 1983 WSB entered into; incur expenditure in excess of agreement with AfDB for about

; * US$200,000 without IDA USS6.6 million and OPEC for US$3.nconcurrence. million. This was drawn to the

attention of WSB who then formallynotified IDA asking for approval inretrospect.

Section 5.01(d). As a condition The tariff increase introduced inof Credit Effectiveness, water October 1979, was acceptable asand sewerage tariffs applicable compliance with condition of Creditto WSB's services were to be Effectiveness. However, tariffsincreased to a level sufficient were not raised to adequate levelsto cover all cash operating in the following years to enableexpenses and debt service WSB to cover its operating expensespayments. (for details see paras. 5.07

through 5.09 of this report).

Supplemental Letter No. 1 Sectoral Action Plan was preparedrequired Government to furnish by the Lesotho National Steeringnot later than June 30, 1980 or Committee (NSC) for thesuch other date as may be agreed, International Drinking Water Supplya report covering public health Decade in technical collaborationeducation needs in the water with WHO and UNDP, also coveringsupply and sanitation sector, health education needs in the

sector. Copy of the report wassubmitted to the Bank in December,1983.

.