L/C/TF Number(s) Closing Date (Original) Total Project Cost (USD) IDA-44710,IDA-H4070,IDA-H Mar ,490,000.00

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1 Public Disclosure Authorized 1. Project Data Report Number : ICRR Public Disclosure Authorized Project ID P Project Name NI Rural Water Supply and Sanitation Country Practice Area(Lead) Additional Financing Nicaragua Water P132102,P L/C/TF Number(s) Closing Date (Original) Total Project Cost (USD) IDA-44710,IDA-H4070,IDA-H Mar ,490, Bank Approval Date 12-Jun-2008 Closing Date (Actual) 31-Mar-2015 IBRD/IDA (USD) Grants (USD) Public Disclosure Authorized Public Disclosure Authorized Original Commitment 26,000, Revised Commitment 24,652, Actual 23,265, Sector(s) Water supply(42%):wastewater Collection and Transportation(31%):Sanitation(20%):General public administration sector(7%) Theme(s) Rural services and infrastructure(100%) Prepared by Reviewed by ICR Review Coordinator Group Ebru Karamete George T. K. Pitman Christopher David Nelson IEGSD (Unit 4) 2. Project Objectives and Components a. Objectives The same Project Development Objectives were stated in the Financing Agreement (p. 6) Project Appraisal Document (p.13), which are: " to increase access by Project Beneficiaries to sustainable water and sanitation services in rural areas of the Recipient". An Additional Financing grant of US$6.0 million was included in December 2012, which focused on scaling-up activities as well as cover cost over-runs under component 2.

2 b. Were the project objectives/key associated outcome targets revised during implementation? No c. Components The Project had four components: 1. Coverage Increases in Rural Areas (Appraisal estimate was US$11.5 million, additional financing estimate was US$1.45 million, actual cost was US$16.0 million). This component aimed to support municipalities in increasing coverage of water and sanitation services in their rural territory through investments and technical assistance to communities. The original target for additional beneficiaries with access to water services was 25,000 (revised target 53,000) and with access to sanitation services was 30,000 (revised target 33,000) beneficiaries. The project aimed to use CDD approach. 2. Coverage Increase in South Caribbean Coast Autonomous Region (RACCS) and North Caribbean Coast Autonomous Region (RACCN) (Appraisal estimate US$5.7million, additional financing estimate was US$2.45 million, actual cost was US$5.5 million). In 1989, the Government of Nicaragua created two autonomous regions on the Atlantic Coast, the Region Autonoma del Atlantico Sur (RAAS) and the Region Autonoma del Atlantico Norte (RAAN), to respond to the local population s demands for a right to preserve their culture and their natural resources. Both regions had only limited transportation network compared to the rest of the country, and included significant number of indigenous populations. Poverty levels and access to basic services in these regions were lower than in the rest of the country. The component specifically included these areas and in addition, the Alto Coco and Bocay area, which is administratively part of another region, but population ethnically linked with the population of the RAAN, would also be included in this component. The original target for additional beneficiaries with access to water services in these regions was 12,000 (revised target 6,000) and with access to sanitation was 15,000 (revised target 5,000). Towards the end of the project, it was identified that several works planned for the Caribbean Coast could not be finalized within the closing date, therefore the remaining sub-projects from Component 2 (Caribbean Coast) were transferred to Component 1 (Pacific Coast). Thus, funds and coverage targets were reduced for the component. 3. Pilot Projects (Appraisal estimate US$3.3 million, additional financing estimate was US$0.8 million, actual cost was US$1.2 million). This component aimed to develop a series of pilot projects-and the accompanying intervention strategies-making best use of the Bank s international experience and successful models developed in other countries in the region. It was thought that these pilot projects could serve as the basis for some larger-scale activities in the follow-up rural water and sanitation project planned for FY10, or be picked up by other donors. The planned pilots included simplified sewers in dense, small towns (building small-bore systems in concentrated communities) and appropriate management models in small towns. 4. Institutional Strengthening and Project Management (Appraisal estimate US$2.6million, additional financing estimate was US$1.3 million, actual cost was US$4.5 million). There were two sub-components: subcomponent 4.a aimed to strengthen the institutions working in the rural water supply and sanitation including Nicaraguan Water and Sewerage Enterprise (ENACAL) and municipalities, and subcomponent 4.b aimed to finance project management and monitoring activities carried out by Emergency Social Investment Fund (FISE). d. Comments on Project Cost, Financing, Borrower Contribution, and Dates Project Costs: Total costs increased from the appraisal estimate of US$23.1 million to US$27.1 million because Additional Financing was added to the project to enable scaling-up of project activities particularly for Component 2 and 3. Financing: The project was financed by IDA grant (H4070) and IDA credit (44710), for which appraisal estimates were US$19.7 million (SDR 12 million) and US$0.3 million (SDR 0.2 million) respectively. The original IDA grant was almost fully disbursed (SDR million and with the exchange rate changes this corresponds to US$18.5 million). The original IDA credit was also almost fully disbursed (SDR 0.19 million was disbursed and this corresponds to USD 0.27 million). Total additional financing grant (H8150) of US$6 million (SDR 4 million) was added in December 2012, and by project closing US$ 4.47 million had been disbursed and US$ 1.3 million was cancelled in March 2015 due to lack of time to contract and implement additional activities. Borrower Contribution: Borrower contribution estimated at appraisal was US$3.1 million and this was slightly higher with US$ 3.9 million at closing. Dates: The original closing date of March 31, 2014 was extended two times to March 30, The first extension of three months on June 05, 2013 was to allow for orderly closure of activities and the second extension of nine months on May 8, 2014 was to compensate for delays due to delayed effectiveness of the Additional Financing and the challenging conditions along the Caribbean cost.

3 Restructuring and Additional Financing: Additional Financing of US$ 6.0 million was included on December 4th, 2012 with the aim of scaling up activities as well as cover cost over-runs under Component 2 due to the higher construction coast in the Caribbean Coast. Project closing date of March 31, 2014 was extended twice (June 2013 and May 2014) for a total of one year due to delayed effectiveness of the additional financing as well as challenging implementation conditions along the Caribbean coast. The restructuring on May 08, 2014 adjusted the results framework by reducing the targets for activities under Component 2 but also by increasing the targets for activities under Component 1, as well as reallocating the funds from Component 2 to Component 1. Since the reduction of targets for Component 2 were compensated by increases under Component 1, and also PDO indicator targets overall were increased, thus before and after restructuring ratings will not be different, a split rating is not conducted. 3. Relevance of Objectives & Design a. Relevance of Objectives High The project development objectives were relevant to the country strategies and priorities. Nicaragua is the poorest country in Central America. The poverty headcount stands at 42 percent and one in seven Nicaraguans lives in extreme poverty. Most of the poor live in the rural areas; many in remote communities where the access to basic services is still constrained by very limited infrastructure (CPS FY 13-17, p. i). Although Nicaragua has achieved its Millennium Development Goals (MDGs) in access to improved water sources, progress on access to sanitation has been slower. Disparities in terms of urban and rural access to water 98 percent versus 68 percent, respectively and to sanitation (63 percent versus 37 percent) are particularly striking. The sector also needs to look beyond coverage to improvements in service quality and sustainability (CPS FY 13, p. 12). The Government's focus on water sector was reflected in the Water Law (2007); however at the time of appraisal, institutional framework for rural water and sanitation sector was still not clear. While a multi-sector project implementation organization, The Emergency Social Investment Fund (FISE) was effectively undertaking rural water supply and sanitation projects, it was not identified as the main institution by the Water Law. Also its multi-sector role limited its ability to continue post-construction role to ensure sustainability. Municipalities and Water Supply and Sanitation Committees did not have the capacity to maintain/operate the works. Therefore, the project aimed to help the Government to develop a sustainable institutional structure. The project development objectives were closely linked with the National Plan for Human Development ( ) that sets a goal to extend quality WSS coverage and achieve MDG No. 7. The development objectives were aligned with the Country Partnership Strategy both at entry and exit. Particularly, the project supported the CPS (FY 08-12) strategic objectives infrastructure and sustainable development and human capital development. The project development objectives were also in line with the CPS (FY ), that supports the country in two key strategic areas one of which is improving social welfare by improving access to quality basic services, in particular by poor rural households. In that respect, the Bank continues supporting the design of the national water and sanitation strategy with complementary efforts to broaden access to potable water and improved sanitation in order to improve health outcomes in Nicaragua (p. 21). Rating High b. Relevance of Design Substantial The project development objectives were in general clear with project components serving to achieve the development objectives. Component 1 and 2 were designed to provide water and sanitation services for Pacific and Caribbean Regions. Component 3 was designed to establish an institutional framework for rural water and sanitation services and building capacity at the central, municipal and community level. While there was unclear legal framework for the rural water and sanitation services, the project aimed to facilitate the constitution of this legal framework through strengthened institutions. However, one shortcoming was that the Caribbean Coast (Component 2) activities required a differentiated approach due to the challenges of the region and lack of implementation experience, which was lacking initially from the project, but

4 this evolved and improved during implementation. The results framework did not include indicators to adequately measure different aspects of sustainability. The score card developed to measure sustainability included various aspects on sustainability but these were not monitored and tracked through indicators (better) measuring institutional, financial and environmental sustainability. Rating Substantial 4. Achievement of Objectives (Efficacy) PHREVISEDTBL Objective 1 Objective Project development objectives are assessed under three headings: (i) access to water; (ii) access to sanitation; (iii) in a sustainable manner. (i) Increase access by project beneficiaries to water services in rural areas, rated Substantial. Rationale Outputs: 257 water points were constructed or rehabilitated (exceeding the target of 200). 9,096 new piped household water connections were constructed (exceeding the target of 7,000). 3,027 rehabilitated household water connections were made (exceeding the target of 3,000). An assessment of 17 systems found 16 systems as high quality. Outcomes: A total of 64,440 additional beneficiaries had access to new water supply. (The targets for Component 1, which covers Pacific Region, was exceeded with 54,172 beneficiaries against the revised target of 53,000 beneficiaries, the achievements for Component 2-Caribbean Coast also exceeded the revised target but fell short of the original target with achievement of 10,268 vs. the original target of 12,000 and the revised target of 6,000). 131 additional communities in Pacific region and 34 communities in Caribbean Region had access to adequate water and sanitation services. A total of 15,549 beneficiaries accessed rehabilitated water supply services. The achievement fell short of the combined target of 23,000 beneficiaries in both Pacific and Caribbean Regions. The reason provided by the ICR for missing the targets was because many connections designed were in such a poor condition that they had to be replaced, which took longer than planned. The ICR also reported that (p. 16), some designs did not consider water supply levels at the dry and rainy seasons, therefore some communities did not have access to water 24 hours a day. Rating Substantial PHREVISEDTBL

5 Objective 2 Objective ii) Increase access by project beneficiaries to water services in rural areas, rated Substantial. Rationale Outputs: It was not clear how many latrines were provided and how was the disposal handled. The project team reported that 10,213 household toilets were built by the project. Domestic waste disposal was not part of the project scope, but as part of the hygiene capacity building, solid waste management was included as a soft activity (training). Outcomes: A total of 44,120 beneficiaries had access to (and estimated to use the) sanitation services. (36,785 beneficiaries in Pacific Region and 10,954 people in Caribbean Region). An ex-post survey was applied to 73 communities to asses if the facilities were being used. The results were not reported by the ICR. The project team reported that an ex-post survey carried out by the Government over 70 communities reported that from the 817 households assessed, 62 were not using the sanitation units (only about 8 percent). Rating Substantial PHREVISEDTBL Objective 3 Objective (iii) Sustainability, as a cross cutting objective rated Substantial. Rationale Outputs: Institutional Sustainability: The project developed a sustainability chain, a structural framework for RWSS management at the central, municipal and local level. At the Central Level, the project helped Social Investment Fund Rural WSS Entity (FISE) to follow unified approach on WSS investments through the development and adoption of sector wide implementation manual for water and sanitation (MEPAS) that used a demand responsive approach for rural investments. 500 communities data was entered and updated in the Rural Information System (SIASAR), which enabled FISE to systematically monitor RWSS quality and pinpoint communities in need of investment or support. Through the use of pilots, the project tested different sanitation solutions and increased options to be offered by FISE to communities. At the municipal level, the project supported setting up and training of Municipal WSS Units (UMAS). A results based training program was provided to 136 municipalities and 51 UMAS were established as a result of this training. The training was on legal, organizational and environmental matters, water quality and hygiene. 60 percent of these municipalities participated in the second part of the training on strengthening CAPS. At the local level, FISE, UMAS and social consultants provided trainings to the communities on organization and function of CAPS, how to calculate tariffs, water use, hygiene and basic accounting. Water meters were installed in all the communities along with the training on water tariffs.

6 165 CAPS were established by the end of the project and 109 of them reached A or B ratings on sustainability. Behavior Change: The ICR reported that (p. 14) project promoted the proper use of latrines through engaging communities on hygiene education, consulting households on the positioning of the latrine and recommending that each latrine have a hand washing facilities positioned close by. Outcomes: The ICR lacked adequate information on different aspects of sustainability as well as methods applied to measure sustainability. However, the project team subsequently sent additional data. The project design included a score card to measure sustainability of CAPS, which was applied through a survey at the end of the project. The ICR did not provide details of the survey in terms of sample size, but the project team subsequently reported that the sample included 105 communities that were chosen randomly (out of the 308 communities). The scorecard evaluated the physical components of the WSS systems, the establishment and functionality of the CAPS, the application and collection of tariffs, the use of meters, protection of the watershed, the quality of water, and the continuity of the service. The ICR considered the CAPS getting an overall score of A and B as sustainable, score C as in transition and D as unsustainable. Institutional Sustainability: As mentioned earlier, the project developed a sustainability chain, a structural framework for RWSS management at the central, municipal and local level, which is instrumental to trickle down impacts on the ground at the community level. Based on the score cards, the ICR reported that 65 percent of local water and sanitation committees (CAPS) created in the first three years still operating in a sustainable manner (exceeded the target of 55 percent).the project team also reported that 96 out of 105 CAPS visited had well-functioning systems, with maintenance improvements needed only in some cases. The project team also subsequently provided the following data: The breakdown of the CAPS that were carrying out the following functions were: Boards Count Percentage Legally incorporated 51 49% Fulfillment of the functions 44 42% Regular meetings 83 79% Financial records 67 64% Accordingly, no CAPS carried out all of the four functions, CAPS conducting three functions were 18 percent, CAPs that carried out two functions were 44 percent and CAPS that carried either only one or no function were 38 percent. However, the main focus on sustainability should indeed be the fulfillment of the functions, which is met by only 42 percent of the CAPS. Thus, there is still some scope for improving the institutional sustainability. Financial Sustainability: The ICR did not report details of financial sustainability. However, the team eventually provided the following data: The percentage of CAPS that can cover O&M costs are 68 percent. The project team reported that compared to a national average of 39 percent as well as much lower rates in Peru and Panama, these recovery rates are encouraging. 62 percent of piped systems had 95 percent or more connections with working meters. In terms of collection rates (average for three months), only 44 percent of CAPS have more than 90 percent collection rate. These figures show that there is still some room for financial sustainability for substantial number of CAPS. In addition, the ICR reported that one risk to sustainability of the RWSS systems is the low capacity of the CAPS to pay for major repairs, since in the majority of CAPS, tariff collection is only enough to cover operation and maintenance costs (ICR p. 20) (See Section 7 for details).

7 Environmental Sustainability: The ICR did not provide adequate data on environmental sustainability. Subsequently, the team provided the following information: Only, 54 percent of the CAPS had adequate water quality (sufficient residual chlorine). The basin or aquifer was completely protected in 69 percent of the cases. However, for 26 percent of the cases there is only minor risk of contamination. Beneficiary Assessment: The ICR reported that the beneficiaries access to and effective use of the sanitation solutions were verified in the ex-post survey (p. 14). However, it was not clear how the hygiene promotion was conducted, which aspects were emphasized (e.g. hygiene, hand washing, ODF) and how. Subsequently, project team reported that hygiene promotion was incorporated as part of sub-project cycle and applied in all communities and included: hand washing, personal hygiene and sanitation solution use. All households receiving a latrine had to have a hand washing station built nearby. The ICR did not provide detailed results on behavior change, what percentage of communities was ODF and applying hygiene rules, hand washing, etc. The ICR could have aimed to measure and report on broad outcomes on effects of behavior change on health level of beneficiaries for example. As mentioned earlier, the project team reported that an ex-post survey carried out by the Government over 70 communities reported that from the 817 households assessed, only 62 were not using the sanitation units; i.e. 92 percent were actually using the units. The ICR did not report any evidence whether the beneficiaries were satisfied by the investments and the tariffs were affordable and they were seeing the positive results and willing to pay. The project design included up-front commitment of communities, the assessment could also look at how this worked from the perspective of the beneficiaries. 76 percent of CAPS had women on the Board in project areas (less than the target of 86 percent) and 70 percent of CAPS had women in decision making positions. Rating Modest 5. Efficiency Substantial Economic and Financial Efficiency An economic rate of return analysis was carried out both at appraisal and at project closing following the same assumptions, except that the appraisal analysis looked at water and ex-post analysis included both water and sanitation investments. The benefits were based on costs that were saved due to the investments, namely, saved time, reduced costs due to purification methods, and savings from avoidance of more costly water sources (water vendors, bottled water). Sanitation benefits mainly included savings due to reduced health expenditures and improved productivity as a result of reduction of diseases. 12 percent discount rate was used. The internal rate of return for both water and sanitation (on average) at project closing was 35 percent compared to 39 percent of appraisal. There was significant difference between Pacific and Central and Caribbean regions with 45 percent and 14 percent respectively for water investments and 55 and 9 percent (lower than the discount rate) respectively for sanitation investments. This was due to very high unit costs in Caribbean compared to Pacific and Central region (US$ 272 per beneficiary versus US$ 140). The ICR argued that the high IRR overall is explained by the fact that in general rural water projects generate higher returns than urban ones given difficulties for accessing water sources and main benefits from water interventions come from time-savings obtained when population does not have to fetch water from long distances, which in some cases was significant (ICR p. 42). However, this argument is based on the assumption that time savings from fetching water are put into productive uses with high returns, however there is also no evidence that there are sufficient economic opportunities with high returns in rural areas to utilize these time savings. The project team subsequently stated that the cost of time for women and children (opportunity cost for not doing their assigned work due to fetching water) is calculated as 50 percent of the minimum wage; which seems reasonable.

8 The ICR presented a unit cost analysis for unit water costs across the region, showed that the project s unit cost was approximately half of the unit costs of similar water projects in Central America (US$ 147 per person compared to US$ 300 in Honduras, US$ 350 in Salvador, US$ in Panama) (ICR p. 44). The ICR also presented a distributive analysis to identify winners and losers looking at fiscal impact and impact on the households. The analysis showed that government overall lost US$ 19 million but the consumers gained US$ 32 million resulting in a net benefit of US$ 16 million. However, the tariff collection amount in the analysis is quite small (US$ 0.3 million only). Indeed, the ICR did not include a cost recovery analysis to demonstrate that communities tariff collection rates are sufficient to cover operations and maintenance expenditures. Operational and Administrative Efficiency The project closing date was extended for a year mainly due to the challenging conditions in the Caribbean coast. The challenges were encountered because there was little experience implementing large-scale RWSS projects in this remote region. The unit costs and implementation timeline on the Caribbean Coast exceeded the original estimates by over 100%, but more favorable implementation conditions along the Pacific Coast permitted the Project to achieve its overall targets. However, as reported by the ICR, the intervention in the Caribbean Coast was important from a development (and poverty alleviation) standpoint. In addition, cost over-runs/or not meeting the revised targets on rehabilitation efforts was reportedly due to change of scope of these works, i.e. most rehabilitation work became complete renewal after assessment on the ground, which substantially increased the costs. Despite the difficulties in the Caribbean Region that impacted both economic and operational efficiencies of the project, the overall efficiency of the project is rated as Substantial. Efficiency Rating Substantial a. If available, enter the Economic Rate of Return (ERR) and/or Financial Rate of Return (FRR) at appraisal and the re-estimated value at evaluation: Rate Available? Point value (%) *Coverage/Scope (%) Appraisal ICR Estimate Not Applicable Not Applicable * Refers to percent of total project cost for which ERR/FRR was calculated. 6. Outcome The achievement of the objectives has minor shortcomings. The relevance of objectives is rated as highly substantial, the relevance of design is rated as substantial despite weaknesses in the results framework, and lack of a differentiated implementation approach for the Caribbean region. Achievement of access to water and sanitation objectives in a sustainable manner are rated substantial. Efficiency is rated substantial based on significant economic rate of returns. a. Outcome Rating Satisfactory 7. Rationale for Risk to Development Outcome Rating

9 The risk to development outcome is assessed as Substantial. Institutional Risk, Substantial: The project has achieved important steps in establishing the sustainability chain and strengthening the capacity at various levels. However, the CAPS still need further support and the follow up project will ensure that this support is provided. This is especially important for the sustainability of RWSS works in communities where the CAPS are operating at a C or D level. Another risk to the institutional sustainability is that the role of FISE in the RWSS sector remains unstable. Although FISE has been established as the lead RWSS organization through several executive decrees, the legal framework still does not recognize FISE as having this role. The ICR noted that (p. 20), during the ICR preparation, the Bank team held meetings with the Minister of Finance who confirmed the Government s intentions to revise the legal framework in the near future in order to legally confirm FISE as the lead RWSS agency. Financial Risk, Substantial. Linked with the institutional risk, the low capacity of the CAPS to pay for major repairs is another important risk. In the majority of CAPS, tariff collection is only enough to cover operation and maintenance costs. Building CAPS entrepreneurial skills and business sense is needed overcoming this risk and building their long-term sustainability. The ICR did not provide information whether tariff rates were affordable by the beneficiaries and collection rates could be improved. a. Risk to Development Outcome Rating Substantial 8. Assessment of Bank Performance a. Quality-at-Entry Moderately Satisfactory The project design efforts incorporated lessons learnt from past projects, specifically Ecuador and Peru as well as Nicaragua Poverty Reduction and Nicaragua Local Development Projects, specifically on demand based approaches and importance for investing in capacity building efforts and coordination of social and national level strategies, and tailoring investments based on community needs. Based on that the project design included upfront community commitment, donor coordination mechanisms, social capacity building and providing a menu of options for the communities. The building of and strengthening sustainability chain, development of sector wide implementation manual for water and sanitation were notable design aspects of the project. The project area included Caribbean Coast, an area that was very remote and with lack of available information, this way the project targeted Nicaragua s poorest population and therefore had a high level of strategic relevance given the need for a systematic RWSS intervention method and significant coverage gaps. Implementation arrangements were sufficient, with FISE to lead project implementation, this way it was planned that FISE would build a capacity to become the official RWSS institution. Shortcomings included an underestimation of the difficulty of working at the Caribbean Coast, and differentiated design elements to mitigate the risks at this location. In addition the results framework lacked adequate indicators to measure sustainability aspect of the project. Quality-at-Entry Rating Moderately Satisfactory b. Quality of supervision Satisfactory The Bank closely monitored project progress provided active supervision support, and adjusted the project when necessary. The Bank team wrote detailed Aide Memoires and ISRs, which provided a candid report of the Project s progress. The issues encountered on the Caribbean Coast were to a degree addressed during implementation, through adequate restructurings and the supporting FISE in developing a toolkit for RWSS investments including the Caribbean Coast. The restructurings were instrumental in maintaining the Project on track to meet its PDO and optimize its results especially in light of the difficulties encountered in implementing works along the Caribbean Coast. The Bank also successfully helped unify donors approaches in the sector through assisting FISE in the development of the sector wide implementation manual and holding regular meetings with donors throughout implementation. The Bank team also designed the follow up project following the same implementation procedures, which is hoped to further achievements on sustainability of outcomes. IT was noted that No Objections for procurement processes were lengthy process. Another issue was that the Bank team did not revise the results framework to better capture sustainability efforts.

10 Quality of Supervision Rating Satisfactory Overall Bank Performance Rating Moderately Satisfactory 9. Assessment of Borrower Performance a. Government Performance The Government showed high commitment to achievement of the project s development objectives evidenced by the policy agenda that highlighted the importance of improving RWSS coverage and service throughout implementation, and the decision to move forward with the AF. The sustainability model developed by the project was adopted to other projects and programs. When the project implementation began to slow down towards the end of implementation because of leadership issues, the Government recruited new leaders at FISE, demonstrating awareness and active interest in the Project s implementation. However, one pending action key for the overall sustainability of the Project and the RWSS sector is the adjustment of the Water Law to reflect FISE s leadership role. Government Performance Rating Satisfactory b. Implementing Agency Performance FISE demonstrated sound project implementation and coordination with minor shortcomings. Overall it displayed high level of commitment to the project. It provided hands-on supervision in 212 geographically dispersed communities. FISE s roll out of rural water sanitation information system was notable as it made Nicaragua the first country to extend the information system to all of its communities. Through the help of the project, FISE established a system to organize, guide and supervise RWSS throughout the country. By the end of the project, FISE was actively ensuring that all donors in the sector followed the sector wide implementation manual. However, During implementation, FISE faced minor shortcomings related to procurement, financial management and monitoring and evaluation processes as well as general administrative coordination. Although these shortcomings did not hinder the Project from fully achieving its PDO, they slowed implementation and played a role in the late start to the final sub-projects, 12 of which had to be canceled given the upcoming closing date. Implementing Agency Performance Rating Satisfactory Overall Borrower Performance Rating Satisfactory 10. M&E Design, Implementation, & Utilization a. M&E Design Project s M&E design has several weaknesses. The outcome level indicators relied on an ex-post survey that included a CAPS sustainability scorecard. FISE carried out a survey at design to develop a baseline. The majority of the intermediate indicators utilized FISE s existing M&E system and reflected information the Government was tracking at a national level. However, there was no robust beneficiary level assessment to measure beneficiary s satisfaction levels, behavior change on hygiene and ODF principles and to understand if the services were affordable. In addition, the outcome and intermediate outcome indicators did not include specific indicators to capture financial and environmental sustainability. Also, although the indicators monitored and reported on access no indicator tracked and reported on quality, adequacy, safety and affordability related outcomes. FISE in coordination with the municipalities was responsible for the collection of indicator data. The indicator targets, however, were difficult to establish given that the

11 project design was demand driven and the activities were expected to evolve to optimize project results. b. M&E Implementation For the PDO-level indicators, FISE oversaw the implementation of the indicator survey at the MTR and at the Project s closure. The FISE and Bank teams used the results from the survey conducted during the MTR to inform the implementation strategy for the second-half of the Project. FISE tracked progress on the intermediate indicators regularly but faced minor difficulties given inconsistent communication on Project data between FISE s units as well as a lack of clarity on how to calculate some of the indicators. Close supervision support from the Bank team, which made frequent supervision missions, helped facilitate indicator-related communication at FISE and clarify calculation methods. At the Project s closure, FISE contracted an independent consultant who conducted an ex-post survey in 105 communities that received infrastructure investments as part of the project and in 275 communities whose municipal water and sanitation units had received training but not infrastructure investments as part of the project. The project s demand driven approach made it very difficult to establish targets. To ensure that the results framework did not lose relevance, the team made several adjustments to the indicator targets through restructurings to reflect the changing situation on the ground. c. M&E Utilization FISE regularly uploaded Project indicators on household water connections, capacity building for CAPS and participation of women on the National Government Monitoring System. In addition, FISE and several municipalities are currently using water and sanitation information system to prioritize communities for investments and TA. M&E Quality Rating Modest 11. Other Issues a. Safeguards Environmental Safeguards: The project was classified as category B under the environmental safeguards; as these were small-scale projects in rural areas, no significant or irreversible environmental or social changes were expected. The environmental and social safeguard policies triggered were the Environmental Assessment Policy (OP/BP4.01), the Physical Cultural Resources Policy (OP/BP 4.11), the Indigenous Peoples Policy (OP/BP 4.10) and the International Waterways Safeguard (OP/BP 7.50), which was added with the additional financing. FISE developed and implemented an Environmental Social Management Framework (ESMF), which included criteria for design standards, screening works and monitoring progress. On an institutional level, FISE established an Environmental Management Unit focused on risk management and RWSS. The ICR did not give the extent of compliance to the mitigation measures implemented by the project on implementation of the ESMF. The ICR (p.10) reported that the World Bank assessments found that overall safeguard compliance was Satisfactory and Moderately Satisfactory ratings reported in some ISRs were linked to minor shortcomings in the staffing of the environmental office, but those did not prevent them from adequately complying with safeguards. The project team subsequently reported that: In general, ESMF requirements were translated into bidding and contract documents to ensure that mitigation and other requirements were clearly communicated to contractors and communities. The Project included civil works with minor environmental impacts such as digging trenches to install pipes or clearing small, vegetated areas to install a latrine. Since these were small-scale systems for rural, often dispersed populations, no large scale, significant or irreversible impacts occurred. The impact were managed by standard mitigation procedures. It was noted that (p. 11) the International Waterways Safeguard Policy was triggered during the preparation of the AF as a precautionary measure given the works along the Alto Coco and San Juan River watersheds, which border Honduras and Costa Rica respectively. In compliance with this policy, the Nicaraguan Government sent a notification to the Governments of Honduras and Costa Rica. No response was received in the established time period, permitting the continuation of the works in compliance with this policy. Social Safeguards: FISE developed an Indigenous and Afro-Nicaraguan People s Plan (PPIA) to support the participation of local populations in the project cycle and to ensure that local cultural considerations were taken into account during project implementation. It was noted that (p.10) FISE s capacity to work with indigenous and Afro-Nicaraguan communities not only in the Caribbean Coast region but also

12 in the Pacific, Center and Northern regions increased substantially over the course of implementation. As part of the PPIA, project coordination agreements were discussed, developed and signed with all regional governments and strategic documents, such as the MEPAS, and capacity building material were adjusted to reflect the physical characteristics and cultural considerations of the Caribbean Region. For example, many Regional Governments used a special implementation manual that included Hygiene as a main goal, costs that reflected the region s realities, the intervention of traditional authorities in some decision-making schemes, and a more flexible community, counterpart contribution scheme for RWSS sub-projects. The implementation manual and relevant community training material were provided in local languages. b. Fiduciary Compliance Financial Management: In terms of general management of financial aspects, FISE sent Interim Unaudited Financial Reports and updated FISE s fixed assets information on a regular basis. The ICR reported that (p. 11), the project was rated Satisfactory for most of the implementation; though some Moderately Unsatisfactory ratings were reported, the related shortcomings did not affect implementation in a substantial way. The Project finished with a Moderately Unsatisfactory ISR rating in both financial management (FM) and procurement due to the then pending resolution of an audit that revealed questionable cost of US$71,444 and a 2014 Procurement Post Review that qualified procurement processes and contract administration as presenting substantial risk. During the ICR process, FISE submitted supporting documentation to the Bank to clarify the questionable costs. The Bank FM team also had discussions with the auditors carrying out the final audit review of the Project, which took place in parallel with the ICR process. The auditors officially informed the Bank that all expenses were adequately justified, except for US$ 1,012 which were considered ineligible expenses and in the process of being reimbursed to the Bank. The FM team recently upgraded the FM rating to Moderately Satisfactory. The project team reported that the final audit report had an unqualified opinion. Procurement: A recent 2015 Procurement Post Review, carried out in parallel to the latest procurement audit review, upgraded PRASNICA s procurement rating from Moderately Unsatisfactory to Moderately Satisfactory given that FISE provided evidence that it had improved the implementation of procurement processes in compliance with Bank policy. The MU rating in the final ISR was linked to the delay of the 2015 procurement review until after Project closing, and was subsequently upgraded once the review was carried out. One procurement challenge that FISE faced was collecting the minimum number of statements of interest and satisfactory offers to hire consulting firms and contractors. Many local firms did not have the qualifications to apply for the contracts and international firms did not express the level of interest expected at design. In addition, several consulting firms that ended up being contracted delivered low quality and delayed work due to their limited capacity and commitment. To overcome these difficulties, FISE and the Bank agreed on several alternative measures (such as the use of individual consultants to improve the social work and the increase of the CDD ceiling) to improve the quality of consulting and construction activities. In parallel, the Bank worked with FISE to apply some mitigation measures such as procurement audits for sub-projects, a schedule of procurement trainings, increased monitoring of contract management, a review of price estimates under the processes and an independent market assessment for the specific project among others. c. Unintended impacts (Positive or Negative) --- d. Other Ratings Ratings ICR IEG Outcome Satisfactory Satisfactory --- Risk to Development Outcome Modest Substantial Reason for Disagreements/Comment Institutional risk and financial sustainability risks are assessed

13 as substantial. Bank Performance Moderately Satisfactory Moderately Satisfactory --- Borrower Performance Satisfactory Satisfactory --- Quality of ICR Modest --- Note 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 The Implementation Completion Report offers five lessons of which the following are the most important (with some reformulation of language): Sustainable access depends on not only building infrastructure but also strengthening capacity of institutions and communities and engaging communities from the beginning. WSS service sustainability depends on the quality of infrastructure as well as institutional capacity to operate and maintain the infrastructure. In the rural context, a tiered sustainability chain that connects small communities with TA is key to the sustainability of local water committees during their transformation from dependent organizations to fully operative, selfsustaining micro-enterprises. Sufficient time is needed prior to design to ensure that users understand the pros, cons and maintenance requirements of each system. Building communities capacity to select systems that are adequate for their needs and reflect their capacity to operate and maintain the systems increases the likelihood of sustainability. In addition, including a social commitment fee prior to implementation ensures communities have the capacity to pay for the systems and builds their commitment to the implementation of the works. Harmonized approach to donor investments helps synchronize investments, facilitating implementation and maximizing overall results. When a sector relies heavily on donor financing, it is critical that sector agencies have tools to align and guide investments to ensure the investments support the agencies vision for the sector, investments are complementary and synergies are explored. The sector wide implementation manual developed by the project (MEPAS), coupled with regular donor meetings have been key to streamlining donor investments and ensuring a certain degree of quality for all RWSS works. Flexible procurement procedures that can be adapted to the local context proves important for rural water and sanitation projects that generally involve small-scale and decentralized interventions, often implemented in low-developed areas where access to markets therefore contractors are limited. During the implementation of the project, the local consulting firms contracted for the preparation of designs and social assistance did not have the qualifications to apply and carry out for these type of activity in such remote areas, and international firms did not express the level of interest expected at design. A similar problem was found in the contracting of works. Evolving approaches (such as the use of social facilitators hired as individual consultants and increased CDD ceiling for works) were key to adapt traditional Bank procedures to the rural Nicaraguan context. This Review finds that: Monitoring and evaluation of sustainability of water and sanitation projects necessitates designing and monitoring specific outcome and intermediate outcome indicators on different aspects of sustainability (institutional, financial and environmental), as well as inclusion of indicators to measure quality, adequacy, safety and affordability of the systems. The M&E system need to include beneficiary level assessments to evaluate and report on the beneficiary level satisfaction, utilization, behavior change and affordability.

14 14. Assessment Recommended? Yes Please explain In order to be able to be able to assess the sustainability of the investments at the beneficiary level. 15. Comments on Quality of ICR The ICR included detailed information on project implementation and challenges encountered but there were also the following notable weaknesses: (i) inadequate evidence on sustainability of outcomes were provided, although the M&E system included a score card system to measure sustainability and no data on adequacy, quality, safety and affordability of investments were reported; (ii) failed to identify that M&E framework had important weaknesses; (iii) safeguard policy implementation results on ESMF was not provided; (iv) inconsistencies between access figures within PDO indicators and intermediate outcome indicators, also confusing information on different surveys and samples; (v) the efficiency analysis did not include assessment of the cost recovery of the investments. a. Quality of ICR Rating Modest