PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE DO (APL1) WAT.&SANI.TOUR.AREAS

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE DO (APL1) WAT.&SANI.TOUR.AREAS Report No.: AB3474 Region LATIN AMERICA AND CARIBBEAN Sector General water, sanitation and flood protection sector (100%) Project ID P Borrower(s) GOVERNMENT OF DOMINICAN REPUBLIC Implementing Agency Secretaria de Estado de Economia, Planificacion y Desarrollo Palacio Nacional Dominican Republic Tel: (809) ataveras@economia.gov.do Environment Category [X] A [ ] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared November 19, 2007 Date of Appraisal December 3, 2007 Authorization Date of Board Approval February 26, Country and Sector Background Environmental contamination poses a threat to the competitiveness and sustainability of tourism. Tourism has been and remains a traditional growth sector in the Dominican Republic. According to the WTO, receipts from foreign visitors represent 12% of Dominican Republic s GDP. Further tourism growth depends on the quality of the environment, clean beaches, nondegraded coral reefs, properly managed protected areas and on adequate services, including safe drinking water and sanitation. Widespread lack of basic sanitation has already resulted in increased pollution levels in many coastal areas and in the degradation of important and sensitive natural segments of the coast. Such pollution and degradation is one of the main environmental challenges faced by the country, and its impact is already being felt in the tourism industry. Watershed degradation is common in coastal areas, as is illegal or unplanned occupation of the lower parts of most of these small river basins. In many cases, such as in the Gran Puerto Plata area, hotel centers gave rise to the development of uncontrolled peri-urban communities inhabited by low-income families, who provide formal and informal services to hotels and tourists. These communities lack basic water and sanitation services has a causal impact on both the health and quality of life of residents and further aggravate the pollution of rivers and coastal areas. Water scarcity in coastal areas has also increased in recent years, mainly due to poor management of water demand, high unaccounted for water consumption in urban areas, and watershed degradation (springs located at the upper basins constitute the main source of water supply to coastal localities, particularly in periods of drought).

2 Sector issues. Responsibility for the delivery of water and sanitation services was assigned in 1962 to the National Drinking Water and Sewerage Institute (INAPA). As part of a process for decentralization initiated in 1973, several provincial water and sewerage Corporaciones have been created since then to replace INAPA in managing water supply and sanitation systems in the capital, Santo Domingo, and in the provinces of Santiago, Espaillat, Puerto Plata and La Romana 1. Ownership of the service related assets previously held by INAPA was transferred to the newly created public Corporaciones. Together with the decentralization of services, the government also initiated the preparation of a Water and Sanitation Law which would provide a general framework for the sector. The Law in its current draft is still under review and discussion by the National Congress. Given the partially implemented decentralization and the lack of agreement on the proposed Law, the Dominican Republic currently does not have a national strategy, official goals and objectives for the sector, or an entity responsible for setting up such strategy. Separation of roles between agencies is also not clear (together with the existing Corporaciones, several State Secretaries, autonomous government institutions, donors, and NGOs are active in this sector) and responsibilities commonly overlap. In part due to the absence of a national strategy, coverage and quality of services is low and cost recovery is minimal 2. The situation is made worse by the lack of incentives to improve operational and financial efficiency. These issues are clearly illustrated by the problems faced by Puerto Plata Water and Sewerage Company (CORAAPPLATA). 3 (a) (b) Low coverage and quality of services. Water and sanitation services in the Puerto Plata area are deficient: about 40% of the population has no access to water services and 52% to formal sanitation. 4 Wastewater treatment is limited, although some tourism areas, particularly in Playa Dorada, have their own treatment facilities. Quality and continuity of water services are also inadequate. In tourism areas this is particular costly as hotels have to comply with quality standards measured by international auditors. As the quality and reliability of the service is not guaranteed, hotels usually bear the costs of operating individual systems to treat the water used in their facilities and dispose of their wastes. Lack of incentives to promote operational and financial efficiency. Cost recovery is minimal since water tariffs and collection rates are low. As a result, companies like CORAAPPLATA rely largely on transfers from the central budget or the Secretary of 1 The Corporation for Water Supply and Sewerage for Santo Domingo metropolitan area (Corporación del Acueducto y Alcantarillado de Santo Domingo, CAASD) was created in In 1977 the Corporation for Water Supply and Sewerage for the city of Santiago (Corporación del Acueducto y Alcantarillado de Santiago, CORAASAN) and all the systems in the province was created. Similar Corporaciones were later created for the provinces of Espaillat (CORAMOCA, in 1997), Puerto Plata (CORAAPPLATA), and La Romana (CORAROM, in 1998) 2 In the absence of a sector-wide information and benchmarking system, anecdotal information indicates that cost recovery among Corporaciones is in the order of 50%, while for those systems operated by INAPA it is below 5%. 3 CORAAPPLATA was created by Law 142/97 in July 1, 1997 to replace the National Institute for Drinking Water and Sewerage (INAPA) in the responsibility for providing water and sanitation services in the community and province of Puerto Plata. CORAAPPLATA initiated its operations in Sanitation coverage is the population with access to toilet (shared or not) and for water, population with access to piped water supply, in the house, outside the house or through public taps. National Census, 2002.

3 Tourism to cover their operating costs and for investments in systems rehabilitation and expansion of service coverage. 5 Understanding that such situation is not sustainable, some of the larger operators have initiated actions to improve their management capacity and their financial situation. 6 However, these problems persist in most Corporaciones given the mentioned lack of incentives and mechanisms to improve efficiency. Despite these sector challenges, CORAAPLATA has initiated significant reforms in recent years. A financial analysis of CORAAPLATA during the period shows that the utility significantly improved operational and commercial performance despite macroeconomic instability in 2003 and The utility was able to manage the crisis through increased tariffs, improvements in commercial efficiency, and control over operating expenditures. Total revenue in 2006 was 2.5 times the 2002 levels; revenue collection rate went from 50% in 2003 to 77% in 2006; income statements show net profit over the entire period and there was a small remaining amount to partially finance its investments. The debt structure showed that liability was lower than 25% in this period. CORAAPLATA has also invested in information technology, macrometering, micro-metering, commercial systems improvements and other reforms in recent years. See Annex 1 for further details on CORAAPLATA Financial Assessment. 2. Objectives The objectives of the first phase of the proposed APL (the Project, APL I) are: (i) strengthening and consolidating the policy framework of the water and sanitation sector in the Dominican Republic; (ii) improving and expanding access to sanitation and wastewater treatment and disposal services in the Puerto Plata region; (iii) improving the financial and operational performance of CORAAPLATA; and (iv) enhancing operational and commercial performance of other regional utilities and preparing them to participate in the second phase of the Program (APL II). Key indicators and main targets for the operation will include: The National Strategy for the water and sanitation sector has been completed and adopted by the Water Sector Council; 5 CORAAPLATA s current cash revenues of about 110 million Pesos per year cover labor costs in the order of 60 million Pesos and chemicals for about 12 million Pesos, leaving about 40 million Pesos for counterpart financing of investments supported by the central government. Current energy costs for about 105 million Pesos per year are paid by the government a subsidy that is consistent across all Corporaciones. 6 In Santo Domingo, the regional water company (CAASD) entered in 2005 into a commercial management contract, focused on expanding metering and basic commercial operation. This resulted in increases of 213% of the monthly collections and of 41% of the active users since then. In Puerto Plata, the management team that took over CORAAPLATA in September 2004 has carried out several actions to improve the situation, among them a pilot project to increase the company s technical and commercial performance. This resulted in an increase in collections from $2-3 in 2004 to $8-9 million pesos per month in 2006.

4 Number of consumers that receive access to improved or new sanitation and to wastewater treatment and disposal services in the Puerto Plata region, the target for this indicator is to provide access to these services for 128,000 consumers 7 ; CORAAPLATA s operating ratio of total revenue to total operating expenses, the target is to reach an operating ratio of 0.7, including electricity costs; and Number of regional utilities signing Performance and Financial Support Agreements and meeting operational and commercial performance targets outlined in these agreements to participate in the APL II, the target is to have two utilities, other than CORAAPLATA, that have signed such Agreements and meet the corresponding performance targets. The objectives of this Project are consistent with the higher objectives of the Country Assistance Strategy (CAS) discussed by the Board on May 19, updated through the Progress Report dated July 6, 2007-, which focuses on governance and institutional strengthening through two main pillars: (i) stabilize the economy, improve competitiveness, and restore economic growth; and (ii) achieve greater social equity through human development and increased coverage and quality of basic public services. The CAS envisages the proposed Project as one of the building blocks to attain its objectives. The Project addresses the absence of an integrated water and sanitation framework and strategy, while pursuing direct interventions to increase the quality and efficiency of services that would serve as models for further actions in the future. As such, it is an essential step towards reducing environmental degradation in tourist areas. As indicated above, this is critical to guarantee long term sector sustainability and contribute to the country s economic development. By helping in the closing of service gaps in water and sanitation, as well as improving sector performance, the proposed Project will have a significant impact on the quality of life of those living near the tourist areas. Considerable spillovers are thus expected on health, particularly through reduced child mortality and morbidity. 8 Although limited initially to the Puerto Plata region, the expansion of sanitation services to be achieved by the Project is expected to benefit disproportionably the poor as the investments are targeting areas with higher than average poverty rates Rationale for Bank Involvement The Government of the Dominican Republic has requested Bank s support for a program to improve water and sanitation services, addressing the absence of a sector strategy and focusing physical interventions during its first phase in the greater area of Puerto Plata. The rational for Bank involvement is based on: (a) Alignment with the CAS. The proposed Project is fully consistent with the CAS objectives and proposed instruments of assistance (see section 3. below). It also responds to 7 The Project aims to increase access to network sanitation for 18,000 mostly poor residents in the Puerto Plata region. An additional 110,000 residents of the region will benefit from improved or new access to wastewater treatment and disposal. In total the Project will benefit approximately 128,000 residents. 8 Poverty Assessment FY05, page Updated poverty rates for the region are provided in Annex 10 and Section D.4 below.

5 the Country Environmental Assessment (FY04), which identified poor quality of coastal waters, water scarcity and watershed management as major environmental problems for the country. Further, the Project is in line with the Dominican Republic Poverty Assessment for FY06, which highlights continued sustainable growth and better social services to the poor as the main policy options needed to reduce poverty in the lowest-income segments of the population. (b) (c) (d) Government Priority. The government has given priority to the improvement of water and sanitation services for two main reasons: (i) there is a growing social demand for better access to water and sanitation; and (ii) inefficient management of water and sanitation is the main cause of environmental degradation, threatening the sustainability and competitiveness of the tourism sector and the image of the Dominican Republic as a high quality tourist destination. The Government is also committed to reach the Millennium Development Goals in this sector. 10 Long-Term Support Strategy for the Sector. The proposed Project represents a logical next step in the Bank s support to promote sector development and builds on both its experience and comparative advantages. Previous sector engagement under the Wastewater Disposal in Tourism Areas LIL has led to: (i) the initiation of discussions amongst key stakeholders on sector regulatory and institutional functions and of INAPA s role with that of the Corporaciones; (ii) application and testing of a practical and cost-effective technology for environmentally sound disposal of treated wastewater for small and medium size coastal towns; and (iii) discussion on private sector participation as an option to increase efficiency of the sector. The Project will build and expand on these initial advances. Coordination and synergies. Although relatively small in size, the Project is expected to serve as a catalyst to align efforts of the different government agencies and donors to facilitate the discussion and adoption of the National Strategy for the water and sanitation sector. As part of these efforts the government has agreed to establish a Water Sector Council. The Council will facilitate the coordination between government institutions, key donors, bilateral institutions and other key strategic stakeholders. The Council will include representatives of the State Secretaries of Tourism (SET), Public Works and Communication (SEOPC), Public Health and Social Assistance (SESPAS), and Economy, Planning and Development (SEEPYD) 11, INAPA, the Corporaciones and main stakeholders. 4. Description The Project will have the three components described below: 10 According to the Informe Final Objetivos de Desarrollo del Milenio (July 2005) annual investments in water and sanitation were around US$90 millions in the period From those, about US$88 million were aimed to increase water provision. Addressing current deficiencies and increasing access to water and sanitation to reach the Millennium Development Goal N10 would require at least 3.4 times this amount (about US$310 million). 11 This Secretary was created to replace the Technical Secretary of Presidency (STP) by Law , on December 28, 2006

6 Component 1: Technical Assistance for Sector Development (estimated cost US$ 3.55 million of which US$ 3.55 million Bank financing) Component 1 of the Project will support efforts to strengthen and consolidate the water and sanitation sector policy framework. The component will finance technical assistance for the development of the National Strategy for the sector, to strengthen the capacity of national policy and regulatory institutions and improve technical, commercial and operational performance of water and sanitation utilities, including targeted training. Specifically, the component would finance: (a) National Strategy for the Water and Sanitation Sector: The Project will finance consultant services and training for the design of a National Strategy for the sector, as well as to identify key reforms needed. The strategic framework will define: (i) sector financing mechanisms; (ii) performance targets for the decentralized utilities; (iii) tariffs and subsidies policies; and (iv) mechanisms for the monitoring and evaluation of compliance. The framework will also propose a division of roles and responsibilities for implementing sector policies among active institutions and agencies. The Project will also include support for the operation of the Water Sector Council to facilitate inter-agency dialogue and coordination. (b) Institutional Modernization and Strengthening of Utilities: The component will finance consultant services and equipment for a first phase of a national institutional modernization and strengthening program to support the improvement of technical and management capacity in public utilities. Specifically, for utilities willing to enter into a Performance and Financial Support Agreements, the component will finance: (i) medium-term business plans; (ii) modernization of consumer cadastre; and (iii) leakage reduction campaigns. Support under this subcomponent would also include feasibility studies, designs and environmental impact assessments for works to be financed under APL II. The Performance and Financial Support Agreements would outline the specific areas for financing and establish operational and commercial targets over the period of the APL I. Reaching these targets will in effect qualify utilities to receive financing for works and continued technical assistance under APL II. (c) Watershed Management Plans and Strategic Environmental Assessment: In the context of the preparation of the National Strategy for the water and sanitation sector, the Project will finance consultant services to develop two of its keystone elements: (i) criteria for the design of Watershed Management Plans aimed at improving regional environmental management capacity and protecting and reclaiming coastal watersheds (also called Proyectos de Directrices); and (ii) a Strategic Environmental Assessment (SEA) for the northern coast. Watershed management plans would eventually constitute the comprehensive planning basis for the future management of coastal watersheds. The ultimate goal is to develop management plans that, taking advantage of the recreational and economic potential of these watersheds, help protect and improve the quality of river and coastal areas. The SEA would assess north coast development alternatives and design strategies for environmental management compatible with the long-term regional economic development and preservation goals. The assessment also aims to incorporate a broader analysis of competitiveness of the regional tourism sector and related issues of environmental sustainability and management. In this regard, the SEA will evaluate the current and future

7 development trends and plans, as well as alternatives for sustainable pollution control, including the possible construction of additional submarine outfalls for the disposal of wastewater discharges for the region. The SEA will provide a planning baseline and establish future goals and plans for the improvement of environmental quality, including land management objectives for the region. (d) Environmental Education and Public Participation Campaign: The Project will finance a national environmental education and public participation campaign with the objective of both increasing the involvement of a broad cross-section of consumers in the sector reform process and raising the environmental and sector awareness of critical stakeholders and beneficiaries. The campaign will have the specific objectives of: (i) mitigating the potential social and political risks of the Project and the broader strategic reform program by providing accurate and timely information to relevant stakeholders; (ii) engage key governmental, institutional and civil society stakeholders in an informed dialogue around specific aspects of the reform program; (iii) generate public support for the Project and the principal technical components; and (iv) cultivate a greater demand-responsiveness and consumer awareness amongst utilities with the ultimate aim of improving performance. The campaign will be designed in detail during the first year of implementation and will have the additional objective of identifying successful mechanisms for civic education and participation that can be mainstreamed under APL II. Component 2: Rehabilitation and Expansion of Sanitation Services in Puerto Plata (estimated cost US$ million, of which US$ million Bank financed) This component will finance: (a) investments to rehabilitate and improve access to sanitation in the Puerto Plata region; (b) investments to rehabilitate the wastewater treatment plant in San Felipe de Puerto Plata and to study, design and construct submarine outfalls in San Felipe de Puerto Plata and Cabarete; and (c) technical assistance to improve performance and efficiency of CORAAPLATA, to supervise Project investments and to prepare detailed designs for this Project and for APL II. (a) Rehabilitation and Improved Access to Sanitation: A technical, environmental and financial feasibility study was conducted between 1998 and 2000 which identified a medium-term investment plan in the water and sanitation sector in the Puerto Plata region. Investments tentatively identified for this Project are based on this earlier investment program. Specifically, the proposed Project will finance the rehabilitation and expansion of priority sewerage networks and pumping stations in the area of Sosua and Montellano, and in intermediary locations such as Playa Dorada, La Union, and Bombita. These works are critical for the operation of CORAAPLATA and the sustainability of the services provided and for the ability of the utility to reach near full coverage for sanitation in urban areas. Through these investments the Project will finance expanded sewerage to benefit over 18, persons in these localities, and major elements of the wastewater collection and treatment systems, such as trunk sewers and pre-treatments facilities, all linked to facilities built under the LIL. 12 Preliminary estimation base don 2002 Census includes Bella Vista, Alto de los Castillos, La Unión, Montellano, Sabaneta de Cangrejo.

8 (b) Wastewater Treatment and Disposal: The Project will finance the rehabilitation of the wastewater treatment plant of San Felipe de Puerto Plata, a four basins lagoon that receives wastewaters from this city and small localities in its surroundings. The project will also finance the feasibility studies, designs and construction of the submarine outfall to discharge treated wastewaters from this plant and from Cabarete s treatment plant, as well as the interconnection of the Playa Dorada hotel complex to the San Felipe system. (c) Technical Assistance to CORAAPLATA: The Project will finance consultant services, training and equipment to support CORAAPLATA to improve its operational and commercial performance. Specifically, this component will finance the preparation of (i) a comprehensive strategic business plan; (ii) institutional strengthening and efficiency improvement programs to bring the utility to reasonable levels of management, operational efficiency and financial viability; (iii) a baseline-and-after Project analysis; and (iv) detailed project designs and feasibility studies. As indicated above, among these studies the Project will finance the feasibility studies needed to select the best option of treatment and disposal of wastewaters in San Felipe de Puerto Plata and in Cabarete, as well as detailed engineering designs for the construction of these outfalls. Given the interest expressed by both the Government and CORAAPLATA to further involve the private sector in the provision of the water and sanitation services, this potential involvement, modalities, scope and arrangements would be analyzed and discussed during the first year of Project implementation. Should CORAAPLATA management and the government decide to undertake a form of private sector participation; the Project will finance consultant services to assist CORAAPLATA in the design and processing of this transaction. Component 3: Program Administration (estimated cost US$ 4.08 million, including US$ 0.90 million Bank financing) Component 3 will finance costs associated with program management. Loan proceeds will be used to finance Project related audits, equipment, training and technical assistance to strengthen the SEEPYD and CORAAPLATA, as well as individual consultants, with qualifications and experience under terms of reference acceptable to the Bank, for the following purposes: (i) external advisory services on procurement; (ii) monitoring and evaluation; and (iii) specialized individual consultants to support the implementation of the Project, subject to prior approval of the Bank. The Bank will not finance from loan proceeds the salaries and other recurrent costs for either SEEPYD or CORAAPLATA. These costs will be financed through Government and CORAAPPLATA resources, allocated to the Project. 5. Financing Source: ($m.) Borrower 6.5 International Bank for Reconstruction and Development 27.5 Total 34.0

9 6. Implementation Although relatively small in size, the Project is expected to serve as a catalyst to align efforts of the different government agencies through the creation of a Sector Council, charged of coordinating with the key stakeholders, including donors, and of facilitating the discussion and creation of the National Strategy for the water and sanitation sector. The Project will take advantage of synergies with other World Bank Group Units, such as IFC, which plans to finance activities related to the development of production capacity to supply the tourism industry. The Bank team will also work with the IFC to explore potential innovative solutions to facilitate private sector participation in solid waste management in tourist areas including Puerto Plata. Such potential collaboration in the area of solid waste would support a more integrated response to regional environmental problems faced in tourist areas. Lastly, the Project benefits from and builds upon the conclusions of a MIGA study on tourism in the Dominican Republic, focused on Puerto Plata. The Project does not anticipate co-financing arrangements. The Institutional and Implementation Arrangements are the following: Borrower and Executing Agencies. The Dominican Republic will be the borrower of the proposed loan. As described, the Project involves two implementing agencies: a central Project Coordination Unit (PCU) within SEEPYD and CORAAPLATA, the public utility responsible for water and sanitation services in the Puerto Plata province. Subsidiary Agreement: CORAAPLATA will enter into a Performance and Financial Support Agreement (Subsidiary Agreement) with SEEPYD, which will establish key commercial and operational targets and the proposed investment program. The utility will also develop a multiyear business plan that defines the medium-term investment and reform priorities. This plan will serve as the basis for the technical assistance program to be implemented under the Project. SEEPYD. The PCU within SEEPYD, based in Santo Domingo, will be responsible for overall Project coordination, implementation of components 1 and 3 and financial management of all Project components. In particular the PCU will assume direct responsibility for the implementation of component 1, including the development of the National Strategy for the water and sanitation sector and related studies and activities, and for the management and supervision of Project monitoring, evaluation and auditing, under component 3. As such, the PCU will assume an overarching supervision, quality control and coordination role for the operation. Additionally, the PCU will delegate technical staff to CORAAPLATA to support the implementation of component 2 and to strengthen Project management capacity within the utility during implementation. The PCU is currently in place and was responsible for the implementation of the previous Bank-financed LIL. The unit will be strengthened prior to implementation with additional technical, management, fiduciary and procurement capacity. Further details on PCU roles and responsibilities are provided in Annex 6. CORAAPLATA will be responsible for implementing component 2 of the Project under the overall coordination of the Office of the Executive Sub-Director, who reports directly to the

10 Director General of CORAAPLATA. A permanent project execution unit exists within CORAAPLATA for coordinating the implementation of capital investment programs developed in collaboration with external partners. This unit in the context of component 2 implementation will be responsible for: (i) technical and financial reporting; (ii) coordination with SEEPYD; (iii) the preparation of bidding documentation and the procurement process for goods, works and services; (iv) the supervision of these contracts; (v) monitoring and evaluation of project investments; and (vi) activities associated with public education and social mobilization. The unit will rely on specific skills and expertise of existing departments throughout CORAAPLATA. To help CORAAPLATA in this function, the project also foresees technical assistance to strengthen its management and procurement capacity and, as indicated above, technical and management support from the PCU. See Annex 6 for further details. Evaluation Committee. An Evaluation Committee will be formed and convened by CORAAPLATA for the evaluation of bids associated with the procurement of goods, works and services under component 2. The committee will include 5 permanent members drawn from CORAAPLATA and the SEEPYD PCU with up to two more staff or technical consultants to CORAAPLATA depending on the nature of the contracting process. Fiduciary Arrangements. The PCU within SEEPYD will assume overall responsibility for fiduciary aspects associated with the implementation of this Project. While CORAAPLATA will execute component 2 of the Project, the PCU will also retain fiduciary responsibilities for payments made under this component. Although CORAAPLATA will manage the procurement process for goods, works and services under this component, contracts will be signed by SEEPYD and payments will be made by SEEPYD based on the results of bid evaluation and technical supervision activities managed by CORAAPLATA. In this way the Project will mitigate the fiduciary risk associated with multiple executing agencies. See Figure 1 below for a description of contractual, coordination and flow of funds arrangements between key Project actors.

11 The World Bank Technical and Fiduciary Reporting Disbursement Requests Disbursements Payment Authorization C ounterpart Financing SEEPYD Special Account Supervision Technical and Fiduciary C oordination Reporting Evaluation Committee for Component 2 (Goods, W orks and Services) CORAAPLATA Payments for Goods, Works and Services Component 1 and 3 Component 2 Supervision Figure 1. Institutional Arrangements Accounting, Financial Reporting and Audit Arrangements. The PCU within SEEPYD will assume overarching responsibility for fiduciary control and supervision under the Project. This will include a supervision and coordination arrangement with CORAAPLATA. Both the PCU and CORAAPLATA will be responsible for maintaining financial records and will prepare detailed Project reports satisfactory to the Bank. The PCU will be responsible for preparing the consolidated Project accounts including reports for the Bank and will keep records of load proceeds receipts and disbursements, including those from the Special Account. The PCU will be required to have financial statements audited, according to international standards, by auditors satisfactory to the Bank under a unified annual audit process. Audits will be made available to the Bank by June 30 of each year for the preceding year. The audit will include separate opinions on the use of the SA and of Statement of Expenditures (SOEs). Project Operational Manual. A draft Project Operational Manual has been prepared and reviewed by the Bank. The Manual will serve as a critical tool for Project implementation and has been developed to maintain the institutional memory of the Project. The Manual includes all key procedures and guidelines for Project implementation. Specifically, the Operational Manual includes detailed information on the methodology for environmental management and related safeguards compliance, document flows, standard progress reporting, procurement and disbursement procedures, operational arrangements between participating agencies, and model terms of reference for key tasks and assignments planned under the operation. A series of recommendations have been made by the Bank to improve the Manual. A final draft of the Operational Manual will be reviewed prior to Negotiations.

12 Water Sector Council. The Council will provide strategic guidance to the PCU towards the implementation of technical assistance activities under component 1 of the Project, including the development of criteria for the strategic environmental assessment, watershed management, environmental education and public participation. The Council will serve in an advisory capacity to the Project only and will not have a formal decision-making or supervisory role with regards to Project implementation. 7. Sustainability The Project addresses long term sustainability through: (i) the development of sector strategies which will help improve the institutional and operational performance of service providers, (ii) the introduction of performance indicators and targets for efficiency gains to which the operator executing the proposed interventions are committed, which will lead to convergence to a sustainable situation in the long term; (iii) information and education of civil society about sector issues and promotion of public participation. Most importantly, sustainability is underpinned by the strong ownership and commitment of CORAAPLATA to implement the proposed Project and of the Government to implement the required institutional and policy frameworks. Critical Risks and Proposed Mitigation Measures Risk Proposed Mitigation Measure(s) Rating Lack of Institutional Coordination. There is little coordination among key government agencies and institutions involved in the water sector, such as: SEEPYD, SET, SEOPC, SESPAS, INAPA and the Corporaciones, as well as among key donors that are active in the country. Counterpart Financing. The disbursement of recent Bank operations in DR has been adversely effected by intermittent access to counterpart resources. Additionally, in the case of the proposed operation, a risk persists that if the operation goes to Congress for approval in January 2008 planned counterpart resources for the Project may not be available until the 2009 Budget. A general lack of ownership and awareness by communities and key sector stakeholders as to the Establishment of the Water Sector Council as the entity charged with the responsibility for setting policies and oversight of the water sector, including supporting the development and implementation of the National Strategy for the sector. The Council will include all of the key sector agencies and institutions and will coordinate with key bilateral and multilateral donors such as the IDB, Spain, Japan, USAID, etc. In the medium-term the development of the National Strategy for the sector will reinforce coordination by clarifying roles and responsibilities for key actors. The CMU is currently coordinating with Hacienda and SEEPYD to reach an appropriate and transparent solution to counterpart availability across all DR operations. Options being evaluated include both: (i) 100% financing of first year investments; and (ii) advancing Congress approval of the proposed operation to allow for counterpart resources to be included in 2008 budget. The team has also discussed with the CMU the possibility of back-loading counterpart financing into calendar years 2009 onwards. The Project includes a comprehensive approach to the development of the sector strategy, by supporting the development of criteria for the development of M H S

13 magnitude of problems in the sector hinder the development of consensus around a comprehensive sector strategy and reform program. Competing financing sources for the sector weaken the reform process. Other government institutions are active in the sector, as are donors and financing institutions. Availability of financing from these sources without a transparent incentives framework could derail the adoption of needed reforms. Limited Institutional Capacity of CORAAPLATA. While CORAAPLATA is on a reform path with improved performance in recent years, concerns persists regarding the operational and financial capacity of the utility to implement new capital investment, maintain existing facilities and improve the quality and coverage of the services Opposition to the Project due to perceived negative opinion of the local communities regarding wastewater treatment and disposal in coastal areas. Previous cases of improper management of wastewater disposal have resulted in increased pollution levels in coastal areas and in the degradation of important and sensitive natural segments of the coast. There is concern among stakeholders and the general watershed management plans as well as the preparation of a strategic environmental assessment of the northern coast that looks not only into sector specific issues, but also into the long term planning and development of these areas. Further, the Project includes support to involve civil society and key stakeholders in order to make the process more participatory and sustainable. The Project includes a series of measures to mitigate this risk. First, the sector Strategy will aim to outline a framework for sector financing with clear performance incentives for regional utilities. Second, the Project will pilot the use of Performance and Financing Agreements that specify clear commercial and operational targets with CORAAPLATA and, at a more modest scope, with other utilities. Third, the Project will make extensive use of public dissemination and participation campaigns to build popular support for reform. Lastly, the use of an APL instrument provides the flexibility and long term vision needed for undertaking such complicated process, without requiring the Government decision on heavy upfront discussions. The Project includes a strong component for institutional strengthening of CORAAPLATA, to further advance on the actions already taken by its management team. PSP is also regarded with great interest by the Government for CORAAPLATA following the quite successful Partial Management Contract (PMC) in Santo Domingo and the pilot study on the largest consumers in the Puerto Plata area, and the Project foresees the possibility of supporting this approach. However it would have to take place in a different context than the concession model pursued through the LIL, or the current PMC model (CAASD). Given the current conditions, the new arrangements would need to be defined. The Project incorporates two mechanisms to mitigate this concern: Environmental Education and Public Participation Campaign. The Project will finance a national environmental education and public participation campaign with the objective of both increasing the involvement of a broad cross-section of consumers in the sector reform process and raising the environmental and sector awareness of critical stakeholders and beneficiaries. The campaign will have the specific objective of mitigating the potential social and political risks of the Project and the broader strategic reform S M M

14 public, whose livelihoods depend on the quality of coastal waters, for the efficiency and reliability of the submarine outfalls to control pollution. Fiduciary Risk. Project financial management responsibilities are concentrated in the SEEPYD PCU which will manage the Special Account. Procurement responsibilities are split between SEEPYD and CORAAPLATA as described in this document. Financial management performance of the SEEPYD PCU under the LIL was moderately satisfactory. Current FM staff in the unit and in CORAAPLATA was not in place during LIL implementation and have limited exposure to Bank FM and procurement practices. A risk exists that the unit will not have adequate capacity to perform fiduciary responsibilities. Overall Risk Rating program by providing accurate and timely information to relevant stakeholders. Feasibility studies for the submarine outfall to discharge treated wastewaters. To ensure the efficiency and reliability of the wastewater disposal, the Project will finance consultant services to carry out feasibility studies to select the best option of treatment and disposal of wastewaters in Cabarete and in San Felipe de Puerto Plata. Results of these studies will be made public The SEEPYD PCU will be strengthened prior to Loan effectiveness with enhanced financial management and procurement capacity. Both SEEPYD and CORAAPLATA fiduciary staff will receive intensive training in Bank procedures during this period. Additionally, the Project during first year of implementation will include more intensive fiduciary supervision to ensure that adequate capacity exists. M (FM), H (PR) S 8. Lessons Learned from Past Operations in the Country/Sector The proposed operation builds upon the Bank s experience in the sector and particularly draws back on the lessons learned from other projects in coastal tourist areas recently completed. Main lessons learnt and incorporated in Project design are: Address the lack of stable sector policies. In the Dominican Republic, policies often change with the government cycles due to the absence of an institutional framework responsible for the sector strategy. The Project addresses not only the development of a sound and comprehensive National Strategy for the sector, but also includes among the actions to be financed in support of the development of the Strategy the creation of a Sector s Council where main sector stakeholders will be represented. The Project also aims to address the difficulties that led to the lack of agreement among sector stakeholders regarding the proposed Water Supply and Sanitation Law,

15 by adopting a phased approach based on the development of a sector strategy, linked to specific institutional advances in a first Corporación (CORAAPLATA). Focus on efficiency and performance gains. For related operations in the Dominican Republic the Bank previously considered requiring the establishment of concessions and other forms of private sector participation (PSP) to reduce the risks associated to weak management capacity. The approach chosen, rather than focusing on the management model of the service operator, focuses on defining clear performance objectives that should induce efficiency gains. Nevertheless PSP is regarded with great interest by the Government and by CORAAPLATA, following the quite successful partial management contract in Santo Domingo and the pilot project done in Puerto Plata to improve technical and commercial performance. Options for PSP will be evaluated during the first year of the Project and should the Government and CORAAPLATA decide to use this approach, the Project will finance consultant services under Component 1 to support the design and implementation of such participation. Efficiency of submarine outfalls. In the previous LIL and in similar projects in other regions, particularly in Croatia and Dominican Republic, small-diameter submarine outfalls were successful applied and tested as a low cost technology for environmental sound disposal of treated wastewater for small and medium size coastal towns. The existing depths, combined with the prevailing temperature-salinity profiles in the northern coast of the Dominican Republic, seem to indicate that this could be the adequate solution for other areas under the Project. The proposed Project would favor the use of this technology. Incorporate public participation and education. A broad body of knowledge in the water and sanitation sector clearly demonstrates the importance of closely monitoring consumer satisfaction with service provision, as a means to better target investments and focus rehabilitation efforts. Additionally, it is well established that involving and educating consumers on the issues of service management should be a critical component of any utility s demand management strategy. Because to a large extent both these elements are absent in the Dominican Republic, there is little involvement from civil society and critical stakeholders in the control of service providers or to ensure continuity of the sector policies. The proposed Project will support activities to promote civil education and knowledge of costumers in these areas, as well as mechanisms for civil society participation to oversee Project implementation. 9. Safeguard Policies (including public consultation) As has been described above, the investment program involves a combination of: (i) identified investments in the expansion of sanitation networks in Sosua, La Union and Montellano, to be developed as a continuation of the investments supported under the previous LIL, and (ii) investments yet to be defined and designed for treatment and disposal of wastewater in San Felipe de Puerto Plata, the interconnection of Playa Dorada and for the disposal of treated wastewaters in Cabarete. The expansion of the sanitation networks will involve traditional and largely uncomplicated works in pumping stations and primary and secondary networks. The scope of the proposed rehabilitation of the wastewater treatment plant and the construction of the disposal infrastructure is yet undetermined in terms of treatment and disposal levels and methodologies and these investments will require additional feasibility studies to determine the

16 specific designs. The anticipated environmental and social impacts of this investment program are nevertheless considered to be largely positive with no foreseeable adverse impacts. However, these latter investments are of a larger magnitude and require a higher degree of environmental management and supervision to mitigate potential adverse impacts on the natural environment and beneficiary communities. It is for this reason that the Project has been classified as a Category A investment. Based on the current Project design, the task team recommends that the Project trigger the following Bank safeguard policies: (i) Environmental Assessment (OP 4.01) given that Project investments may have environmental impacts that will require specific prevention and mitigation measures to ensure the sustainability of investments; (ii) Natural Habitats (OP 4.04) given that the Project involves the disposition of treated wastewater through a submarine outfall that has the potential to impact marine ecosystems if appropriate management and control instruments are not in place; and (iii) Cultural Property (OPN 11.03, being revised as OP 4.11) given that all Project investments have not been identified at the level of feasibility studies and design; and that procedures would need to be specified to address chance find situations. Similarly, even though all foreseen works are to be situated in roads or public areas, no involuntary resettlement or land purchase is expected and procedures have been agreed to modify the alignments whenever such cases do appear and can be economically done, the task team also recommends that the Project trigger the Bank safeguard policies for Involuntary Resettlement (OP/BP 4.12). The Project also includes appropriate screening to ensure that the related safeguard policy for Pest Management (OP/BP 4.09) is not triggered by any investments. Concrete safeguards capacity building measures have been identified for both the SEEPYD PCU and CORAAPLATA. Personnel identified to manage environmental and social safeguard issues in both agencies with a few exceptions do not have extensive experience with Bank safeguard procedures. During the preparation of EA and Resettlement Framework documents, personnel in both agencies were provided with orientation on relevant policy issues. Identified staff will receive more intensive training prior to effectiveness. Public Consultation: As indicated, two public consultation campaigns were held, one on June 11, the second one between September 4 and 8, The purpose of these consultations was to present and review: (i) the proposed investment program; (ii) the draft environmental management framework which defines environmental screening, analysis, approvals and mitigation measures; (iii) the terms of reference for the EIA to be carried out on those yet undefined investments in wastewater treatment and disposal; (iv) the draft resettlement framework; and (v) the terms of reference for the social assessment to be carried out during implementation. The second public consultation focused on presenting to the potential beneficiaries in Sosua and Montellano the designs and draft Environmental Assessments of the proposed sewerage expansion investments for these localities. These consultations involved representatives from the PCU, CORAAPLATA and local government as well as representatives from the regional private sector, civil society, NGOs, leaders of community organizations, focus groups, public in general and the press (print, radio, and TV). Participants in the consultation confirmed that the social and environmental management instruments presented reflect appropriate prevention and mitigation measures that would enhance the sustainability of Project investments. A series of recommendations were also made to fine-