Actual Project Name : St Lucia Water Supply Infrastructure Improvement Country: St. Lucia US$M): Project Costs (US$M

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1 IEG ICR Review Independent Evaluation Group 1. Project Data: Date Posted : 04/29/2011 Report Number : ICRR13250 PROJ ID : P Appraisal Actual Project Name : St Lucia Water Supply Project Costs (US$M US$M): Infrastructure Improvement Country: St. Lucia Loan/Credit (US$M US$M): Sector Board : WAT Cofinancing (US$M US$M): Sector(s): Water supply (92%) Central government administration (8%) Theme(s): Infrastructure services for private sector development (50% - P) Water resource management (25% - S) Access to urban services and housing (25% - S) L/C Number: C4065; L7297 Partners involved : Board Approval Date : 05/19/2005 Closing Date : 01/15/ /15/2009 Evaluator : Panel Reviewer : Group Manager : Group: George T. K. Pitman Robert Mark Lacey IEG ICR Review 1 IEGPS1 2. Project Objectives and Components: a. Objectives: According to the DCA the objectives of the Project was to carry out critical water infrastructure works designed to: 1. Provide more efficient, continuous and reliable water service to the north of the Borrower s territory 2. Maintain the patronage and support of commercial users within the system. According to the PAD the Saint Lucia Water Supply Infrastructure Improvement Project was designed to support a short-term investment program to carry out critical works required to achieve the following objectives : 1. Alleviate the water shortage in the north of the country. (The infrastructure works proposed would allow the utility to supply the entire north of the island with a more efficient, continuous and reliable service.) 2. Implement urgent investments that will result in additional revenues, reduce the likelihood of commercial users (important sources of cross-subsidy for poor consumers) abandoning the system and improve the potential of a successful partnership between the government and the private sector. In this ICRR the PAD description of the project objectives is used because the second objective is more clearly defined and easier to monitor. It should be noted that while the DCA does not mention the proposed public-private partnership (PPP), it is clear from the ICR and ISRs that the Bank's supervision team were clearly guided by the objectives as stated in the PAD. The main beneficiaries of this project included residential, commercial, and industrial consumers including about

2 86,000 residents in the north of the island (53% of the total population) supplied by the Roseau Water Supply System and the Hill 20 Water Supply System. b.were the project objectives/key associated outcome targets revised during implementation? No c. Components (or Key Conditions in the case of DPLs, as appropriate): Part A: A Infrastructure Improvement Works. (Appraisal estimate US$6.94 million; actual US$10.07 million). 1. Upgrade the Roseau dam pumping station through: (a) replacement of existing pump-motor assemblies to facilitate a pumping capacity of approximately 10 million gallons per day; and (b) additional works which may include, inter alia, provision of voltage conditioning equipment, upgrade of switchgear, installation of adjustable speed drives, upgrade of pipe works, and replacement of standby generation to accommodate increased power supply requirements of the pumping -motor assemblies; 2. Improve raw water transmission between Vanard and Sarot through the installation of : (a) a 24-inch ductile iron pipe between Vanard and Sarot; and (b) joint restraints at river crossings located between the Millet and Vanard pumping stations; 3. Upgrade of the Theobalds water treatment plant to a capacity of 10 million gallons per day through the installation of additional treatment units; and 4. Upgrade of the Morne Bocage distribution pipeline through the construction of required works, using the existing or an alternative design approach that responds to the supply needs, which include the installation of a new: (a) pump station at Ciceron; (b) pressure pipeline with capacity to meet water demands up to 2.53 million gallons per day; (c) storage tank of 200,000 imperial gallons at the Morne Fortune storage facility; (d) gravity main transmission pipeline linked to storage tanks at Morne Fortune and Morne Du Don; and (e) storage tank of 100,000 imperial gallons in the Babonneau area. Part B: B Technical Assistance, Project Management and Capacity Building. (Appraisal estimate US$0.63 million; actual US$1.01 million). Provision of technical assistance to support project implementation, carry out project management activities, and strengthen the capacity of the staff of the Borrower and the water utility WASCO in project management and priority technical areas, including the provision of training. The areas of technical assistance include : (1) oversight and monitoring of the quality of works performed by contractors hired under Part A of the Project; (2) carrying out of studies on the water resources of the Roseau River, including analyses of : (a) the hydrological capacity of the Roseau dam and reservoir system, and possibly of other surface water sources; (b) the potential for increasing the capacity of the Roseau dam through engineering improvements; and (c) safety and environmental considerations related to such activities; and (3) Carrying out of a groundwater resources study to determine the quantity, quality and potential use of groundwater in St. Lucia. d. Comments on Project Cost, Financing, Borrower Contribution, and Dates: The cost of the project was initially estimated at US$ 7.9 million, financed by an IBRD loan for US$3.85 million and an IDA credit in the amount of US$3.85 million equivalent, with a commitment from the Government of US$0.24 million. Project costs at closure were US$11.08 million, or some 40% higher than foreseen at appraisal. In April 2007, more detailed engineering analyses of the works led to increased costs. In addition, bids received for the turnkey contract were higher than initially estimated because of a requirement to work 24/7 to meet the deadline imposed by the March 2007 Cricket World Cup hosted by St Lucia. Finally, fuel and construction costs had significantly increased throughout the Caribbean since appraisal. The original turnkey contract was awarded at a contract price of US$ 8.1 million, and during its implementation, two variation orders were approved resulting in the revised contract price of a little over US$ 10 million. The Government made an additional contribution of US$ 1.1 million to cover the extra expenditures under the second variation order consisting of spare parts and optional enhancements to the system to facilitate its operation. 3. Relevance of Objectives & Design: Objectives : Substantial Resolving water shortages in the most densely populated and developed region of the island was highly relevant. Water supply was and is a critical factor in tourism development that, following the decline in the agricultural sector after withdrawal of EU subsidies for bananas, is now the predominant driver of economic activity in Saint Lucia. Service sectors account for 80% of GDP and 54% of employment. The assured supply of potable water and the provision of a reliable service underpins the likelihood that hoteliers and developers will invest. Although not included in the 2001 CAS, the proposed project was in accordance with the CAS objective of

3 creating an enabling environment for continued or increased private investment in sunrise industries and improving living conditions through increasing the efficiency of infrastructure provision. The project's development objectives should have made specific reference to the Water Sector Reform Project that this project was supposed to complement. Design: Substantial The project was designed to complement the Bank s support for the ongoing Water Sector Reform Technical Assistance Project (Ln SLU) that was to help the transition of WASCO from a publicly -managed utility to a privately-operated company under a well-functioning regulatory framework. The Bank believed that improved water supply infrastructure would provide significant incentives for the private sector to become involved. The imperative for enhanced water supply service provision was highlighted by the selection of Saint Lucia as a host to the Cricket World Cup in an event which drove the construction of new tourism facilities. To meet expected standards of service provision on time, implementation was designed on an accelerated schedule. Additionally, because attention was focused on physical outputs in accordance with the emphasis in the PAD, there was only modest attention to institutional reform issues and monitoring and evaluation (M&E). Even so, more attention could have been given to improving the financial standing of the utility. 4. Achievement of Objectives (Efficacy): 1. Alleviate the water shortage in the north of the country and supply a more efficient, continuous and reliable service. Substantial. The water shortage was alleviated. The flow of water to the north of the island increased from 6 million gallons/day (mgd) to 8.5 mgd. The ICR (page 13) states that the available capacity is 10 mgd. The demand projected at appraisal for 2010 was 8.7 mgd (PAD page PAD page 34). In the Castries South Region (where consumption was metered) the consumption increased from 3.17 mgd in 2005 to 5.66 mgd in 2007, an increase of 78%; metering is still to be introduced to other areas (ICR page 33-34). A continuous and reliable service was put in place. Prior to the project only 43% of communities received 24/7 water supplies and this improved to at least 90% in the last year of the project (target 100%). The ICR reports that the remaining 10% are receiving 18 hours of service a day although specific data were not available from WASCO (ICR page 12). The efficiency of the improved water supply system could not be determined. The PAD states that non-revenue water (commercial losses plus leakage) in the north was 44% and that 74% of consumers were metered in It was expected that installing meters and rectifying defective distribution systems would reduce the volume of non-revenue water. The overall physical leakage losses of 36% were expected to be reduced by infrastructure upgrades to 32%, whilst commercial losses would remain unchanged. No evidence is presented in the ICR to demonstrate improvements in physical supply efficiency. However, incremental revenues increased faster then incremental water supply. From the metering data available for the northern region for the period (ICR page 23) metered flows increased by 4.8% while revenues increased by 10%. The project team state that "Increased revenues are a result of an improved, more reliable supply as well as increased metering. Collections ratios were already high before the improvement." 2. Implement urgent investments that will result in additional revenues, reduce the likelihood of commercial users abandoning the system and improve the potential of a successful partnership between the government and the private sector. Modest. Revenues increased, but so did costs. Comparisons are only available for 2007 and 2008 for customers in the north of the island. No comparison is possible with the PAD 2004 baseline data for the whole utility as this was not disaggregated by region. On the basis of the data for the northern region, total revenues increased by 10% because of increased water sales. The greatest increase in revenues by sub -sector was hotels (15.6%), followed by commercial (12.4%), government (11.4%) and domestic (6.9%). The share of hotels in total billings rose from 19% in 2004 (PAD page 64) to 21% in the northern region in 2008 (ICR page 23). However, while revenues increased, costs rose even faster, and the utility's working ratio (operating costs/revenues) declined from the 2004 baseline of 0.9 to 1.05 in April The target was Commercial users and hotels have not abandoned the system. In the norther region, hotel consumption increased by 8.9%, domestic use by 4.7%, government use by 3.9%, and commercial use by 1.9%. Reportedly, licensing of new hotels was resumed as a result of the project and no hotels abandoned WASCO as the service provider (ICR, page 13). The ICR also reports that hotels no longer need trucked water supplies in the dry season (ICR page 23). Improving the potential of a successful partnership between the government and the private sector was not achieved. The financial situation of the water utility continues to deteriorate despite the project. How far this affected the potential for a successful PPP is unclear. Logically a deteriorating financial situation would reduce the potential for a successful PPP as it would send the wrong signals about government's concerns for commercial efficiency and impartial regulation.

4 5. Efficiency (not applicable to DPLs): Economic and financial rates of return were estimated ex-ante and ex-post. The ex-ante economic benefits were calculated as the avoided costs of water rationing to capture the benefits from expected improvements in the reliability of the water supply. The results from the economic analysis show a NPV of EC$ 6 million and economic rate of return (ERR) of 16%. Under the scenario in which WASCO received the investment costs as a full subsidy from the government, the financial IRR was 172% and the NPV was about EC$23 million. In the absence of a government investment subsidy, the project would have still been financially viable with an NPV of EC$ 5 million and a financial IRR of 15%. The ex-post economic analysis (ICR page 32), using the same methodology and assuming a reduction in leakage losses of 7%, a modest 1% increase in domestic demand and incorporating the higher project costs, produced a modest ERR of 12% and a NPV of only EC$104,000. No evidence presented in the ICR that leakage losses were reduced and the ERR of 12% may not have been achieved in practice. Efficiency is rated modest a. If available, enter the Economic Rate of Return (ERR ERR)/Financial Rate of Return (FRR FRR) at appraisal and the re-estimated estimated value at evaluation : Rate Available? Point Value Coverage/Scope* Appraisal Yes 16% 100% ICR estimate Yes 12% 100% * Refers to percent of total project cost for which ERR/FRR was calculated. 6. Outcome: The relevance of project objectives and design are rated substantial. While infrastructure investments improved water supplies and revenues, the sustainability of those water supplies remains in jeopardy until the utility is put on a sound commercial footing. The financial situation of the water utility continues to deteriorate despite the project and this probably reduces the potential for a successful PPP. Overall, efficacy is thus rated modest. With substantial efficiency this leads to a moderately satisfactory outcome. a. Outcome Rating : Moderately 7. Rationale for Risk to Development Outcome Rating: The sustainability of the infrastructure built, and continued good service provision, rely on the ability of WASCO to maintain the works and to reverse its declining financial performance. While it was expected at appraisal that appointment of a new private partner facilitated by a parallel Bank project would have addressed these problems, the Government's decision not to opt for PSP poses significant risks to future performance. As a result, it is unclear where funding will come from to undertake further urgent distribution upgrades, system optimization including pressure zoning and district metering, desilting of headwork storage reservoirs, and improved operation and maintenance. a. Risk to Development Outcome Rating : Significant 8. Assessment of Bank Performance: Quality-at at-entry entry. Technically the project was fairly straightforward. Even so costs were significantly underestimated. The project team states: "As for the cost estimates, the appraisal costs were preliminary, produced by a top flight engineering firm, and independently confirmed by the best water and sanitation engineers at the Bank. The approach for this project was a turnkey where the contractor carried the detailed design and construction after selection. In fact the cost estimates at appraisal stage was very consistent with the lowest bid. The entire Caribbean went into a construction boom during this period and the government added some additional bells and whistles to the design during the detailed design phase (after selection) which added to costs but which were not inadvisable in and of themselves. In the end, the additional costs were around US$ 2 million for a project that contained a water treatment plant, storage facility, pumping stations and major transmission pipes. On a percentage basis, this looks significant. In real terms, it is not especially given the steep rise in fuel and construction costs during this period of time and the modest additions to the design requirements." Appraisal also seriously underestimated the risks to project sustainability posed by the Government's ambivalence on the proposed PSP. Supervision.

5 During supervision the Bank also played a key role in the coordination of different parties involved (consultants, contractors, PCU, WASCO). Supervision missions were frequently carried out and reporting was regular and candid throughout. Missions were well-staffed and included fiduciary and environmental specialists. However, supervision was focused on physical implementation and more attention should have been given to utility performance and efficiency as these were key factors that would have increased the utility's potential attractiveness to a private sector operator. a. Ensuring Quality -at at-entry Entry:Moderately b. Quality of Supervision :Moderately c. Overall Bank Performance :Moderately 9. Assessment of Borrower Performance: Government. The Government assumed part of the final cost increases and so increased their contribution significantly. While government was very supportive of the project to bolster its success as the host for the World Cricket Cup, it did not, once the infrastructure improvements were made, proceed to endorse institutional arrangements (to be executed through a sister Bank project ) that would have improved utility performance and enhanced project sustainability. The PSP transaction is currently being re -considered, following the failure to award in the last bidding process, which was abandoned due to legal concerns and ultimately a lack of consensus within the Cabinet with regards to the structure for the PPP. As a result, the government's Project Coordination Unit was overly focussed on the infrastructure objectives and paid almost no attention to the institutional ones. As the ICR notes (page 18), the decision not to award the PPP adversely affected WASCO s ability to improve its financial and operational situation, which was another outcome expected from this operation. Implementing Agency. The utility managed the physical improvements and contractors well, albeit at significantly higher cost than foreseen. Greater consideration could have been given to recycling the backwash water (as designed at appraisal) that was wasted thus lowering water use efficiency. a. Government Performance :Moderately b. Implementing Agency Performance :Moderately c. Overall Borrower Performance :Moderately 10. M&E Design, Implementation, & Utilization: Design. A fairly general results-based M&E system is described in the PAD, but too many assumptions were made about the efficacy of existing M&E systems maintained by the utility that proved unfounded. Given the high quality and thoroughness of the financial analysis of the utility (PAD, Annexes 9 and 10) all the required M&E indicators were available but not included in the M&E framework. Although a more efficient supply of water was a project objective the project did not not included efficiency criteria in either its results monitoring framework for physical performance (PAD, page 31) or in terms of billing and revenue collection (PAD, page 56). Implementation.Routine input and output data required to manage cash flows and contract performance were well reported. In contrast there was no attention to indicators of utility performance and water use efficiency. Utilization. M&E data collected were used to monitor progress on infrastructure improvements only. a. M&E Quality Rating : Modest 11. Other Issues (Safeguards, Fiduciary, Unintended Positive and Negative Impacts): The Project was classified as an Environmental Category B under OP Large scale excavations were expected during the installation of the pipelines, the impact of which was thoroughly investigated through Environmental and Social Assessments carried out at appraisal.two major issues identified that were successfully managed were disruption to transportation and the compensation of farmers affected directly by the construction activities. Apart from a minor problem associated with release of sediment -laden backwash water from the sedimentation filter system, there were, according to the ICR, no adverse environmental issues. The

6 presence of storage dams supplying the headworks invoked OP 4.37 (Safety of Dams). The ICR reports that dams were inspected and found to be safe, and the only recommendation (which was followed) was that dam desilting should be give priority as it is reducing live storage capacity. The project was found to fully compliant with the Bank's fiduciary and auditing requirements (ICR page 11). 12. Ratings: Outcome: Risk to Development Significant Outcome: ICR IEG Review Moderately Significant Reason for Disagreement /Comments Physical objectives were achieved but the project failed to support financial and technical recovery and sustainability of the utility posing significant risks to the investment made. Bank Performance : Highly Borrower Performance : Quality of ICR : Moderately Moderately Appraisal was overly focussed on quickly delivering physical improvements and paid inadequate attention improving the utility's efficiency and financial performance. Government supported the project in order to meet its immediate objective of successfully hosting the World Cricket Cup. Thereafter its interest in institutional reform of the water sector waned. The performance of the water utility continues to decline. NOTES: - When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate. 13. Lessons: Considerable attention must be paid to political economy dimensions when designing water supply projects that include institutional reform and infrastructure improvements. In the case of St Lucia it was decided to have two projects because it was believed that improved infrastructure would increase the attractiveness of the utility to potential private sector operators. In practice, the government backtracked on its commitment to institutional reform and private sector participation once the infrastructure was complete. Additionally, agreeing to an accelerated implementation schedule was not very efficient as it increased costs. Decide on overall development priorities and structure project objectives accordingly. The history of the St Lucia project indicates that from a macroeconomic perspective it was believed that a stand -alone water supply operation would bolster economic growth as a basic input to the development and expansion of tourism. In the short-term this was the case as the success of the World Cricket Cup demonstrated. In the longer-term, however, economic growth from tourism may be jeopardized by falling standards of service provision as the utility is unable to finance routine operation and maintenance. Bundling utility reform together with infrastructure improvements in a single project may have been the better option. An alternative that was not considered was to split water supply provision and recognize that there are customers who fall into two quite different economic groups: (a) provide improved supplies to local commerce and domestic consumers and minimize costs; and (b) allow tourism investors to develop private desalinated water production plants for their own use. 14. Assessment Recommended? Yes No

7 Why? Has the performance of the utility continued to decline? What progress has there been on institutional reform? What lessons can we learn about the political economy of water sector reform? 15. Comments on Quality of ICR: The ICR is satisfactory, but barely so. It is overly focussed on successfully delivering new infrastructure on time while not giving enough attention to issues of political economy. Ratings are too sanguine and driven by the success of infrastructure construction rather than outcomes. Although sufficient evidence is provided to understand the political economy of the water supply sector and its risks, presentation is problematic. It would appear that the initial ICR report was drafted and saved as a PDF file and copied into the ICR template. Unfortunately this has had an adverse effect on the spacing of the letters in the text and many words are running together making the ICR difficult to read. a.quality of ICR Rating :