IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD IBRD-76300) ON A LOAN IN THE AMOUNT OF US$136.0 MILLION EQUIVALENT AND AN

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD IBRD-76300) ON A LOAN IN THE AMOUNT OF US$136.0 MILLION EQUIVALENT AND AN ADDITIONAL FINANCING LOAN IN THE AMOUNT OF US$103.0 MILLION EQUIVALENT TO THE STATE OF CEARÁ Report No: ICR1973 WITH THE GUARANTEE OF THE FEDERATIVE REPUBLIC OF BRAZIL FOR A CEARA INTEGRATED WATER RESOURCES MANAGEMENT PROJECT Sustainable Development Department Brazil Country Management Unit Latin America and the Caribbean Region December 28, 2012

2 CURRENCY EQUIVALENTS (Exchange Rate Effective May 15, 2012) Currency Unit = Real (R$) R$1.00 = US$2.02 US$ 1.00 = R$0.50 FISCAL YEAR ABBREVIATIONS AND ACRONYMS CAGECE Companhia de Água e Esgoto do Ceará Ceara Water Supply and Sanitation Company CAS Estratégia de Assistência para o País Country Assistance Strategy COGERH Companhia de Gestão dos Recursos Hídricos Ceara Water Resources Management Company CQS Seleção Baseada na Qualificação do Consultor Selection Based on the Consultants Qualifications DNOCS Departamento Nacional de Obras contra a National Department of Works against Seca Droughts DO Objetivos de Desenvolvimento Development Objectives EIA Estudo de Impacto Ambiental Environmental Impact Assessment EMF Arcabouço de Gestão Ambiental Environmental Management Framework ERR Taxa de retorno econômica Economic rate of return FM Gerenciamento Financeiro Financial Management FMR Região Metropolitana de Fortaleza Fortaleza Metropolitan Region FSL Empréstimo com Amortização Constante Fixed-Spread Loan FUNASA Fundação Nacional da Saúde National Health Foundation FUNCEME Fundação Cearense de Meteorologia Ceara Meteorological Foundation FY Ano Fiscal Fiscal Year ICB Concorrência Internacional para Contratação de Obras International Competitive Bidding IDACE Instituto do Desenvolvimento Agrário do Ceará Agrarian Development Institute Ceará IERR Taxa Interna Econômica de Retorno Internal Economic Rate of Return IFRR Taxa Interna Financeira de Retorno Internal Financial Rate of Return IWRM Gerenciamento Integrado de Recursos Hídricos Integrated Water Resources Management LCR Região da América Latina e Caribe Latin America and Caribbean Region LCS Seleção pelo Menor Custo Least-cost Selection M&E Monitoria e Avaliação Monitoring and Evaluation NCB Concorência Pública Nacional National Competitive Bidding NGO Organização Não Governamental Nongovernmental Organization O&M Operação e Manutenção Operation and Maintenance PAC Programa de Aceleração do Crescimento Growth Acceleration Program

3 PAD Documento de Avaliação do Projeto Project Appraisal Document PCPR Projeto de Combate à Pobreza Rural Rural Project Alleviation Projects PIU Unidade de Implementação do Projeto Project Implementation Unit PGRH Projeto de Gerenciamento de Recursos Hídricos da Bahia Bahia Integrated Water Resources Management Project PROAGUA Programa Nacional de Desenvolvimento Federal Water Resources Management Nacional PROAGUA Semi-árido dos Recursos Hídricos Sub-programa de Desenvolvimento de Recursos Hídricos para o Semi-Árido Brasileiro Project Additional Financing Federal Water Resources Management Project PRODHAM Projeto-Piloto de Gestão de Micro-bacias Micro Watershed Management Pilot PROGERIRH Projeto de Integração e Gerenciamento dos Recursos Hídricos do Ceará Ceara Integrated Water Resources Management Project PROURB Projeto de Desenvolvimento Urbano e Gestão de Recursos Hídricos do Ceará Ceara Urban Development and Water Resources Management Project QAG Grupo de Garantia de Qualidade Quality Assurance Group QCBS Seleção com Base em Qualidade e Custo Quality- and Cost-Based Selection REA Avaliação Ambiental Regional Regional Environmental Assessment SAT Equipe de Salvaguardas Safeguards Advisory Team SBD Documento Padrão de Licitações Standard Bidding Document SEAIN Secretaria Especial de Assuntos Secretariat for International Affairs Internacionais SIAFI Sistema Integrado de Administração Financeira Integrated Federal Financial Administration System SIGERH Sistema Integrado de Gestão de Recursos Water Resources Management Hídricos Integrated System SIGMA Sistema de Informações Gerenciais Project Information System SOE Declaração de Gastos Statement of Expenditures SOHIDRA Superintendência de Obras Hidráulicas do Ceara Hydraulic Works Company Ceará SRH Secretaria de Recursos Hídricos. Secretariat for Water Resources TOR Termo de Referência Terms of Reference UGPE Unidade de Gerenciamento de Programas Special Programs Management Unit Especiais WRM Gerenciamento de Recursos Hídricos Water Resources Management WUA Associação de Usuários de Água Water User Association At Appraisal: Vice President: David de Ferranti Country Director: Gobind T. Nankani Sector Director: John Redwood Project Team Leader: Larry D. Simpson

4 Vice President: Country Director: Sector Manager: Project Team Leader: ICR Team Leader: At ICR: Hasan A. Tuluy Deborah L. Wetzel Karin E. Kemper Erwin De Nys/Paula Freitas Erwin De Nys/Paula Freitas

5 BRAZIL Ceará Integrated Water Resources Management Project CONTENTS Data Sheet A. Basic Information...i B. Key Dates...i C. Ratings Summary...ii D. Sector and Theme Codes... ii E. Bank Staff..iii F. Results Framework Analysis.iii G. Ratings of Project Performance in ISRs xi H. Restructuring (if any) xi I. Disbursement Profile...xii 1. Project Context, Development Objectives and Design Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1. Project Costs and Financing Annex 2. Outputs by Component Annex 3. Economic and Financial Analysis Annex 4. Bank Lending and Implementation Support/Supervision Processes Annex 5. Beneficiary Survey Results Annex 6. Stakeholder Workshop Report and Results Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders Annex 9. List of Supporting Documents Annex 10. Safeguards MAP IBRD 39667

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7 A. Basic Information Country: Brazil Project Name: Project ID: P L/C/TF Number(s): ICR Date: 12/31/2012 ICR Type: Core ICR Lending Instrument: SIM Borrower: Original Total Commitment: Revised Amount: USD M Environmental Category: A Implementing Agencies: Secretariat of Water Resources Ceara Water Resources Management Company Ceara Integrated Water Resources Management Project IBRD-45310,IBRD STATE OF CEARA BRAZIL USD M Disbursed Amount: USD M Cofinanciers and Other External Partners: B. Key Dates Process Date Process Original Date Concept Review: Appraisal: Approval: Revised / Actual Date(s) 07/27/1998 (OP) 02/05/2008 (AF) Effectiveness: 05/24/ /24/2000 (OP) 11/24/2009 (AF) 03/15/1999 (OP) 09/16/2008 (AF) Restructuring(s): 01/06/2000 (OP) 12/18/2008 (AF) Mid-term Review: 08/01/2002 (OP) 08/01/2004 (OP) Closing: 06/30/ /26/ /21/ /02/ /04/ /31/ /08/ /31/ /29/ /24/ /12/ /07 / /14/2003 (OP) 07/14/2010 (AF) 04/30/2009 (OP) 12/31/2011 (AF) i

8 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Moderately Unsatisfactory Moderate Moderately Satisfactory Moderately Unsatisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Moderately Unsatisfactory Quality of Supervision: Moderately Satisfactory Implementing Moderately Agency/Agencies: Unsatisfactory Overall Bank Overall Borrower Moderately Moderately Satisfactory Performance: Performance: Unsatisfactory C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Project No at any time (Yes/No): Problem Project at any time (Yes/No): DO rating before Closing/Inactive status: Yes Moderately Satisfactory Quality at Entry (QEA): Quality of Supervision (QSA): Satisfactory Satisfactory Rating D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) General agriculture, fishing and forestry sector 6 Sub-national government administration Water supply Theme Code (as % of total Bank financing) Land administration and management Other environment and natural resources management 15 Rural services and infrastructure Water resource management ii

9 E. Bank Staff Positions At ICR At Approval Vice President: Hasan A. Tuluy David de Ferranti Country Director: Deborah L. Wetzel Gobind T. Nankani Sector Manager: Karin Erika Kemper John Redwood Project Team Leader: Erwin De Nys/Paula Freitas Larry D. Simpson ICR Team Leader: ICR Primary Author: Erwin De Nys/Paula Freitas Erwin De Nys Paula Freitas F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) (a) Increase the sustainable water supply for multiple uses, improve the efficiency of Ceará's integrated water resources management system and decrease vulnerability of poor populations to cyclical drought through: (i) improvements in the institutional, legal and administrative managerial frameworks with emphasis on participatory management mechanisms; (ii) the rehabilitation and new construction of the hydraulic infrastructure aimed at the integrated management of river basins; (iii) the development and consolidation of sustainable cost recovery, management, operation and maintenance systems for the hydraulic infrastructure; and (iv) the integration of environmental policies with water management policies. The main performance indicators are: (i) the percentage increase in the volume of bulk water supplied by COGERH, the states water resources management company; (ii) the increased reliability of water supply and resistance against droughts; (iii) the implementation of new and/or improved water resources management, operation and maintenance tools; (iv) increase in the number of users with enhanced reliable access to quality water; and (v) the percentage of recovery for fixed and variable costs of providing water. b. Stimulate multiple use, efficient and shared management of Ceará's water resources. The project would support the following actions: (i) organization and strengthening of river basin committees and water user associations; (ii) implementation and propagation of more effective water use and management technologies; and (iii) education, information and training of the general public and water users aimed at efficient water use, demand management and the reduction of waste. The main performance indicators are: (i) the increase in the number of river basin committees and water user associations, including the number of people participating in these entities; (ii) the decrease of the physical waste of water and the increased productivity in the economic sectors which use water as a production input; (iii) the percentage of billed water services v/s collections of bills. c. Promote the improved management of soil and vegetation in tributary watersheds to enhance water conservation, minimize erosion and maximize natural water storage iii

10 mechanisms, through the adequate management of critical micro-basins and groundwater resources. The project would foster the hydro-environmental recovery of selected microbasins in the state by increasing the vegetated area, controlling run-off, minimizing erosion, increasing water retention times, increasing groundwater recharge, developing aquifer management plans and recharge zone protection plans, improving the local infrastructure and production methods; and by evaluating new technologies. The main performance indicators are: (i) hectares of rehabilitated watershed vegetation, (ii) number of micro-basins stabilized, (iii) measured runoff hydrographs as a function of time and volume for specific microbasins, (iv) measurement of volumetric erosion in key microbasins and sedimentation change in key catchments, (v) number of recharge protection zones established, (vi) number of aquifer and groundwater management plans developed. Revised Project Development Objectives (as approved by original approving authority) (a) PDO Indicator(s) Indicator Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Indicator 1 : Increase in the volume of bulk water distributed by COGERH. Value 6.92 m3/sec (volume m3/sec m3/sec quantitative or monitored by COGERH accumulated accumulated Qualitative) at baseline) Date achieved 05/24/ /31/ /31/2011 Comments (incl. % achievement) Indicator 2 : Value quantitative or Qualitative) The increase attributable to the Project is m3/sec. After completion of the six pipelines under the AF, expected by mid-2013, the total increase attributable to the Project will be m3/sec (107% achievement). Increase in the recovery margin/level of fixed and variable costs of the integrated system. 70% of O&M costs as informed by COGERH at 100% recovery 100% recovery implementation start Date achieved 05/24/ /31/ /31/2011 Comments (incl. % achievement) 100% achievement. COGERH has become self-sufficient from the State since % of fixed and variable costs come from water charges, and the remaining 6% is from other sustainable revenue. Indicator 3 : Increase in the levels of guarantee of water supply. Value quantitative or Qualitative) 10, million m3 total volume of water accumulated in dams monitored by COGERH 10, million m3 total volume of water accumulated in dams monitored by COGERH 10, million m3 total volume of water accumulated in dams monitored by COGERH iv

11 Date achieved 05/24/ /31/ /31/2011 Original target considered the increase result of the six reservoirs under the Comments Original Project. Two reservoirs completed under the AF, led to total increase of (incl. % million m3. When all dams are complete, total will million m3 achievement) (156% achievement) Implementation of new management tools to improve the efficiency of Ceara's Indicator 4 : Integrated Water Resources Management System, such as permit and tariff policies. Value quantitative or Qualitative) Well-integrated Weak integrated mgmt and efficient system presenting fragile management institutions and policies system presenting and lacking coordination consolidated among them. Bulk water institutions and tariffs without underlying policies and analysis, applied only to effective urban use. coordination among them. v Well-integrated and efficient management system presenting consolidated institutions and policies and effective coordination among them. Introduction and application of water tariffs in all sectors; strengthened bulk water operating agency. Date achieved 05/24/ /31/ /31/ % achievement. O&M plans for hydraulic structures; Real time data for Comments reservoir operations; dam safety rules and procedures; groundwater monitoring; (incl. % groundwater mgmt plans started; prioritization of hydraulic infrastructure achievement) selection criteria. Increase in the number of users with stable and guaranteed access to water for Indicator 5 : multiple uses. Value quantitative or Qualitative) 116 Not defined 380 Date achieved 05/24/ /31/ /31/2011 Comments (incl. % achievement) Indicator 6 : The indicator refers to bulk water users. No target was defined for this indicator. The actual value includes large urban water supply agency CAGECE, industrial and large touristic entrepreneurships, and a portion of the irrigation perimeters users. Decrease in the physical waste of water and increase in use efficiency through new technologies and the increase in productivity of sectors that use water as a raw material. Value quantitative or Qualitative) 30% 25% Not available Date achieved 05/24/ /31/ /31/2011 Comments (incl. % achievement) The Project did not have any specific intervention related to reducing bulk water losses in its design. CAGECE actual water losses in 2011 for four systems were lower than expected reaching 10-20%. Efficiency of water use by sector was not

12 measured. Increase in the number of people participating in river basin committees and Indicator 7 : water user associations. Value 11 basin 12 basin quantitative or 3 basin committees committees committees Qualitative) Date achieved 05/24/ /31/ /31/2011 Comments (incl. % achievement) Indicator 8 : Value quantitative or Qualitative) 110% achieved. 12 basin committees functioning with 494 member institutions with 2 representatives each. Decrease in erosion and increase in vegetated soil; increase of water availability in dry season. Erosion: Erosion: ton/ha/year Erosion: ton/ha/year Vegetated soil: ton/ha/year Vegetated soil: 65% 80% in pilot areas in pilot areas in pilot areas Date achieved 05/24/ /31/ /31/2008 The project's design was to implement pilot schemes in four micro-watersheds to Comments test the technical and social viability of soil and moisture conservation and learn (incl. % lessons. The actual results refer to the first micro-watershed with monitored achievement) results. (b) Intermediate Outcome Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Indicator 1 : Incremental m3 of water made available to the Fortaleza Metropolitan Region. Value (quantitative or Qualitative) 6.62 m3/sec volume made available at baseline 1.9 m3/sec increase in volume vi m3/sec increase in volume Date achieved 05/24/ /31/ /31/2011 Comments (incl. % achievement) 695% achievement. The original target only considered the four new reservoirs to be financed under the Original Project. Actual increase is due to four new reservoirs sections I, II and III of the Integration Canal. Indicator 2 : Decrease in the number of people subject to water rationing. Value (quantitative or Qualitative) 0 Not defined. minus 300,000 interior minus 2.6 million in FMR Date achieved 05/24/ /31/ /31/2011 Comments (incl. % achievement) Target was not set at Appraisal. 300,000 people in the interior and 2.6 million in the FMR are no longer subject to water rationing due to the construction of 8 reservoirs plus the construction of Sections I, II and III of the Integration Canal. Increase in the volume of water used for different activities, i.e. human water Indicator 3 : supply, irrigation, industry and tourism.

13 Value (quantitative or Qualitative) Not available. Not defined. vii Industry: 0.33 m3/sec, urban water supply: m3/sec, Irrigation: 3.09 m3/sec Others: 0.58 m3/sec Total: m3/sec Date achieved 05/24/ /31/ /31/2011 Comments (incl. % achievement) Actual values correspond to water supply by COGERH to paying bulk users in No baseline data or targets were defined at Appraisal. Total water release by COGERH from 136 reservoirs in 2011 was 47.3 m3/sec. Indicator 4 : Increase in the number of sites with groundwater available in the dry season. Value (quantitative or Qualitative) No underground dams. Not defined. 27 underground dams. Date achieved 05/24/ /31/ /31/2008 Comments This indicator specifically referred to small underground dams to be built under (incl. % the PRODHAM pilot in four micro-watersheds. achievement) Indicator 5 : Increase in are of the vegetated areas along riverbeds. Value (quantitative or Qualitative) ha 47.6ha Date achieved 05/24/ /31/ /31/2008 Comments (incl. % achievement) 170% achievement. This indicator referred to PRODHAM pilot project and resulted in about 47.6 ha of recovered vegetation in the four watersheds of the pilot project. Indicator 6 : Increase in total and per ha agricultural production in the microbasins. Value (quantitative or Qualitative) Not available. Not available. Not available. Date achieved 04/25/ /31/ /31/2008 Comments (incl. % achievement) Indicator 7 : Value (quantitative or Qualitative) Actual production (total and per ha) was not measured within the pilot project because of the time needed for the results to materialize. Rather, attention was given to monitoring the means to achieve agricultural production increase. Entities members of the State Water Resources Management System are adequately staffed. COGERH adequately staffed. Not available. Not defined. SRH adequately staffed until 2007, not so after Date achieved 05/24/ /31/ /31/2011 COGERH was able to hire permanent staff whereas SRH lost many permanent Comments employees and consultants after 2007 to the heated private sector who were not (incl. % replaced with other permanent staff. The Government did not authorize opening achievement) of new vacancies to SRH.

14 Indicator 8 : Water charges reach a sustainable level of cost recovery. Value 70% of O&M costs as 100% of O&M (quantitative informed by COGERH at costs or Qualitative) implementation start. 100% of O&M costs Date achieved 05/24/ /31/ /31/2011 Comments (incl. % achievement) 100% achievement. COGERH has become self-sufficient from the State since % of fixed and variable costs come from water charges, and the remaining 6% is from other sustainable revenue. Indicator 9 : Number of water use permits issued by the State as Project is implemented. Value (quantitative or Qualitative) Date achieved 05/24/ /31/ /31/2011 Comments (incl. % achievement) New water permits issued since 2000 to all sectors: industry, water supply, irrigation and tourism. Given the wide coverage of bulk water users currently achieved in 2012, the original target of seems to have been highly overestimated or incorrect. Indicator 10 : Number of water user associations created. Value (quantitative or Qualitative) Date achieved 05/24/ /31/ /31/2011 This indicator referred mainly to river basin and irrigation associations. The lessthan-expected increase was more than compensated by the creation of 44 Comments (incl. % reservoir management commissions for the participatory management of the achievement) water in reservoirs. Indicator 11 : Hydrological monitoring system developed and implemented. Value (quantitative or Qualitative) No system. System implemented. System implemented. Date achieved 04/25/ /31/ /31/ % achievement. COGERH monitors the level of 136 reservoirs. FUNCEME Comments implemented 70 data collection platforms with meteorological sensors for air (incl. % temp, relative humidity, solar radiation, precipitation, wind velocity and achievement) direction, atmospheric pressure. Indicator 12 : Plan of Operation and Maintenance finalized and in use. Value (quantitative or Qualitative) No Plan. Plan completed and in use. Plan completed and in use. Date achieved 05/24/ /31/ /31/2011 Comments 100% achievement. The Plan was used for the selection and prioritizing of the (incl. % dams to be financed by the AF. achievement) Indicator 13 : Dam safety and inspection program implemented. Value (quantitative or Qualitative) No Program Program implemented. Program implemented. viii

15 Date achieved 05/24/ /31/ /31/ % achievement. COGERH keeps a dam safety group and does systematic Comments inspections of the 136 dams detecting need for rehabilitation and/or other actions. (incl. % A dam safety panel provides technical advice to SRH on the design and achievement) construction of new dams. Indicator 14 : Bulk water tariff strategy developed and under implementation. Value (quantitative or Qualitative) No strategy. Strategy implemente. ix Strategy implemented. Date achieved 05/24/ /31/ /31/ % achievement. COGERH carried out a tariff study implemented in A Comments working group was created by State Water Resources Council to study tariff (incl. % costs for irrigation perimeters. Decree issued on May 3, 2010 was issued achievement) including irrigation tariffs. Indicator 15 : Public information campaign conducted. Value (quantitative or Qualitative) No campaign Campaign conducted Campaign conducted Date achieved 05/24/ /31/ /31/ % achievement. A campaign for the Rational Water Use Plan was carried out Comments by COGERH in the ambit of the Original Project. Since then, other information (incl. % campaigns have been carried out with the river basin committees and water achievement) management commissions. Indicator 16 : Reservoirs, pipelines and integrated distribution systems constructed. Value (quantitative or Qualitative) n/a 6 reservoirs; and 1 integrated system 12 reservoirs; 6 pipelines; and 1 integrated system 8 reservoirs; and 1 integrated system Date achieved 05/24/ /31/ /31/ /31/2011 Comments (incl. % achievement) Based on mid-december supervision mission: 3 additional reservoirs to be completed by December 2012 and 5 pipelines to be completed between December 2012 and May Indicator 17 : Hydraulic infrastructure rehabilitated. Value (quantitative or Qualitative) n/a 25 dams 29 dams 29 dams Date achieved 05/24/ /31/ /31/ /31/2011 Comments (incl. % achievement) 100% achievement. 23 dams were rehabilitated under the Original Project and 6 under the AF. Other dams were rehabilitated by COGERH with funds from the Federal Government. Indicator 18 : Water and soil recovery in selected microbasins. Value (quantitative or Qualitative) 0 4 microbasins 4 microbasins Date achieved 05/24/ /31/ /31/2008 Comments (incl. % 100% achievement. All four pilot microbasins planned for interventions under PRODHAM were benefited with water and soil recovery activities.

16 achievement) Hydrogeological, socioeconomic and institutional plans carried out and Indicator 19 : implemented. Value (quantitative or Qualitative) No Plan 4 Plans 2 Plans Date achieved 05/24/ /31/ /31/ % achievement. The original plans foreseen as target were replaced by specific Comments monitoring activities carried out directly by COGERH. Studies were carried out (incl. % for the aquifers in the Metropolitan, Potiguar and Araripe and Campo de Dunas achievement) Pecém/Paracuru. Increase in efficiency in the implementation of water permits in the irrigation Indicator 20 : sector. Value (quantitative or Qualitative) 5% 50% 47.5% Date achieved 01/01/ /31/ /31/2011 Comments (incl. % achievement) 95% achievement. Formula: water volume allocated with permits for the irrigation sector / estimated water volume used by the irrigation users x 100. The increase refers mainly to the introduction of water permits to the irrigation perimeters. Indicator 21 : Water charge index. Value (quantitative or Qualitative) 10% 37% 36.7% Date achieved 01/01/ /31/ /31/2011 Comments 99% achievement. Water charge is measured with the formula: water volume (incl. % charges paid / estimated water volume used by users x 100 achievement) Indicator 22 : Water volume made available with the construction of the Integration Canal. Value (quantitative or Qualitative) m3/sec (installed capacity) 11.0 m3/sec (delivered) Date achieved 05/24/ /31/ /31/ % achievement. The target refers to installed capacity. The Canal was Comments designed and built to deliver up to 22.0m3/sec (two siphons of 11 m3/sec each) (incl. % of water to FMR. Purposely, so far one siphon implemented, delivering 11.0 achievement) m3/sec for current needs. Number of people receiving water from the pipelines constructed under the Indicator 23 : Additional Financing. Value (quantitative or Qualitative) Date achieved 01/01/ /31/ /31/2011 Comments (incl. % achievement) The zero in the actual value results from the fact that the pipelines under the AF are still being finalized. After the six pipelines are completed by May 2013, 144,000 people will be benefited. x

17 G. Ratings of Project Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 06/29/2000 Satisfactory Satisfactory /05/2000 Satisfactory Satisfactory /22/2001 Satisfactory Satisfactory /24/2001 Satisfactory Satisfactory /25/2002 Satisfactory Satisfactory /03/2002 Satisfactory Satisfactory /04/2002 Satisfactory Satisfactory /16/2002 Satisfactory Satisfactory /09/2002 Satisfactory Satisfactory /21/2003 Satisfactory Satisfactory /15/2003 Satisfactory Satisfactory /18/2004 Satisfactory Satisfactory /15/2004 Satisfactory Satisfactory /19/2005 Satisfactory Satisfactory /28/2005 Satisfactory Satisfactory /09/2006 Satisfactory Satisfactory /18/2006 Satisfactory Satisfactory /13/2007 Satisfactory Moderately Satisfactory /20/2007 Satisfactory Moderately Satisfactory /14/2008 Satisfactory Satisfactory /06/2008 Satisfactory Satisfactory /01/2009 Satisfactory Satisfactory /19/2009 Moderately Satisfactory Moderately Satisfactory /24/2010 Moderately Satisfactory Moderately Satisfactory /05/2010 Moderately Satisfactory Moderately Satisfactory /27/2011 Moderately Moderately Unsatisfactory Unsatisfactory /10/2011 Moderately Satisfactory Moderately Satisfactory /22/2012 Moderately Satisfactory Moderately Satisfactory H. Restructuring (if any) Restructuring Date(s) Board Approved PDO Change ISR Ratings at Restructuring DO IP xi Amount Disbursed at Restructuring in USD millions Reason for Restructuring & Key Changes Made 11/26/2001 S S 5.09 Works category percentage increase. 05/21/2002 S S Works category percentage

18 Restructuring Date(s) Board Approved PDO Change ISR Ratings at Restructuring DO IP Amount Disbursed at Restructuring in USD millions 09/02/2002 S S /04/2002 S S /31/2003 S S /08/2006 S S Reason for Restructuring & Key Changes Made increase. Works category percentage increase. Increase limit of disbursements made via SOE. Works category percentage decrease. Works category percentage decrease and extension of closing date. 10/31/2006 S S Works category percentage decrease. 04/29/2008 S S Extension of closing date. 12/24/2008 S S Extension of closing date. 02/12/2009 S S Extension of closing date. 04/07/2009 N S S Reallocation of loan proceeds. I. Disbursement Profile xii

19 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal 1. This Implementation Completion and Results report (ICR) evaluates the performance of the Ceará Integrated Water Resources Management Project (PROGERIRH), implemented with a first loan approved Jan. 6, 2000 (Ln BR) in the amount of US$136.0 million and with Additional Financing (AF, Ln BR) in the amount of US$103.0 million for the same project objectives, approved on Dec. 18, The AF loan was closed on December 31, A six-month extension of the ICR was approved on June 19, 2012 to allow for completion of pending construction of water works and compliance with social and environmental safeguards obligations under the Project. 2. Climate and Water. More than 90% of the area of the State of Ceará (148,920 km 2 ) and population of about 8.5 million (2010), is located in a tropical semi-arid zone (sertão). The remaining 10% stretches along the more humid Atlantic coast, including the capital city Fortaleza and its metropolitan region with 3.6 million inhabitants. Mean rainfall in the sertão is less than 800 mm p.a. and highly irregular; in the coastal region, it is greater than 1,000 mm, and up to 1600 mm in Fortaleza. Variability of rainfall in Ceará is among the highest in the world. Rain falls mostly in the first half of the year; the second half is generally dry. Without storage, all rivers are dry for parts of the year. Periodic droughts affect not only the semi-arid interior but also the coastal region and Fortaleza. Groundwater of good quality is limited due to the crystalline rock geology underlying most of the state. 3. Climate and Development. Ceará has been among the poorest states of Brazil, as the semi-arid climate and its recurrent droughts traditionally allowed only precarious subsistence farming and extensive animal grazing. Climatic uncertainties did not favor investments. Recurrent droughts led to major migration to the large cities of the Northeast, the Amazon, or Rio de Janeiro and São Paulo. Those that remained were supplied with water from trucks. The more vulnerable parts of the population stayed behind and faced severe problems such as educational neglect of generations of rural children and youths. The rapid growth of the Fortaleza Metropolitan Region (FMR) during the last 70 years was due in large part to the rural exodus triggered by recurrent droughts. Providing water to the increasing population of the FMR was a serious challenge for the State at the time of project preparation. 4. Water Infrastructure and Management. Reservoirs to store water between seasons and years were the traditional response of governments to droughts for more than 100 years, but they were built and operated in an ad-hoc, unplanned, uncoordinated and nonintegrated fashion. Until the early 1990s, droughts were considered emergencies, not as recurring events to be expected and managed. Storage was insufficient and managed inadequately, without integration within river basins, and facilities for water distribution (pipelines or canals) were lacking. Planning did not emphasize multiple, competing uses of water, and data on rainfall and river flows were scarce. Hydraulic infrastructure was inadequately operated and maintained, dam safety was not assured and water supply to the fast-growing Fortaleza region was not guaranteed. Water use was uncontrolled and free, and water users participated little in water management. 1

20 5. The adoption of new water management policies by the State of Ceará during , ahead of the National Water Law (1997), made Ceará the pioneer of water resources management (WRM) in Brazil. In 1993, the Bank financed the PROURB project 1. It included a specific WRM component to support the implementation of the 1992 state s new water law. PROURB helped build a number of strategic medium-size reservoirs in the state, and supported strengthening of WRM to a limited degree, but it lacked the integration of management, particularly integration of river basins and among institutions. The PROGERIRH Project discussed here is the third Bank-financed project to assist the State of Ceará in implementing modern WRM policies, planning and management tools to overcome the impact of recurrent droughts. The Project was preceded by the Ceará WRM Pilot Project (Loan 4190-BR, closed in 2002) to provide planning, methodologies and institutional strengthening for the PROGERIRH project. 6. At project start, Ceará had already achieved the following: Water Resources Management and Institutions: The State Secretariat for Water Resources (SRH) was created in The first State Water Resources Plan had been formulated in The State Water Resources Policy was enshrined in state law (Law of 1992), and included the definition of a State WRM System. A State Water Resources Council had been operational since Three out of the eleven river basins of the state had established committees, and 30 water users associations had been formed. A water rights policy was defined and being implemented (1994), and bulk water charges were defined for some uses and collected partially (since 1996). A state company (COGERH) was created in 1993 to manage bulk water, alongside an agency responsible for construction of hydraulic works (SOHIDRA). Infrastructure: Plans for a large river basin transfer from the Castanhão reservoir (finished in 2002) in the Jaguaribe river basin to the Fortaleza Metropolitan Basin and the industrial and port region of Pecém had been drawn, but the canal s final design and alignment had not yet been decided. Priority investments in reservoirs and conveyance structures had been identified. There were 117 strategic reservoirs operated by COGERH in 2000, with a total storage of 10.3 billion m 3. The state s largest reservoir Castanhão was under construction and to be completed in 2002, by the federal agency National Department against Droughts (DNOCS). The Worker s Canal (Canal do Trabalhador) to supply the Fortaleza Metropolitan Region had been built in an emergency in 1993/4 to carry water from the Jaguaribe river basin to the FMR, but fell into disrepair a few years after Original Project Development Objectives (PDO) and Key Indicators 1 Ceará Urban Development and Water Resources Management Project Loan 3789-BR (ICR No of May 18, 2004) It was rehabilitated with federal funds but serves now mainly irrigation demands, not the FMR. 2

21 7. The PDO was threefold and contained the following performance indicators described in the PAD: Objective A. Increase the sustainable water supply for multiple uses, improve the efficiency of Ceará s integrated WRM system and decrease vulnerability of poor populations to cyclical drought through: Main indicators (i) percentage increase in the volume of bulk water supplied by COGERH, the state's WRM company; (ii) increased reliability of water supply and resistance against droughts; (iii) implementation of new and/or improved WRM, operation and maintenance tools; (iv) increase in the number of users with enhanced reliable access to quality water; and (v) percentage of recovery for fixed and variable costs of providing water by COGERH. B. Stimulate multiple use, efficient and shared management of Ceara s water resources. C. Promote the improved management of soil and vegetation in tributary watersheds to enhance water conservation, minimize erosion and maximize natural water storage mechanisms, through the adequate management of critical micro-basins and groundwater resources. (i) increase in the number of river basin committees and water user associations, including the number of people participating in these entities; (ii) decrease of the physical waste of water and the increase in use efficiency through new technologies and increased productivity in the economic sectors which use water as a production input; (iii) percentage of billed water services versus collections of bills. (i) hectares of rehabilitated watershed vegetation; (ii) number of micro-basins stabilized; (iii) measured runoff hydrographs as a function of time and volume for specific micro-basins; (iv) measurement of volumetric erosion in key microbasins and sedimentation change in key catchments; (v) Number of recharge protection zones established; (vi) number of aquifer and groundwater management plans developed. 8. As was common practice for many Bank projects at the time, no baseline or target values were given in the PAD for most of the indicators. While some indicators are macro i.e. referring to the WRM system of Ceará as a whole, others are related to specific results of the hydro-environmental pilot project PRODHAM such as (i) to (v) linked to the third dimension of the PDO (section C in the table above). It is important to highlight that Project preparation was assessed and considered satisfactory by QAG. A detailed output matrix using the indicators list from PAD Annex 1 was included in the Project Implementation Plan, which was part of the preparation package at the time. In addition, baseline and target values were agreed with the Borrower for most indicators at project start, monitored throughout implementation and reported in the ISRs. During the preparation of the Additional Financing (AF), additional indicators were agreed with the Borrower, monitored during implementation, and reported in the ISRs. The indicator list in PAD Annex 1 and the new indicators agreed for the AF were taken as basis for the results presented in this ICR and its data sheet. 3

22 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification 9. The PDO and key indicators remained unchanged throughout the life of the Project. During the preparation of the Additional Financing (AF), a few other indicators were agreed with the Borrower but were not included in the Project Paper because the team understood it was not required. These indicators were, however, included in the ISRs and monitored during the implementation of the AF. 1.4 Main Beneficiaries 10. The PAD identifies both the rural and the urban population of the State s semi-arid interior as principal beneficiary groups through new and rehabilitated reservoirs and water conveyance facilities, guaranteeing drinkable water, improved health conditions and increased agricultural production from irrigation and leading to economic and demographic decentralization (as opposed to prior centralization in the FMR). The reservoirs built under the Project benefited an estimated population of about 300,000. Poor rural communities were also the target of the micro-watershed pilot component PRODHAM (Component 5). The urban population of the FMR was another principal beneficiary group, to which the largest of the six components was aimed (Integration of Key River Basins, Component 3), with expanded and more reliable water supply. The Integration of River Basins with the construction of the Integration Canal assures water supply during drought periods to the FMR, with an estimated beneficiary population of 3.6 million, of which an estimated 6-10% are extremely poor people. 1.5 Original Components 11. Component 1: Management and Institutional Component (US$ 25.0 million, 10% of total estimated cost). Building on progress made in the institutional, legal and management frameworks of the state, this component sought to enhance the work done by then, refine the systems and continue the implementation of sustainable practices in the management of the resources. The component was divided into five sub-components: (i) Hydro-meteorological Information System; (ii) Sustainable Operation and Maintenance of Bulk Water System; (iii) Dam Safety and Inspection Program; (iv) Basin Committee Organization and Training; (v) Water Tariff Evaluation; (vi) Market-Based Water Transfer Mechanisms; and (vii) Public Information and Education Program. 12. Component 2: Strategic Reservoir Network (US$22.2 million, 9 percent of total estimated cost). Design and construction of key infrastructure critical to the provision of water supplies to rural water-short areas and to reduce the vulnerability of the citizens of the state to cyclical drought in the short to medium term. 13. Component 3: Integration of Key River Basins (US$166.8 million, 67.5 percent of total estimated cost). Provision of reliable and quality water supply for industrial, municipal and domestic purposes within the Metropolitan Basin of Fortaleza through a new river basin transfer from the Jaguaribe river. The component included also an analysis of the best option for this diversion and its executive designs. 14. Component 4: Restoration of Existing Bulk Water Infrastructure (US$23.2 million, 9.4 percent of total estimated cost). Continue the evaluation process of existing 4

23 bulk water supply infrastructure and begin implementation of restoration measures for those systems deemed most critical to ensuring continued supply of bulk water in the short term. 15. Component 5: Micro Watershed Management Pilot Project PRODHAM (US$5.0 million, 2 percent of total estimated cost). Rehabilitation of micro watersheds (fourth-level tributaries) in four pre-defined areas of the State. The pilot project was to develop methodologies for a functioning approach for local community involvement, implementing technically, socially, environmentally and economically sustainable solutions for improved management of soil and vegetation in the tributary watersheds by enhancing water conservation, minimizing erosion and maximizing moisture storage. 16. Component 6: Groundwater Management (US$5.0 million, 2 percent of total estimated cost). Most of the state of Ceará is situated on crystalline rock formations with scarce good-quality groundwater, requiring water storage in surface reservoirs during the rainy season (January - May). In two regions of the state, however, there are significant groundwater resources, and the component focused on these two areas through the Cariri and Coastal Zone sub-components. In the Cariri region, the Component aimed at collecting and producing relevant data regarding its groundwater situation; and developing and implementing an action plan for improved groundwater management. The activities in the Coastal Zone focused on the development of a groundwater management plan including identification and preservation of critical recharge zones to ensure long term sustainability of the resources. 1.6 Revised Components 17. Additional Financing (AF) for this Project of US$ million was approved by the Board on December 17, 2008, with a closing date of December 31, While project objectives remained the same, project components were consolidated in two major areas: (a) WRM, and (b) hydraulic infrastructure 3. AF was to fund another six strategic reservoirs and associated water conveyance structures (pipelines). 1.7 Other significant changes 18. Extensions of Closing Date: The original Project had four extensions of Closing Date, from June 30, 2006 to May 31, 2008, then to December 31, 2008, to February 15, 2009 and finally to April 30, The closing date was extended in order to allow full disbursement of the original Loan. With the approval of AF, overall project closing was extended to December 31, Amendments to the Loan Agreement: The original project Loan Agreement had seven amendments. The first four (November 2001, May 2002, September 2002 and December 2002) raised loan funding for Category 1 Works from 50% to 95% until withdrawals had reached US$22.1 million. The last three amendments (October 2003, June 2006 and October 2006) gradually reduced loan financing for the same category to compensate for the initial increases. These changes in the Loan Agreement responded to the Borrower s needs of financial resources in the initial phases of the construction of the river basin transfer infrastructure. 3 Annex 2 presents a detailed description of the original Project and Additional Financing components. 5

24 20. Additional Financing: The Ceará Integrated WRM Additional Financing Loan was designed to scale up the activities financed under PROGERIRH mainly through additional hydraulic infrastructure and consolidation of the institutional framework for integrated water resources management. The development objectives remained unchanged, but the components were rearranged and consolidated into two. The Loan in the amount of US$103 million was approved by the Board on December 17, 2008, became effective on November 24, 2009, and the Closing Date was December 31, Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry 21. The Project was generally well prepared but included four key shortcomings: (i) unrealistic estimates (see paragraph 24); (ii) lack of baseline and target data; (iii) a couple of irrelevant indicators; and (iv) inadequate risk analysis regarding availability of counterpart funds. The PAD did not include baseline and target data in the results matrix for most of the indicators. The Project was solidly based on experience gained with the water resources sector in Ceará under the Ceará Urban Development & Water Resource Project (PROURB). The Federal WRM Project PROAGUA had already started in 1998 on the basis of the new national water resource legislation and was supporting similar concepts as PROGERIRH across the states of the Brazilian Northeast. Ceará had already created the most important legal and institutional instruments for water resource management in the 1990s. Through the loan for PROGERIRH, the Bank recognized the unique commitment and progressive stance of the Government of Ceará with regard to water resource management and decided to embark on a longer-run program in support thereof. As additional support for the institutional and analytical dimensions of WRM and for the preparation of PROGERIRH, the Ceará WRM Pilot Project was carried out between 1998 and 2002 (Loan 4190-BR) Assessment of Project Design 22. The project development objectives (PDOs) were in line with the goals of the Country Assistance Strategy for Brazil at the time (CAS ) as documented in Annex 1 of the PAD. The PDOs were relevant and achievable. However, as it was the practice at the time, they were not translated into operational outcome indicators, which were also not quantified in terms of baseline and target values. Several alternatives to the adopted project strategy were considered and described in the PAD. The Project strategy combining strengthened water management and institutions and infrastructure was deemed most sustainable to reach the Project objectives and was reconfirmed at the design stage of the Additional Financing. 23. The project design by components followed broadly the PDOs. It adequately linked institutional development and the expansion of physical infrastructure, which was reflected even more explicitly in the two components of the Additional Financing. The Project took into account the management capacity of the State s institutions correctly and included strengthening for improved implementation of WRM tools and increased participatory management of river basins. The financial viability of the bulk water 6

25 provider, COGERH, and adequate water tariffs were stressed as essential for the sustainability of water resources development. 24. Regarding infrastructure, the basin integration through the Integration Canal was a major focus of the Project because of the need to secure water supply to FMR through the largest reservoir in the State, Castanhão, expected to be completed in However, given that the study of the optimal solution for the water transfer from the Jaguaribe river basin to the Metropolitan basin had not been concluded by Appraisal, and the final layout and design for the Integration Canal had not been decided, cost estimates were very approximate. Consequently, Project costs were established as the result of the loan size predetermined by the Federal Government s external financing committee and the loan funding percentage prescribed by Bank management. It was envisaged at Appraisal that real costs could be higher and larger counterpart funding could be required to conclude the Integration Canal with its three sections, but it was considered opportune to start the Project and secure additional resources later as needed, which proved to be a correct approach and well calculated risk eventually. 25. The construction of strategic reservoirs complemented the effort to increase water storage in the state initiated with PROURB and followed by PROAGUA. In addition, the rehabilitation of existing infrastructure was a priority to support COGERH in the mandate of operating and maintaining the state s bulk water infrastructure. The pilot microwatershed component (PRODHAM) to design methodologies to promote watershed conservation by and for the rural poor was well-conceived although it lacked clarity in the selection of its monitoring indicators, which made it difficult to evaluate. Soil degradation and even desertification in the semi-arid region are serious problems not only for small farmers, but also shorten the life of reservoirs through siltation. The pilot component added complexity, but also enhanced relevance and innovation to the Project. 26. The economic and financial analyses were carried out with appropriate methodologies, depth and detail, including an analysis of the fiscal and distributional impact. The analyses did not include the Institutional Development component, which is difficult to evaluate in terms of economic benefits. Financial analysis showed the critical dependence of COGERH as bulk water provider on bulk water sales and appropriate tariffs, particularly with regard to water supplied to the FMR, and thus underlined the need for careful analysis of water charges and proposed changes to the tariff structure. 27. The deep involvement of the Bank in Ceará s water sector, the uncertain overall funding requirements over the medium term and the need to implement institutional improvements as well as new infrastructure, suggests that an Adaptable Program Loan (APL) might have been a more suitable lending instrument than a SIL, with successive tranches to fund time slices of infrastructure investments conditioned on progress with policy and institutional adjustments. The issue was raised at the Concept meeting. The team pointed out the advantage of using a programmatic financing instrument. However, that would have meant splitting the proposal into a phased approach while the infrastructure proposed was needed through a single intervention in order to facilitate the integrated river basin management approach within the State. Besides, given the urgency of the implementation of the proposed Project in response to the drought situation in the State at the time, any delays caused by the interjection of an APL at that point would have offset its advantages. 7

26 28. Project preparation took adequate account of relevant safeguard policies. The project was rated as Category A for environmental purposes. The Bank policies on Environmental Assessment, Natural Habitats, Pest Management, Physical Cultural Resources, Involuntary Resettlement and Dam Safety were triggered. No indigenous populations existed in Ceará that would be affected. A detailed description on safeguard activities is included in Annex The Additional Financing (AF) provided continuity to the financing of PROGERIRH activities consistent with the project s objectives and components. It contributed to the financing of scaled-up activities to enhance the impact of the Original Project. It also contributed to continue the high level dialogue between the Bank and the Government, strengthened with the inclusion of water resources indicators in the SWAp operation, carried out in parallel. The AF activities included the: (a) completion of the Integration Canal; (b) implementation of additional water storage and supply; and (c) consolidation of institutional and legal reforms of the State s water resource management system and the use of instruments for allocating water among it multiple uses. Although the implementation period of the Additional Financing was limited to three years from the closing date of the Original Project, the team considered it feasible to implement the proposed activities under that timeframe. The assessment was made considering that the new infrastructure design and studies had already been prepared and considered acceptable by the Bank, and the implementing agencies teams were experienced and showed good performance under the Original Project. This situation changed after Board approval of the AF as most of the team left SRH as a result of the changes in State Administration. Besides, due to delays in the processing of the AF, including delays in approval by Senate, the actual implementation period was reduced to two years Borrower Commitment 30. The Borrower s commitment to the objectives, strategy and content of the Project was adequate. The Borrower s Water Policy Sector Letter, dated August 5, 1999, documented such commitment before negotiations. The project was ready for implementation at loan signing. The Bank had already approved four reservoir sub-projects that complied with requirements of economic viability, resettlement planning, environmental impact assessments and dam safety. Bidding for these dams was started right away in February The final design of the Integration Canal, however, had not yet been decided as the studies were being finalized. For the Additional Financing, the designs and safeguard studies of the six proposed dams were completed before implementation start. The counterpart funds considered for the AF included an additional amount of US$76 million spent by the Government with the construction of the Canal under the Original Project Risks and Mitigation Measures 31. Selected major risks identified at appraisal were: (a) financial counterpart funds are unavailable: modest risk. To the contrary, given the uncertainty about total project cost, this risk was actually high. No mitigation measures were proposed; (b) Lack of political and social support for the necessary legal and institutional reforms: modest risk. Public information and awareness campaigns had been built into the project design. However, the QAG quality-at-entry assessment rightly raised this risk to 8

27 high in view of the perceived low public acceptance of increasing bulk water tariffs sufficiently to guarantee financial sustainability of COGERH; (c) difficulty of Project Implementation Unit (PIU) to coordinate all foreseen actions: modest risk. In light of the complexity of the Project, but also of prior Borrower experience with Bank loans and built-in strengthening of the executing agency (SRH), modest risk was appropriate. The Project provided for hiring of specialized consultants and training of the PIU. 32. QAG Quality at Entry. A Quality at Entry Assessment was carried out by QAG and rated satisfactory in May 2001 (one year after appraisal). All aspects of the Project were rated either highly satisfactory or satisfactory, with the exception of Fiduciary Aspects that were rated marginal as the financial management requirements had not been met before negotiations. The Assessment recognized the sound design of the Project, which was, however, not adequately reflected in the PAD, especially in the targets and indicators matrix. In addition, although not pointed out in the Assessment, there were four key shortcomings in Project design: (i) unrealistic cost estimates (see paragraph 24); (ii) lack of baseline and target data; (iii) a couple of irrelevant indicators; and (iv) inadequate risk analysis regarding availability of counterpart funds. 2.2 Implementation 33. The Original Project achieved most of its objectives, but with delays. The Additional Financing extended the Project scope by including additional reservoirs and conveyance systems; however, it faced serious difficulties in executing planned activities within its three-year implementation period Factors contributing to successful implementation 34. The Borrower had exceptionally strong interest and ownership in the Project, in the physical as well as in the institutional components. During the first six years, the Borrower did not spare efforts to raise the additional counterpart funds required and was successful in doing so. The Borrower had prior experience with large investments in WRM, including procurement and financial management skills. Responsibilities were well-defined and well-distributed among the three principal agencies (SRH, COGERH and SOHIDRA). Capacity was strengthened with high quality technical experts, especially during the Original Project. 35. The Bank supervised Project implementation in all aspects (physical, social, environmental and institutional) continuously, vigorously and with frequent deployment of specialists. The Bank s insistence on appropriate resettlement and on environmental mitigation and compensation measures was crucial for successful implementation and compliance with safeguard policies. The stronger than usual Bank involvement was positively recognized by the Borrower and staff concerned. The Bank also provided technical assistance where necessary, for example, on complex groundwater issues. 36. QAG Quality of Supervision. A Quality of Supervision Assessment was carried out by QAG and gave an overall rating of satisfactory in October The assessment results included a number of strong elements and a few shortcomings pertaining to the quality of monitoring and evaluation (which was hampered by the original design problem with matrix of indicators), leading to Moderately Satisfactory ratings in two dimensions. These, however, were largely offset by the presence of an experienced and 9

28 qualified team located in the Country Office, effective supervision of technical aspects, excellent relations with the borrower, and tireless effort to convince an experienced and sophisticated borrower to adopt an innovative approach to water resources management. On balance, QAG judged the strong aspects to overshadow the shortcomings and therefore rated the overall quality of supervision Satisfactory Factors contributing to implementation problems 37. The Original Project suffered from two serious delays: first, the difficulties in concluding works on one of the six reservoirs (Pesqueiro), including the resettlement activities; second, the late start of the construction of sections II and III of the Integration Canal (in 2005, rather than in 2001 or 2002) 4. The Pesqueiro reservoir experienced the most troubles during construction, including the implementation of its resettlement component (agrovila) 5, due to problems with the contractor that led to the cancellation of the contract and rebidding of the works. The bidding process for the contract of the sections II and III of the Integration Canal also suffered delays caused by lack of definition from the Borrower on the format of the bidding (two processes or one with two lots) and by the failure of the prequalification process recommended by the Bank and the need to initiate a new international bidding process later on. 38. Changes in state government in 2007 interrupted the flow of implementation, especially during the last six months of tenure of the old Administration, when government activities and spending are generally reduced, and again during the first six months of the new government, as political and staff appointments and decision making on spending are slow to occur. In this context, in 2007, SRH lost some of its capacity with the loss of many of the staff and consultants that had worked on the Project for many years and represented part of the institutional memory. This affected project management and administration and certain functions of the Project, such as coordination and supervision of the resettlement and environmental activities for each dam/reservoir. 39. The Additional Financing phase also suffered important delays that led to the noncompletion of some Project activities before the closing date. Delays related mostly to the infrastructure component and were caused by difficulties with the timely completion of procurement processes by SRH due to the changes in staff and the need for additional training on Bank s procurement guidelines; problems with some contractor s financial capacity that led to execution delays and one cancellation of contract; and the need of revision of engineering designs. The AF loan was approved in December 2008, but signed only in September 2009 and became effective in November 2009, with a closing date of December 2011, whereby it only had an effective 2-year implementation period. Delays in getting the AF signed were due to procedures for processing loans between the Federal Government and the State and the need to obtain Senate approval. 4 The Integration Canal consisted of five sections. The first three of them would bring water from Castanhão reservoir to FMR and were supported by PROGERIRH. Sections IV and V continued bringing water until Pecem Port industrial area and were completed with Government funds. 5 The agrovila is the agricultural village that was built by the contractor to resettle the families displaced by the construction of the reservoir. 10

29 40. At the AF Project closing, two of five dams had been completed 6, and the other three were still under construction, as well as the six conveyance systems planned under the Project. As of mid-december 2012, the degree of completion of the three remaining dams was 75% for Gameleira dam, 92% for Mamoeiro dam and 96% for Jatobá dam, and the degree of completion of the conveyance systems (pipelines) were 33% for Ipaumirim, 42% for Itapipoca, 90% for Ipueiras, 70% for Antonina do Norte, 80% for Madalena, and 95% for Amontada. None of the works had supervision contracts in place as the Government decided to discontinue supervision activities through external firms (supervision was done through SOHIDRA) although there was an agreement with the Bank that supervision by an external firm should be carried out throughout the whole implementation. This decision had impact in the quality of supervision of works and environmental mitigation activities as SOHIDRA does not have enough staff to carry out the required close supervision of all works. In addition, the supervision firms were responsible for preparing the as-built reports of the dams and pipelines, which include the actual final design of each infrastructure, which most times differ from the original design. In mid-december 2012, the Bank carried out a supervision mission to the State to verify the status of each work. According to the results of the mission, it is expected that Gameleira and Jatobá dams will be fairly completed by end-december 2012; leaving small adjustment works to be carried out in January 2013 while Mamoeiro dam completion is expected by February With regards to the conveyance systems, it is expected that Amontada and Ipueiras pipelines will also be completed by December 2012; leaving small adjustment works to be carried out in January The completion of Madalena and Antonina do Norte pipelines is expected by February With regards to Itapipoca pipeline, the Borrower has carried a new procurement process to contract the completion of works as the original contract was canceled due to financial problems with the contractor. The new contractor is mobilizing resources to start the services and completion is expected by May Ipaumirim pipeline works are paralyzed. The contractor has entered into a judicial dispute with the implementing agency with a request to cancel the contract that has not been accepted by the agency. Once the dispute is resolved and works are resumed, it will require an additional six months for completion. Finally, another pending issue by mid-december 2012 refers to the 35 houses built by the Project in 2011 for the families resettled as a result of the construction of the Umari dam. Since completion, the houses have been presenting structural problems and the solution was to demolish and reconstruct all of them. The original contractor is doing so at no additional cost, in groups of five houses, and the families are being temporarily relocated into houses rented by the Government. Due to the pending works and resettlement issues not resolved by December 2012, the Bank will continue the supervision of these activities until completion in Cost Overruns. The Original Project costs turned out to be even higher than expected, and required a prolonged search for additional funds on the part of the Borrower. While cost overruns may not have affected the achievement of results, they detracted from smooth implementation of works and institutional improvements. Cost 6 After further consideration, the Borrower decided to replace the construction of the sixth planned dam (Trairi) with the preparation of technical, environmental and resettlement studies for another dam that was considered of higher priority. The construction of Trairi dam was taken out of the Project scope as other alternatives to provide water supply to the beneficiaries had been implemented. 11

30 increases were due in part to the final layout and design of the Integration Canal, especially of its third reach; increase in the costs of iron used in the Canal pipes; and overall construction costs rise. In addition, the devaluation of the Brazilian currency led to significant inflation in the construction sector in Brazil, with price increases of 69% between 1999 and The Bank showed flexibility in mitigating cash flow problems of the State. It adjusted the financing percentage for works for a limited time to 95% in the original Loan, while the State secured additional funding. The Borrower secured loans from national banks in In addition, the Bank s SWAp loan to Ceará in 2004 also contributed funds to the State s WRM program. Finally, the State received additional federal funding for other reservoirs and conveyance systems and for the Integration Canal. The Borrower gave absolute priority to the Canal, minimizing expenditure that could be postponed. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 43. The PAD contained a list of outcome and output indicators (many without targets). At Project startup, the Borrower s own Project Implementation Plan (PIP, April 2000) used the PAD list and contained a large and comprehensive number of output indicators, including baseline and annual target levels up to 2005, but not for outcomes. The baseline and targets for most indicators included in the PAD were agreed with the Borrower at Project start, were monitored during implementation and reported in the Implementation Status Reports (ISRs). Although the AF Project Paper did not include a new results framework, the team agreed with the Borrower and monitored specific AF related indicators, which were also reported in the ISRs. SRH kept detailed records of physical and other outputs and reported them regularly to the Bank. Supervision missions checked these reports, which were also used for this ICR. 2.4 Safeguard and Fiduciary Compliance 44. Major attention was given to the carrying out of environmental assessments and the preparation of environmental management plans for reservoir and canal works, the supervision and implementation of environmental management plans, the resettlement of people displaced by the construction of reservoirs, and dam safety. SRH maintained special units to manage resettlement and environment. Safeguard application was thoroughly addressed and supervised by frequent Bank missions and by targeted visits concerned with resettlement, environmental mitigation or compensation measures, and dam safety. Although the Borrower was proactive and succeeded in dealing and overcoming most safeguards related issues during implementation, a problem persisted in the resettlement of the Gameleira dam and the 35 families resettled in that area in January 2001 only had access to energy and water by December 2012 despite many recommendations and alerts given by the Bank in different supervision missions in 2011 and In addition, the poor quality of construction of the houses in the resettlement area of Umari dam should have been identified during implementation of works. This situation is only being resolved in December 2012, more than one year after completion of works. Therefore, the overall safeguard compliance rated was downgraded to Moderately Unsatisfactory. The specific aspects are detailed in Annex

31 45. Procurement and Financial Management. There were no major issues of compliance with Bank procurement rules and procedures. The project had a large number of procurement processes and 3 agencies, SRH, SOHIDRA and COGERH were involved in the preparation and implementation of the procurement activities. SRH had a key role in the procurement of works, goods, consulting and non-consulting services, with the responsibility of planning and monitoring the procurement processes, preparation of documents. All this work was done with the inputs (technical specifications/ terms of reference) provided from the respective technical departments. SRH rapidly responded to the Bank recommendation to strengthen its capacity, hiring a procurement specialist for the overall duration of the project and in 2008 one staff of the State General Attorney Office (PGE) was relocated to the SRH to help out with the procurement workload. 46. Project financial management was considered to be moderately satisfactory throughout project implementation. The project had several shortcomings related to the submission of the quarterly financial monitoring reports (IFRs) during FY11. Errors and inconsistencies in the IFRs were found during supervision, which together with noncompliance regarding the use of an automated FMIS (Financial Management Information System) to monitor and generate the IFRs, led to the temporary downgrade of the project's FM rating. These issues were eventually addressed properly by the client. The FMIS was integrated with the state's accounting systems, in accordance with the Bank's guideline regarding use of country systems. Outcome and financial controls of the project were not impacted. Annual audit reports for the Project were submitted regularly, with unqualified opinions by the external auditor on the project's financial statements. 2.5 Post-completion Operation/Next Phase 47. At the closing date (Dec. 2011), six reservoirs built under the first phase and two of the five reservoirs planned under the AF had been completed, while three reservoirs remained under construction. In addition, all six pipelines planned under the AF were under construction. It was agreed between the Borrower and the Bank that the Government would finance the completion of all pending works during 2012 with the continued supervision of the Bank team. By mid-december 2012, none of the pending works had been completed yet but the Government remained committed to complete part of them by end December 2012 and the remaining ones by May No follow-up actions are planned by SRH to expand and mainstream the soil and moisture conservation efforts started under the watershed pilot. However, some lessons have been incorporated in other Government initiatives in other sectors. As evidenced by the state-wide mobilization around water through the Pacto das Águas (2009) and building on the environmental diagnoses of strategic reservoir made by COGERH under the AF, the state has become more aware of the water quality and sources of pollution in the reservoirs. Going forward, more attention will need to be given to water quality issues, including through a more integrated planning of land and water use at the basin level and broader intersectoral coordination. The closing workshop of PROGERIRH made clear the state s awareness of the water quality challenges as reflected in Annex 6. The proposed new Bank Project 7 for Ceará State includes further funding from the Bank for 7 Program for Results (PforR) operation being prepared with the State including three different sectors. 13

32 the water resources and water supply and sanitation sectors with an integrated plan for water quality related policies and investment activities. 49. The Ceará Government is now working on the design of one of the largest water infrastructure projects planned in the State and even in the Northeast: the Ceará Water Belt (Cinturão das Águas), conceived as a gravity-fed conveyance system of approximately 1,300 km length and flow rate of 30 m3/s, which is planned to use water from the São Francisco River Inter-Basin Transfer Project. The Ceará Water Belt is being conceived to attend 100% of all water demands for human consumption, industrial, tourism and irrigation by Assessment of Outcomes Rating: Moderately Unsatisfactory (MU) 3.1 Relevance of Objectives, Design and Implementation 50. The project development objective remains consistent with the current Country Partnership Strategy ( ) and its strategic objectives, in particular, in view of its contribution to regional development of the semi-arid Northeast through strategic water infrastructure investments, expansion of water supply to poor and urban households and increase climatic resilience. Project objectives are also relevant with regard to current priorities of the Brazilian Government, such as inclusive growth and reduction of poverty, with emphasis on the Northeast (semiarid) region. The importance of water for both economic development and reduction of poverty in Ceará state will grow, even more so in the light of expected impacts related to increased climate variability. 3.2 Achievement of Project Development Objectives 51. Project achievements were crucially important to the development and consolidation of the water resources sector in the State of Ceará, which is today considered as best practice in the country. The institutional strengthening achieved and the water resources management instruments implemented and improved have been remarkable. At the same time, the construction of the Integration Canal with reliable provision of water to the Fortaleza Metropolitan Region and to the development of the state s industrial park at Pecém Port have had significant positive impact and taken the State to the next level of development. In that context, some of the achievements were actually highly satisfactory, however, they have been downgraded to satisfactory due to the delays in implementation. If only the Original Project achievements were considered in this ICR, the Project would be considered Satisfactory. However, due to the non-completion of works under the Additional Financing by December 2012, the long time it took to address resettlement issues at Gameleira dam, and the delays in addressing the problems with resettlement houses in Umari dam area, the overall project outcome has been rated as moderately unsatisfactory (MU). Given the economic, social and political importance of water issues in Ceará, there is no doubt that all pending works will be successfully completed and will fulfill their intended development and poverty reduction objectives. However, for the purposes of this ICR, they have not been fully achieved yet. 8 Report No , discussed by the Executive Directors on September 21,

33 52. The achievement of the PDO is evaluated against its three main dimensions: (A) Increase the sustainable water supply for multiple uses, improve the efficiency of Ceará s integrated WRM system and decrease vulnerability of poor populations to cyclical drought. (B) Stimulate multiple use, efficient and shared management of Ceará s water resources. (C) Promote the improved management of soil and vegetation in tributary watersheds to enhance water conservation, minimize erosion and maximize natural water storage mechanisms, through the adequate management of critical micro-basins and groundwater resources. These will be discussed individually below, together with the pertinent indicators included in the Results Frameworks of the PAD. A. Increase the sustainable water supply for multiple uses, improve the efficiency of Ceará s integrated WRM system and decrease vulnerability of poor populations to cyclical drought. Rating: Moderately Unsatisfactory (MU) 53. This objective refers to the ability of COGERH to supply more water more reliably from new and rehabilitated reservoirs and pipelines, and, mainly through a new river basin transfer, from the existing Castanhão reservoir to the FMR through the Integration Canal. It also refers to the financial sustainability of COGERH s operations. The objective was largely achieved in urban areas but not in rural areas because of the significant delays in the construction of reservoirs and pipelines during the AF phase. The MU rating is the result of the accumulated delays in the completion of works, whereby by Project closure (including a six-month extension of the ICR) two dams and six pipelines had still not been fully completed. While these works will be completed and the expected benefits will be sustainably materialized, within the context of this ICR, those outcomes and benefits are not yet achieved. 54. Outcome - Increase in the volume of bulk water distributed by COGERH: As a result of the Project, the regulated bulk water supply increased 152%, from 6.92 m 3 /s in 2000 (baseline) to m 3 /s in The increase contemplates the operation of sections I, II and III of the Integration Canal, from Castanhão reservoir to FMR. The six pipelines that had their construction initiated by the AF 10 will represent, when completed, another 0.25 m 3 /sec of bulk water distributed by COGERH. About 76% of the total volume went to urban/human consumption, 18% to irrigation, 4% to fish and shrimp farming, and 2% to industrial use. Most of this supply was subject to water charges (except some public irrigation schemes and most irrigators that have not yet been awarded water rights). The increase also includes the supply to the FMR, guaranteed in great part through the new Integration Canal. Since the Original Project was prepared, the FMR population has increased from 2.2 million to 3.4 million. The Canal has permitted to meet this rapidly growing demand and avoid even worse droughts than in the past. 9 The total increase was larger, but included contributions from reservoirs not financed under this project. The medium bulk water release in 2011 from all 136 reservoirs managed by COGERH amounted to 47.3 m 3 /sec. 10 Two of them will be completed by December 2012; another two are expected for completion by February 2013 and one by May The sixth one is 33% completed by mid-december 2012 but the works are paralyzed as the contractor has entered into a judicial dispute with the implementing agency with a request to cancel the contract that has not been accepted by the agency. Once the dispute is resolved and works are resumed, it will require an additional six months for completion. 15

34 55. Outcome Increase in the recovery of fixed/variable costs of the integrated system. In less than 20 years, COGERH evolved from being highly subsidized to recovering 100% of its O&M costs as evidenced by 2011 figures. In 2011, COGERH had operating revenues of US$18.9 million, and operating costs of US$20.1 million, covering the difference from financial revenues and ending with a pre-tax profit of US$438,600. The investment cost of the hydraulic infrastructures receives financial support from the Government treasury. Cost recovery evolved over time and was achieved by COGERH with the support of studies to define the costs of supplying bulk water by major system and by user sector, communication campaigns, and central Government support to an adequate tariff strategy. Compared to other water resources management entities in Brazil and even at the global level, COGERH s financial autonomy is remarkable. 56. Outcome Increase in the level of guarantee of water supply. The water supply guarantee level was increased through the establishment of additional reservoir capacity of 370 million m 3 with the construction of eight strategic dams and reservoirs (six under the first phase and two under AF). This increase will be complemented with an additional 70 million m 3 after the other three reservoirs being implemented under the AF are completed by end December This is taken as the incremental reservoir storage and incremental regulated release capacity. The incremental reservoir capacity guarantees water supply during the annual dry seasons and drought periods. The eight new reservoirs already completed are capable of delivering a regulated discharge of 2.77 m 3 per second to users in the interior of the State, benefitting an estimated population of 250,000. However, due to the delays in the completion of the six pipelines under the Additional Financing, an additional 140,000 intended beneficiaries are still waiting for the completion of the works. 57. In addition, the Integration Canal plays a major role in delivering water supply to the FMR from the Castanhão reservoir. Water supply to the FMR is thus guaranteed during drought periods, as evidenced during the 2012 drought, which was the worst of the last four decades. The water delivered to FMR is currently, on purpose, restricted by the capacity of one siphon (11 m3/s), but could readily be doubled, when demand requires, by building an additional siphon. 58. No specific indicator had been included in the PAD directly linked to the objective of decreasing vulnerability of poor populations to cyclical drought, however, the Project included activities that led to its achievement. The reservoirs built under the Project increase the availability of a dependable water supply, across drought periods, to the population near the reservoir and downstream of each dam, particularly to urban population in towns of the State s interior served by pipelines, estimated overall at about 300, people. Both rural and urban populations in the interior include a significant segment of extremely poor families (households with monthly per capita income less than R$70 in 2010), ranging from 15% to 47% 12. A conservative estimate is now that vulnerability to cyclical drought has decreased for at least 45,000 extremely poor people in the interior. The largest component of the project, the Integration Canal, assures water supply during drought periods to the FMR, with a population ,000 from the first six reservoirs, 49,600 from two reservoirs and conveyance pipelines under AF. 12 C. Nascimento de Medeiros e V. Rodrigues de Pinho Neto (IPECE), Análise espacial da extrema pobreza no Estado do Ceará, VII Encontro Economia do Ceará em Debate, 2011, based on IBGE Census

35 estimated as 3.6 million, of which an estimated 6-10% are extremely poor people, resulting in at least 210,000 extremely poor people benefited. 59. Outcome - Increase in the number of users with stable and guaranteed access to water for multiple uses. COGERH has been able to increase the number of paying bulk water users from 116 in 2000 to 380 in 2011, and total invoicing of water charges from R$8 million in 2000 to R$42.0 million in Such users include the largest client, the urban water company CAGECE. The sectoral coverage of water users was increased in 2010 to include also irrigation, fish and shrimp farming and bottling of water. At least one large public irrigation system has already become a paying user of bulk water (Tabuleiro das Russas). 60. The Project achieved the implementation of new and improved water resources management tools through strengthened WRM institutions. Under the Project, the State Cadaster of Water Users laid the foundations for higher efficiency, achieved with more consistent implementation of water permits and charges. Management tools were not necessarily new, but they had not been implemented widely before the Project. Apart from the strengthening of the principal WRM institutions (SRH and COGERH), the project was instrumental in proposing and implementing water tariffs for all sectors, in collecting water charges, in making available real-time data for reservoir management, in effective operation and maintenance of a larger network of reservoirs and conveyance structures, in implementing a dam safety policy and procedures, screening and ranking of new hydraulic projects for their technical, economic and environmental viability, and in monitoring groundwater resources and starting to control their use. 61. SRH, jointly with COGERH, has registered about 15,500 water users in the State Cadastre of Water Users under this Project, up from about 4,600 in Within that universe, about 6,200 water right awards had been issued by SRH by March Registration of users and uses is a first condition for efficient allocation and for charging for water. Some 47% of the estimated actual water use by large irrigators is reported to have been made under water rights awarded by SRH (but not necessarily charged for). Charging for water use in Ceará had begun in 1996, but only for urban water supply and industrial use. The coverage of charges was expanded in 2010 to other sectors, such as irrigation, fish and shrimp culture. Through the Project, new proposals for the structure of water tariffs were developed, and adopted after extensive discussions and negotiations with user representatives and basin committees, and through a work group of the State Water Resources Council. The proposals were based on an analysis of the capacity to pay of typical users, but also on the need to cover the O&M cost of COGERH. Only users consuming more than 1.44 m 3 /month are subject to water charges. By 2011, there were about 380 paying users, including all large clients, such as the Ceará Water and Sewerage Company, CAGECE. Users are invoiced by COGERH and all revenue stays within COGERH. 62. Under the current tariff structure, the price of water varies among sectors. Industry is charged most heavily (from R$0.432 to R$1.485/m 3 ), followed by the water supply company CAGECE that provides water to the FMR (R$0.099) and fish and shrimp culture (from R$0.003 to R$0.036). Charges for irrigation use are the lowest, varying 13 COGERH prepares the issue of water rights for issue by SRH. 17

36 from R$0.001 to R$0.013/m 3. Until 2016, irrigation water tariffs are further reduced by rebates. This reflects a political and cultural reality in the state, in which water for irrigation has traditionally been considered a free good and where irrigation users carry a large political weight. 63. The Loan Agreement called for a pilot to try market-based allocation of water rights. Such pilot was not implemented due to legal impediments in the Brazilian law. Water rights in Brazil, and thus also in Ceará, are not allocated to the highest bidder and cannot be transferred by the designated right holder to another user. 64. The Project created a network of 70 automated data collection and transmission platforms for hydro-meteorological data over the entire State and installed remote monitoring of water levels in 125 of 136 strategic reservoirs, allowing more efficient reservoir operation. This includes management for flood mitigation in the large Jaguaribe basin. These platforms were transferred for operation by the Ceará Meteorological Foundation (FUNCEME). COGERH publishes on its website current data for reservoir levels and rainfall in the state, thanks to a very strong collaboration with FUNCEME. 65. The State Secretariat for Water Resources (SRH) was strengthened as key entity responsible for water resources policy and management. SRH developed the capacity to oversee and coordinate the executing parts of the WRM system (COGERH and SOHIDRA), to create an effective interface to basin water committees, to lead water resources planning and to fulfill its functions in allocating water rights to bulk users. However, this capacity has diminished to a certain extent since 2007, when many staff and consultants left SRH. Since then, SRH was able to hire a few temporary staff but no permanent hiring has been authorized by the State Government. The State Water Resources Plan was updated in 2005, but not thereafter. In 2009, the Pacto das Águas (Water Pact) was prepared under the leadership of the State Assembly with participation of different sectors, institutions and civil society. This document presents an updated State approach to dealing with water related issues. 66. The most significant institutional success of the Project has been the strengthening of COGERH, the state agency responsible for bulk water operation. COGERH expanded and trained its staff and improved its operational instruments and decision support systems, with the support and collaboration of other entities like the Ceará Meteorological Foundation (FUNCEME), which also benefited from the Project. It also increased the real-time data available for reservoir and canal operations, generated internal rules and guidelines for operation and maintenance of water infrastructure, and increased dam safety. The agency has also become financially autonomous with the growing income from water charges. 67. COGERH monitors and operates 136 strategic reservoirs built by both the State and the Federal Government, with about 18.3 billion m 3 of storage, up from 117 reservoirs and 10.5 billion m 3 of storage in The Project has increased dam safety in the state as a permanent feature of design, operation and maintenance of hydraulic structures, not only because of Bank safeguard requirements. In addition, COGERH has produced and is implementing effective operation and maintenance plans for its large hydraulic systems (reservoirs and canals), including the Integration Canal. 18

37 68. The selection of new hydraulic structures to be built is part of efficient water management. The Project has applied careful screening of new dam projects with regard to economic viability, environmental impacts and resettlement requirements and costs, and this practice has become routine in water resource investment planning in the state. B. Stimulate multiple use, efficient and shared management of Ceará s water resources. Rating: Moderately Satisfactory (MS) 69. Shared, decentralized water management is a feature of both the Brazilian water resource legislation and that of Ceará. It has been pioneered effectively and comprehensively in Ceará, in large part under this Project, as a key element of the State Integrated WRM System (SIGERH). 70. Outcome - Increase in the number of people participating in river basin committees and water user associations. The Project has promoted the installation of nine, with 494 member institutions with 2 representatives each, out of the twelve Water Basin Committees, covering now all of the state of Ceará. Furthermore, since 2007, the State replaced the previously existing Water Users Associations into the new form of Water Management Commissions, each linked to a major reservoir. There are now 44 formal Commissions, in addition to 34 informal local commissions that will over time be converted to formal Commissions. Members in Committees and Commissions represent water users, organized civil society, and local, state and federal government. The Project has given strong support for the mobilization, organization, training and logistics of the committees. 71. Basin committees and Management Commissions play an active role in the annual allocation of water, and in related decisions regarding maximum and minimum discharge from a basin s reservoir. The deliberations are informed by data and forecasts provided by COGERH and FUNCEME. The committees and commissions participate in conflict resolution and in disseminating their decisions. The commissions also have responsibilities in terms of environmental surveillance, water quality control, reporting of illegal activities in the reservoir (such as illegal fishing, or illegal logging in the river beds). Shared management of water at the basin and reservoir level is expected to have contributed to a more socially efficient (equitable) allocation and use of water. It has also broken the de-facto monopoly use of water of certain large users in some basins. 72. Outcome - decrease in the physical waste of water: The Project did not have any intervention specifically related to reducing bulk water losses and their measurement. However, water loss was measured at 6% (compared to 30% at baseline) in one industrial supply system of the FMR, where COGERH implemented metering system in At the same time, CAGECE has shown reduction of potable water losses rates significantly higher than originally expected. CAGECE actual water losses in 2011 for four systems, Catu, Carmina, Malcozinhado, and FMR, were measured at 12%, 10%, 11%, 20%, respectively; well below the expected losses rate of 25%, 25%, 25%, 65%. 73. Outcome - Increase in use efficiency through new technologies and increase in productivity of water by sectors that use water as raw material. The Project did not have any intervention providing new technologies to specific sectors (e.g. irrigation) to increase water use efficiency or water productivity. Accordingly, efficiency of water use as sectoral output per unit of water was not measured. However, use efficiency is 19

38 expected to have increased as a consequence of user registry, issuing of water rights and charging for bulk water use. C. Improved management of soils in watersheds. Rating: Satisfactory (S) 74. Outcome Decrease in erosion and increase in vegetated soil. This component and its associated indicators are related to four specific pilot projects, through which the Project would develop intervention methodologies for subsequent ex-project replication and scale-up. The Project successfully implemented the four pilot projects to introduce and test soil and moisture conservation, by building underground dams, terrace systems, and recovery of riverine vegetation by local communities, in four microwatersheds. 75. Overall, the four pilots were successful in preventing a scenario of further soil and water loss from inappropriate land use practices, at least in parts of the watersheds. The essential outcome of the pilots were the lessons learned from their implementation, in terms of viable technologies, need for public sector support, community mobilization and participation, and costs. Successful, replicable practices have been amply documented in seven concise primers, and the findings of scientific monitoring have been published in six papers and six books, including an evaluation of the socio-economic process and its results. The replication and scale-up of the methodologies developed will contribute to decreasing erosion and increasing vegetation state-wide. However, the results could only be monitored and reported in numbers for one of the pilot areas. The other micro-watersheds were rolled out later and given the time needed for those physical processes (erosion reduction, vegetated soil increase), these results could not be monitored quantitatively but the process by which the pilots were implemented has been validated by the Project team and beneficiaries. The results produced by the pilots are the following: Actions Results Number of successive sediment retaining dams constructed Number of underground dams constructed 27 Number of cisterns constructed 470 Recovery and preservation of riverine vegetation 18,03 hectares Production of dead cover 42,48 hectares Level cultivation - dry-farming system 2,20 hectares Construction of surrounding stone barriers meters Production of permanent vegetation buffers 3.81 meters Terracing meters Production of seeding Reforestation 29,49 hectares Recovery of degraded areas 5,23 hectares 76. The Project has strengthened cooperation among institutions and stakeholders on groundwater management within the State and also between Ceará and the neighboring State of Rio Grande do Norte. It has generated knowledge about important groundwater 20

39 aquifers in the state, in the coastal region (particularly in the FMR), in the Cariri region (important for urban water supply), and for the Apodi aquifer (important for irrigation) located at the boundary with Rio Grande Norte. Knowing the characteristics of these aquifers in terms of quantity, quality, recharge and safe yield, monitoring their behavior, having registered existing wells and involvement of groundwater users in the process permits more effective, efficient and participatory management of the aquifers, including future conjunctive use. It also helps to preserve the aquifers buffering capacity, thus increasing resilience during prolonged drought. The development of effective groundwater management plans based on increased knowledge and continuous monitoring is a challenge ahead. 3.3 Project Efficiency 77. Most Project activities have been completed and achieved the desired outcomes overall by December Part of the outcomes will be achieved with some delay as a result of the delays in the completion of the dams and pipelines under the AF diminishing Project efficiency accordingly. 78. Economic analysis ex-post. The economic analysis of selected new reservoirs and of the hydraulic works for the water supply to the FMR was repeated with actual data, following the same methodology used as at appraisal. Costs included capital costs, O&M costs, resettlement, environmental compensation, and water treatment costs for urban water supply. Benefits were estimated based on two types of use: human/urban water supply and industrial water supply 14. The economic rates of return (ERR) on three strategic reservoirs in the PAD ranged from 13% to 15%, and for the same reservoirs ranged ex-post from 7% to 15%. The investments in the Fortaleza Metropolitan Region (FMR), including the Integration Canal, the Aracoiaba Reservoir, the Worker s Canal, and rehabilitation works, show an ERR of 13%, compared to the appraisal estimate of 16%. For the project as a whole (94% of project cost), excluding the investments in institutional strengthening and policy reform, the ex-post ERR is 11%, compared to the appraisal estimate of 14%. The reason for the differences between appraisal and the expost analysis is mainly due to the higher than anticipated costs, both investment and O&M costs. Details of the analysis are given in Annex Justification of Overall Outcome Rating: Moderately Unsatisfactory (MU) 79. Overall outcome rating of the Project is moderately unsatisfactory, in line with the ratings for the achievement of the three main dimensions of the PDO discussed above. 3.5 Overarching Themes, Other Outcomes and Impacts 80. All of the outcomes of the project were actually intended. The poverty impact could not be ascertained with precision, but is expected to have been highly significant for at least a quarter million of poor and extremely poor people by sparing them from the impacts of severe periodic droughts. It is expected that this might reduce migration from rural to metropolitan urban areas, and stimulate population growth of medium-size urban 14 Irrigation was not included as it was not relevant at the three reservoirs analyzed. 21

40 centers in the interior. All of the institutional strengthening under the Project was included in the design. 81. The outcome and lessons learned from the watershed management pilots could be quite significant as a basis for poverty reduction on a larger scale in rural areas of the entire Brazilian Northeast. That would require new institutional channels for replication and scale-up of the methodologies adopted and lessons learned. 82. The construction of sections I, II and III of the Integration Canal was intended to provide reliable water supply to Fortaleza Metropolitan Region, which was achieved. At the same time, it allowed for the completion of the infrastructure by the State with the construction of sections IV and V until Pecém Port and its industrial area. The Integration Canal has become one of the main vectors for the economic development of the State providing guaranteed water from Castanhão reservoir. It is also the main infrastructure of the State that will allow for the adequate and immediate use of the additional water being transferred from the São Francisco river basin that is expected to reach the State in Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops 83. A workshop called by the State Government to assess and discuss the outcomes of the PROGERIRH project was held in March 2012 in Fortaleza. Participants included government officials involved in the water sector, current and former project staff, university professors, and representatives of river basin committees. The meeting was helpful in highlighting the achievements of the Project, as well as the historical context and precedents. All participants were highly appreciative of Project results and impacts, and deplored the end of a period considered as extremely positive for WRM development in Ceará. The rather intensive role of the Bank in the Project was mentioned as an important factor of success. The workshop was also useful in defining the challenges the State now faces, such as guaranteeing the quality of reservoir water though integration and coordination with other State policies, the need to promote watershed soil and water conservation more broadly, and the need to serve dispersed rural inhabitants not yet served by medium and large reservoirs. 4. Assessment of Risk to Development Outcome Rating: Moderate (M) 84. The key elements of water management that were strengthened under the Project user registration, allocation of water rights, charging for bulk water and participatory basin and reservoir management are not under any significant threat. Collection of water charges has shown a vigorous upward trend, and is increasingly accepted by the stakeholders as a necessary means of managing scarce water resources. At the same time, the strengthening of the river basin committees will have to be taken over by COGERH after twelve years of continued support by the Project. This will represent a new challenge to incorporate the costs and ensure adequate assistance to the committees. In addition, the operation and maintenance of the hydro-meteorological network currently under the responsibility of FUNCEME is not guaranteed. Coordination efforts between COGERH and FUNCEME should be made to ensure the adequate funding of the network. 22

41 85. The risk of poor maintenance of the new reservoirs and conveyance systems is deemed low. Maintenance of hydraulic structures is one of the main functions of COGERH and for which it collects adequate revenue. Maintenance is not dependent on Government budget allocations. Failure of maintenance, particularly of the reservoirs and the Integration Canal, would quickly trigger complaints from basin committees and management commissions, creating extreme political pressure on COGERH to perform well. 86. There is, however, a new important risk to the strategic reservoirs (not only to those built under the Project): deterioration of water quality through eutrophication as a result of human activity is becoming an increasing threat. Eutrophication is a consequence of untreated waste water effluents released into rivers and reservoirs, runoff of fertilizers used in agriculture, of cattle dung washed into reservoirs, and also of fish culture. It is compounded by the fact the water turnover rate of reservoirs is relatively low in the semi-arid climate. Recognizing these new challenges, the Government has approached the Bank to formulate and implement water quality related policies and investment activities, through a closer coordination of sector policies (urban development, sanitation, agriculture and water resources) in the State Although the construction of three dams and six pipelines was not completed by mid- December 2012, the risk of non-completion by the Government in 2013 is very low. These are priority infrastructure works to the State, and their completion is particularly urgent in the context of the current very dry season and the expectation of increased droughts related to climate change. The adequate and reliable availability of water in the State is an unquestioned and absolute economic, social and political priority. 88. A further threat is the sedimentation of reservoirs from erosive processes in the watersheds, which will eventually reduce live storage and thus the useful life of reservoirs. However, awareness of this threat still appears to be low. The PRODHAM watershed conservation pilot has been crucial in demonstrating feasibility of erosion control and soil moisture conservation by small farmers, but there is as yet no apparent program or a capable agency to mainstream the pilot results widely. This requires some new Government initiative. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry. Rating: Satisfactory (S) 89. The Project was consistent with the Government and the Bank priorities because of the importance of sound management and safe access to water in the State of Ceará. At the same time, it built on an existing and evolving program for development of the state water sector. QAG rated quality at entry as satisfactory. The background work for preparation was sound and the lessons learned from earlier Bank financed projects supporting Ceará s water sector were adequately taken into consideration. Criticism on the design was related to: (i) the lack of operational outcome indicators which were not quantified in terms of baseline and target values (although this was common practice at 15 Program for Results (PforR) operation being prepared with the State including three different sectors. 23

42 the time as evidenced by QAG s quality of entry satisfactory rating), and (ii) the overall cost estimate. Otherwise, all relevant aspects were adequately covered: technical, social/ resettlement, environmental, procurement, financial management and economic and financial viability. (b) Quality of Supervision. Rating: Moderately Satisfactory (MS) 90. Bank supervision is rated moderately satisfactory. The Bank team supported effective implementation through regular and appropriate supervision missions towards the achievement of development outcomes. The supervision effort of the Bank over about twelve years was strong, continuous and comprehensive. There were at least forty-five full supervision missions and technical visits to cover specific components. Each full supervision mission went through all pertinent technical, fiduciary, social and environment aspects and recorded needs for action by the Borrower and implementing agencies in the Aide Memoire. The Bank team could have been more proactive in restructuring the Project to revise its results framework and formally include the correct and agreed baseline and target information. However, baselines and targets were promptly agreed with the Borrower at implementation start and monitored throughout the Project life, including reporting in ISRs. 91. During the original Project, when funding difficulties threatened to impact performance, the Bank was flexible in adjusting financing percentages and reallocating the loan proceeds, and helped mitigate the fund shortage through SWAp loans to the state and to a certain extent also through the PROAGUA loan. In addition, the Bank provided substantial Additional Financing to increase the scope of the Project. With the delays in the AF, several works remained incomplete at closing date; the Bank then obtained an agreement from the Borrower that all unfinished work would be concluded with State funds by 2012, and the Bank continued to supervise that implementation throughout 2012 and will continue supervising the implementation until completion of all works as some of these works will only be completed in Despite the strong and continued supervision support provided by the Bank team, which would justify a satisfactory rating, the Quality of Supervision is being rated as moderately satisfactory for two main reasons: (i) the Bank s assumption (based on the client s good track record both in the implementation of water projects and in other Bank operations) that the Borrower would complete the works relatively early after Project closure, proved unjustified, in view of the fact that several works are still unfinished one year after closing date, and (ii) the last ISR prepared before the closing date in December 2011 too optimistically rated the achievement of the PDO as moderately satisfactory even though only two dams, out of five, and none of the six pipelines had been completed by then. (c) Justification of Rating for Overall Bank Performance. Rating: Moderately Satisfactory (MS) 93. The overall Bank performance is rated as moderately satisfactory, in line with the same ratings for quality at entry and supervision. 5.2 Borrower Performance 24

43 (a) Government Performance. Rating: Moderately Unsatisfactory (MU) 94. The performance of the Government of the State of Ceará is rated moderately unsatisfactory. It strongly supported the Project during preparation phase and most of the implementation. During implementation, it gave priority to the completion of major infrastructure works under the Original Project, notably the Integration Canal, and provided the necessary support to a continuous strengthening of Ceará s institutional framework for WRM (especially COGERH), which is now considered as one of the best institutional set-ups for WRM in Brazil. 95. However, the State Government has shown a lack of pro-active handling of several non-performing works contracts of dams and pipelines, especially during the AF phase of the Project. This led to severe delays in construction and compliance with both social and environmental safeguards. This is partly related to the fact that from 2007 onwards, the Government was not able to retain many experienced and dedicated technical staff and consultants, mainly in SRH and SOHIDRA as most of them left to the heated private sector or other Government institutions, thus causing a decline in the technical follow-up of the Project by the Implementing Agency. Also, the Government did not open new job vacancies and adequately staff SRH and SOHIDRA with permanent personnel, which was only achieved for COGERH. Finally, the State Government was not always effective in guaranteeing the timely collaboration of other state agencies, such as the Environmental Secretariat or the Land Institute, although eventually these agencies performed their part in environmental compensation and mitigation, as well as in land titling to the resettled population. 96. In addition, under the Additional Financing phase, the Government was not able to achieve the results agreed with the Bank for completion of all works during Although delays in the execution of works are partially related to financial problems with contractors, several delays in contract execution relate to inadequate allocation of funds to these contracts after the closing date. In addition, the Government has also decided to stop the external supervision of works activities by a contracted firm. Instead, it decided to continue supervision of works via the State superintendence responsible for surveillance of contractors performance (SOHIDRA), which is not adequately staffed to perform the necessary supervision required by the Project. Finally, the long delay in providing a permanent solution to the energy and water supply of the resettlement area of Gameleira dam could have been avoided by a stronger action from the Government side to resolve the problem. In that area, 35 resettled families only in December 2012 received access to energy and water despite many recommendations and alerts given by the Bank in different supervision missions in 2011 and (b) Implementing Agency or Agencies Performance. Rating: Moderately Unsatisfactory (MU) 97. The main Implementing Agency was SRH. COGERH and SOHIDRA executed specific parts of the Project as delegated by SRH. FUNCEME was responsible for few activities during the first years of the original Project. The implementing agency overall performance is rated moderately unsatisfactory (MU). On the one hand, SRH carried out its planning, implementation and policy functions adequately, especially in the first phase of the Project. It established and maintained special units to implement the watershed 25

44 conservation pilot, to coordinate the environmental mitigation and compensation activities and to carry out resettlement. The effort of SRH to implement resettlement in accordance with Bank rules within the Brazilian legal context (which does not have a resettlement law) is commendable. 98. On the other hand, especially during the AF, its action was characterized by several deficiencies, such as insufficient action on delays in construction work, and inadequate attention to resettlement and environmental mitigation works. This occurred because the supervision capacity of the SRH was not strong enough (particularly in the later years) and SOHIDRA was not adequately staffed or its staff were not well trained in supervising environmental and social aspects in contractors work. As a result, the effectiveness of SRH and SOHIDRA in supervising and enforcing environmental safeguards and contract clauses vis-à-vis the contractors was not satisfactory and has contributed to the nonachievement of most AF infrastructure related results. (c) Justification of Rating for Overall Borrower Performance: Moderately Unsatisfactory (MU) 99. The overall Borrower performance is rated as moderately unsatisfactory, in line with the ratings for Government and Implementing Agency performance discussed above. 6. Lessons Learned 100. The Government of Ceará has continuously expanded and reinforced its water system over the last decade, in great part through the Project. This involved not only expansion of infrastructure but also improvements in management and user participation. By doing so, it has connected more people and more uses to the system and increased their level of guarantee of water supply. This tendency will continue with the arrival of the water from the São Francisco River Inter-Basin Transfer Project to the state of Ceará Ceará s institutional model separating planning and policy formulation from implementation of water resources instruments with financial sustainability is relevant for other states of northeast Brazil that are faced with similar WRM challenges and could be adapted to their specific contexts. The state of Ceará has put very significant efforts over the last decade to consolidate and strengthen its institutional set-up for water resources planning and operation and maintenance of its key water infrastructure. By implementing improved policy and management tools, such as permit and tariff policies, it achieved the objective of financial sustainability of COGERH. Therefore, Ceará is arguably the best prepared state of the Northeast to receive the water of the São Francisco River Inter-Basin Transfer Project and address its associated financial and operational challenges A strong political will is needed to integrate institutions around water resources management. Ceará still has a lot to achieve in this area, as evidenced by the case of the PRODHAM pilot, which brings together different aspects of water management. This pilot, although widely recognized as a success story in terms of environmental management, farmers participation and income generation, has hitherto not been scaled up for lack of institutionalization of its model. More broadly, the state needs to further develop institutional capacity to formulate and implement water resources policies in conjunction with different entities (e.g. agriculture, tourism, urban 26

45 development, industry etc.), especially to address the critical water quality challenges, but also to address challenges related to dam safety, which require strong inter-sectoral collaboration mechanisms Participatory, decentralized WRM at the river basin level is key for achievement of improved management of resources. Firstly, the decentralized support by COGERH, through its eight regional offices, undoubtedly contributed to consolidating and strengthening the water allocation process by the River Basin Committees. Secondly, the strong collaboration between Ceará s Meteorological Foundation (FUNCEME) and COGERH greatly facilitated the use of climate and hydrology forecasts into this allocation process. Looking forward, and considering the expected changes in precipitation and temperature from climate variability and change, these processes will likely be challenged by changes in terms of water availability and water demand. It is, therefore, important that the state considers those possible impacts at different time scales, and explores options to increase the flexibility and adaptive capacity of its institutional and legal framework, and infrastructure, to address them More attention needs to be given early on to water quality issues; water volume and quality are inextricably linked. In Ceará, reservoirs have been constructed historically to deal with recurrent droughts and assure adequate water quantity, with little or no water quality management objectives. Likewise, the design of Bank financed projects in the water sector did not include specific water quality related objectives. Yet, increased influxes of pollutants, combined with fluctuations in water volume, have contributed to a degradation of the water quality in key reservoirs throughout the state. As water levels fall particularly during droughts, conditions may reach a highly eutrophic state and water becomes unusable precisely when it is most needed. It is recommended that future interventions in Ceará and similar states in the semi-arid northeast consider water quality improvement objectives and interventions to be adopted among sector agencies (e.g. water supply and sanitation, urban development, agriculture, among others) combined with local participatory strategies at the watershed level In the context of Ceará, it was the right choice to incorporate environmental (e.g. clearing of reservoir areas) and resettlement actions (e.g. construction of agrovilas for people displaced by the construction of reservoirs) in the work contracts. However, effective compliance with these safeguards requires: (i) intensive training of implementing agencies staff on Bank s safeguard policies, on the content of environmental management plans and on the equivalency of these to local, state and federal requirements, (ii) a well-trained, specialized professional team for planning and supervising environmental mitigation actions, (iii) training of contractor staff in the requirements of environmental action plans before the start of construction and (iv) an effective communication strategy that shares the benefits of the Project with the local affected population and the importance of complying with environmental requirements with the contractors Resettlement should provide more than one option for rehabilitation of families (as was the case with irrigated plots in agrovilas) and involve them in the choice of the most suitable alternative. Also, to ensure that agrovilas are sustainable after the end of the Project and the departure of the Implementing Agency, it is important 27

46 that the state establishes clear institutional arrangements, including with the local governments, regarding access to basic social and infrastructure services Intensive Bank involvement in supervision of resettlement and environmental safeguards is indispensable, as effective Borrower attention to these aspects is often limited, particularly where civil society organizations are scarce or absent in representing or safeguarding the interests of displaced persons and of the environment. While Ceará has made considerable improvements incorporating social and environmental safeguards in the planning of projects, it is important to further strengthen civil society and stimulate its demand for compliance with such safeguards, as a matter of good governance and sustainability of these institutional achievements Innovation processes like the ones achieved in Ceará s water sector, require long term vision and political commitment, financial stability and institutional strength. To support a state like Ceará in those long-term processes and for such large combined infrastructure and institutions focused-projects, the Bank needs to invest in a long term vision and take risks, which it has been able to do with this Project, leading to very important development outcomes. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies 109. The draft ICR was submitted to the counterparts for comments on December 9, The Borrower s implementing agency, SRH presented their comments to the draft report through the letter OF. GS. N 2087/2012 dated December 26, 2012 and received by the Bank on the same date. The full content of the letter is presented in Annex In the letter, the Borrower expressed its satisfaction with the recognition of the significant benefits of the Project and the achievement of main objectives, which has allowed for the development and consolidation of the State water resources sector, considered one of the best implemented in the country. It also stressed in the letter that out of the 23 intermediate indicators, only 7 were not achieved in full; considered by the implementing agency as a demonstration of the high degree of Project success, achieving the main objective of increasing the State s capacity to deal with water resources scarcity issues through structural measures and actions aimed at strengthening the management system, creating a new culture and consolidating a new model for dealing with the water resources in Ceará In this sense, the Borrower expressed its disagreement with the overall outcome rating of moderately unsatisfactory. In its point of view, this rating does not reflect Project overall performance. The Borrower s understand that this rating relates to the fact that four dams were and the pipelines have not been completed yet. In that regard, the Borrower mentions the report from the Bank s mission carried out from December 10 to 14, 2012, which states that the dams will be fairly completed by end-december 2012, leaving small adjustment works to be carried out in January Amontada, Antonina do Norte and Ipueiras pipelines are 95% completed and Madalena pipeline is 80% completed, all of them expected for completion in January Itapipoca pipeline completion has been delayed due to the bankruptcy of the original contractor, which has 28

47 already been replaced and the works have resumed, with completion expected by May The construction of Ipaumirim dam is paralyzed for judicial reasons. (b) Cofinanciers. Not Applicable. (c) Other partners and stakeholders Not Applicable. 29

48 Annex 1. Project Costs and Financing A. Original Project (a) Project Cost by Component (in US$ million equivalent) Components Management and Institutional Component Strategic Reservoir Network Integration of Key River Basins Restoration of Existing Bulk Water Infrastructure Micro Watershed Managemen Pilot Project Appraisal Estimate (USD million) Actual/Latest Estimate (USD million) Percentage of Appraisal Groundwater Management Total Baseline Cost Physical Contingencies Price Contingencies Total Project Costs Front-end fee PPF Front-end fee IBRD Total Financing Required (Exchange rate used in Appraisal was US$1.00 = R$1.70. Actual amounts are calculated in an exchange rate of US$1.00 = R$2.02). (b) Financing Source of Funds Type of Co-financing Appraisal Estimate (US$ million) Actual/Latest Estimate* (US$million) Percentage of Appraisal Borrower IBRD Total *The amount related to Bank financing relates to actual disbursements. 30

49 B. Additional Financing (a) Project Cost by Component (in US$ million equivalent) Components Appraisal Estimate (USD million) Actual/Latest Estimate (USD million) Percentage of Appraisal Water Resources Management Hydraulic Infrastructure Total Baseline Cost Physical Contingencies Price Contingencies Total Project Costs Front-end fee PPF Front-end fee IBRD Total Financing Required (Exchange rate used in Appraisal was US$1.00 = R$1.75. Actual amounts are calculated in an exchange rate of US$1.00 = R$2.02). (b) Financing Source of Funds Type of Co-financing Appraisal Estimate (US$ million) Actual/Latest Estimate* (US$million) Percentage of Appraisal Borrower IBRD Total *The amount related to Bank financing relates to actual disbursements. 31

50 Annex 2. Outputs by Component 1. The detailed project components and their outputs are described as follows. Component 1: Management and Institutional Component (US$ 25 million, 10 percent of total estimated cost). 2. Description. Even though tremendous progress had been made in the institutional, legal and management frameworks of the state, this component sought to enhance the work by then, refine the systems where needed and continue the implementation of sustainable practices in the management of the resources. The component was divided into the following specific sub-components: Hydro-meteorological Information System: 3. Inventory and prioritization of the information gathering activities within the state, classification of activities as collector-user potentialities. Identification of areas where information was not being collected and areas of redundancy. Electronic data collection, assimilation, distribution and archiving to be designed to optimize the availability of all natural resources information within the state to all users without compromising the need for real time availability to information originators. Based upon this refined design, system components were to be acquired and installed to provide a comprehensive and accessible data base of natural resources information to both the public and the private sector. Sustainable Operation and Maintenance of Bulk Water System: 4. Assistance to COGERH in the development of a sustainable and comprehensive Plan of Operation and Maintenance (POM) for the State. Development of sustainable preventative maintenance practices, establishment of depreciation reserves for extraordinary maintenance and equipment replacement, maintenance training programs, and emergency response strategies for the bulk water system. Dam Safety and Inspection Program: Development of a comprehensive program of inventorying, risk classification, inspection and rehabilitation prioritization for the over 5,000 dams and reservoirs within the State. Basin Committee Organization and Training: 5. Enhancement of the existing program of formation and development of capacity within River Basin Committees to participate in the management of water resources within the river basins of the State. Water Tariff Evaluation: 6. Continue the program of evaluation of bulk water tariffs and the development of an acceptable strategy of setting tariffs that reflects the real cost of providing the service and also provides a socially viable system of tariffs and cross-subsidies, where necessary, to guarantee water availability to all segments of society and, at the same time, assure the sustainability of the bulk water systems. 32

51 Market-Based Water Transfer Mechanisms: 7. Design and implement, on a pilot basis, a market-based transfer system for water use rights that enhances adjustment of water supplies to meet changing demands reflective of values determined in the market place. Public Information and Education Program: 8. Design and implement a public information and education program within the State with the objective of educating the general public, the political leaders and the media regarding the value of water resources and the necessity for conserving and maintaining the quality of those resources. Component 2: Strategic Reservoir Network (US$22.2 million, 9 percent of total estimated cost). 9. Description. Design and construction of key infrastructure critical to the provision of water supplies to rural water-short areas and to reduce the vulnerability of the citizens of the state to cyclical drought in the short to medium term. Delineation of the infrastructure was said to be provided in a hierarchization study of dams included in project files. Component 3: Integration of Key River Basins (US$166.8 million, 67.5 percent of total estimated cost). 10. Description. Provision of reliable and quality water supply for industrial, municipal and domestic purposes within the Metropolitan Basin of Fortaleza for the short, medium and long term. This included: (a) a detailed analysis of the inter-basin water resources transfer proposals of the PROGERIRH Plan to evaluate environmental, social, technical and economic feasibility of such proposals and to develop a long-range schedules for implementation of feasible options. The analysis was to include hydrological modeling, supply and demand projections, environmental and social evaluation, analysis of alternatives, sensitivity analysis, and consideration of regional planning goals for both the originating and the receiving river basin. (b) preparation of final designs and construction of key inter-basin transfer systems found to be of high priority, feasible and necessary, including the development of operation and maintenance plans for these facilities; (c) construction of priority infrastructure necessary to assure an adequate water supply for industrial, municipal and domestic purposes to the Metropolitan Basin of Fortaleza. Component 4: Restoration of Existing Bulk Water Infrastructure (US$23.2 million, 9.4 percent of total estimated cost). 11. Description. The state water company COGERH had taken over the operation and maintenance responsibilities of the bulk water supply facilities of the state including the facilities formerly operated and maintained by CAGECE and the Federal Government (DNOCS). These facilities were suffering from a lack of sustainable operation maintenance over several decades. COGERH had inspected and inventoried the condition of these facilities and prioritized the need for restoration. The component continued the 33

52 evaluation process of existing bulk water supply infrastructure and begin implementation of restoration measures for those systems deemed most critical to the assurance of continued supply of bulk water in the short term. Component 5: Micro Watershed Management Pilot Project PRODHAM (US$5 million, 2 percent of total estimated cost). 12. Description. Rehabilitation of micro watersheds (fourth-level tributaries) in four predefined areas of the State. Conceived as a pilot project, it was to develop methodologies on how to build a functioning approach for local community involvement, implementing technically, socially, environmentally and economically sustainable solutions that help promote the improved management of soil and vegetation in the tributary watersheds by enhancing water conservation, minimizing erosion and maximizing natural water storage mechanisms. 13. This component was developed as a complimentary aspect of the global PROGERIRH. While the global PROGERIRH focused on areas close to the primary water courses in the state, the PRODAHM focused on fourth-level tributaries in micro watersheds. In these rural areas, the population typically is very poor and dependent on water availability during the rainy season. With the onset of the dry season, water scarcity impedes development of economic activities such as irrigation or intensive animal husbandry. In addition, local vegetation along these small tributaries suffers due to its uncontrolled use. The loss of this vegetation cover in turn has a negative impact on soil moisture, wind retention and the micro climate, thus creating a downward spiral of environmental and livelihood degradation. 14. The main objective of this component was the rehabilitation of micro watersheds in four areas of the state of Ceara. Conceived as a pilot project it developed methodologies on how to build up a functioning approach for local community involvement, implementing technically, socially, environmentally and economically sustainable solutions that help promote the improved management of soil and vegetation in the tributary watersheds by enhancing water conservation, minimizing erosion and maximizing natural water storage mechanisms. The ultimate purpose was to improve the livelihood of the inhabitants of these areas increasingly threatened by environmental degradation and recurring droughts. 15. The expected results of the pilot were: (a) a methodology for rehabilitation and prevention of degradation effects on the vegetation; (b) development of simple techniques of soil and water conservation using local human and natural resources; (c) reestablishment and conservation of local biodiversity; and (d) increased inter-seasonal water availability for animal consumption. Depending on the results, the approach might be extended to other areas. Component 6: Groundwater Management (US$5 million, 2 percent of total estimated cots). 16. The main area of the state of Ceara is situated on chrystalline rock formations with relatively little good-quality groundwater. For this reason the principal water source is surface water which is stored in reservoirs during the rainy season lasting from January 34

53 through May. In two regions of the state, however, there are significant groundwater resources: the coast and in the Cariri region. This component focused on these areas through two sub-components. A. Cariri Sub-component: 17. The Cariri region in the Southeast of the State has relatively abundant rainfall and groundwater, which is crucial to the economic and social stability of that region. However, evidence had accumulated that groundwater resources were diminishing. This sub-component was to produce relevant data and analyses regarding the groundwater situation in the Cariri region, especially regarding the Chapada do Araripe highlands and their link to the Cariri plain, and develop and implement an action plan for better groundwater management, involving the local communities, possibly including reforestation, groundwater monitoring, registry of water users, training water managers in the region and educating the public. B. Coastal and Littoral Zone Sub-component: 18. Groundwater in the coastal zone and the related coastal freshwater lakes are important for the State s tourism industry, both from a recreational and from a drinking-water viewpoint, as well as for much of the current water supply to Fortaleza. Groundwater resources are vulnerable to pollution from residential and industrial development, to intrusion of salt water and to over-exploitation. The sub-component was to continue analysis and the implementation of recommendations developed under the Ceará Water Pilot Project for the development of a coastal and littoral zone groundwater management plan, to include a program for the identification and preservation of the critical recharge zone to assure the long term sustainability of this valuable resource. Additional Financing 19. An Additional Financing (AF) for this Project of US$ million was approved by the Board on December 17, While project objectives remained the same, project components were re-organized into two major areas: (a) WRM, including groundwater management, formerly under Component 6, and a new water quality monitoring system, and (b) hydraulic infrastructure, containing the following elements: Component 1 - Water Resources Management 20. Description. This Component will comprise the following groups of activities: Institutional Strengthening: 21. Development and strengthening of human resources for the State WRM entities and the public communication system to facilitate the social change for a new water culture. Water Rights, Licensing and Control System, Bulk Water Tariff Program: 22. Updating and expansion of the technical and information basis for allocating and managing water rights, enforcing water rights and bulk water charges, and re-evaluating the bulk water tariff and tariff collection system. Water Basins Committees and Water Users Associations: 35

54 23. Supporting the creation of additional water basin committees and water user associations, dissemination of lessons learned and best practices through the watershed pilot (PRODHAM), and development of environmental education programs for bulk water conservation. Operation and Maintenance of Hydraulic Infrastructure: 24. Preparation of studies for rehabilitation and enhancement of water infrastructure, and implementation of automated O&M for priority infrastructure. Water Quality Management and Groundwater Management: 25. Implementation of a water quality monitoring system and expansion and strengthening of the groundwater management system. Component 2 - Hydraulic Infrastructure 26. This revised component represented the bulk of additional funding and included the preparation and implementation of additional water storage and supply facilities that had been analyzed in the preparation of the original PROGERIRH but not included in the project scope earlier due to funding limitations. The component included three groups of activities: Strategic Reservoirs Network: 27. Six reservoirs (Umari, Gameleira, Trairi, Jenipapeiro, Jatoba and Mamoeiro) were selected following a prioritization methodology developed earlier, that are to be primarily used to provide municipal/domestic water supply to critical rural areas that lacked adequate and reliable treated water, particularly during the periodic droughts. Water Transfer Axis: 28. The completion of Section III of the Integration Canal initially funded under PROGERIRH was included in the scope of the AF, but was to be entirely financed with counterpart funds. The sub-component also included the water conveyance systems (Madalena, Itapipoca, Fortim, Ipaumirim, Ipueiras and Antonina do Norte pipelines) to distribute water from the above-mentioned six strategic reservoirs, to be funded in part with AF loan funds. Studies and Engineering Designs to support State infrastructure investment planning. The annex follows the component structure adopted under the Additional Financing, but includes also the components Restoration of Bulk Water Infrastructure and Microwatershed management, which were part of the original project scope only. Water Resources Management: A. Institutional Strengthening First Phase and Additional Financing (AF) Institutional Strengthening SRH, COGERH, SOHIDRA strengthened, with training, office equipment, furniture, field equipment, vehicles, information technology, studies, WRM plans, consultancies, technical assistance, etc. 36

55 Master course in water management (11 students) Regional offices of COGERH established Management Information System for SRH Environmental protection Infrastructure for Araripe National Forest Environmental education and training in Araripe National Forest Environmental education and infrastructure in three areas of environmental protection Monitoring of conditions in estuary and mangrove forests of four rivers Monitoring of schistosomiasis in Aracoiaba reservoir and river Branch office of State Environment Secretariat in Pecém industrial/port complex. Environmental inventories for 28 reservoirs Water Management Ceará WRM Plan (2005) aerial photography for 123 reservoirs Decision Support System for Water Allocation and associated training Dam Safety Dam safety rules, criteria and procedures Dam safety inspections Dam safety panel Public Information and Awareness Campaign on Rational Water Use Campaign on water tariffs Distribution of primers to irrigation users Radio programs on WRM in selected basins Pacto das Águas (State Water Pact): eight seminars, 225 people, 94 institutions to discuss water resource scenarios for Ceará B. Water Rights, Licensing and Control System, Bulk Water Tariff Program Tariff studies, proposals and decrees First Phase and AF Studies on ability to pay of water users Studies on cost of providing bulk water by major systems Study on cost of bulk water supply to eight major irrigation schemes Proposal for water tariff structure. Decree of 2003, modified by Decrees of 2010 and of Inclusion of irrigation and fish/shrimp cultivation in water charging 380 paying bulk users Cadastre of bulk water users Cadastre carried out in eight river basins. Total of 15,500 users registered by the project16. Water rights awarded 5,000 Tradable water rights pilot scheme Not implemented. Instead: Plan to optimize water allocation (for Banabuiú, Orós and Castanhão dams) C. Water Basins Committees and Water Users Associations First Phase and AF 16 Another 2284 users were registered under the PROAGUA project 37

56 River basin committees 12 basin committees created and functioning Educational and information events, training Management Commissions formally established 34 informally operating, still to be formalized Educational and information events, training D. Operation and Maintenance of Hydraulic Infrastructure First Phase and AF Operation and Maintenance Plan Hydro-meteorological infrastructure O&M Plan for Hydraulic (Bulk Water) Infrastructure drafted and concluded 70 automatic data collection platforms Water level monitoring in 125 reservoirs Projects (designs) for telemetric monitoring and control of hydro-mechanical equipment and conveyance structures E. Water Quality Management and Groundwater Management Groundwater studies and monitoring Water quality monitoring First Phase and AF Groundwater unit established in COGERH Technical chamber and groundwater group established (advisory) Monitoring and plan for participatory management of groundwater in Chapada do Apodi Monitoring of groundwater and management plan for Cariri/Araripe aquifer Hydro-geological study of groundwater in Fortaleza metropolitan region Study on qualitative risk re-evaluation of groundwater use in the FMR Study evaluating residential self-supply of groundwater in the FMR. Acquisition of quality monitoring equipment Hydraulic Infrastructure A. Strategic Reservoirs Network Number of new reservoirs First Phase 6 dams/reservoirs: Aracoiaba Carmina Catu Cinzenta Faé Malcozinhado Pesqueiro Additional Financing 5 dams/reservoirs 18 Gameleira Umari Jatobá Jenipapeiro Mamoeiro 17 These substitue for the earlier water user associations 18 Gameleira, Jatobá e Mamoeiro dams had not yet been completed by mid-december 2012 but completion is expected by end-december The sixth reservoir planned under the AF, Trairi, was taken out of the Project scope by the Government at implementation start as other alternatives to supply water to the beneficiaries had already been implemented. 38

57 Storage capacity million m million m 3 Regulated flow (at 90% dependability) m 3 /sec 1.35 m 3 /sec Population benefiting 230, ,600 Resettlement villages 3 villages, with 121 houses and agricultural plots 5 villages, with 140 houses and agricultural plots Assisted self-resettlement 404 families 87 families B. Water Transfer Axis First Phase Integration Canal 1 st reach I (54.7 km, 22 m 3 /sec), 2 nd reach (46.1 km, 19 m 3 /sec) and part of 3 rd reach (66.3 km, 19 m 3 /sec) Conveyance structures Second reach of industrial water supply system for thermal power plants CGTF and USCJ Spillway to stabilize syphon Nr. 1 of the conveyance canal Sítios Novos, Pecém Automation equipment to supply water to the Industrial and Port Complex Pecém Additional Financing Remainder of 3 rd reach Six conveyance structures (pipelines). 19 Amontada 20 Antonina do Norte Ipueiras Itapipoca II Ipaumirim Madalena 144,600 people served C. Restoration of Bulk Water Infrastructure First Phase only (none under AF) Rehabilitation works 23 rehabilitation sub-projects for dams, reservoirs and water intake structures D. Studies and Engineering Designs to support state infrastructure investment planning 19 Ipueiras and Amontada pipelines are expected to be completed by December Itapipoca pipeline is expected to the completed in May 2013, Madalena and Antonina do Norte in February Ipaumirim pipeline will be delayed for completion in 2013 due to an ongoing judicial dispute between the contractor and SRH. 20 The originally planned Fortim pipeline would capture water at Trairi dam. Therefore, it was taken out of the Project scope together with Trairi. The inclusion of Amontada pipeline was then agreed with the Bank. The pipeline captures water at Missi dam, constructed under the Bank-financed PROAGUA Project. 39

58 First Phase Additional Financing New dam projects and designs prepared 14 dams, 11 conveyance structures 1 dam New conveyance pipeline projects and designs prepared 10 Feasibility studies for dams prepared 9 1 dam Watershed Management First Phase and AF Pilot micro-watersheds 4 pilot projects/micro watersheds 17 demonstration units 53 ha restoration of streamside vegetation and degraded areas 74 km stone contour bunds, vegetative contour bunds 130 km terracing 3,330 sediment contention barriers 27 underground barriers 470 cisterns 95,000 seedlings 800 producers trained 79 environmental education events 42 technical training events 100 organizational strengthening events 25% adoption rate of improved practices among trained producers Pilot results Production and dissemination of material about results of PRODHAM component 11 primers 3 dissertations 6 books Website, CDs, DVDs 40

59 Annex 3. Economic and Financial Analysis (including assumptions in the analysis) 1. Conclusion: Internal economic rates of return (IERR) on the three, pre-defined strategic reservoirs described in the PAD were expected to range from 13% to 15%. Analysis shows actual IERRs for these same strategic reservoirs ranging from 7% to 15%. The reasons for the differences between appraisal and the ex-post analysis are explained in Section A below. Of the three strategic reservoirs analyzed, one is economically profitable, exceeding their appraisal estimate, while the others are below appraisal estimate and marginally economically viable. The investments in the Fortaleza Metropolitan Region (FMR), which included investments in the Transbasin Link Castanhão-Fortaleza, the Aracoiaba Reservoir, the Worker s Canal, and rehabilitation works, shows an IERR of 13%, compared to the appraisal estimate of 16%. The project IERR is 11% compared to the appraisal estimate of 14%. 2. The economic and financial analyses of the Project were conducted at two levels. First, using traditional cost-benefit analysis, detailed economic and financial assessments were undertaken for the main infrastructure components, namely (a) increased and reliable supply to the FMR, and (b) a sample of three completed strategic reservoirs. The evaluated infrastructure components account for 94% of the total project costs estimated at appraisal (excluding the Additional Financing). We have excluded the original financing investments in the ex-post economic analysis because those investments have not yet produced benefits and/or data was not available. 3. The analysis followed the same methodology and cost-benefit calculations done at appraisal in order to compare the projected net benefits with the actual economic and financial returns. Nevertheless, the institutional development component has been pivotal to the achievement of the overall project benefits, however it has not been quantified in this analysis. Therefore, for the Project as a whole, the linkages of the different components, i.e. the investment costs of the above-mentioned investments were considered. These were compared to the benefit streams derived from incremental water supply. 4. The ex post economic analysis followed the same methodology as the appraisal assessment. The cash flows were calculated up to the year 2028 (30 years from appraisal), discounted using a discount rate of 12 percent which is assumed to be a proxy of Brazil's opportunity cost of capital. Benefits were estimated based on the type of use. Three different types of use were included in the quantitative analysis: human water supply, industrial water supply, and irrigation. However, for the sample of projects evaluated, irrigation benefits were not included in the base scenario given that there was no expected area with specific irrigation activities planned. Thus, given that irrigation activities had been undertaken, the approach used was conservative by not including irrigation within the benefit stream. 5. Cost information was provided by Project Unit, as well as O&M costs by COGERH and CAGECE. These costs include capital costs, operation and maintenance costs, rehabilitation, and resettlement. Although the project did not finance water treatment plants, distribution networks for municipal water supply, or irrigation infrastructure, such 41

60 investments were undertaken with own Government funds. We included these additional costs in order to be able to arrive at the real net return to all investments. A. Analysis of Strategic Reservoirs 6. From Map 1, we observe the location of all reservoirs financed by PROGERIRH, and MAP 2 shows the clear growth in the number of households between 2000 and 2010 with adequate water supply. Table 1 below shows the comparison between the appraisal estimates and the ex-post economic analysis of the 3 strategic reservoirs: Malcozinhado, Carmina, and Catu. The reason for the differences between the appraisal estimates and the ex post analysis are the following: a. For Catu and Carmina Reservoirs, although the actual volume of water supplied to end user was lower than originally estimated, given the better than estimated reduction in losses throughout the system and the larger than expected population growth, economic benefits were maintained. The big difference leading to a negative NPV, is due to the higher than anticipated costs, both investment and O&M costs. Catu and Carmina had an increase in costs of 42% and 37% with respect to the appraisal estimate. b. For Malcozinhado overall costs were 17% less than the appraisal estimate. Actual investment costs were higher, but O&M costs were much lower, leading to net savings. Furthermore, given that it was the largest Reservoirs in the sample, this kept the overall costs of these 3 reservoirs at only 11% above the appraisal estimate. c. In addition, increases in costs related mostly to rises in fuel prices and overall construction costs partially caused by the devaluation of the Real in Construction costs have also increased as a result of the heating of the construction market in Brazil with the launch of a large infrastructure program by the Federal Government in Table 1. Comparative Economic Analysis of Strategic Reservoirs Strategic Reservoir Appraisal Estimate Actual Present Value (US$ '000) IERR (US$ '000) Benefits Costs NPV (%) Benefits Costs NPV Carmina 2,061 1, % 2,165 2,158 (225) 11% Catu 3,225 2, % 3,185 4,114 (1,270) 7% Malcozinhado 5,435 4, % 5,615 3, % Total 10,721 9,109 1,612 14% 10,966 10,144 (890) 11% B. Analysis of Infrastructure Investments for the Fortaleza Metropolitan Region (FMR) and overall Project Returns 7. Population in the FMR has grown as estimated in appraisal, but potable water consumption and system efficiencies have been higher than originally expected (see Table 2 below). In particular CAGECE reports a great improvement in the reduction of system losses in the past few years, as well as an increase in water consumed. Although a desegregated ex post analysis by type of water user group was not possible, there has been a clear increase in incomes in the past decade, as well as a proliferation of IERR (%) 42

61 underground water sources, so it has been challenging to quantify the current level of overall benefits from project investments for the FMR. Table 2. Comparative data of appraisal assumptions vs. observed estimates Reservoir (Acude) + FMR POTABLE WATER CONSUMPTION (2011) Estimated (M3/year) Actual (M3/year) SYSTEM EFFICIENCY (2011) Estimated Water Distribution Losses (%) Actual Water Distribution Losses (%) POPULATION (2011) Estimated Actual Catu 1,525, , ,368 67,000 Carmina 304, , ,985 9,952 Malconzinhado 1,000, , ,442 84,825 Fortaleza Met Reg. (*) 425,212, ,405, ,677,297 3,610,000 Total 428,043, ,027,316 3,823,092 3,771,777 (*) The FMR estimates include water to other uses (commercial and irrigation) 8. Overall costs in the FMR infrastructure have been 12% higher than originally estimated at appraisal. Investment costs for the Transbasin Link (Tranches 1 and 2), were higher than expected, but O&M costs have been lower. With respect to the Aracoiaba Reservoir, it shows both higher than estimated investment and O&M costs. Given the lack of disaggregated cost data by item, we are not able to identify the source of the costdifferential, however staff at COGERH and CAGECE attribute the increase to the large and sustained level of international oil prices. But even with the increase in costs, the overall project investments still show a positive NPV with an IERR within the limits of the appraisal sensibility analysis. Table 3. Comparative Economic Analysis of PROGERIRH Appraisal Estimate Actual Project Investments Present Value (US$ '000) IERR (US$ '000) IERR Benefits Costs NPV (%) Benefits Costs NPV (%) FMR Investments (*) 238, ,688 58,379 16% 211, ,341 10,358 13% Strat. Reservoirs (**) 10,721 9,109 1,612 14% 10,966 10,144 (890) 11% Total 248, ,797 59,991 14% 222, ,484 9,468 11% (*) Aracoiaba Reservoir, Worker's Canal, Transbasin Link Castanhao-Fortaleza (**) Carmina, Catu, Malcozinhado 9. Benefits for human water supply include increase of service coverage, reduction of intermittent water supplies, water quality improvement and resource savings caused by switching from alternative sources at a higher cost to the consumer to a piped water network at a lower cost per cubic meter. Since all incremental treated water provided through this project was (and is) distributed by CAGECE (Ceará's water and sanitation company), we have used CAGECE's tariffs. With the project, an incremental 2.7 million inhabitants will be served by the water from this Project. In addition, the Project has provide drought security to both current and future inhabitants of the Fortaleza Metropolitan Region, as evidenced by the reduction in the need to request the population 43

62 to save water and eliminating the need of shutting off the water supply for specific periods of time. 10. The tariff used for calculation of the value of this incremental water is based on CAGECE's tariff schedule, with weights applied to different consumer groups. At appraisal tariffs varied between US$ 0.52/m3 and US$ 1.18/m3 for residential, commercial and industrial consumers respectively, and have been increasing steadily tariffs were at US$ 0.71/m3, US$ 1.15/m3 and US$ 2.22/m3 for residential, commercial and industrial consumers (lowest category) respectively (see Table 4 below). Table 4. Tariff schedules CAGECE US$/M3 min max min max min max min max RESIDENTIAL COMMERCIAL INDUSTRIAL Irrigation benefits could be estimated based on the expected incremental irrigated area, its associated water use and incremental crop production. The strategic reservoirs are mainly located in the interior where poverty of the population is greatest and education levels are low; however in recent years there has been an increase in state assistance programs for agriculture and irrigation, so it has been difficult to isolated the impact of a more reliable water source with other public sector farmer supports. No primary data were available to quantify the incremental benefits from irrigation, so the approach used was conservative by not including irrigation in the base case scenarios and irrigation benefits were thus underestimated. Nevertheless, a recent study 21 has shown that per hectare profitability due to irrigation (and diversification into value added products) could go from 10% to 35% on average. This not only has increased rural, but probably also has had a positive social impact by reducing migration to Fortaleza in the recurring drought periods, which force people to look for alternative livelihoods and which can cause considerable negative social impacts. 12. Overall current water charges by COGERH are still below actual O&M costs (R$0.003 per m3) for bulk water delivered to CAGECE for municipal use, which is less than at appraisal (R$0.01 per m3); and no charges yet to the agricultural sector. Although the overall charges are not yet sufficient to cover O&M, Ceará is one of the few Brazilian states charging for bulk water. With this project, the institutional reforms have been under way and a new and improved tariff structure has been introduced. Results from the ex-post analysis show that the proposed investments for the Fortaleza Metropolitan Region component were economically viable. However, the financial analysis illustrates that at current prices, consumption and tariff levels, the investment in this, and other components, continue to require capital subsidies from the government since the FIRR only reaches 4%. The results of the strategic reservoirs show low financial rates of return, due to their multipurpose use. The reservoirs are for human and industrial consumption 21 COGERH. OS PERÍMETROS PÚBLICOS IRRIGADOS DO CEARÁ, OS CUSTOS DE PRODUÇÃO E A COBRANÇA DE ÁGUA DE IRRIGAÇÃO. May

63 plus capacity for irrigation and other uses. Also, COGERH is not yet able to charge for water with a potential irrigation use. MAP 1 Strategic Reservoirs Built with PROGERIRH Resources 45

64 2 - Households with adequate water supply (per municipality) 46