Documentof The WorldBank For OfficialUse Only ReportNo: 30233-IR PROJECTAPPRAISALDOCUMENT ONA PROPOSEDLOAN INTHEAMOUNTOFUS$120MILLION TO THE ISLAMICREPUBLIC OFIRAN FOR ALBORZ INTEGRATEDLAND AND WATER MANAGEMENT PROJECT February 11,2005 Water, Environment, Social andRuralDevelopmentDepartment MiddleEast andNorthAfrica Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective June 30,2004) Currency Unit = IranianRls 8400Rls = US$1 FISCAL YEAR March 21 - March20 ABBREVIATIONSAND ACRONYMS AILWMP Alborz IntegratedLandand Water Management Project ASC Agricultural Service Centers BWC Basin Water Council BWF Basin Water Fund CAS Country Assistance Strategy CLO Central Liaison Office CP CroppingPattern CWRAS CountryWater Resources Assistance Strategy DOE Department of Environment EC Executive Committee EIA EnvironmentalImpact Assessment EO1 Expression of Interest ERR Economic Rate of Return ESA Environmental and Social Assessment ESDQC Environmental, Social & Sustainable Development -Quality Assurance & Compliance Unit ESMP Environmental and Social Management Plan FA0 FoodandAgriculture Organization FC Financial Controller FM Financia1Management FMR Financial Monitoring Report FO Financial Officer FOM Financial Operational Manual FRWO Forest, Rangelandand Watershed Organization FYDP Five-Year Development Plan GO1 Government of Iran HY HighYield IWRM IntegratedWater Resources Management MCC Main Conveyance Canal MDOE Mazandaran Department of Environment M&E Monitoring andEvaluation MFRWD Mazandaran Forestry, Rangelandand WatershedDepartment MGRWC Mazandaran and Golestan Regional Water Company MJAO Mazandaran Jihad and Agriculture Organization MNA Middle East and North Africa Region MOE Ministry of Energy MOEF Ministry of Economic Affairs and Finance MOJA Ministry of Jihad andAgriculture MOU Memorandumof Understanding MPO Management andPlanning Organization NPV Net Present Value OM Operations Manual O&M Operation and Maintenance OMC Operation and MaintenanceCompany PIC Project Information Center P M Participatory Irrigation Management PKJ Project Implementation Unit PPF Project Preparation Facility RP Resettlement Plan RPF Resettlement Policy Framework RWCs Regional Water Companies SA Special Account sc Steering Committee S I L Sector Investment Loan SOE Statement of Expenditures TA Technical Assistance TORS Terms of Reference WBI World Bank Institute WRM Water Resource Management WUAs Water Users Associations wwcs Water and Wastewater Companies Vice President: Christiaan Poortman Country Managermirector: Joseph P. Saba Sector Director: Inger Andersen Sector Manager: Vijay Jagannathan Task Team Leader: Satoru Ueda This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. IRAN.ISLAMICREPUBLICOF Alborz Integrated Landand Water Management Project CONTENTS A. STRATEGIC CONTEXT AND RATIONALE .....................................................................Page1 1 Countryandsectorissues 1 2.. ......................................................................................................... 2 3 Higherlevelobjectives to which the project contributes ...................................................... 3 B.. Rationale for Bank involvement .............................................................................................. PROJECTDESCRIPTION ..................................................................................................... 3 1 Lendinginstrument . 3 2 Project developmentobjective and key indicators ................................................................ 3 3 Project components ................................................................................................................... 4 4 Lessonslearned and reflectedinthe project design .............................................................. 5 5 ................................................................. 6 C IMPLEMENTATION ..... .................................................................................................................. Alternatives considered and reasonsfor rejection .............................................................................................................. 7 1 Partnershiparrangements ....................................................................................................... 7 2 7 3 Monitoring and evaluation (M&E) of outcomes/results ........................................................ 8 4.. .. Institutional and implementationarrangements ................................................................... Sustainability ............................................................................................................................. 8 5 Critical risksand possible controversial aspects ................................................................................... .................................................................... 9 6 Loadcredit conditions and covenants 11 D APPRAISAL SUMIMARY ..................................................................................................... 11 1 Economic and Financial Analyses ......................................................................................... 11 2 .. ... Technical 12 Fiduciary .................................................................................................................................. .................................................................................................................................. 3 13 4 Social........................................................................................................................................ 14 5 Environment ............................................................................................................................. 15 6 Safeguard policies ................................................................................................................... 16 7 ..... PolicyExceptionsand Readiness ........................................................................................... 17 Annex 1:Country and Sector or Program Background ............................................................. 18 Annex 2: Major Related Projects Financedby the Bank and other Agencies .......................... 23 Annex 3: Results Frameworkand Monitoring ............................................................................ 24 Annex 4: Detailed Project Description .......................................................................................... 27 Annex 5: Project Costs ................................................................................................................... 48 Annex 6: ImplementationArrangements ..................................................................................... 49 Annex 7: Financial Management and Disbursement Arrangements ......................................... 55 Annex 8: Procurement .................................................................................................................... 66 Annex 9: Economic and Financial Analysis ................................................................................. 88 Annex 10: Safeguard PolicyIssues... ........................................................................................... 103 Annex 11:Institutionaland Legal Framework and Social Aspects ......................................... 106 Annex 12: Project Preparationand Supervision ....................................................................... Annex 13: Documentsinthe Project File ............................................................................ , 117 ......116 Annex 14: Statementof Loansand Credits......... ....................................................................... 118 Annex 15: Country at a Glance................................................................................................... 119 MAPS IBRD33254 IBRD33339 .. 11 IRAN,ISLAMICREPUBLICOF ALBORZ INTEGRATEDLANDAND WATER MANAGEMENT PROJECTAPPRAISAL DOCUMENT MIDDLEEASTAND NORTHAFRICA MNSRE Date: February 11,2005 Team Leader: Satoru Ueda Country Director: JosephSaba Sectors: Irrigation and Drainage (80%);General Sector Manager: Vijay Jagannathan Agriculture, Fishingand Forestry Sector (20%) Themes: Decentralization (P);Participation and Civic Engagement(P);Rural Services and Infrastructure (P);Water ResourcesManagement (P) Project ID: PO71170 Environmental screening category: FullAssessment LendingInstrument: Specific Investment Loan Safeguard screeningcategory: Significant impact [XILoan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 120.00 ProDosedterms: 7 Years BORROWER 80.3 I 0.00 80.3 INTERNATIONAL BANKFOR 57.4 62.6 120.0 RECONSTRUCTION AND DEVELOPMENT Total: 137.7 62.6 200.3 Borrower: Ministry of Economic Affairs and Finance Islamic Republic of Iran ResponsibleAgency: Ministry of Jihad and Agriculture, No. 28,5th floor, Shaghayegh Street, Abdollahzadeh Avenue, Keshavarz Blvd., Tehran, Islamic Republic of Iran Tel: 98-21-895-2360 Fax: 98-21-895-2357 lomoia@soil-water.gov.ir Mazandaran GolestanRegional Water Company (MGRWC) 3'd K.M.of Sari, Ghaemshahr Road Postal Code 4815898643, Mazandaran, Islamic Republic of Iran Does the project depart from the CAS in content or other significant respects?Ref. PAD A.3 [ ]Yes [XINO Does the project require any exceptions from Bank policies? Ref. PAD D.7 Have these been approved by Bank management? I s approval for any policy exception sought from the Board? [ ]Yes [ IN0 . Does the project include any critical risks rated "substantial" or "high"? Ref. PAD C.5 [XIYes [ ] N o Does the project meet the Regional criteria for readinessfor implementation?Ref. PAD 0.7 [XIYes [ ] N o Project development objective Ref. PAD B.2, TechnicalAnnex 3 The proposed project will assist the Islamic Republic of Iran in piloting basin-wide integrated water resources management (IWRM) in Mazadaran Province so that the lessons learned can be replicated in the rest of the country. The project's development objective is to demonstrate the benefits of the IWRM at the river basin level by: (a) sustainably increasing agricultural productivity through the improved irrigation and drainage system and participatory management mechanism; (b) reducing soil erosion and sediment yields into the Alborz Dam, which i s currently under construction usingthe Islamic Republic of Iran's funds, through the improved upper watershed management; and (c) protecting the water environment downstream of the Babol River and other water bodies through improvedhydrologicaVwater quality monitoringreservoir operation, and pest management. Project description [one-sentence summary of each component] Ref. PAD B.34 TechnicalAnnex 4 (a) Reducing soil erosion and sediments into the Alborz Dam through the improvement of upper watershed management; (b) Improving irrigation and drainage management through the rehabilitation and development o f the hydraulic infrastructure and the establishment o f Water Users Associations; (c) Establishing the Basin Water Council and Basin Water Fund to support participatory decision making over water allocation and management, as well as community-based water and land conservation activities; (d) Protecting the water environment downstream of the Babol River and other water bodies as well as implementing other mitigation measures based on the Environmental and Social Management Plan, and (e) Providinginstitutional support for project coordination and implementation. Which safeguard policies are triggered, if any? Ref. PAD D.6, TechnicalAnnex 10 The project triggered seven safeguards policies: environmental assessment, pest management, cultural property, involuntary resettlement, forests, safety o f dams, and projects on international waterways. Significant, non-standard conditions, if any, for: Ref. PAD C.7 Board presentation: None Loadcredit effectiveness: The signingof the Subsidiary Grant Agreement Covenants applicable to project implementation: The GO1will: (i) establish a BasinWater Council under terms of reference acceptable to the Bank; (ii)establish a WUA prior to the construction and rehabilitation of each branch canal with terms and conditions acceptable to the Bank; and (iii) maintain the Environmental and Social Management Plan, the Resettlement Plan for the Alborz Dam Reservoir, :he Resettlement Policy Framework for Downstream Irrigation and Drainage Area and the Resettlement Policy Framework for the UpperWatershed Area, inform and substance satisfactory to the Bank. A, STRATEGICCONTEXTAND RATIONALE 1. Countryandsectorissues Inmany respects, Iranis at acrossroads regardingits management of water resources. Over the past three decades, the country has invested heavily in hydraulic infrastructure, consisting of over 100 dams with an estimated storage volume of over 30 billion m3, and complementary water distribution systems for both irrigation and drinking water supplies in urban areas. On the institutional front, management of resources has been decentralized through fifteen autonomous Regional Water Companies (RWCs), which are responsible for bulk water production and treatment; Operation and Maintenance Companies (OMCs) for irrigation infrastructure and Water and Wastewater Companies (WWCs) for urban water supply and sanitation. Despite these significant developments, the country i s facing a water crisis on several fronts. These include rapid aquifer depletion, water quality deterioration, inefficient irrigation water use and service gaps in meeting the demands of rapidly growing urban settlements. These problems have been further compounded by water logging and salinization caused by poor drainage, and periodic flooding inestuarine areas caused by ineffective management of riverine water flows. The management of constructed dams and irrigation systems could be enhanced. Many of these expensive structures have been built without adequate arrangements for operation and maintenance (O&M). In other cases, such as the Maroon Dam in Khuzestan Province, complementary investments in the water distribution network to farms were not made, resulting in sub-optimal utilization of highly capital intensive investments in the dam. More generally, in the absence of agricultural sector reforms, there are virtually no examples of farmers diversifying to high-value, water-conserving crops, a growing phenomenon in other countries of the Middle East and North Africa (MNA) Region. While Iran's economy is predominantly based on agriculture, which uses 90 percent of the country's water resources, agricultural productivity levels are much lower than in comparable MNA countries in terms of yields per hectare and per unit of water utilized. Incentives to use water efficiently have been absent for irrigation water providers andwater consumers alike. In summary, the Government of Iran's (GOI) actions on the institutional front, although well- intentioned, have proved futile in managing water resources in a sustainable way. The sectoral experience can be characterized by over-investments, poor O&M of hydraulic infrastructure and absence of water user engagement in management of the resource. While the GOI's ministries and regional offices have competent staff with impressive technical qualifications and construction experience, they lack the benefit of global knowledge of what works and what doesn't for sustainable water resources management (WRM). The GO1 i s aware of these concerns and in 2003 formulated and approved a Water Resources Strategy, which highlighted: (a) improving overall land and water use efficiency in urban and rural areas; (b) promoting participation by all stakeholders in sustainable basin-level development planning andmanagement; (c) rehabilitating and developing hydraulic infrastructure for sustainable water usage; (d) mitigating pollution problems caused by discharge of untreated wastewater into public waterways and aquifers; and (e) strengthening the institutions involved in the sector as well as coordination among stakeholders. These issues and policies have also been highlighted in the 1 Country Water Resources Assistance Strategy (CWRAS), which was jointly prepared by the GO1 and the Bank inFY05. 2. Rationalefor Bank involvement In 2003, the Bank's Board of Executive Directors approved a Water Resources Sector Strategy, which advocated managing water resources by adopting three principles. The first, the ecological principle, argues that land and water in a river basin need to be managed holistically to protect the environment; the second, the institutional principle, argues that integrated water resource management (TWRM) i s best carried out when managed at the lowest appropriate level with the participation of all stakeholders; and the third, the financial principle, argues that water i s a scarce resource, and needs to be managed as an economic good through the design of appropriate incentives that improve allocation and enhance quality. In many ways, the difficulties experienced with past investments in Iran have arisen because the institutional and financial designs of projects did not adequately follow the above principles of IWRM. For instance, irrigation water pricing does not generate incentives for resources conservation. Water allocations between the OMCs and urban water utilities do not meet any "market" test. Enforcement of pollution standards has been virtually non existent, and the GOI's capacity to protect upper watersheds from unsustainable exploitation by herders and loggers has been weak. There i s thus tremendous scope for improving water use productivity in agriculture through pricing and institutional reforms. Unless such measures are taken immediately, however, unsustainable water use could seriously constrain Iran's competitiveness in the global economy, thereby hinderingfuture economic growth. The caveat i s that these significant concerns cannot be solved by a single "magic bullet.'' The suggested solution-and where the Bank can assist-is to plan for WRM holistically, while implementing specific programs to validate key aspects of design. Through a process of testing innovative project designs, learning about what works and what doesn't in the Iranian context, the GO1can enhance management of water resources ina sustainable manner. The Alborz Integrated Land and Water Management Project (AILWMF) will buildon the Bank's previous experience inIran through its Irrigation Improvement Project (TIP), which closed inFY02. IIPwas a conventional irrigationrehabilitation project that successfully demonstrated delegationof O&M to Water Users Associations (WUAs) of farmers for the distribution system below the tertiary canals on 640 hectares of irrigation infrastructure in the Tajan pilot area. WUAs continue to manage their infrastructure on the basis of service contracts with the local OMC. Although the policy content of this loan was relatively small, the project succeeded increating goodwill and trust between the GO1sectoral leaders and the Bank's project team, and more importantly a strongdesire for continuedengagement. The GOI's request for Bank assistance through the AILWMP has therefore come not only as a follow-up to the IIP, but also with the idea of transferring global knowledge and experience in sustainable WRM to the country. The use of a Sector Investment Loan (SIL) instrument i s suggestedbecause the applicability of the "global-best-practices-to-the-Iranian-context" needs to be validated on a sufficient scale before any country-wide reforms can be instituted. The project design also recognizes the need for initiating a process of knowledge sharing and peer learning 2 between the Bank and GO1project teams. Finally, this project takes into account the phasing of project investments, so that key technical assistance (TA), ensuring user participation, takes place before physical construction of infrastructurebegins. 3. Higher levelobjectives to which the projectcontributes The Bank InterimAssistance Strategy (April 16, 2001) reviewed and summarized the development challenges and prospects faced by the country including WRM. The Bank i s also preparing a new Country Assistance Strategy (CAS) in order to assist Iran in advancing key policy reforms and development objectives of the Fourth Five-Year Development Plan (FYDP) for 2005-2009. The FYDP lays out four pillars of development, which are: (a) achieving fast, sustainable growth by relying on the transition to a market economy; (b) sharing the benefits of economic development by addressing the needs of the poor and disadvantaged; (c) enhancing natural resource management and the environment; and (d) building an efficient, accountable, and transparent public sector. The CAS will address the improvement of water resources management reflecting the issues and policies highlightedinthe CWRAS inFY05. Specifically, the project will operationalize the pillars of the GOI's FYDP and the Bank's WRM policies, including the CWRAS within the context of a water basin by: (a) enhancing support for the transition to a more market-based economy by promoting efficient rehabilitation, development and management of irrigation infrastructure, and facilitating agricultural diversification; (b) supporting the benefit-sharing objective by enhancing incomes of the residents in the rain-fed and upper watershed areas of the basin, most o f whom currently live close to the poverty line; (c) promoting sustainable environmental management at a basin level through land and water conservation; and (d) at the implementation stage of the project, testing institutional mechanisms that enhance sharing of information, local decision-making, and above all holding the provincial level water and farm service agencies accountable to the basin-level stakeholders, while delegating more management responsibilities to water user groups. B. PROJECTDESCRIPTION 1. Lendinginstrument The project will use a SIL instrument. The use of performance indlcators as a means of sharing knowledge to develop and scale upthe reforms in the country is proposed. 2. Project development objective and key indicators The proposed project will assist the GO1in piloting a basin-wide IWRM in Mazandaran Province so that the lessons learned can be replicated in the rest of the country. The project's development objective i s to demonstrate the benefits of the IWRM at the river basin level by (a) sustainably increasing agricultural productivity through the improved irrigation and drainage system and participatory management mechanism; (b) reducing soil erosion and sediment yields into the Alborz Dam, which i s currently under construction using GO1funds, through the improved upper watershed management; and (c) protecting the water environment downstream of the Babol River and other water bodies through improved hydrologicaVwater quality monitoring, reservoir operation, and pest management. 3 The primary beneficiaries of the project will be farmers in tradltional irrigation and rainfed areas (total around 77,000),foresters and herders inthe upper watershed, fishermen in the abbandans and the basin population (total around 973,000) in general. In order to ensure sustainability of the hydraulic infrastructure and economic efficiency of water use, the project will work towards promoting local stakeholder participation in water allocation and distribution decisions at both the basin and farm levels, as well as the devolution of O&M responsibilities to users groups. The key outcome indicators of the project are: (a) increased agricultural productivity (US$/ha), (b)reduced soil erosion and sediment yields flowing into the Alborz Dam (m3/year) and (c) improved water environment downstream of the Babol River (m3/s)and other water bodies. Intermediate results indicators for eachproject component include: (a) the area benefiting from the improved irrigation and drainage system and managedby functioning WUAs (ha) and O&M costs recovery ratio (%); (b) the area implementing watershed management plans (ha); (c) a functioning Basin Water Council (BWC) that will take appropriate action for basin-wide management of water resources with stakeholder involvement; and (d) the establishment of fully functional hydrological and water quality monitoring stations, which provide data that can be used for effective WRM. The detailed results framework and monitoringindicators are describedin Annex 3. 3. Project components The project consists of the following five components: (a) Upper Watershed, Forestry and Rangeland Management (Base Cost - US$13 million): This component will include: (i) for preparing an upper watershed master plan and TA capacity building for community management organizations; (ii)forest and rangeland rehabilitation and management, including nursery construction and regeneration of naturauartificial stands (51,500 ha); and (iii)soil and water protection measures, such as gabion check structures and other vegetative measures, over the upper watershed area. This component aims at establishing effective soil and water protection measures by improving sustainableand participatory community-based forest and rangeland management, including establishment of cooperatives inthe upper watershed. (b) Irrigation and Drainage Management (Base Cost US$129million): This component will - include: (i) rehabilitation and construction of irrigation and drainage systems covering a total area of about 52,000 ha, comprising 33,000 ha of traditional irrigation areas, and 19,000 ha of new irrigationareas that are currently rainfed, with supplementary irrigationby groundwater; (ii)capacity building and TA for establishment of WUAs to manage secondary networks and cost recovery of O&M expenditures, and (iii) agricultural extension and research activities to support farmers for improved water management, crop diversification and increased income. This component aims to enhance irrigation water use efficiency and agncultural productiordincome through rehabilitation and modernization of the irrigationldrainage systems, together with improved O&M, diffusion of participatory water management, and training and support for agricultural extensionhesearch. (c) ZWRM (Base Cost - US$5 million): This component will finance: (i) to establish a TA BWC; (ii)Basin Water Fund(BWF)to provide assistance for community-based activities a 4 for water and natural resources conservation, and (iii) establishment of a support system the that enables the B W C to discharge its mandate by involving stakeholders in sharing information on environmental impacts, benefits of the project, and promoting water conservation inthe basin. Environmental Management (Base Cost US$8 million): This component will include the - following elements as identified in the ESMP: (i) water quality monitoring in rivers, aquifers and abbandans, (ii) river ecology monitoring and mitigation measures; (iii)forest monitoring and management; (iv) an integrated pest management plan; (v) resettlement instruments; (vi) a dam safety plan; (vii) cultural property; and (viii) public participation and awareness raising. These will be addressed in the form of TA for special studies, provision of monitoring equipment and capacity building training for GO1staff and users, as well as prioritized mitigation measures. Project Implementation and Coordination Support (Base Cost - US$4 million): This component will provide support for project implementation and coordination at the national and basin level. It will also provide institutional support for the Mmistry of Jihad and Agriculture (MOJA) and the Mazandaran and Golestan Regional Water Company (MGRWC), including strategic sectoral andfeasibility studies for future projects. 4. Lessonslearned and reflected inthe project design Based on the outcome of the Bank's Operations and Evaluation Department (OED) review and the Implementation Completion Report (ICR) of the recently completed IIP in Iran, many useful lessons were learned. The project received an ICR outcome of "satisfactory" while the outcome of the OED review was "moderately satisfactory." The relevant lessons for the current project include: (a) Readinessfor immediate project implementation is critical. Implementation readiness has two dimensions. First, institutional and policy reforms need to take place at a pace with which GO1counterparts are comfortable. For example, despite overall consistency with the four pillars, the Bank's Water Resources Strategy has many new ideas and concepts that needto be phased ingradually. Secondly, counterpart staff at GO1and the project level need to better familiarize themselves with Bank procedures and policies. In the design of the proposed project, both aspects have been included and key staff responsible for project implementation have been involved in the design phase and received TA to appreciate the fiduciary and environmental safeguard policies. The terms of reference (TORS)and design of components to be implemented in the first year are completed and the components are ready for implementation. On the Bank's side, implementation supervision i s proposedto be intensive, for which a dedicated team of Bank staff i s being established. (b) Proper institutional coordination requires management at the lowest appropriate level. The proposed project focuses on buildinginstitutional capacity at the Mazandaran Province level, and in the BWC with representation from civil society and user groups. The role of the Central Liaison Office (CLO) will be limitedto overall project supervision, monitoring, reporting, and interactions with the Bank and the GOI's sectoral policy makers. 5 The implementing agencies need to strengthen their procurement capabilities in order to guarantee smooth project implementation. The project will strengthen the procurement capability of the project teams by financing an International Procurement Advisor who will assist the CLO in managing procurement procedures and train staff to eventually take over the procurement function. The International Procurement Advisor has been selected andtwo national Procurement Officers have beentrained inTurin, Italy. Beneficiary participation based on preliminary agreements with water users at an early stage is cruciul in allowingfaster implementationof all components. The CLO has already organized stakeholder workshops promoting establishment of WUAs. Assurances have been sought from the GO1 that this critical component will be implemented during the early stages of the project, thus ensuring that each WUA is established in advance of the construction of the corresponding irrigation network canals. The IWRM approach is essential to sustain the benefits of agricultural productivity and mitigate the potential negative impacts of infrastructure development. The Eastern Anatolia Watershed Rehabilitation Project in Turkey demonstrated that upper watershed managementis critical. InEgypt, a series of irrigation improvement, pumping and drainage rehabilitation projects indicated the necessity of an integrated approach to better address inter-connected water issues inthe same basin. These lessons are incorporatedin the IWRM approachof the proposed project's design. 5. Alternatives considered and reasonsfor rejection (a) Irrigation and drainage alone: A simple repeater irrigation improvementproject instead of an Integrated Land and Water Resource Management Project on a basin scale. The team considered the option of preparing a simple repeater irrigation project based on the design of the recently closed IIP. This option was not adopted because it did not fulfill the ecological, institutional and financial principles described in Section 2. Instead, the proposed project provides an opportunity to support interventions at the basin level, which i s a sufficiently large spatial area for managing land and water resources using integrated and sustainable approaches. (b) TA alone without lending for infrastructure building versus a regular SIL. The team considered the option of focusing on a TA and capacity enhancement project, rather than infrastructure building. This option was also not adopted because, as with many middle- income countries, the Iranian sector policy dialogue needs to focus on knowledge sharing and peer learning in WRM through practical means. At present, Iran has some of the world's leading experts on dam construction, and irrigation design and construction standards are reasonably high. However, management of the hydraulic infrastructure on a sustainable basis has been inadequate. Under these circumstances, traditional TA and training courses would not help in renewing development of the sector. The challenge i s in balancing the skills of the technical specialists with the multi-sectoral or holistic management expertise required for sustainable water usage. The S I L instrument provides such an opportunity to undertake investments and complementary TA, together with knowledge enhancement and planning for sustainable outcomes. 6 Rehabilitation of the existing irrigated area alone vs. including a rainfed and supplementary groundwater irrigation area in theproject. The team considered the option of limiting its physical intervention to rehabilitating existing irrigation systems and came to the conclusion that new and existing irrigation areas need to be included in the project, because: (i)farmers in the rainfed areas are much poorer than those in the existing areas, and in many instances are over-extracting groundwater due to lack of reliable surface irrigation water supply; (ii)a social survey revealed that farmers in this area expressed a willingness to participate, including paying increasedwater charges inexchange for reliable surface water supply; and (iii) the project's economic analysis (see Annex 9) confirms that includingthe new areas i sjustified. Adaptive Program Loan vis-&vis SZL. The team considered the option of an Adaptive Program Loan but could not identify an appropriate phasing of triggers for subsequent loans that would match the construction of all irrigation networks and systems with the completion of the dam reservoir impoundment in2007. A more feasible option was found to be a S I L project, designed in a three-phased approach with clear milestones and monitoring indicators, explained indetail inthe latter half of Annex 6. C. IMPLEMENTATION 1. Partnershiparrangements The Bank will continue to work closely with other donor programs, in particular, the Food and Agriculture Organization (FAO) TA scheme to provide consistent support for irrigation modernization, WUA development andWRM activities inIran. 2. Institutionaland implementationarrangements The project will be implemented by MOJA and MGRWC. MOJA i s responsible for on-farm, tertiary and quaternary irrigation, drainage and agricultural extension as well as forestry and rangeland management. It is a public entity that follows the laws and regulations applicable to the public sector in Iran. This part of the project will be mainly implemented by its provincial office, the MazandaranJihad andAgriculture Organization (MJAO). MGRWC is responsible for the diversion weir and trunk irrigation networks from the main to the secondary canal system. The MGRWC is wholly government-owned and operates under the principles and procedures of commercial law in Iran. Accordingly, the project funds being channeled as grants to MGRWC will be subject to the budget law instead of the trading law under which the company operates. A National Steering Committee (SC) has been established to oversee project implementation and coordination between the various institutions. The SC i s chaired by the Vice Minister of the Ministryof Economic Affairs and Finance (MOEF) and includes the Vice Ministers of MOJA and the Mmistry of Energy (MOE), the General Director for Water Resources from the Management and Planning Organization (MPO)and the General Director of the Central Bank of Iran. MOJA and MGRWC will establish and maintain a CLO and the MGRWC will dispatch its representativeto the CLO. The CLO will be located within the premises of MOJA in order to serve 7 as a focal point to ensure effective implementation and enhance coordination between MOJA, the two PIUs (one each within MJAO and MGRWC) and the World Bank. Project Implementation Units (PIUs) have already been established within MJAO and MGRWC respectively to: (a) coordinate with the CLO and other agencies at the field level; (b) supervise actual project implementation; (c) carry out respective procurement and financial management functions; and (d) provide overall guidance to beneficiaries. Inorder to support stakeholder participationat the lowest appropriate level, the Bank will assist in establishing two other institutions: (a) B W C as the coordinating body between governmental agencies, NGOs and project beneficiaries; and (b) legally-empowered and financially autonomous WUAs under the Cooperatives Law. WUAs serve as the nucleus unit of community-based water management efforts. The project builds on the positive experience of the previous IIP under which Tajan pilot WUAs are functioning. Furthermore, the Project Preparation Facility (PPF) financed a study tour for fourteen key members of the CLO and PIUs to Morocco to study how Basin Agencies there are organized and empowered. 3. Monitoring andevaluation (M&E)of outcomeshesults The project will monitor and evaluate implementation, including impacts on beneficiaries, water resources and natural resources management, through the outcome and results indicators described in Annex 3. Data collection, analysis, and reporting will be conducted through annual and semi- annual reports as well as periodic evaluations by external consultants and Bank supervision missions. The CLO will be responsible for coordinating all M&Eactivities and preparing reports, and will be assisted by consultants. Consultants will train the CLO in data processing, storage and analysis, using standardized methodologies and reporting formats. The consultants will also strengthen the capacity of members of the PIUs, WUA and other stakeholders to monitor and evaluate project impacts in terms of productivity, sustainability and customer satisfaction. The BWC will be responsible for sharing project information and data at the basin level. It must be emphasized that the key element of the M&E system i s to ensure adequate feedback from the BWC to the CLO and the Bank supervisionteam. 4. Sustainability Sustainability will depend on how closely project implementation adheres to ecological, institutional and financial sustainability. The project's focus i s to build institutions for stakeholder participation that generates ownership at the local level. In the Imgation and Drainage component, the establishment of WUAs is aimed at building user ownership and accountability for managing the water distribution network. This will be carried out through devolving the irrigation water O&M function and responsibilities to the WUAs, who will be responsible for the financial upkeep of the branch irrigation networks. The users will also be encouraged to participate in the planning and design phases of the project. In the upper watershed, the project will support the establishment of community-based forestry cooperatives aimed at balancing forestry and livestock production needs with natural resources conservation. The proposed BWF will finance demand-dnven pilot initiatives for soil and water conservation as well as income generating activities for low income residents. In order to ensure that these institutional mechanisms are set in place, the project is divided into three phases, the goals of which are as follows: (a), institutional development; (b) participatory infrastructure development; and (c) sustainable O&M. While these are the principle objectives of the respective phases, some physical works will also take place in Phases Iand 111to demonstrate the delivery of tangible benefits to stakeholders. A detailed description of the phasing approach i s described inAnnex 6. 5. Critical risks and possiblecontroversial aspects During preparation, the team assessed the potential risks involved in attaining the development objectives of the project and assuring implementation progress. The table below sets out many o f the key potential risks, resulting in an overall high potential risk. It also provides the mitigation measures agreed with the GO1in order to allow the project to proceed with an acceptable degree of risk. Although the country-wide disbursement rate in Iran i s very low, the project's implementing agencies (MOJA and MGWRC) have both implemented a similar World Bank project (Irrigation Improvement Project). Risk Risk RiskMitigationMeasure Rating ToProject Development Objective 1.Continuedcommitment M The GO1has demonstrated strong interest and commitment by applying for of the GO1to the project the PPF, which is being used to buildproject implementation capacity. It has also signaled commitment to improved water management through this project as well as the Urban Water Supply and Sanitation Project. The CWRAS has also been widely discussed by stakeholders in Iran through its key ministries including MOEF, the MPO, MOJA, and MOE. There is a consensus that the proposed project will serve as a pilot demonstrating the benefitsof the IWRMapproachona basinscale. 2. Inadequateinstitutional H 1)There is longexperienceintheproject area with traditional irrigation water capacity development in managementstructures such as that of the mirabs and ab-dars. W A Sto guarantee 2) During the first year of project implementation, management contracts sustainable O&M of between the OMCs and W A Swill be developed and made effective before irrigationinfrastructure, to branch canal network construction commences. A draft management beconstructedunder the framework for WUAs has beenincludedinthe OperationsManual. project 3) The project will provide substantial support (through the Irrigation and Drainage Management Support Consultancy) for effective stakeholders' consultation, social awareness raising and training activities, as well as community consultations before the signing of management contracts with WUA staff. The project will also facilitate the processfor legally sanctioning WUA establishmentand operation. 3. Lack of legal status of L 1)The BWC will be established by a decree from the Mazandaran Governor BWC andBWF as a legal entity. This procedure is straightforward and entails no complex issues. 2) Detailed TORSfor the BWC and BWFincluded in the Operations Manual ensure stakeholders' participation and inter-governmental agency coordination. 3) The BWF mechanism is similar to the one developed under the Bank- 9 financed Environmental Management Support Project in Iran and hence has local precedents. 4. Inadequate development H 1)The project will provide opportunities to learnfrom good practices inother of a fully functional BWC countries. Key CLO and PIU staff have conducted one study tour inMorocco and propose to visit Turkey, utilizingPPFfunds. 2) Technical assistance from the integrated water resources and environment management consultancy will be provided for establishment and operation of the BWC. TA will also ensure basin-wide stakeholders' participation. Detailed TORSare included in the Operations Manual. 3) A simplified financial procedure has been agreed to support community- basedland and water activities under the BWF.To ensurethe sustainability of the fund a separate account will be opened in a commercial bank to receive the beneficiary repayment portion of the fund. 4) An independent external assessmentof BWC performance, financed by the project, will provide the CLO, PIUs and Bank team with informationthat can be used to improve effectiveness. To ComponentResults 1.Inadequateand delayed L The GO1 has provided local budget for project preparation since 2002. In availability of counterpart addition, it has demonstrated its commitment by expediting studies and other funds activities that were required for completing project preparation usingthe PPF. 2. Inadequate capacity of M 1)An InternationalProcurement Advisor has beenrecruited and two National CLO and PIUs, including Procurement Officers have been trained in Turin, Italy. Financial Controllers, fiduciary aspects dedicated to the project, have been appointed and attended a training in Lebanon. Financial Officers for both PIUshave beenrecruited. 2) For slulls not available in the CLO and PIUs, the project will finance adequate TA. Terms of Reference for four key consultancies have been prepared. One will provide direct management support to the CLO and PIUs; the other three will provide operational support to implement all components of the project. Requests for Expressions o f Interest (EOI), have already been . published;n the dgMarket. 3. Inadequatecoordination M Duringthe project preparation period, the MOJA and MGRWC demonstrated ,etween CLO and MGRWC excellent coordination through the CLO. The procurement compliance review function is centralized in the CLO, with representation from MGRWC. Detailed coordination mechanisms were agreed and are specified in the Operations Manual. !. Delayedproject H The detailed design work will be implemented in parallel with social mplementationprocess mobilization activities and consultationin order to ensure user participation at iecauseo f the participatory 211 stages. Social mobilization, including consultation and awareness raising ilanning and design activities, will be carried out by the irrigation and drainage management iroposed :onsultancy in conjunction with detailed design preparation for the branch :anal. i.Sub-Account H rhe MOJA portion of the project will require opening a Sub-Account for nanagement and the flow of MJAO in Mazandaran and funds transfer denominated in local currency. The undsfromMOJAto MJAO 3 4 arrangements will include electronic monthly reporting on the payments mdcashbalance of the sub-account for MJAO. FMsoftware and training will - ie provided to buildcapacity. 1.Potential reputational risk M 1) The team has worked closely with ESDQC, the unit for compliance review lue to misunderstanding o f md quality assurance, with regard to the GOI's preparation of the he project design and hvironmental and Social Assessment (ESA), consultation and disclosure nitigatory measuresin xocess and the need to address the seven safeguard policies that are triggered onnection with the GOI's )y the project. inanced dam and the !) A communications capacity buildingprogram has been prepared and will :settlement of villagers )e implemented by the CLO with guidance from and monitoring by the Bank eam. 10 3) The team has sought and received assurances from Bank regional management that adequate budget will be provided to fulfill due diligence requirements to monitor implementation of measures related to the safeguard policies and enhancement of quality and communications strategies. OverallPotential Rating H 6. Loadcredit conditions and covenants (1)Effectiveness Condition The signingof the Subsidiary Grant Agreement. (2) Other Covenants The GO1will, (i) later than December 31, 2005, establish a Basin Water Council, a clear set of no rules and mechanisms for stakeholder participation, decision malung, coordination, governance structure and a secretariat, under terms of reference acceptable to the Bank; (ii) establish a WUA prior to the construction and rehabilitation of each secondary, tertiary and quarternary canal with terms and conditions acceptable to the Bank; and (iii)maintain the ESMP, the Resettlement Plan for the Alborz Dam Reservoir, the Resettlement Policy Framework for Downstream Irrigation and Drainage Area and the Resettlement Policy Framework for the Upper Watershed Area, in form and substance satisfactory to the Bank. D. APPRAISAL SUMMARY 1. EconomicandFinancialAnalyses (1)Economic Analysis The economic analysis assessed the benefits of the project using a with-/without-project methodology based on estimated changes in yields andcropping patterns. Net Present Value (NPV) and Economic Rate of Return (ERR) criteria were used to assess the economic viability of the project. Benefits and cost streams were calculated from financial models reflecting the net incremental economic/financial benefits as a result of undertakingthe project. Economic benefits derive primarily from: (a) the introduction of a modern surface irrigation system (net area of 19,000 ha) for 33,000 farmers; and (b) modernization and renovation of deteriorated traditional irrigation infrastructure and on-farm improvements, resulting in a more reliable, efficient, and equitable water distribution system in the existing irrigation area (net area of 33,000 ha) for 44,000 farmers. Improvements in drainage will also enable crop diversification and intensification through secondary crops in fall and winter, seasons when heavy precipitation can cause flooding and poor drainage. The project i s justified based on the economic rate of return. For the base case (cropping pattern CP3), the overall ERR i s 16.2% (traditional area i s 30% and new area i s 14%). The analysis i s conservative in two ways: (a) it does not include the "future without project'' situation in which benefits decline as the irrigation system continues to deteriorate; and (b) substantially increased 11 benefits-resulting from the prolonged life of the Alborz Dam, improved municipal and industrial water supply, in addition to other environmental benefits related to ecology and human health- have not been included as they not easily quantifiable. Sensitivity analysis shows that the ERR i s rather susceptible to cropping pattern changes but robust for all patterns from 12.5 to 21.2 percent. Some agncultural policy issues are beyondthe control of the project, but among the GOI's top priorities i s to improve agricultural income through better irrigation efficiency, crop diversification and production technology improvements. (2) Financial Analysis Cost Recovery of O&M:Inthe traditional area, through water charges of 2% of gross revenue on all irrigated crops and system maintenance charges, farmers would pay US$87/ha against total estimated O&M costs of US$64/ha. Inthe new area, through water charges of 3% of gross revenue on all irrigated crops and systemmaintenance charges, farmers would pay US$132/ha against total estimated O&M costs of US$84/ha. Capital Cost Recovery and Water SubscriptionFee: Iranian law requires beneficiaries to contribute 30% of the capital costs of on-farm development works with payment over a 10-year period without interest. In the new irrigation area, this includes land leveling on 15,590 ha and land leveling and drainage system works on 3,000 ha. Beneficiaries would pay about U S $ 9 l k a for land leveling and about US$21.5/ha for field drainage annually over ten years. Farmers also pay a one- time subscription fee for water rights. In the new irrigation area, the current subscription fee i s US$833/ha and can also be paid yearly without interest over a 10-year period at US$83/ha/year. In the traditional irrigated area, the subscription fee would be prorated-if farmers receive about 25% of the supplemental water from the project, they would pay 25% or US$2l/ha/year. Beneficiaries Capacity to Pay: Incremental net income from the project inboth traditional and new irrigation areas i s adequate to support full recovery of O&M costs and water subscription fees as well as 30% capital costs recovery of on-farm management works. Inthe traditional irrigation area, total net income will increase by US$360/ha (from US$1,220/ha to US$1580/ha) or by 30%. Inthe new irrigation area, total net income will increase by US$814/ha (from US$740/ha to US$1,554/ha) or by 110%. 2. Technical An overall project feasibility study of acceptable quality has been prepared and preliminary engineering designs have been completed. The detailed design work of the major trunk canal (12.6 km) has been completed and its first section is under construction through GO1 financing. The preliminary designs of the secondary and tertiary canal systems have been completed. In addition, the TORS for key studies such as master planning works for the upper watershed and socio- institutional support for WUAs have been prepared, and these consultancy services are ready to be advertised. Detailed designs for the network canals will be undertaken during project implementation with the participation of users. Beneficiaries will be assisted in establishing and organizing their respective WUAs, followed by the conclusion of contracts with OMC that specify O&M anduser fee collection responsibilities. 12 To ensure accountability of OMC in providing the right quantities of irrigation water at the scheduled time to WUAs, it i s proposed to establish pilot flow measurement stations to verify the new water rights acquired by the WUAs, as well as the volumetric consumption of irrigation water on pilot units by farmers under different cropping patterns and intensities. The cost of irrigation water conveyance in the primary and secondary system was compared for typical areas using lined open channels and buried pipelines of different materials. The project will, in its initial phase, carry out pilot works, for which TORShave already been prepared, to consider the viability of piped systems as compared to open channels for the smaller conveyors such as the tertiaries and quaternaries. The project will also assist in improving the O&M of the Alborz Dam and ensure efficient use of the stored water in the reservoir while maintaining a minimumbase water flow in the downstream portion Babol River to protect its water environment. The water volume released from the dam will be optimized, taking into consideration the hydrological conditions of the tributaries joining the Babol River downstream as well as the irrigation and environmental water requirements. 3. Fiduciary Financial Management The GO1will channel the proceeds of the Loan on a grant basis to MOJA and MGRWC with the required counterpart funds. Loan proceeds will be disbursed in accordance with the policies and procedures of the Bank's disbursement guidelines and GO1regulations. These regulations require that two budget lines be opened for the project and a framework agreement be signed between the implementing entities and MPO. This will take place once the Loan i s declared effective. All payments under the project will be subject to government laws, regulations and the project's enhanced controls and procedures through the approval of all invoices by the project units and the engagement of an external independent auditor to perform year-end audits. To facilitate timely payments of the Bank`s share of eligible expenditures to contractors, suppliers, consultants and others, two Special Accounts (SA) denominated in US Dollars have been opened for the PPFandboth will be used under the project. The first SA will be managed by MOJA while the second will be managed by MGRWC.Each entity will operate its SA independently and will be responsible for the preparation of withdrawal applications. Since MOJA's part of the project activities will be implementedmainly by MJAO inMazandaran, MOJA will open a Sub-Account to be managedby MJAO at a local bank. The CLO and the two PIUs, domiciled at the MJAO and MGRWC, will each install and operate an accounting system at their offices which will enable them to record and report on all financial transactions under the project. MOJA and MGRWC will have recruited two FOs and MJAO has identified a dedicated financial staff member for operating this system. These FOs will work closely with the Financial Controllers (FCs) and will audit, prepare, monitor and update project accounts and financial reports regularly using the accounting system in accordance with the Financial Operational Manual (FOM). A draft of this manual has been prepared and was discussed during loan negotiations. Two separate F M reports will be issued under the project and submitted as a package by the CLO to the Bank. 13 Inaddition to the government annual audits performed by the Diwan A1Mouhassabah, the project will be subject to year-end verification by an external independent auditor acceptable to the Bank. He/she will perform the overall annualproject audit basedon TORSacceptableto the Bank and will issue an independent audit opinion about the project financial statements. Procurement During the May 2004 mission, a Senior Procurement Specialist (MNA Region) reviewed the procurement capacity of MOJA and MGRWC and proposed a provisional Procurement Plan (PP) covering the first 18 months from project effectiveness. The PPhas beenreviewed by the Bank and attachedto Annex 8. Both MOJA and MGRWC have experience from the IIP and have retained some engineering staff involvedinthat project. However, basedon the country's general procurement environment and the Procurement Capacity Assessment, the overall procurement risk i s rated as "substantial". In order to overcome these constraints, the Procurement Capacity Assessment Report recommended that the project establish a centralized procurement support function within the CLO in Tehran, with the PIUs in MGRWC and MJAO conducting smaller procurement based on simplified national competitive bidding and shopping procedures up to agreed thresholds. In addition, MGRWC will be responsible for authorizing all procurement related documents, while the CLO will fulfill procurement quality assurancefunctions incompliance with Bank guidelines. Furthermore, an International Procurement Advisor and national procurement staff have been nominated to assist the CLO and PIUs. The international adviser will guide and assist national procurement staff in preparingprocurement related documents and enhancing their capacity. Staff will also receive regular procurement training at international training centers and in-country training organized through visiting consultants. In addition, the international adviser will evaluate the progress of national procurement staff to ensure adequatecapacity buildup is maintained. 4. Social Opportunities, constraints, impacts, and risks from sociul context. Opportunities are specific to project components. In the upper watershed areas, stakeholders are willing to participate in improved land and soil conservation that improves livelihoods. The social development outcomes for upper watershed residents will depend on the project's delivering enough benefits through community demand-driven projects. The BWF will be set up with the chief purpose of funding such projects, which will encourage the various communities to change their livelihood patterns and cooperate inwatershedprotection. A social development specialist will be mobilized under the upper watershed consultancy master plan preparation to inform and train communities on the benefits of joint participation in community-driven projects. The specialist will work with the PIU inaddressingupper watershed managementissues. Furthermore, the participatory upper watershed master plan will serve as the basis for bringing together community stakeholders through the development of small community projects and the consolidation of Forestry Cooperatives. The TOR for this consultancy has beenprepared and the Request for EO1has been issued. In the lower areas of the basin, W A Swill be established. They will empower farmers by giving them a voice in the planning and design of on-farm infrastructure. At present, farmers are aware of 14 inefficiencies and future benefits of water demand management, but have little confidence in government institutions. Social development specialists will work with irrigation engineers in participatory design and WUA institution building. There i s adequate legal and institutional basis for WUAs and for their subsequent federation at the basin level. TORS for the irrigation and drainage management support consultancy, including social surveys and consultation for WUA establishment have been preparedandthe Request for EO1has beenissued. Finally, the project will enhance the role of the BWC in integrating communities from the upper and lower areas of the basin. It will have the distinction of serving as a forum for all communities inthe basinto share important data andideason new andon-going projects intheir areas. Participation of key Stakeholders. Inaddition to the Forestry Cooperatives and W A Sdescribed in the preceding section, key stakeholders in the basin will be represented in the BWC and will participate in improved water basin management. The BWC's main function i s empowerment of water basin stakeholders. Opinions and attitudes of key stakeholders were surveyed and are documentedin a Social Assessment, and results incorporated inthe project design. At negotiations, assurances were obtained from the GO1that: (a) the BWC will be empowered to perform the roles envisagedin the project, and (b) the BWF will provide low income stakeholders with financing for natural resources conservation andincome generating activities. Social issues in theproject. Social issues of importance include: (a) a large area under traditional irrigation with traditional rights: in this area, project interventions are related to malung design improvements and working in the context of traditional rights, uses and practices; (b) linking the proiect to land consolidation: in some areas this i s a community hope, while in others it causes insecurity and fear; the project needs to adopt a highly pragmatic approach; (c) a new development area with few traditions of community cooperation to build on; and (d) public perceptions of government control: water issuesare highly sensitive and some areas are characterizedby low trust. Monitoring social impacts. The project will monitor the uptake of community improvement projects through BWF and BWC; and the establishment and operation of W A Sthrough the PIUs. WUAs will be empowered through the project to monitor and evaluate their own operations in a participatory fashion. The internal communication and information exchange will be coordinated by the CLO through the consulting support mentioned above. For additional details, see Annex 3 for stakeholder, M&Easpects, and Annex 11for social, legal, andinstitutional aspects. 5. Environment The comprehensive river basin management approach will facilitate solutions to basin-level water allocation and water quality problems. The design of the project represents an attempt to solve inter-sectoral conflicts on ground and surface water usage in an efficient, sustainable, and equitable manner. Inparticular, the project will mitigate the potential negative effects of the Alborz Damand protect the water environment of the downstream portion of the Babol River and other water bodies. Improving management of forest and rangeland in the upper watershed of the Alborz Dam will reduce the rate of siltation in the reservoir and thereby extend the life of the dam. Downstream 15 benefits will include participation of rural and urban stakeholders through water quantity and quality monitoring and an integratedpest management plan across the provincial agencies. The project will also support decision-making on IWRM at the lowest appropriate levels by including users through farm-level WUAs, micro-catchment level forest co-operatives, and the apex BWC. In addition, the project will support community-driven water and natural resources conservation initiatives under BWF in order to improve upper watershed management, water use efficiency and water pollution prevention. 6. Safeguardpolicies The GO1requested the Bank to provide financial support for completing the entire irrigation and drainage network system of the Alborz Dam, for which construction was started by the GO1 in 1999. Although the dam is not financed by this project, it falls into the project's zone of influence. The original Environmental Impact Assessment (EIA) approved by the Department of Environment (DOE)was reviewedfor due diligencebythe Bank. For AILWMP, the GO1decided to conduct further studies and complement the original EIA with a Supplementary Environmental and Social Assessment (ESA) in order to cover the larger project area and comply with the Bank's safeguards policies. The project, placed in Category A under OP 4.01, triggers seven (7) safeguard policies, as set out below. The ESA contains mitigation measures for potential negative impacts of project activities; these are summarized in the ESMP, and include impacts monitoring, comprehensive capacity building activities for GO1 staff and users (training and seminars) and procurement of equipment (for upgrading of laboratories, field monitoring and establishment of a hydrometric network). The capacities of provincial government agencies will be strengthened to take joint and coordinated responsibility for mitigation measures and subsequent monitoring. Public participation and disclosure of information are incorporated in project design to ensure dissemination of results and initiatives as well as public awareness of and consultation on important environmental matters. The GO1 organized consultative meetings with local stakeholders in Mazandaran in February and May 2004. The final draft ESA, includlng the three resettlement instruments, was disclosed at government offices in Tehran and at Sari in Mazandaran and in the Bank's InfoShop in September 2004. Safeguard PoliciesTriggered by the Project Yes No EnvironmentalAssessment (OP/BP/GP4.01) [XI [ I NaturalHabitats(OP/BP4.04) [I [XI PestManagement(OP4.09) [XI [ I CulturalProperty(OPN 11.03, beingrevisedas OP 4.11) [X 1 InvoluntaryResettlement(OP/BP4.12) [XI [[II IndigenousPeoples(OD 4.20, beingrevisedas OP 4.10) 11 [XI Forests(OP/BP4.36) [XI [ I Safety of Dams(OP/BP4.37) [XI [I ProjectsinDisputedAreas (OP/BP/GP7.60)* [ I [XI Projectson InternationalWaterways (OP/BP/GP 7.50) [X 1 [I * By supporting theproposedproject, the Bank does not intend to prejudice thefinal determination of theparties' claims on the disputed areas. 16 7. Policy Exceptions and Readiness Issues Status Fiduciary Both the procurement and FMassessments resulted in specific action plans. An International Procurement Advisor hasjoined the CLO. FOs for the CLO and MGRWC have beenappointed. Project Staffing The CLO and PIUs have been establishedand are already functioning. Key CLO and PIUstaff and Consultants including directors, procurement, and accounting staff, have been mobilized. Four major consulting services will assistthe CLO and PIUsto effectively implement the proiect, for all o f - - which TORShave been prepared and Requestsfor EOIs havebeen issued. Tender TORSfor the four main consulting services: (i) Project Management and Coordination Support; Documents (ii) WatershedMasterPlanStudy;(iii) Upper Irrigatioinand Drainage Management Support; and (iv) Integrated Water Resourcesand Environment Management Support have beenprepared. Detaileddesign and tender documents for the mainconveyance canal have been prepared. Disclosure The final draft ESA, including three resettlement instruments, was disclosed in September 2004 Requirements both inIranand the Bank's InfoShop. Monitoring and M&Eindicators have beenpreparedand incorporated intothe project design and implementation Evaluation arrangements.The management support and coordination consultancy will assist the CLO to carry out M&Eacross the components; the Request for EO1has been issued. Land Land acquisition will be required for downstream irrigation and drainage systems development. Acquisition No involuntary resettlement will be required inthe upper watershed and reservoir areas under the Plans Bank financed project. However, since the GOI's dam project and watershed management strategy entail resettlement, the GO1submitted the Resettlement Policy Framework (RPF) for the upper watershed and Resettlement Plan (RP) for the dam reservoir area in addition to the RPFfor the downstream irrigation and drainage area. The final draft RP and RPFswere reviewed by the Bank with ESDQC guidance, and disclosed inSeptember 2004, together with the final draft ESA. 17 Annex 1:Country and Sector or ProgramBackground Iran's Water and NaturalResourcesSituation The Islamic Republic of Iran covers a total area of about 165 million ha out of which the potential cultivable area i s about 51 million ha. In 2000, total land fit for agriculture measured about 18 million ha, of which about 5.7 million ha was irrigated land. At present, about 7.5 million ha are equipped for irrigation; of which around 55 percent relies on groundwater and 45 percent on surface water including dam reservoirs 6.0 million ha are privately owned (4 million ha groundwater and 2 million ha surface water) while 1.5 million ha are government-led schemes (0.1 million ha groundwater, 1.2 million ha dam reservoir and 0.2 million ha surface water). The total irrigated area is by far the greatest in the MNA region; by comparison, Egypt has about 3.3 million ha, Iraq about 3.5 million ha, and Morocco about 1.25 million ha. The average annual rainfall inIran i s about 250 mm and about 90 percent of the land lies in aridor semi-arid areas. Rainfall and river runoff varies with the region and the season. Rainfall i s concentrated in winter and spring except for the snowmelt in the northern mountainous areas. Geographically, Irancan be divided into the following major river basins: (a) the Central Plateauin the middle, (b) the Lake Orumieh basin in the northwest; (c) the Persian Gulf and Gulf of Oman in the west and south, (d) the Lake Hamoun basin inthe east and the Kara-Kum basin inthe northeast; and(e) the Caspian Sea basin inthe north. The Caspian Sea is the largest land-locked water body in the world (424,240 km2)and its surfacelies about 22 mbelow sea level. The rainfallcharacteristics of the various basins are summarizedinthe table below. All these basins, except the Persian Gulf and Gulf of Oman, are interior basins. There are several large rivers, but only the Karun River is navigable, as the others are too steep and irregular. The KarunRiver, with atotal length of 890 km, flows through the southwest of the country andempties into the Persian Gulf. All river flows are seasonable and variable. Spring floods cause enormous damages while there is little flow inthe summer. Annualrenewablewater supply is estimated at about 129billion m3.Surface water representsabout 92 billion m3and groundwater recharge i s estimated at about 37 billion m3.The total safe yield for groundwater including non-renewable water and rechargefrom other countries is estimated at about 49 billion m3.The annual renewable water supply per capita i s about 2,000 m3/capita, which is expectedto decrease to about 1,390 m3/capitain 2025 due to rapid growth of the population. from 64.5 million in 2002 to 93 million in 2025. Dams have played an important role in water resources development in Iran. In 2000, fifty-six major dams were in operation, with a total capacity of about 17.9 billion m3.At that time, fifty- 18 eight dams were under construction, with a total capacity of 11.4 billion m3.The GO1continues to undertake major dam buildmgprojects. The annual total water use is estimated at about 92 billion m3,of which about 92 percent i s for agriculture, 6 percent for domestic consumption and 2 percent for industrial use. Although overall water use constitutes 55 percent of the annual renewable water supply, the volume of groundwater abstracted, estimated at about 57 billion m3in 1993, exceeded the safe yield. The situation is reportedto have deteriorated since then. Low IrrigationEfficiency The agriculture sector share of GDP is declining but remained at 15 percent in 2001. The sector accounts for about 26 percent of non oil export earnings. It continues to play an important role in creating employment opportunities, with a share of 39 percent in 1990, and maintains at least 25 percent at present. The sector also employs women and poor farmers inthe rural areas who account for around 40 percent of the total population. Despite the importance of agriculture, irrigation water use efficiency is very low. Surface flood irrigation accounts for more than 95 percent of the total irrigation area, with only the remaining 5 percent equipped with advanced irrigation systems. Most of the canal systems are made of unlined earthen bunds. On-farm irrigation technique is also not up to standard, due to a lack of landleveling andadequate agricultural extension support. Inadequatedrainage alsohas causedwater loggmg and salinization problems inmany areas. Despite the fact that the GO1has carried out significant investments in dam reservoir construction and more than half of the irrigated area is supplied by groundwater, irrigation efficiency is still extremely low. The GO1i s aiming to convert groundwater irrigation to surface water irrigation in response to rapidly depleting aquifers. However, comprehensive water use efficiency improvements for the conveyancefrom sources (either dams or groundwater wells) to the fields and for the on-farm level are critical. Distorted Economic and Financial Systemfor Irrigation The economic and financial system has also caused distortion in water use allocation, efficiency, and investment plans. The agriculture sector still receives subsidies in many forms and tends to obscure the relationship between the increase in agriculture productivity and water used. By far the most important irrigated crop is wheat, covering almost one-third of the total irrigated area, followed by irrigated fruit trees, which take up one fifth of the total area. Other major irrigated crops are barley, rice, and vegetables. Clearly, more crop diversification towards higher value addedcrops per drop of water should be encouraged. Under the Fourth FYDP, the GO1is aimingto open the agriculture sector, make it more competitive and economically sound, departing gradually from its traditional food security policy. The GO1 is seeking policy advice from the Bank for accommodating these dynamic changes without disruptingsocial order. Water charges for O&M cost recovery are a typical example. The current water charge i s determined based on gross agricultural production values (from 1-3 percent dependmg on the type of schemes) without taking into account hectares or actual irrigation water use. Farmers have no incentive either to save water or to increase agriculture productivity under this system. This type of 19 tariff system i s not unusual in many countries, but needs to be revised in order to send the right signals to farmers. The GO1has also legislated a cost recovery system for major irrigation scheme investment costs (upto 30 percent of the costs for tertiary and quaternary canals andon-farm irrigation improvement including land leveling and sub-surface drainage). The investment cost recovery mechanism i s still a relatively nascent concept in the MNA region and its strategic decision i s commendable. International experiences have proved that the lack of a cost recovery mechanism tends to lead to over-investment in rather luxurious systems, such as unnecessary lining of end canals without considering their additional accruing benefits. This legislation does not seem to have been realized inmost cases, however, andenforcement poses another challenge for the GOI. InadequateInstitutionalMechanismfor Water Resourcesand IrrigationManagement The GO1has introduced a unique O&M system for the dam reservoir, diversion weirs, and canals from the main to the tertiary levels. It has established fifteen RWCs nationwide as semi- autonomous management entities. In addition 19 OMCs have been established, to which the RWC delegates management functions and responsibilities for all the canal systems. They are intended to be run on the basis of revenues from water charges to beneficiary farmers. There are few countries which try to collect all O&M costs, not only for branch canals but also main canal systems including dams, malung this one of the most advanced O&M in the world in principle. In reality, the RWC and OMC appear to have received substantial subsides from the government due to inadequate collection of water charges from farmers. To address this issue, the GO1aims to delegate management responsibilities of branch canals below the secondary level to community-basedWUAs inorder to encourage user self management, foster users' willingness to pay, and promote further privatization of the RWC and OMC by reducing financial burdens. At present, WUAs who have taken on these responsibilities seem to have succeeded in a limited number of cases. The previous Bank IIP successfully established Water Users Groups at the tertiary level in the nearby Tajan area in Mazandaran Province. Useful lessons can be drawn from this experience to develop more autonomous WUAs, with increased O&M responsibilities, up to the secondary level, with a command area of about 4,000 ha. Under the proposed project, stakeholder sensitization, participation, and consultation will be conducted at all phases, from canal alignment planning to detailed design and determination of O&M procedures. These activities, including study tours and hands-on training workshops for users and operational staff, will enhance user ownership and commitment to maintaining the systems, including financial and physical contributions. Absenceof anIWRMApproach From the institutional perspective, the most serious issue i s inadequate coordination between the MOE and MOJA. MOE is in charge o f dams, diversion weirs, and main canal systems down to the tertiary level, as well as urban water supply and wastewater treatment. MOJA was formed when the Ministry of Agriculture, formerly responsible for on-farm irrigation, drainage and the agricultural extension service, merged with the Ministry of Jihad, formerly responsible for upper watershed, 20 forestry and rangeland management. In addition, the DOE i s in charge of environmental aspects, including water quality. The GO1does not possess at present sufficient experience in IWRM to address issues on a basin scale. Inadequate coordination results in poorly managed water resources and irrigation schemes. An example of this was the lack of downstream irrigation and on-farm improvement even after the dam reservoir was completed and ready to supply water for the downstream area. Forest and rangeland degradation as well as increased soil erosion in the upper watershed also is becoming apparent in many parts of the country, threatening to significantly reduce the life of the dam reservoir. This issue of upper watershed degradationissue was highlightedinthe Bank's Environment Policy Note and resonated in both MOJA and the DOE. The proposed project will provide a master planning opportunity to establish sustainable forestry and rangeland management, with the participation of communities inthe upper watershed, along with various training opportunities. The project will also pilot the BWF, which will provide direct support for soil and water conservation efforts as well as income generating activities inthe upper watershed. Water quality i s also declining in many rivers due to untreated waste from urban areas, rural villages, and industries. The agriculture sector also contaminates the river and aquifer systems through overuse of pesticides and fertilizers, as a result of distorted incentive mechanisms such as heavy input subsidies and lack of appropriate extension support. Industrial factories discharge heavy metals, which could affect the health of the population downstream. Overall, the DOE'S capacity is weak; it has little capacity to enforce environmental regulations, let alone penalties. Mainstreaming environmental and social dimensions on a basin scale planning level is critically important, as is modifying stakeholderbehavior. An important aspect of poor coordination is the absence of a data sharing system using a common platform. Water quality and related monitoring capacity is insufficient in the DOEand other RWCs and provincial MOJA departments and the three entities undertake their functions without coordinating and sharing information and data. Field monitoring and laboratory equipment, particularly for water quality, i s not adequate to meet the needs for protecting public health and ecological systems. Establishment of a common, shared data base and system i s extremely important. Such a system should also be open to other stakeholders inthe basin so that they are able to understandthe situation and issues and take necessary actions to resolve issues in a participatory andtransparent manner. The efficient and effective operation of IWRM systems should also be examined based on sound knowledge of data and decision-malung tools. The improvement and rehabilitation of existing infrastructure may warrant revisiting operational procedures that were established long ago and may no longer be adequate to address current water demands. This could lead to allocation of increased budgetary resources to upgrading existing systems rather than new infrastructure development. However, this requires careful review of all aspects including economic, financial, social, environmental and technical dimensions. The proposed project will provide a model of the institutional dimension of N R M as well as the technical dimension, through an optimized water distribution system, combined with a GIs-based water data and knowledge sharing system, to be developedunder the MGRWC and the new BWC. 21 With regard to staffing, both the MOJA and MOEhave many well educated and experienced staff in their headquarters and regional offices. However, neither has had the capacity to manage emerging projects that encompass economic, financial, social, environmental and legal aspects.The poor performance of many large scale water resources and irrigation development projects appears to result at least in part from inadequate economic and financial studies as well as benchmarking and M&E activities. Inorder for MOJA and MOE to promote privatization of the RWC and OMC, they require staff capable of addressing financial aspects, as well as social and communication issues, in order to promote WUAs. A legal specialist is also needed who can translate new ideas into laws, regulations and covenants. Government andBankAssistanceStrategies The GO1is aware of these issues and is seelungto addressthem inthe Fourth FYDP.The FYDPi s expected to contain the four pillars o f (a) achieving fast, sustainable growth, relying on the transition to a market economy, (b) sharing the benefits of economic development and addressing the needs of the poor and disadvantaged, (c) enhancing management of natural resources and the environment, and (d) buildingan efficient, accountableand transparent public sector. The issues of the water resources and irrigation sector fit into these four pillars and will be significantly addressed under the plan ifthe GO1 remains committed to this strategy. The GO1 has also highlighted the importance of inter-sectoral coordination for IWRMon a basin scale since the Third EYDP. It has advocated the establishment of the ministerial water council as well as water basin organizations at the provincial level. The Bank shares the view of the GO1regarding its strategic directions, as expressed in the Bank's Water Resources Sector Strategy in 2002 and the CWRAS (FY04). The Bank possesses global experience in issues related to water sector reform. It is an advocate of the IWRMapproach, based on significant experienceinsector work andlending operations. The MNA Region water team has led a regional dialogue through the MNA Regional Water Initiative and Mediterranean Technical Assistance Program, to discuss policy and strategic issues on water and the environment. Together with World Bank Institute (WBI), the team has conducted various field workshops involving social, environment, and institutional specialists. The GO1 appreciates the Bank's advisory role for this endeavor under the FYDP, in connection with lending operations for the investment project. It i s the team's strong belief that the proposed project will serve as aplatformfor addressing various water related issuesin an integrated way on a basin scale. It will also serve as amodel for eventual replication for other basinsinIranand inother countries. 22 Annex 2: Major RelatedProjects Financedby the Bank and other Agencies Sector Issues BankFinanced Water Resourcesand IrrigationReform IrrigationImprovement Project S (W94, closed FYOO) AAA -Country Water Resources Assistance Strategy (FY05) r- Agriculture Sector Reform AAA Agriculture Sector Note (FY02) UrbanWater Supply and Sanitation Tehran SewageProject (FYOO) S UrbanWater Supply and Sanitation (FY04) Environmental Management Environmental Management S Support Project (FY03) AAA EnvironmentalSector Note (FY05) OtherDevelopmentAgencies UNDP-Environment Conservation of Wetland, GEF JICA -Watershed Management Technical Assistance Pilot Project inNorthernIran 23 Annex 3: ResultsFrameworkand Monitoring ResultsFramework Outcome Indicators Use of Outcome Information Demonstratingthe benefits of lWRM at river (a) Increasedagricultural productivity and Annual M&Ereport and feedback basin levelthrough: income (kgha or US$/ha); for the annualoperational plan (a) Sustainably increasing agricultural (irrigation anddam reservoir) productivity; (b) Reducedsoilerosionandsedimentyields flowing into the Alborz Damreservoir (m3) (b) Increasinglife of the damby reducing soil using amodel andpilot field data; erosion and sedimentyields flowing into the reservoir; and (c) Improved river maintenance flow (m3/s) andwater quality on the downstreamportion (c) Protecting the water environment inthe of the Babol River during the peak irrigation downstreamDortion of the river andother period. Use of Results Monitoring Component One: ComponentOne: (a) Number of hectares where watershed (a) Annual M&Ereport More forestersandherdersimplement watershed management plans are implemented (ha) (b)WatershedMaster Planfollow- (b) Shareof forestry areas managedby UP operationalforestry cooperativesor similar entities (%) ComponentTwo: Component Two: ainageManagement (a) Area coveredby rehabilitated or new (a) Annual M&Ereport More farmers havereliable and sustainable irrigation and drainage systems (ha) irrigation/ drainagesystems (b)RealignmentofWUA (b) Shareof irrigation systemsmanagedby establishmentprocedure operationalWUAs (%) ComponentThree: ComponentThree: ComponentThree: IntegratedWater ResourcesManagement (a) BWC meetingsand actions inresponseto (a) Annual M&Ereport IWRMprinciples are implementedin actions project progressandmonitoring datasubject takenby the BWC to annual independentextemal review (b) Amount of BWFusedinresponseto (b) Realignment of BWC and BWF community groups for funding proposals operational mechanism ComponentFour: ComponentFour: ComponentFour: EnvironmentalManagement (a) Increasednumber of hydrological and (a) Annual M&E report againstthe All stakeholdersknow water quantity and quality water quality monitoring stations ESMP situation in the basin (b) Unified annualbasin-wide water (b) Annual reservoir operationaland monitoring report anddatabase irrigation plan ComponentFive: ComponentFive: ComponentFive: ProjectImplementationSupport (a) Number of competent operational staff and (a) Regular follow-up of recruitment The CLO and PIUs have skills and capacity to consultants and training plans of the CLO and fulfill their functions adequately PIU staff (b) Number of strategicstudies completed' (b) Policy Notes Note: The GO1has agreed to conduct technical studies for agricultural marketing, water tariffs and water laws (See Minutes of Negotiations, January 8-12,2005). 24 c 2 a 0 2 P E9f I a I b I W Id 4 a .I 2 a E a B I I m I I 1 I s 4YI.. N In t-- W 0 2 1:: - F $ : t- 3 I I 0 2 I 3N I I. Annex 4: DetailedProjectDescription SUMMARY PROJECTDESCRIPTIONS DEMARCATION AND BETWEENMoJA AND MGRWC The project will be implemented by MOJA and MGRWC, which will carry out the following partsrespectively: MOJA: Parts A, B.l (b), B.2, B.3, C.2, D.l, andE.l MGRWC: PartsB.l (a), C.1, C.3, C.4, D.2, andE.2 PartA: Upper Watershed, Forestryand RangelandManagement 1. Preparation of an upper watershed master plan including carrying out of socio-economic studies, development of a forestry and rangeland management framework, carrying out of feasibility studies of engineering structures, provision of training and acquisition of equipment for the enhancement of natural resources management capacity of local communities and MFRWDstaff. 2. Construction of erosion control structures and gabion check dams for the retention of sediment and reduction of the influx of silt into the Alborz Damreservoir. 3. Enhancement of the management and conservation of forest and rangeland, through fertilization and seeding of degraded rangeland, introduction of a rotational grazing management system based on participatory planning processes, rehabilitation of degraded natural stands, replanting andprotection of forest clearings and construction and maintenance of forest roads. PartB: Irrigation andDrainageManagement 1. Improvingirrigationwater useefficiency and productivity through: (a) rehabilitation, improvement and construction of diversion weirs, main and secondary canals and pumping stations for irrigation water lifts, acquisition of water monitoring equipment and carrying out of participatory M&Eactivities; and (b) carrying out of on-farm development including surface and sub-surface drainage, tertiary and quaternary canals and land leveling; as well as demonstration schemes for on-farm water management. 2. Establishment and strengthening of participatory irrigation management (PIM), through: (a) conducting detailed socio-institutional surveys and consultations for raising awareness on the merits of PIM; (b) the creation of WUAs for the operation and management of irrigation water canals; (c) the provision of technical advisory services, training and carrying out of study tours for the benefit of WUA, MOJA, MJAO, and MGRWC staff; and (d) construction of offices, acquisition of operation and maintenance equipment and provision of administrative support to WUAs. 3. Support for agncultural extension services through the construction and rehabilitation of additional offices, provision of operational facilities and equipment, carrying out of a program to 27 test ways of developing women's extension units, provision of training to farmers on efficient water and pesticide use, andcarrying out ofjoint extension andresearchprograms. PartC: IntegratedWater ResourcesManagement 1. Establishment of a BWC to coordinate the activities of executing agencies and stakeholders, including reviewing current and emerging issues of land and water resources management; proposing policies, strategies and action plans; monitoring the state of water and other natural resources; disseminating information to executing agencies and stakeholders; and supporting community-driven pilot activities for land and water conservation through the creation of a BWF. 2. Creation of a BWF for the provision of support to community-driven pilot activities tailored towards upper watershed, forestry and rangeland management, and the improvement af agricultural productivity andirrigation water use. 3. Provision of support to the BWF for community-driven pilot activities tailored towards environmental conservation. 4. Development of an IWRM support system including: (a) a comprehensive surface and ground water model to enable simulation of the water balance for the extended project area; (b) an optimized reservoir operation system linked with a monitoring network for hydrological conditions and downstream water requirements; (c) a water knowledge database for the monitoring and management of water supply and demand; and (d) provision of water rights and introduction of volumetric water charge systems. PartD: EnvironmentalManagement 1. Provision of technical advisory services and training; carrying out of specialized studies; acquisition of equipment; mitigation works; carrying out of M&E activities; conduct of information dissemination and awareness raising activities for: (a) forestry monitoring and management; (b) water quality monitoring and improvement in abbandans; (c) environmental screening of BWF activities for upper watershed, forestry and rangeland management and agricultural productivity and irrigation water use improvement; (d) integrated pest management; and (e) resettlement management and monitoring inthe upper watershed area. 2. Provision of technical advisory services and training; carrying out of specialized studies; acquisition of equipment; mitigation works; carrying out of M&E activities; conduct of information dissemination and awareness raising activities for: (a) water quality monitoring and improvement in rivers and aquifers; (b) environmental screening of BWF activities for environmental conservation; (c) water ecology monitoring and mitigation; (d) dam safety management; (e) resettlement management and monitoring in the dam reservoir area and the downstream irrigation area; and (f) physical cultural property protection. PartE: ProjectImplementationand CoordinationSupport 1. Acquisition of office equipment and supplies and provision of technical advisory services, training and study tours for the benefit of staff of MOJA, MJAO and other selected government offices, for the effective implementation of the project. 28 2. Acquisition of office equipment and supplies; provision of technical advisory services, training and study tours for the benefit of staff from MGRWC and other agencies and organizations, for the effective implementationof the project. DETAILED PROJECTBACKGROUND AND COMPONENTSDESCRIPTIONS The project area includes: (a) the upper catchments, which are mainly rangeland or forest covered; (b) middle lands, which are gentle hills with irrigated valley bottoms and degraded or semi-degraded forests on hill sides; and (c) the lowlands, which are mainly irrigatedplains, down towards the Caspian Sea, which is about 25m below oceanic sea level. (See map of project area below). The total project area i s 1,347 km2,and the three sub-areas 346km2(upper), 110km2(middle) and 891km2(lower), respectively. The population of the project area i s almost 1million, of which the vast majority lives inthe lower area. The upper land ranges from mountains with summits of 3,300m above sea level (a.s.1.) down to the Alborz Dam site at 190ma.s.1. The middle land i s defined as the area between the Alborz Dam and the start of the main irrigation canal, at an elevation of 150m a.s.1. The lower land i s densely populated, predominantly irrigated and lies between 150m to -25m a.s.1 (Caspian Sea coast). The five main cities of the project area are located here. The proposed project will be the first of its kind in Iran to introduce an integrated river basin management approach and enable land and water resources to be managed in a sustainable manner. The project comprises the following components: Component1:Upper Watershed,Forestry andRangelandManagement(BaseCost US$13.2 million) This component addresses problems of rural poverty and natural resource degradation. The Alborz watershed, located in the northern slopes of the Alborz Mountains of Iran, includes five sub-catchments covering a total area of 500 square kilometers. Some parts of these catchments are still densely forested but others are already heavily degraded. Widespread encroachment, unsustainable grazing and timber harvesting practices as well as illegal logging pose significant immediate and future threats to the ecological integrity of the watershed and, if unchecked, will lead to large-scale degradation of the fragile mountainous ecosystems and negative impacts on downstream agricultural areas. The specific objectives of this component, hence, are to: (a) reduce erosion and sedimentation in the upper watershed with a particular focus on protecting the Alborz Dam reservoir; (b) restore and protect 29 natural rangeland and forests; and (c) increase productivity and incomes of communities and forest cooperatives inthe area. These objectives will be pursued through the following sets of interventions: (a) construction of water and soil erosion structures, such as gabion check dams and biological protection measures; (b)restoration of alpine rangelands through seeding, closures and participatory grazing control regimes; (c) improving forest productivity through replanting and subsequent protection of cut- over areas and degraded stands; (d) facilitating forest management improvements through the adoption of a community forestry approach and new silvicultural and timber management and marketing; (e) improving upland communities' livelihoods through introduction of alternative income-generating measures; and (f) ensuringincreased responsibility and involvement of local communities inthe planning and management of natural resourcesinthe upper watershed. The component will draw extensively on the implementation experiences and lessons learned of the Eastem Anatolia WatershedRehabilitation Project (EAWRP)inTurkey, which i s considered a flagship project for the Bank demonstrating best practices in watershedmanagement, and other similar projects. This project successfully piloted key features of participatory watershed rehabilitation, biodiversity conservation and resources management in geo-morphological and socio-economic settings similar to those prevailing in the Alborz Mountains. The lessons of this project would need to be adaptedto the specific context inIraninorder to be replicated. The interventions envisaged under this component are designed as a continuous process that allows for flexibility and adaptation as the project evolves. Initial community awarenessbuilding and participatory planning will be followed by the implementation of forest and rangeland rehabilitation measures. The speed of implementation will need to be determined according to priorities set by communities and in agreement with local government departments. Sustainable management of the resource base will need to ensure that adequate production, income and employment levels are achieved through the project. The component will be implemented through an interactive planningprocess, whereby the local implementing agencies, such as the FRWO and the DOE, work together with local communities to prepare and implement plans across micro-catchments, specifying interventions for soil and water protection, improved range management and forest rehabilitation, and income generation measures. The proposed participatory community-driven approach for the upper watershed includes the following sub-components: Sub-Component 1: Participatory watershed design, community planning and capacity building (US$l.Omillion) Participatory community organization design and phasing will be conducted during the first two years of the project to lay the groundwork for subsequent implementation. Design exercises will be conducted separately for the respective sub-catchments areas and will build on existing community and cooperative institutions. Where those institutions do not exist, the design exercise will elaborate and recommend adequate forms of community organization. Technical expertise and the long-standing relationship between upland communitieskooperatives and the local forestry and watershed protection department will be crucial inthis regard. Specifically, the sub-component will include: (a) the development of an overall framework, including micro- catchment plans for mechanical water and soil protection structures and other infrastructure 30 measures, such as access roads, according to needs and priorities of local communities; (b) awareness building, organization and training of upland communities to enhance capacity in organizing management of rangeland and forests and to form a partnership with the FRWO and the DOE; (c) agreement on mechanisms to develop annual work plans and budget plans and to monitor implementation progress; (d) socio-economic baseline studies in order to subsequently monitor community impacts; and (e) technical training, study tours and equipments for project staff from the FRWO and DOE. Sub-component 2: Soil and water protection structures (US$4.8 million) Given the severity of current debris flow and silt loads transported in the tributaries of the upper watershed, mechanical soil and water protection measures will be constructed to control sediment inflow within the upper and medium segments of the main streams. Based on the priorities to be developed in the watershed design framework and micro-catchment plans, the sub-component will aim at facilitating the construction of light erosion control works at higher elevations as well as gabion check dams in the middle ranges to retain sediment and reduce the influx of silt into the Alborz reservoir. The planning and implementation of such measures will ensure that communities are to the largest extent possible involved in the process and benefit in the form of short-term income opportunities. Sub-Component 3: Rangeland and Forest Conservation and Management (US$7.4million) Interventions in the alpine areas will focus on rangeland restoration, increased productivity, and introduction of participatory grazing management regimes. Specific activities will include: (a) enrichment seeding and fertilizing of degraded rangeland capable of increased production; (b)maintenance of natural springs and installation of water pipes and animal troughs; and (c) introduction of a rotational grazing management systems based on a participatory planning process. Inthe forested areas, focus will be on rehabilitation of degraded and over-logged forest stands and on an increase in overall productivity of forest and timber management operations. Specific activities will include: (d) rehabilitation of degraded natural stands; (e) replanting and protection of forest clearings; (f) assisted natural and artificial stand regeneration; (g) protection and thinning operations to maintain and enhance productivity of natural forest stands; (h) forest road construction and maintenance in areas where the current road network i s underdeveloped and poses a significant bottleneck to sustainable forest management; and (i) TA to the local forestry department and forest cooperatives to enhance quality of timber production, including fuelwood and industrial timber, and marketing. Community income support activities (BWF under component 3.2) Soil and water protection measures and forest rehabilitation activities will serve as short-term income sources for local communities. These, however, will need to be complemented by additional income generating activities to sustain and improve livelihoods in the upper watershed in the medium and long term. Depending on the particular preferences and needs, communities as well as individual villagers would be offered a menu of interventions for implementation. Investment support will be provided on a cost-sharing basis through the BWF together with TA. The FRWODOE would assist local communities in prioritizing activities, approaching the BWF, securing investments, and monitoring impacts against the upper watershed socio- economic baseline study. 31 As communities and villagers will determine their medium-term priorities in the course of the overall community framework development, the specific costs of supporting income generation activities will also be determined. The broad menu of possible interventions would include: (a) forest management equipment and investment support for small-scale timber processing facilities to strengthen efficiency of harvesting operations, product specification and marketing; (b) support to innovative livestock breeding through strengthening extension services for cattle breeding, chicken production, pen feeding, forage production and conservation, and genetic upgrading of the livestock population; (c) support to horticulture on-farmland plots to produce high value fruit, nuts etc., to meet household demand or serve local markets; (d) investment support and training to develop and manage eco-tourism facilities around the Alborz Dam site and forest protected areas, such as basic infrastructure, restaurants, guesthouses, forest trails, hunting lots etc.; (e) extension and investment support to dryland agriculture such as the construction of small-scale terraces to reduce erosion and runoff and retain soil moisture; (f) promotion of food and forage legumes (chickpeas, lentils, vetch) on existing fallow land to enhance soil fertility and expand food production and the availability of forage; (g) promotion of fuel-efficient household heating and coolung stoves and development of community fuelwood plantations to reduce consumption from natural forests. Component2: IrrigationandDrainageManagement(Base CostUS$128.7 million) The objective of the project's irrigation and drainage management component is to increase agricultural production and incomes in the areas of intervention by (a) rehabilitating and expanding irrigation and drainage systems to improve irrigation water use efficiency and productivity, (b) instituting PIM and sustainable operation and maintenance (O&M) through relevant institutional developments and training, and (c) implementing irrigated agriculture extension andimprovement programs. This will be achievedby: (a) Implementing the irrigation and drainage system rehabilitation and development works to serve a total area of about 52,000 ha, of which about 33,000 ha are traditional irrigation areas and about 19,000 ha will be new irrigation areas including main, secondary, tertiary canals and on-farm development (US$118.1 million); (b) Promoting socio-institutional developments for sustainable O&M, the establishment of about 10 WUAs covering the full development area, and training of system users and operators inPIMand O&M (US$5.5 million); and (c) Strengtheningthe agncultural advisory and extension services, as a basis for support and assistance to farmers in achieving increased irrigated agriculture production and water conservation through improved use of water, irrigation techniques, and pest management (US$5.1 million). Project Backgroundfor Imgation and Drainage Component The project will, utilizing water from the new Alborz Dam, irrigate an area of 52,000 ha that is currently suffering from a shortage of irrigation water, and will also provide an adequate drainage system. The area also benefits from storage capacity of about 134 abbandans, which are small service reservoirs built to store floodwater from the rivers, for use in irrigation during the 32 dry seasons. The three main rivers have about 350 streams off-talung to irrigate the traditional irrigation areas on which there are also about 270 motorized pumps to lift water for irrigation when the river water levels drop below gravity command levels. In addition, about 21,690 wells discharge about 250 million cubic meters per year for irrigation use. The present cropping intensity in the project area is about 110%, with rice being the main cash crop. The project intends to increase the cropping intensity in the improved traditional irrigated areas to 126% and in the new development areas, to between 133% and 145%, for the various cropping patterns reviewed inthe project feasibility studies. Sub-component 1: Irngation/Drainage System Rehabilitation and Development (US$I18.1 million) The projected physical infrastructure development forms part of a long-standing Mazandaran province water resources development plan, and in particular i s linked to the Alborz Dam development. The Alborz Dam, currently under construction, i s located on the Babol River upstream from (to the south of) the development area. Below the dam and to the north on the same river, at the top (south-west) end of the development area, construction of the Gange- Afrooze diversion weir, and of the first 3.7 km of a right bank Main Conveyance Canal (MCC) to serve the development area, is also on-going. Construction of a further 8.9 kmof the MCC has started. The irrigation and drainage infrastructure works to be implemented under the project are intended to rehabilitate, improve and supplement (but not normally to replace) the traditional irrigation systems, and to provide full modem surface water irrigation systems for the currently rainfed agriculture areas. While the traditional water management system by local water masters called mirabs and ab-dars will be retained and provide a basis for future water management, it is not suited to cope alone with the demands of modem water management. The mirabs conduct water distributionfor lower canal systems empirically at intakes and tumouts, by controlling water levels through stop logs and makeshift weirs made of stone, earth, or wooden boards, according to the abdang (pre-fixed distribution ratio). No measurement facility i s equipped to handle existing intakes and turnouts. The introduction of a more advanced system will increase overall water distribution efficiency while a modem measurement facility will be able to monitor delivered water volume more efficiently, constituting the basis for future volumetric water charges. The sub-component will also include a pilot on-farm water management and benchmarking program as well as participatory M&E activities. The objectives of the program are to: (a) improve the efficiency of on-farm water application through proper water management and precise land leveling; (b) organize farmers into irrigating and cultivating the tertiary block units under a pre-arranged rotation schedule; (c) assure timely and frequent maintenance of tertiary canals, drains, and on-farm ditches; (d) introduce other irrigation methods, such as furrow and pressurized irrigation, for various crops; and (v) carry out participatory M&E programs to demonstrate project benefits. Representative tertiary blocks with different mixes of crops will be selected at upper and lower ends of the system. The tertiary laterals of these blocks will be provided with water measuring devices and simple control structures for diversion of water to the quaternary laterals and the farm ditch. The procedure and program related to surveys, field measurements and monitoring will be established by irrigation consultants who will also train field technical staff of MJAO 33 during the initial phase of project implementation. Irrigation water measurement and collection of water charges based on volumetric water use will be conducted on a pilot basis in the new area. Other benchmarking exercises will also be conducted in detail to formulate benchmark data and subsequent M&E programs. Sub-Component 2: Institutional Developmentfor Participatory Irrigation Management (PIM) (US$5.5 million) Institutional Establishment The socio-institutional development program i s intended to establish andlor consolidate a rational organizational framework and capacity for sustainable PIM and O&M, such that the water using communities on the one hand and the OMC on the other hand can assume joint system management responsibilities and activities to their mutual benefit. To this end, an initial awareness, information dissemination, consensus-building and water user mobilization process will be undertakenat village level. Legally-constitutedWUAs are then to be formed at secondary or primary system levels (corresponding to command area sizes normally in the order of 4,000 ha), and contractual arrangements and procedures between the WUAs and the MGRWC/OMC are to be established to cover water deliveries, irrigation management, systems O&M, provision of irrigation and drainage services, and payment of fees. To a great extent this will, in the traditional irrigation system areas, formalize and strengthen the already existing arrangements. WUAs in these areas are to be formed around one or more river irrigation intakes and will assume management responsibilities for the systems served by these intakes. The M C C and other new conveyance systems, for which the OMC will assume management responsibilities, will traverse these existing systems, but i s not expected to cause major physical or operational changes to them other than the provision of a new water-taking point for supplementary irrigation flow supply. The river intakes and conveyance canal outlets will be the points of contact and transfer between the OMC and the W A S .Within the new irrigation development areas, to be served by two lateral (branch) conveyance canals managedby the OMC, WUAs are inprinciple to be formed basedon one or moreprimarycanal outlets from the lateralconveyance canals, but additional considerations will include command area sizes, final system layout characteristics andthe relationship of these to village boundaries. Implementation Approach For each WUA, it i s requiredthat prior to the construction of works relating to systems for which the WUA will assume management and O&M responsibilities, it should: (a) be legally constituted; (b) have formalized contracts with the MGRWC/OMC to cover future irrigation and drainage services, systems O&M, and water charges collection; and (c) have a formal WUA membership agreement and approval on record concerning the planned and designed works. Mechanisms will then be put in place whereby the WUA can participate in works construction supervision and approval on matters that could affect its future systems management and O&M performance. Management and O&M training programs will continue during the period of construction, in preparation for commencement of these activities following completion of the works. Following initial survey and consultant engagement activities, implementation of the physical infrastructure works development program will proceed in parallel with implementation of the 34 socio-institutional development program. During the WUA establishment period, water user representatives will be involved in the initial social mobilization and training programs, and will also participate with the MGRWCIOMC and project consultants in the finalization and approval of surveys, plans and designs for infrastructure works layouts, rehabilitation, improvements and construction. Trainingfor PIM Support Training and capacity building programs are to be an integral part of the socio-institutional development program. In the first instance they will be aimed at conveying to the project stakeholders the concepts of, reasons for, and previous relevant experiences elsewhere with PIM and WUAs. This will support the key initial awareness, dissemination, consensus-building and mobilizationactivities. There will then be more informal general irrigation development training inconjunction with the intendedapproach to participatory planning,design, implementation and supervision of the infrastructure works. Also, during the process of establishment and then operational start-up and functioning of the WUAs, and of implementation of the infrastructure developments, formal training will focus on organizational and financial management and administration, and on water management and systems O&M. It is intended that, through both the MGRWC/OMC and the MJAO, expertise and advice on these topics will continue to be provided to WUAs on a long-term basis as needed, through irrigation management extension services to be initially supportedby the project. Study tours constitute an indispensable tool to gaininghands-on experience on WUA operation. Besides the in-country trainingprogram, it will be important to expose the mainproject staff and some WUA representatives to experiences in WUA development and transfer of irrigation management in other countries, especially those with similar economic conditions. This will provide insights into the requirements for accepting full responsibility for O&M and financial managementof largeservice areas. o&Msupport The MJAO, MGRWC, and the BWC, once established, will undertake, with the assistance of consultants, a review of current and future projected O&M activities in order to: (a) develop a program for adequate O&M while outlining requirements for staffing, equipment and financial resources; (b) initiate the implementation of the agreed program; and (c) provide an adequate annual budget for O&M purposes. Items to be analyzed and reviewed include: maintenance priorities, frequencies and schedules, work procedures and controls. Annual O&M activities will be carefully monitored and evaluated by the concerned agencies with the objective of improving management and procedures. The project will provide some essential O&M equipment and spare parts for the WUAs. The issuing of any such equipment to the beneficiaries will be subject to the establishment and formalization of their WUA, of which 10 are anticipated in the project area. For each WUA, the equipment will include two small tractor backhoeAoader type machines for clearing smaller canals and drains, forming the backbone of mechanized and decentralized O&M activities. The project will also provide two tractorkrailers with implements, two pick up trucks, a small office/ store with furnishing, to be the meeting point of the WUA, and small tools for O&M. 35 As regards cost sharing of o n - f m works, it was agreed, in principle, that a cost sharing arrangement be put in place whereby on-farm capital investments by the project (irrigation channels, on-farm sub-surface and surface drainage, land leveling works) are recovered from beneficiaries after a 3-year grace period and a ten-year interest free repayment period. It i s suggestedthat this be organized through the WUAs and repayments may also be deposited into a revolving fund overseen by the EC in the BWC. The money from this revolving fund may similarly be used after project completion for introduction of further improvements to existing infrastructure. such as modern pressurized irrigation systems, including drainage and land leveling. Sub-Component 3: Agricultural Extension Service Support (US$5.1million) This sub-component will provide additional office and operational facilities, houses, vehicles, and special equipment for agricultural extension and research purposes, includmg farm machinery; mobile film units for awareness raising activities will also be provided. To facilitate the introduction of new production technologies and crops, some equipment will be provided to be tested and introduced under research and extension programs carried out jointly by local research and extension staff. A pilot program to test ways of developing a women's extension unit will be set up, building on the existing women's departments at the provincial level. Furthermore, integrated pest management training, which i s funded under the environmental management component, will be conducted by the agricultural extension service, to encourage optimal use of pesticides and fertilizers by farmers for better agronomical and environmental aspects. Extension Service The public extension service falls under the Extension and Farming Systems Deputy of MOJA, which has the responsibility for overall administration, coordination, and management of extension programs. In Mazandaran province, there are 15 Agricultural Service Centers (ASCs) with a total staff of 103 including about 10 women, and of whom 28 have BSc or MSc degrees. The ASCs serve some 396 villages in the project area with around 77,100 land owners. The functions of the ASCs include not only the provision of extension advice for inigation water, crop diversification, and pest management, but also other tasks such as the allocation of inputs and machinery and providing support to strategic government programs such as the land consolidationprogram. The project will focus on providing enhanced extension services in order to allow farmers to take full advantage of the irrigation and drainage improvements under the project. It also will provide support for women's activities under the extension sub-component. Good strides have already been made as a result of the IIPto establish a participatory demand-driven service with improved farmer-extension-research linkages in Mazandaran Province (Tajan sub-project area), and the project will primarily support activities to widen and deepen these existing efforts in the Alborz area. The project will: 0 Work with key farmers and cooperative groups through workshops and farmer-to-farmer field trips; 0 Prepare a number of mass media activities; 36 Establish demonstrations for irrigation practices, crop diversification, livestock management and for women's activities; 0 Carry out economic and social studies of extension programs; and 0 Provide training, including overseas studies for experts and in-country training programs for technical staff. Improved farmer-extension-research linkages will be developed by supporting field research sites (including on-farm adaptive research sites) and a join extension-research program of non- farmadaptive researchtrials anddemonstrations. Women in Agriculture Matters related to women in agriculture are the responsibility of the Rural Women Affairs Office under the Extension and FarmingSystems Service inMOJA. InMazandaran, the rural Women's Affairs Department falls within the Provincial Extension Service and consists of three women specialists. Mazandaran i s characterizedby the important role of women on the farm. Farms are generally small with limited mechanization, so that women's involvement in cultivation i s increased. On average, 85% of the work done inrice fields i s done by women, 80% for livestock and by-product production, 90% in handicrafts, and 30% in forestry. Health problems may also arise becauseof the highuse of pesticidesinrice and limiteduse of protective gear. The project will provide assistance to the government's program to support rural women, primarily through the extension program and the Rural Women's Office in Mazandaran. The program will place a woman extension officer in each ASC, along with a vehicle and driver, which will allow them to carry out programs specifically targeted for women. These extension officers will carry out workshops and training programs in order to develop a network of `key' women or pioneer women inthe same way that there is already a network of key farmers. These women will act as facilitators at the village level to pass on information to other village women on technical issues, andon availability of extension programs andother support. Component 3: Integrated Water ResourcesManagement (Base Cost US$4.9 million) The objective of this component will be to facilitate coordmation and planning across the entire basin and further develop the tools that all the organizations require to achieve a higher level of integratedbasin planning and management. Inparticular, the needs are: (a) enhancedpartnership among all stakeholders; (b) sound knowledge of the basin's resources (data /information, systems, and models) for informed decision-making and optimized water distribution; and (c) enhancedcommunity-driven activities for water and natural resources management inthe basin. This component is subdivided intothree sub-components: TheBWC; TheBWF;and 0 IWRMSupport Systemestablishment. 37 Sub-component 1: The BWC (US$0.6million) Roles and Responsibilities The project will assist the GO1in establishing a BWC as an independent body responsible for coordinating between existing executing agencies, and all stakeholders in the basin. The BWC will consist of representatives from the MGRWC, MJAO, MDOE, MFRWD, WUAs and community groups. The specific objectives andmandatesof the BWC will be to: Review current and emerging issues of land and water resources management on a basin scale in a comprehensive manner; 0 Propose policies, strategies and action plans (ultimately in a form of a basin master plan) in coordination with MJAO, MGRWC as well as stakeholders for improving resource managementin the long term; Serve as a focal point for monitoring the state of water and other natural resources and project impacts, disseminating information to all agencies and stakeholders, and facilitating consensuson proposedrecommendations; Maintain a basin-wide water knowledge database accessible by the implementing agencies; and Support community-dnven pilot activities for land and water conservation through the creation of aBWF. The BWC will have limited executive authority that will not conflict with the mandates of existing government agencies, such as the MGRWC, MJAO, and MDOE and their day-to-day management activities. Specifically, the BWC will not interfere in: (a) irrigation, water supply or hydropower operations (as these will remain the primary responsibility of the existing agencies); or (b) general water managementfunctions such as water extraction licensing, issuanceof waste water permits, and water quality monitoring, as these will all behandled by the MGRWC. Structureof the BWC The BWC will consist of the following entities: (a) Executive Committee (EC); (b) Coordinating Committee (CC); and (c) Secretariat. The draft TORs for the BWC have been prepared and incorpored in the Operations Manual (OM). The TORs including the management structure of the BWC will be finalized and authorizedby the Governor of Mazandaran Province. Executive Committee The EC will serve as the executive body of the BWC. Its role and responsibilities will be to: (a) review and authorize the overall policy and strategic action plan for basin management and its institutional structure; (b) oversee the development of a new water knowledge database that will promote interaction between various agencies and serve as the basis for M&E activities and preparation of semi-annual progress reports; and (c) develop and authorize the general procedure and criteria of the BWFand guide its operations. The EC will consist of representativesfrom MGRWC, MJAO, MFRWD, OMC, MDOE, as well as two representatives from the upper watershed and downstream irrigation areas (WUAs and 38 Forestry Groups). In total it will comprise no more than five to ten members. The EC will meet every other month. It was principally agreed with the GO1 that an official order by the Governor of Mazandaran Province would establish the BWC as a legal entity, with TORs acceptable to the Bank. The BWC would have authority to allocate funds from the BWFby establishing its allocation criteria, reviewing and selecting proposals and collecting beneficiaries' contributions in a revolving fund in accordance with the TORs in the Operations Manual. Approved proposals would then be submitted to either the MGRWC or MOJA (depending on the type of proposals) for funding. Disbursement would be carried out through the two special accounts in accordance with annual agreements with the MPO, as for other project components. Duringthe first year of project implementation the GO1will conduct further review and analyses regarding the institutional design of the BWC and the administrative arrangements of the BWF with the TA from the Bank. The Bank will assist the GO1in organizing workshops with the support of the WBI in order to review worldwide lessons and best practices with the MGRWC, MOJA, MOEFandMPO. Coordinating Committee The Coordinating Committee (CC) will serve as an overarching stakeholder forum and advisory rather than executing body. The objectives of the CC will be to: (a) discuss current emerging issues and long-term basin management policies; (b) enhance coordination among a broad range of stakeholders, seelung innovative ideas for land and water resources management; and (c) discuss the project's impacts on water and other natural resources conditions basin-wide. It was agreed that the CC will comprise the existing Government Stakeholder Representation Committee along with a newly created Community Stakeholder Representation Committee consisting of 25 stakeholder representatives including MJAO, MGRWC, MDOE, academics, and representatives WUAs, Forestry Cooperatives and NGOs. The head of the BWC will rotate between the heads of the MGRWC and MJAO. Where necessary, additional members will be included on a temporary/permanent basis in order to provide the necessary linkages with other concerned agencies or to &scuss specific issues. BWC Secretariat A small Secretariat will be established to support the CC and EC. The Secretariat will operate under the supervision of the EC and consist of a manager, an accountant, an engineer, an agronomist, an M&E officer, a communication and social mobilization specialist, and an assistant, in addition to seconded staff from MGRWC and MOJA. The main functions of the Secretariat are to: (a) prepare materials for policy and strategic discussions on basin management for the EC and CC; (b) propose and regularly review the procedures and criteria for BWF management and implementation; (c) review the BWF funding proposals from communities and propose funding allocations for the EC's approval; and (d) incorporate the semi-annual progress reports from all concerned agencies with an emphasis on the M&Eof the project's impacts. 39 Sub-component 2: BWF (US$3.0 million) Objective The objective of the BWF is to support community-driven pilot activities to improve water and land resources management and income generating activities to reduce the pressure on natural resource exploitation. The draft TORSfor the BWF have been prepared and incorporated into the OM. The BWFwill support the following activities: 0 Assist local communities and users groups in conserving, rehabilitating and managing the natural resource in a sustainable manner through developing appropriate community- basedinstitutions and mechanisms; 0 Promote techniques and sound practices for water use efficiency improvement, land and water quality conservation, sustainable and high value crops, horticulture and livestock production; 0 Promote income generating activities through improved access to technical, financial and commercial services inorder to support community development; and 0 Address environmental concerns in day-to-day management of resources and ensure environmental dimensions (i.e., water quality improvement equipment, awareness raising activities and reduction in chemical and pesticide use) while planning and undertaking development activities. Implementation Procedure The proposals to be submitted by community groups will be reviewed by the BWC Secretariat based on previously agreed and accessible criteria and selection procedures. These need to be discussed by the CC and then approved by the EC. A positive or negative list will be used to ensure a transparent and simple selection process. The criteria will also set budget caps for projects depending on their type and the beneficiaries. To ensure that the Bank's overarching goal of poverty alleviation i s supported by the project, it was agreed that the proceeds of the BWFwill target the poor as the primary beneficiaries in the region. The BWC's Secretariat will review this matter and establish the appropriate guidelines for the definition of small farmers, herders andforesters within the project area. The BWF can finance goods and consultancy services for Phase I.Since it i s not possible to determine the exact mix of goods and service to be procured, the detailed activities will be provided in the updated annual procurement plans. There will be no differentiation between this and other project components with respect to the use of procurement methods provided by the project. Projects involving civil works will be included if the BWF runs well for the first two years of Phase I. These criteria will be reviewed during the review of Phase Ibased on the performance of the initial period. Furthermore, social mobilization activities for the WUAs and forestry cooperatives will provide opportunities to assess the needs and expectations that the BWFcould support andto prepareits criteria andprocedure. 40 The funded activities are principally subject to cost-sharing from the beneficiaries and their community groups. The extent of cost-sharing will depend on the type of activity and will be determinedduring the initial periodof project implementation. It i s suggested that all repayments benefit from a 3-year grace period, followed by a ten-year repayment period of the capital, interest free. The recovered costs will be deposited into a separate account from the project SA. A separate account is opened in a commercial bank for the revolving fund in order to receive the beneficiary portion of the costs. The commercial bank keeps accounts and releases funds. The initial capital will be provided by the IBRDLoan and the CLO will procure consultancy services, goods or works for beneficiary groups in coordination with the MJAO and MGRWC. The beneficiaries will repay their portion (subtracting the subsidized portion) into the revolving fund account. Sub-Component 3: IWRMSupport System Development (US$1.2 million) The rWRM supporting system will be developed including: (i)basin-wide water balance simulatory modeling; (ii) optimized water distribution system development from reservoir to field plots; (iii) basin-wide water knowledge database development; and (iv) provision of water rights and pilot volumetric water charge systems. (i)Basin-wide Water Balance Simulatory Modeling A comprehensive surface and groundwater model will be required in order to enable simulation of the water balance for the entire basin based on different operational scenarios. Although the GO1developed a monthly surface water simulation model from the Alborz Dam, this tool is not sufficient to address the more complicated and dynamic water regime changes in the system covering the Babol and Tala1Rivers, aquifer systems, and abbandans. The aquifer model that has been developed i s a separate one which could not provide clear ideas about the potential impacts of increased surface water irrigation, potentially increased groundwater recharge, and water quality implications. A comprehensive water model will be developed during the initial year of the project to ascertain all the interlinkages between dam operation, changes of surface water regime, aquifer table changes, and possible water pollution from increased chemical use. This model will allow impacts from various types of reservoir operations to be checked so that the optimized water distributions system can take into account these factors. (ii) Optimized Dam Reservoir Operation System Technological advancements in hydrologic data collection, stream flow forecasting, modeling and computer technology can provide opportunities for adjusting daily reservoir operations according to actual water demands. With effective use of real-time data and computer models, the operation of the Alborz Dam in combination with diversion weirs and the canal network can be upgraded to provide operators with a decision support system whereby reservoir water releases will be optimized to meet water requirements downstream. A consultancy contract i s planned to support the development of new operational tools (computer models and monitoring equipment) grouped together with capacity building and training programs. The implementation of the system i s best managed with the aid of computer models that allow real-time, or near real- time, decision-makingbased on a regular flow o f monitoring information. 41 (iii)Basin-wide Water Knowledge Database Developmenl A new water knowledge database will be developed along with a data acquisition, transmission and sharing system for monitorindmanaging water supply and demand throughout the basin; transmission of this information will be facilitated in both directions between the MGRWC, OMC, BWC, and the WUAs and their representatives (i.e., mirabs). Water quality and other water related environmental data should also be collected and stored in order to have a comprehensive database. The database will be accessible to all stakeholders to facilitate understanding of the current water situation and to assist in undertalung various analytical and planning tasks by all relevant agencies, including the MGRWC, MJAO, MDOE, and other entities. Semi-annual summary reports on water and other natural resource conditions will be prepared by the BWC for information dissemination. (iv)Provision of Water Rights and Introduction of Volumetric Water Charge SystemIntroduction The new water rights will be provided for the new irrigation area in exchange for a subscription fee from the farmers. Iran has not had much experience in water rights under the modem water law. The project will provide technical support for making inventories o f all water rights with clear definition of water volume and periods of use. This will also provide an opportunity to develop water rights and charges based on volumetric use of water in pilot areas in order to encourage users to improve water productivity and crop diversification. Component4: EnvironmentalManagement(BaseCostUS$7.6million) The basic concept of this component i s to ensure the mitigation of possible negative impacts of the GOI's on-going Alborz Dam and irrigatioddrainage network development project, as well as the Bank's AILWMP. The latter will complement the institutional development of the original project through intensive TA capacity building support. The GO1has prepared and disclosed a draft ESA Report including the ESMPin compliance with the Bank`s seven triggered safeguards policies. Furthermore, the project aims to help resolve water relatedenvironmental issues on a basin scale. The water quality of the Babol and Talar Rivers i s deteriorating due to increasing pollution loads from cities, such as Babol and Ghaem Shahr, industries, agricultural pesticides and fertilizer use. Many factories are discharging wastewater including heavy metals without proper treatment. Farmers are overusing pesticides and fertilizers due to inadequate agcultural extension services. The GO1and the Bank are envisioning a wastewater treatment facility on Babol River under the second phase of the Urban Water and Sanitation Project. This project i s expectedto significantly reduce biological and chemical pollution loads from cities and surrounding areas in that basin. However, it will be difficult for the project alone to deal with all pollution issues such as untreated effluents from many small villages and excessive chemical use in irrigation agriculture in vast areas of the basin as well as for aquaculture in abbandans , which has been rapidly increasing over the past few years. This component will provide essentiaI TA for specializedstudies, capacity building, and training programs for concerned government agency staff, farmers and other stakeholders. It will also provide monitoring equipment so that those agencies and communities groups will be able to 42 fulfill their duties andresponsibilities for environmental monitoring andconservation in addition to meeting the requirements andmitigation measuresidentified inthe ESA Report. Principally, the MGRWC and MJAO are the two project implementing agencies while the MDOE i s a beneficiary agency which will receive support from the project in the form of TA, equipment and training. Procurement will be undertaken by the project liaison office in coordination with the technical units of the regional agencies, including the MDOE, so that the TORSof technical studies, training programs, and equipment specifications can be formulated. While the DOE in Tehran is the regulatory agency responsible for formulating environmental policies, by-laws, regulations, and standards and for monitoring the state of the environment, the MDOE i s responsible for taking a lead and/or assisting other line ministries in developing policies, standards and plans related to environmental aspects in Mazandaran Province. The MDOE is also in charge of research, environmental planning, monitoring and enforcement relatedto environmental conservation. The MGRWC, MJAO, and MDOE are supposed to share collected data, information, and results of their analyses (under their respective mandates) on water quantity and quality and other environment related aspects. The newly created BWC will serve as a focal point and depository to facilitate data sharing and disclosure to a broad range of stakeholders. The system will be designed and built together with the optimized water distribution system covering the Alborz Dam, diversion weirs, irrigation networks, and through farm fields under Component 3. The water and environment related data, information and analytical results and other M&E surveys will be summarized in a report on a semi-annual basis by the BWC and sent to the CLO, and eventually to the Bank. The shared information will not only assist the governmental agencies in fulfilling their respective responsibilities but also raise the awareness of the general public regarding environmental concerns and the impacts of mitigation measures to be taken by the project. As a first step, the analytical results of water pollution sources and loads mapped out on the GIS database can be posted on the Internet website together with water quality data from upstream watersheds to the mouth of the rivers. Such a tool could have enormous impacts on behavioral change. Polluters highlighted in the public data base as a "red" warning would likely take immediate actions to reduce pollution loads. Furthermore, community-based pilot activities for water quality improvement and conservation would be supported through the BWF under Component 3. Through the preparation process of the ESMP, this component i s structured based on seven pillars: (i)water quality monitoring; (ii) ecological studies in rivers and abbandans including migratory fish and birds; (iii) forests and rangeland management; (iv) pest management plan; (v) involuntary resettlement; (vi) dam safety plan; and (vii) public participation, awareness raising and consultation. (i) Water Quality Monitoring Inadequate monitoring and enforcement capability are seriously undermining water quality monitoring and management. The MGRWC, MJAO and MDOE are conducting water monitoring based on their respective responsibilities. The MGRWC i s in charge of water 43 resources monitoring (both surface and groundwater), MJAO i s in charge of water quality monitoring o f abbandans which are historically owned by groups of farmers, while the MDOEi s responsible for water quality monitoring under its mandate to protect public health and natural resources. However, a reliable water quality dataset i s lacking. The GO1was not able to conduct a full assessment of the water quality situation in the Babol and Talar Rivers, aquifers, and abbandans due to insufficient reliable data, although initial diagnostic results indicatedthat water quality is deteriorating and major efforts are required to prevent further worsening and serious impacts on human health and the ecosystem. These issues are clearly attributed to insufficient monitoring equipment, government staff capacity and training opportunities, In particular, the MDOE has limited capacity for environmental regulation enforcement and compliance review. Coordination among the three agencies i s also laclung, thus preventing effective data sharing and generation of synergetic effects on a basin scale. In order to address these issues, the project will help strengthen the agencies' capacities to monitor water quality and improve compliance with water and other environmental issues noted inthe ESMP.The project will provide essential water quality monitoring equipmentbasedonthe assessment report (R. Kayal, October 2003). Additional TA will be provided for the agencies to prepare and agree on monitoring plans, technical specification of monitoringequipment, as well as the BWC data sharingprotocol and basin-wide water knowledge database. Special technical studies under Component 3 will cover basin-wide water resources assessment and modeling including river flows, aquifers and abbandans. The above mentioned report also indicated that the aquifer table and quality also seem to be declining due to groundwater over- abstraction for irrigation, sea water intrusion and salinization, and increased pesticide and fertilizer use. All these elements are interconnectedto each other on a basin scale and warrant a sophisticated comprehensive simulation model which enables decision makers (government representatives and stakeholders) to ascertain the impacts given various water use scenarios and other surrounding conditions. Such a model would not only help fine-tune the project design duringimplementationbut also help assess the global water resources situation on a basin scale, inform all layers of stakeholders of the results in a visual manner and allow the responsible agencies (including the BWC) to take appropriate measures in mitigating potential negative impacts infull consultationwith the stakeholders, (ii)Ecological Monitoring and Study A comprehensive set of ecological monitoring, survey and analytical studies is proposed for rivers and abbandans to constitute a solid baseline data related to ecology. For instance, the current condition of migratory fish, such as sturgeon, as well as their behavior and measures to allow them to swim upriver, will need to be studied in order to support GO1FishingDepartment efforts to aid fish recovery in the rivers. Currently, the fry of such fish are being released on a pilot commercial basis. Migratory birds in abbandans should also be studied in terms of their types, behaviors and for possible protective measures. This study i s not a requirement to mitigate the project's impacts but rather a supporting tool for the GOI's effort, particularly the MDOE, to maintainandenhancethe valuable ecosystem inthe basin. 44 (iii) Pest Management High pesticide use and its impacts on the water environment and public health is a concern for the govemment and local population. The GO1has been gradually shifting the responsibility of procurement and application of pesticides to farmers while tightening the regulation on use and marketing, and encouraging-judicious pesticide use and integrated pest management, especially bio-control. The project will provide training, capacity building, and equipment in order to enhance the advisory capacity of the extension service in combination with other agncultural advisory and research activities. The project will also provide support for awareness raising campaigns to disseminate information to farmers on the proper use of pesticides and their harmfulimpacts. (iv) Forest and Rangeland Management An integrated management approach for the upper watershed area including forests and rangeland areas will be conducted under Component 1.TA, including the master planning work, equipment, and training programs will be provided by the project. In particular, coordination between the Forestry and Watershed Management Department of MJAO and the MDOE will be ensured and strengthened through the process of master planning, M&E. This aspect of Component 1thus constitutes the essentialpart of the ESMP interms of M&E. (v) Involuntary Resettlement With regard to the involuntary resettlement safeguardpolicy, the Resettlement Plan (RP) for the reservoir inundation area and the Resettlement Policy Frameworks (RPFs) for the upper watershed and downstream irrigation areas have been prepared as part of the ESA. Since all the associatedcosts for involuntary resettlement will be borne by the GO1without cost sharing from this project, they are not included in this component, except for monitoring costs. Monitoring andcompliance review will be conducted by the CLO and the Bank's supervision missions based on the progressreport to be preparedby the line agencies (MGRWC andMJAO). (vi) Dam Safety A Panelof Experts for DamSafety was heldinFebruary2004 by the MOEinorder to ensure the quality of designand construction work of the Albom Dam, safety related instrumentation, O&M and emergency preparedness plans, in compliance with the dam safety safeguard policy. The panelists visited the Alborz Dam under construction as well as three existing dams in order to examine site conditions and identity required measures to secure dam safety during the construction and operational periods. The POE recommended the following measures: (a) continuation of POE meetings during implementation, (b) staff training for quality control and O&M including national workshops and seminars, (c) preparation of the O&M and emergency preparedness plans, (d) technical studies for seismic risk analysis, and (e) contingency budget for emergency survey and repair work. Given the number of dams under construction and planning and the heavy reliance on their use in Iran, the project will provide technical support for efficient dam reservoir operation and safety management on a country level, in addition to direct support for monitoring and compliance 45 review of the safeguard policy. The POE will be convened periodically in order to provide guidance on the implementation of this sub-component. (vii) Public Participation, Consultationand Awareness Raising This sub-component will deal with the issues not addressedinthe above sub-components as well as the integration aspects of environmental management. The project will provide support for awareness raising activities including seminars, leafletshrochures / video/TV spot production and circulation. The sub-component is focused on the water related environmental aspects and is ledby the MDOEinconsultation with other agenciesthrough the BWC mechanism. A communications needs assessment was carried out duringthe May 2004 mission andthe TORS for a communications strategy and intemationalhational specialists were prepared. Accordingly, the project will provide support to MOJA, MGRWC, and MDOE indesigning and implementing the communications strategy to effectively engage in a dialogue with their respective stakeholders and concernedconstituents. The communications program will be developed with a baseline study on public perception, knowledge and behavior towards environmental issues. An M&E system will be established to detect any changes inthe baseline indicators and determine the effectiveness of the investment in the communications program. Component5: ProjectImplementationandInstitutionalSupport (Base CostUS$3.9 million) TechnicalAssistancefor CLOand PIUs The project will provide consultant assistance for the CLO in Tehran as well as two PIUs in MGRWC and MJAO and a small Secretariat in the BWC in Mazandaran Province, in order to strengthen their implementation capacity. Key international and national consultants will be hiredinthe area of irrigation and WRM, environmental managementand procurement. Financial management, M&E,social and institutional specialists will also be hired. Other support staff will also be provided under the project. These specialists are expected to provide overall technical guidance and coordination for various project components and for the preparation of the project progress report, including the M&E, safeguards compliance and fiduciary aspects, to be submitted to the SC andthe World Bank. Training The project will provide training for staff at the CLOYPIUs, and the BWC Secretariat, and other associated government offices (MOJA, MOE, MPO, and DOE) in the area of project management, fiduciary functions (procurement and financial management), and overall technical aspects. Some specific technical training for provincial government staff and stakeholders inthe area of W A S ,O&M, extension service and environmental management will be provided under respective project components. Furthermore, on-the-job training will be conducted by various consultants engaged in design, specialized studies, construction supervision, agncultural and environmental aspects. The project will also provide for overseas training through short term visits and through participation in workshops and seminars on management and technical aspects relevant to the subject. 46 Office Support The project will provide a minimum set of office buildings, furniture, equipment (computer and software), office supply, and vehicles. This will supplement the other incremental operating costs for office maintenance and staff travel for the CLO andPIUS. Future Project Preparation The project will provide TA and training to MOJA and MGRWC in order for them to conduct strategic sector works and feasibility studies for future project preparation, sector-wide planning and analysis for water resources, irrigation, agriculture and forestry aspects. 47 Annex 5: Project Costs The total costs of the project are estimated at about US$200 million. The IBRD Loan will be US$120 million with the remainder funded by the GO1counterpart financing and beneficiary contributions. Project Cost By Component and/or Activity Local Foreign Total \ W U ~ W W W ~ /T rcennm (us$ooo) (US$O00) A. Upper Watershed, Forestry and Rangeland Management Technical Assistance and Capacity Building 436 617 1,053 Soil andWater Protection 3,370 1,423 4,792 Rangeland and Forest Conservation & Management 5,227 2,130 7,357 Subtotal Upper Watershed,Forestry and Rangeland 9,033 4,169 13,202 Management B. Irrigation and DrainageManagement Rehabilitation and Development of Irrigation and 77,601 40,523 118,124 Drainage Systems InstitutionalSupport for WUA Establishment 4,082 1,386 5,468 Agricultural Extension and ResearchActivities 3,538 1,605 5,143 SubtotalIrrigah'on and Drainage Management 85,221 43314 128,735 C.IntegratedWater ResourcesManagement BWC & BWF 3,349 314 3,663 SystemsDevelopment and Technical Assistance 359 877 1,236 SubtotalIntegrated WaterResources Management 3,708 1,191 4,899 D.EnvironmentalManagement 5,663 1,923 7,586 E.InstitutionalSupport 2,208 1,703 3,911 Total Baseline Cost 105,833 52,500 158,333 Physical Contingencies 9,268 4,753 14,021 Price Contingencies 21,527 4,398 25,925 Total Project Costs' 136,628 61,651 198,279 Refunding of Project PreparationAdvance 1,040 424 1,464 Front-end Fee 600 600 Total FinancingRequired 137,668 62,675 200,343 'Identifiable taxes and duties are US$16million, and the total project cost, net of taxes, is US$184 million. Therefore, the share of project cost net of taxes i s 92%. 48 Annex 6: ImplementationArrangements The Borrower will be the GO1 represented by the MOEF. The implementing agencies will be MOJA and MGRWC. The MDOE is a beneficiary agency receiving equipment and training for improving environmental management. MOJA is responsible for on-farm tertiary and quaternary irrigation, drainage, agricultural extension as well as forestry and rangeland management. MOJA i s a public entity that follows the laws and regulations applicable to the public sector in Iran. This part of the project will be mainly implementedby its provincial office, the MJAO. The MGRWC i s responsible for the diversion weir and trunk irrigation networks from the main to the secondary canals system. The MGRWC i s wholly government-owned and operates under the principles and procedures of commercial law in Iran. However, all capital investments for MGRWC are financed by the central government as grants to MGRWC. Accordingly, the project funds being channeled as grants to MGRWC will be subject to the budget law instead of the commercial law under which the company operates. MOJA and MGRWC have opened SAs respectively in order to withdraw funds from the PPF. These SAs will be established inline with the GOI's counterpart budget lines. ProjectImplementationArrangementsat CentralLevel SteeringCommittee The GO1has established a Steering Committee (SC) chaired by the Vice Minister of Economic Affairs andFinance andcomprised of the General Director for Water Resources of the MPO,the Vice Ministers of MOJA and MOE (Water Affairs), and the Director of the Iranian Central Bank. The responsibilities of the SC include: (a) providing policy guidance; (b) monitoring progress during project implementation; and (c) coordinating with other agencies during the process. Central Liaison Office Both MOJA and MGRWC will establish and maintain a CLO and the MGRWC will dispatch its representative to the CLO. The CLO will be located within the premises of MOJA in order to serve as a focal point to ensure effective implementation and enhance coordination between MOJA, the two PIUs (one each within MJAO and MGRWC) and the World Bank. The CLO will comprise a Director, International Procurement Advisor, Procurement Staff, FO, Accountant, M&E Specialist, Environment Specialist, Water Resources Specialist, Imgation and DrainageEngineer, and other technical staff and bilingual assistants. The CLO will be responsible for: (a) liaising with the Bank and all concerned ministries; (b) serving as the Secretariat of the SC; (c) preparing consolidated annual work plans for submission to the Bank; (d) coordinating project monitoring activities based on the M&E and the ESMP; (e) preparing the semi-annual progress reports based on technical inputs from PIUs for submission to the Bank; (f) preparing the consolidated FMreports and disbursement applications 49 and submitting them to the Bank; (8) carrying out MOJA part procurement actions as well as compliance review and supervision support for MGRWC part procurement actions; (h) preparing training programs for MOJA staff and consolidating them with those of MOEfor presentationto the Bank; (i)assisting in the preparation of the Mid-Term Review Report and the Implementation Completion Report; and (j)addressing the W A Sand BWC / BWF aspects as well as other policy matters related to MOJA. ProjectImplementationArrangementinMazandaranProvince MJAO PZU MOJA will establish and maintain a PIU within the MJAO. The MJAO will be responsible for implementing quaternary canal management, on-farm activities, sub-surface drainage, and agricultural extension services, as well as forestry and rangeland management. The MJAO i s headed by a Director General and supported by the Directors of the Soil and Water Department andForestry/ Watershed ManagementDepartment. MOJA will assignMJAO responsibility for: (a) supervising the implementation of its designated components; (b) preparing the draft annual work plan of the MJAO and its subsequent submission to the CLO; (c) coordinating MOJA's part in activities at the field level with stakeholders and other agencies; (d) preparing the MOJA project progress reports; (e) supporting preparation of MOJA's portion of procurement documents for the CLO and carrying out such procurement whenever appropriate; and (f) managing the Sub-Account and supporting MOJA's partinFMaction andreport preparation for submission to the CLO. MGRWCPIU The MGRWC i s established as an autonomous agency under the law regulating government enterprises. The MGRWC will implement the diversion weir, main and secondary irrigation canals andtrunk open drainsystems. The MGRWC will establish and maintain a PIU with responsibility for: (a) supervising the implementation of MGRWC components; (b) preparing the MGRWC annual work plan, (c) coordinating MGRWC activities at the field level with stakeholders and other agencies; (d) preparing MGRWC project. progress reports, (e) carrying out procurement actions under the compliance review and supervision support of the International Procurement Advisor at the CLO; (f) maintaining financial procedures for its SA, preparing the application for withdrawal of the proceeds of the Loan and arranging an audit of the SA; and (g) addressing the WUAs and BWC/BWF aspects as well as other policy matters related to MGRWC. OtherInstitutionalArrangements Operationsand Maintenance Company (OMC) On the basis of formal contracts with the RWC, the OMC in Mazandaran conducts O&M of the higher-order irrigation and drainage systems below the dam including diversion weirs and intakes as well as the main and lateral canals and drains down to the points of water delivery to entities managed by farmers groups. The OMC i s expected to have O&M contracts with the WUAs. Stakeholder ownership of the OMC is divided between the private sector (51 percent) 50 andthe government (49 percent). The private sector portion is further divided between the staff of the OMC (20 percent) and the Consumer Cooperatives of Government Employees (31 percent). Water UsersAssociations (WUAs) Following the precedent of the Tajan project under the IIP, the WUAs will be established under the Law of Cooperatives supervisedby the MJAO, MGRWC and the Ministry of Cooperatives. The WUAs will be rcsponsible for all O&M tasks, including minor repairs when needed, as well as operational monitoring, planning and management, corresponding to the improved systems entrusted to them. They will contract with the OMC for receipt of water from higher-order systems and for collection and payment of the corresponding water fees. Further details are describedin the Operations Manual. The MJAO and MGRWChave establishedaJoint Water Management Committee to support the establishment of WUAs and various stakeholder consultation activities. The MJAO will take the lead in supporting the WUA establishment activities with the MGRWC and the newly establishedBWC. BWC The project will establish the BWC to enhance coordination between the MJAO, the MGRWC, the MDOE, and all other stakeholders including upper watershed foresters, herders, and downstream irrigation-farmers. The BWC will be composed o f (a) an EC which will have the executive authority for decision-making and overseeing the operation of the BWF; (b) a Coordinating Committee composed of 25 stakeholder representatives inclulng MJAO, MGRWC, MDOE, as well as academics and representatives from W A S ,Forest Cooperatives, and NGOs; and (c) a Secretariat which handles daily administrative affairs. The management structure of the BWC will be reviewed and finalized during the authorization process under the Mazandaran Governor's Decree. The BWC will provide financial and technical support for various community-based activities to improve land and water management through the above- mentioned BWF. Further details are mentioned in Annex 4 (Sub-component 3.1) as well as in the Operations Manual. 51 InstitutionalArrangement Water Resources 1. MOJA =Ministry of Jehad-eAgriculture 2. CLO =CentralLiaisonOffice 3. MGRWC = Mazandaran-GolestanRegionalWater Company,4. SC = SteeringCommittee 5. BWC = BasinWater Committee, 6. MJAO=MazandaranJehade AgricultureOrganization. 52 Project ImplementationSequencing and Milestones 1.Phase I The first phase (for the first one and half years) will mainly focus on the institutional establishment and capacity building of stakeholders and user management entities such as WUAs, FCs, the BWC and the BWF. In particular, the project will conduct massive social sensitization and mobilization activities for the establishment of WUAs and forestry cooperatives. The PIUs of MJAO and MGRWC will conduct consultations with those user groups in planning and designing of the branch canals (below secondary) at each step to determine water distribution blocks, canal alignment, gate types and operation modes, maintenance procedures, division of managementresponsibilities and irrigationwater charges. In parallel, detailed design, bidding document preparation, tendering, and construction works will be continued for the diversion weir and MCC, part of which i s being constructed under GO1 financing. This will help the project to demonstrate delivery of real and tangible benefits to farmers and promote farmers' interests in PIMat the branch canal level. Detailed schedules for the irrigation and drainage systems at different hierarchical levels and areas as well as other components are indicated in the Operations Manual. These detailed schedules have been prepared based on the timing and duration of procurement actions, social consultation and physical construction works. Capacity building and training programs will be provided for the CLO and PIU staff in order to familiarize them with both the Bank's adrmnistrative procedures and the new water management practices, as well as increase their logistical and administrative capacities. The training for users will also be initiated to diffuse the concepts of PIM. The application procedure for the BWFwill also bepromoted among the localpopulation. Various key technical studies will be conducted, including the M&E activities, water balance modeling, design of the GIS-based water data sharing system and optimized dam reservoir operation. An Upper Watershed Master Plan will be prepared with stakeholder participation which will serve as a basis for forestry and rangeland management as well as project interventions in that area. Other safeguards related to mitigation actions will also be initiated. These will include water quality monitoring, RP preparation in the upstream watershed and irrigation areas, meetings the Panel of Experts for dam safety, and implementation of the ecological study for rivers and abbandans. The BWC and BWF will be authorized by an official order from the Mazandaran Governor duringthe first year with detailed institutional arrangements and operational procedures. TA will be provided for finalizing the arrangements basedon international experience. Pilot community- based projects will be funded by the BWF only after those arrangements are officially authorized. During the first phase, eligible activities will be limited to stakeholder consultation, training, andprocurement of small goods. 53 2. Phase II This phase will accelerate the construction of irrigation and drainage systems as well as other systems control devices and equipment installation. Design and specifications of the systems must have been completed by the end of Phase I. contract packages will be combined as The much as possible to accelerate physical construction works. The capacity of the CLO and PIUs will have been strengthened in order to carry out heavy procurement and supervision loads by this time. The GO1will construct branch canals (below secondary) andinitiate on-farm activities only after the community-based management organizations are established as legal entities, with covenanted O&M contracts with the OMC specifying their respective management and water charges collection responsibilities. Establishment of the WUAs, however, is not a pre-condition for the construction of the diversion weir, MCC and primary canals, considering the long interactive process to establish the WUAs andthe needto demonstratethe delivery of tangible benefits to stakeholders. Regardmg the upper watershed component, only after the Master Plan is completed with stakeholder participation and Forestry Cooperatives or similar entities are established with annual working plans, will the GO1be able to proceed with constructing physical structures, including check dams and forestry roads. Pilot and non-structural forest and rangeland management activities would be the exception to this. The eligible programs under the BWF will be expanded to pilot works and larger goods procurement if the initial consultation activities demonstrate sound implementation and performance records duringPhase I. The Secretariat of the BWC may be expanded to a full PIU in order to enhance its capacity to deal with needed inter-sectoral coorlnation and stakeholder participation inthe systems inplace. 3. Phase111 This phase will lay more emphasis on system adjustments during the actual operational period and adaptation of the operational staff and users to the newly createdwater management system. Construction works of branch canals will be continued and finalized along with establishment of functional WUAs. User operational training will be emphasized, with hands-on-training using the newly installed operational systems and gates. The M&E program will also be fully implemented to start examining increased productivity and efficiency. User feedback and consultation will be conducted to ensure that the systemi s functional and whether adjustmentsare needed. 54 Annex 7: FinancialManagementand DisbursementArrangements DisbursementArrangements The Loan will be disbursed during project implementation over a period of seven years. Managing the project funds and all related financial transactions, including preparation and submission of disbursement applications throughout the project, will be the responsibility of the MOJA, supported by the CLO, and the MGRWC PIU. The allocation of Loan proceeds by expenditure category is summarized inthe table below: Table: Allocationof LoanProceeds Category Amount of the % ofExpendituresto be Financed LoanAllocated (US$) (1) Works (a) Under Parts A, B.l(b), B.2, B.3, C.2, 37,123,000 and D.l of the Project 75% (b) Under PartsB.l(a), C.l, and C.3, (2.4 45,374,000 and D.2 of the Project (2) Goods 100%of foreign expenditures, 100%of (a) Under PartsA, B.l(b), B.2, B.3, C.2, 2,217,000 local expenditures (ex-factory cost} and D.1andE.1of the Project 80% of localexpenditures for items _--(b)Underof Parts B.l(a), C.l, C.3, C.4, D.2 2,150,000 procuredlocally and E.2 the Project .. - 95% for foreign firms and individuals -- (3) Consultants' services (a) Under Parts A, B.l(b), B.2, B.3, C.2, 7,965,000 and 88% for local firms and individuals D.1andE.1oftheProject (b) UnderPartsB.l(a), C.l, C.3, C.4, D.2 6,743,000 and E.2 of the Project ._. (4) Training, workshops and Study Tours (a) Under PartsA, B.l(b), B.2, B.3, C.2, 1,492,000 D.1andE.1ofthe Project 100% (b) Under PartsB.l(a), C.1, C.3, C.4, D.2 994,000 and E.2 o f the Project :5) Works, Goods and Services under Parts C.2 and C.3 of the Project (for BWF) 100% (a) Under Part C.2 2,200,000 (b) UnderPartC.3 800,000 [6) Incremental Operating Costs (a) Under Parts A, B.l(b), B.2, B.3, C.2, 470,000 85% D.1andE.1of the Project (b) Under PartsB.l(a), C.l, C.3, C.4, D.2 380,000 and E.2 of the Project 17) Refundingof Project Preparation Advance 1,464,000 Amounts due pursuant to Section 2.02(c) of this Agreement 8) Front Endfee 600,000 Amount due under Section 2.04 of this Agreement 91 Unallocated 10.028.000 1 1 - I --- I , Total 120,000,000 0 The IBRDfinancing share for each category indicates its upper limits. 0 Special Account A i s operated and managed by MOJA while Special Account B is operated and managed by the MGRWC. 55 Documents for Withdrawals Under Parts A and B of the project, Loan proceeds, which will be disbursed in accordance with the Bank's disbursement guidelines as outlined in the Disbursement Handbook, will be used to finance the project activities. Transaction-based disbursement will be used under this project. Accordingly, requests for payments from the Loan Account will be initiated through the use of withdrawal applications either for Direct Payments, Reimbursements, Replenishments to the SA, or Issuance of Special Commitments. All withdrawal applications will include appropriate supporting documentation including detailed Statements of Expenditures (SOEs) for reimbursements and replenishments to the SA. Use of Statements of Expenditures (SOEs) During implementation SOEs will be used for all expenditures for: (a) works under contracts costing less than US$2,000,000 equivalent each; (b) goods under contracts costing less than US$350,000; (c) services under consultant firms contracts costing less than US$lOO,OOO equivalent each and under individual consultant contracts costing less than US$70,000 equivalent each; (d) training and study tours; and (e) incremental operation costs, under such terms and conditions as the Bank shall specify by notice to the Borrower. The supporting documentation will be maintained by each of the two implementing units and will be made available for review by Bank supervision missions upon request; documentation relating to SOEs will be retained for up to one year from the date the Bank receives the audit report for the fiscal year inwhich the last withdrawal from the Loan Account was made. Special Account (SA) To facilitate project implementation and make timely payments of the Bank's share of eligible expenditures to contractors, suppliers, consultants and others, two U S Dollars Special Accounts (SA) have been opened under the project. The first SA (A) will be managed by the MOJA in Tehran, with an authorized allocation of US$3 million and an initial deposit of US$1 million, while the full allocation may be claimed when disbursements and special commitments reach US$10 million. The SA (B), which will be managedby the MGRWC inMazandaran, will have an authorized allocation of US$4 million and an initial deposit of US$1.5 million. The full allocation may be claimed when disbursements and special commitments reach US$12 million. Each of the two accounts will be operated independently from the other, and accordingly each entity will be responsible for the preparation of the withdrawal applications for each of their accounts. In adhtion two accounts and one Sub-Account2 will be opened to deposit the counterpart funds made available by each implementing entity. Replenishment of the SA will follow Bank procedures, and the bank statement of SA transactions will support all replenishment applications. The minimum amount for applications regarding direct payments and special commitments will be 20% of the respective authorized allocations to the SA. Requests for replenishment of the SA will be submitted on a periodic basis. The SA statements will be audited annually by an independent auditor acceptable to the Bank and a separate opinion will be issued accordingly. The audit report should be submitted to the Bank for review no later than six months after the end of each project fiscal year. Please refer to the flow of project funds. 56 FinancialManagement 1. Executive Summary The MOJA, MJAO and MGRWC financial management arrangements, to be used during project implementation, were reviewed and the findings revealed that the laws and regulations applied by these implementing entities are based on principles and procedures defined by the legal framework and operational decrees in Iran, including ministries. The limited assessment of the financial management system, as applied in Iran, revealed that the internal control activity requires enhancement and that the current accounting systems are mainly manual and are not capable to generate periodical project reporting such as the Financial Monitoring Reports (FMRs). In order to overcome the system shortfalls, the project financial management arrangements will be enhanced by putting in place additional controls and procedures including the following: (a) each of the project units will maintain a simple parallel accounting system for the project expenditures; (b) each of the implementing entities will assign to the project units FC who will be supported by expert FOs; (c) an independent auditor will carry out a separate financial audit of the project expenditures for each of the implementing entities; (d) the project payment requests will be reviewed and approved by the respective FC and by the head of the project unit; and (d) the CLO in Tehran will assume a coordinating role for submission of the FM related documents to the Bank. All payments, under the project, will be subject to the govemment laws, regulations and controls, in addition to the project units' verifications and approvals. These additional financial controls and procedures, as stated in the previous paragraph, will supplement the existing financial controls and procedures of both entities. During the implementation of the project, both the additional controls and procedures and the government's financial controls and procedures will be followed. Due to the limitation in the reporting systems of the MOJA in Tehran and the MJAO and the MGRWCinMazandaran, andto support generating project financial reports, each of the entities wilI maintainand operate an accounting system which will enable them to record and report on all the financial transactions relating to its component of the project. For this purpose the MOJA and the MGRWC have recruited two FOs and the MJAO has identified the project champion from within its staff. These project FOs will work closely with the FCs and the project units and will be responsible for the implementation of the accounting system and will document, in the form of an FOM, the draft of which was discussed during project negotiations, the required procedures detailing, among other tasks, the flow of funds, auditing and reporting requirements at the different entities and implementation levels. In addition to the government yearly audits performed by the Diwan A1 Mouhassabah, the project will be subject to verification by an external independent auditor acceptable to the Bank, to be engaged with Terms of Reference acceptable to the Bank, to perform the overall yearly project audit, including activities performed at the provincial levels, and to issue an independent audit opinion. 57 II. Financial Management Related Risks Bank policies require that Loan proceeds are used only for the purposes for which they were made available, with due regard to economy, efficiency, and the sustainable achievement of the project's development objectives. Therefore, the Recipient of the Loan, among other things, i s requested to maintain an appropriate and adequate financial management system, including records and accounts, and prepare financial statements, which adequately reflect the operations, resources, and expenditures of each implementing unit. Risk Assessment and Mitigation Summary. Talung into consideration the Bank policy mentioned in the previous paragraph, the financial risk associated with this operation i s considered as high due to following factors: (a) the limited assessment by the Bank team of the procedures governing the budget system in Iran in the absence of a Country Financial Accountability Assessment; (b) project implementation by MOJA/MJAO and the MGRWC, whose knowledge of and experience with Bank guidelines and procedures i s limited; (c) project implementation by the office of the MOJA in Sari, thus triggering the opening of a Sub-Account and the transfer of funds, denominated in local currency, to the field; (d) the distance between Sari and Tehran, thus increasing the risk of information transfer and confirmation of project financial status between the PIUs and the CLO; (e) the institutional structure of the government, which does not define the relation between the MOJA CLO and the MGRWC: the entities are totally independent from each other; and (0inadequate control mechanism to support generating project FMreports by the MJAO, MGRWC and the CLO. Some of the above risks will be mitigated during the project preparation period while the remaining issues will be closely monitored and supervised during the project implementation period. The mitigation measures and arrangements have been validated by key government officials and FCs during preparation as follows: (a) training has already been and will be provided to the implementing entities; (b) the FM arrangements will include monthly reporting about the payments made and the cash balance of the Sub-Account to the MOJA and funds will be advanced in local currency to honour payments due within thirty days; (c) the CLO in Tehran should play a coordinating role with the two PIUs in order to ensure that periodic updates of project status are prepared and reconciled; (d) an MOUwill be prepared and signed between the MOJA and the MGRWC defining the relation relating to the project between the two entities along with the level of coordination and the exchange of the information between them; (e) the FMarrangements will introduce a ringfenced accounting system at the three entities, which will enable them to report on the project activities and generate project financial reports. Ill. TheControlEnvironment All project payments will be subject to the government controls and regulations under the MPO, MOEF, and the Supreme Audit (Diwan a1 Mouhassabah). These controls will be reinforced through the verification and approval of the project invoices by the respective CLO andPIUs and the engagement of an external independent auditor to perform yearly audits of the project financial statements. The annual budget plan i s agreed upon with the MPO while the budget expenditure control i s implemented by the MOEF through the funds provision and payments approval. The Diwan a1 58 Mouhassabah applies post verifications to the transactions in order to ensure the compliance with the budget and other applicable laws. ZV. Project Arrangements Budget Accounts: Two project accounts, within the government budget, have been established by the MPO. Also, a framework agreement, detailing the flow of funds and project implementation arrangements, will be signed between the MPO and each of the two implementing entities upon project effectiveness. The two accounts will be used to allocate the Loan proceeds and the counterpart funds over the life of the project. All project payments will be charged to these accounts. These accounts will be reconciled on a monthly basis with the parallel accounting system that will record in detail the project financial transactions and provide the detailedreports. Accounting System: In order to support generating project financial reports, including the Bank required FMRs, each of the entities will maintain and operate an accounting system, which enables them to record andreport on all the financial transactions relating to its component of the ,project. For this purpose the MOJA andthe MGRWChave recruited two FOs and the MJAO has identified the project champion from within its staff. These FOs will work closely with the FCs and the project units and will be responsible for the implementation of the accounting system. They will document, in the form of an FOM, the required procedures detailing, among other tasks, the flow of funds, auditing and reporting requirements at the different entities and implementation levels. The draft of the FOMwas discussed duringproject negotiations. Flow of Information: Part A of the project will be implementedby MOJA through its offices in Mazandaran, i.e., MJAO, while the accounting system i s managed at the ministry in Tehran. The flow of information between the two entities needs to be defined, agreed upon and documented inthe project's FOM.To facilitate the compilation of project financial information andprogress, the MJAO will remit to the ministryinTehran, on a monthly basis, the provincial data inorder to compile the information into the quarterly F M R s detailing the implementation progress of this part of the project. The data shouldinclude: 0 Listing of all signed contracts, detailing amounts paid during the month, year to date and cumulatively, including the disbursement forecast, under each, for the coming six months; 0 The activities that will be committed during the next six months and the disbursement forecast under each; 0 Physical progress report detailing the progress o f the activities being implemented. If the MJAO faces difficulties in preparing these reports, the CLO will provide the required assistance and training to the financial staff. Manual of Financial Procedures: The project procedures and the accounting system managed by the MOJA, MJAO and MGRWC are not reflected in the legal framework as defined by the laws and regulations applicable to the public sector in Iran. In order to ensure the accuracy and completeness of the accounting system data and to define the relation between all entities involved with project implementation and thus facilitate the flow of project information, the FCs and the FOs of the three entities, assisted by an external financial consultant, will prepare the 59 project FOM. This will integrate the applicable laws and outline the project implementation arrangements. A draft of this manualwas presentedanddiscussed during project negotiations. V. Invoice Verification,Processing and the Flow of Funds All invoices, either for advance payments or for incurred expenses will be subject to applicable government controls and procedures as well as verification and approval by the CLOPIUs. These invoices will be verified and approved by the appropriate departments within each entity and will be forwarded to the respective CLO/PIUs for authorization and to the respective financial department for verification and issuance of payments. All payments under the project will be honoredthrough paymentssignedby the respective MOEF controller and by the Minister or the person authorized to sign on the Minister's behalf. The respective FCs will be responsible for the project funds and for the managementof the respective SA. The flow of funds mechanism will depend on the implementing entity. MGRWC: Upon presentation of a signed withdrawal application, funds will be transferred from the Loan Account to the project's SA, opened at a commercial bank according to the Central Bank instructions and managed by the MGRWC. The FC will request, quarterly, counterpart funding from MOEF. The counterpart funds will be deposited into a separate account opened for the project. Deposits into and payments out of the SA, to pay contractors/suppliers/consultants, will be made in accordance with the provision of the Loan Agreement. Figure 1 shows the cash andinformation flow chart for the component implemented by the MGRWC. MOJA/MJAO: Upon presentation of a signed withdrawal application, funds will be transferred from the Loan Account to the project's SA, opened at a commercial bank according to the Central Bank instructions and managed by the MOJA. The FC of the MOJA will be responsible for the project funds andfor the management of the SA. Inturn, the provincial office of MOJA in Sari, known as MJAO, will be provided with advances, in local currency, from the SA based on the MJAO monthly forecasts showing the payments due within the coming thirty days. Replenishments to this advance will be transferred by MOJA upon presentation of supporting documentations for incurred expenditures and a copy of the Sub-Account bank statement. Advances from the SA to the Sub-Account in Sari should be documentedwithin thirty (30) days and no replenishmentsmade from the SA until MJAO documents the advances. The MOEFwill transfer, on quarterly basis, the needed counterpart funds to MOJA which in turn will transfer funds as neededto the provincial Sub-Account. The advances from the project SA and from the government counterpart funds will be deposited into separate bank accounts. Deposits into and payments out of the SA, to pay contractorshupplierdconsultants, will be made in accordance with the provision of the Loan Agreement. Figure 2 shows the cash and information flow chart for the component implemented by the MOJAMJAO. 60 Figure 1 1- I I -------- DP I I IBRD MGRWC ------ Accounting LoanAccount Financial Controller Entry Project L System I I I I II II I I I SAR I 7-ProjectSpecial I I DP Account at bank US$ - I I II I I I I I , i Financial Ministry of Monitoring Economic Affairs Reports andFinance CounterpartFunds I bank, Localcurrency Basedon FCrequests I I I Contractors,Suppliers& ConsultantsPaidinLocal Currency I Contractors Suppliers Consultants DP: Direct Payment SAR: Special Account Replenishment :DocumentFlow :CashFlow 61 Figure2 Financial Controller Entry Project L I 1I I I I II II III II I I I I I II II I I SAR Project Special I I I DP Account at bank II IIIIII II I II I i 1 I I I I I I II I Financial Replenishment III Monitoring Ministry of 4 times/ year Project Counterpart I I Reports Economic Affairs FundsAccount at II I and Finance bank I (=SI I I I I I II I I I I I I I I I 1 I I I Project Account Provincial level Contractors Suppliers Consultants CounterpartFunds Provincial level t :DocumentFlow : CashFlow Contractors, Suppliers & Consultants 62 VI. Project Reports Quarterly: The MOJA and the MGRWC will generate, separately, the Financial Monitoring Reports relating to its part of the project and submit them to the Bank as part of the project progress report. These reports are made up o f Financial Reports: to include a cash flow statement, beginning and ending project cash balances and an expenditure report comparing actual and planned expenditures in addition to the SA reconciliation statements. Also, a narrative report explaining all variances that exceed 15% when compared to plan and the proposed corrective actions should be included as an annex to the financial reports. Physical Progress Reports: to include narrative information and output indicators linking financial information with physical progress for the major activities under each of the project components. Procurement Reports: providing information on the procurement of the, goods, works, services, training and selection of consultants showing procurement performance against plan, including informationon all authorized contract variations. These reports should be remitted to the Bank within 45 days from the end of the period. The proposed reports format and presentation have been agreed upon with the Borrower during negotiations. Annual: Audited Project Financial Statements will be submittedto the Bank. They will include: 0 Statement of sources and utilization of funds, indicating funds receivedfrom various sources, and project expenditures. 0 Appropriate schedules classifying project expenditures by component and activity, showing yearly and cumulative balances. 0 Special Accounts Reconciliation Statements and SOEs paidusingSOE procedures. VII. Auditing Arrangements Each of the two entities will issue a separate audit report as they are independent entities with no financial relation whatsoever between them. Accordingly, the MOJA and the MGRWC will remit to the Bank not later than six months after the end of each year, the project audit report covering the part implemented by the respective entity. The external audit reports shall encompass all project related activities and shall be in accordance with internationally accepted auditing standards, e.g., International Standards on Auditing. The annual audit reports of the project accounts shall include an opinion on the project financial statements. Also, the audit reports shall include a separate opinion on the different SA transactions reconciling opening and year-end balances. In addition to the audit reports, the auditor will prepare a "management letter" identifying any observations, comments and deficiencies, in the system and controls, that the auditor considers pertinent, and shall provide recommendations for their improvements. The external independent auditor should be acceptable to the Bank and the TORSwill be prepared and submitted for the Bank's no objection, at least nine months prior to the end of the project fiscal year. 63 VIII. DisbursementArrangements To facilitate project implementation and make timely payments of the Banks share of eligible expendltures to contractors, suppliers, consultants and others, two U S Dollars Special Accounts (SA) have been opened. One will be managed by the MOJA in Tehran while the second will be managed by the MGRWC in Mazandaran. Each of the two accounts will be operated independently from the other. Accordingly each entity will be responsible for the preparation of the withdrawal applications relating to each of the accounts. 3. Staffing M Experiencedfinancial officers have beenhired at the CLO and at the MGRWCto follow on the project accounting while the FCs will sign allproject payments.Training on Bank guidelines and procedures will be provided to the project teams. 4. Accounting Policies andProcedures I M IIUpon finalizing the project's FOM,well defined financial policies andprocedureswill be inplace. The relationbetween ~~ the different implementing entities will be defined. However the control policies applicable to the public sectorin Iran will be enhancedto follow on the project accounts. 5. IntemalAudit NIA 6. Extemalaudit H External audit will be camed-out by an independentauditor acceptable to the Bank. There was no capacity assessment for 64 the audit professionto determine capability to perform audits as per InternationalStandardson Auditing. 7. ReportingandMonitoring M With "ring fencing" the accounting activity at both implementingentities, the projectwill generatefinancial reportsincludingthe FMRs. 8. Information systems M T h i s risk will be reducedthroughthe installation, at each implementing entity, of an accountingsoftwareto follow on the project accounts andtransactions Overall ControlRisk M X. Bank Supervision Duringthe first year of the project implementation, intensive Bank supervision will be required in order to ensure that the parallel accounting system and the project FM arrangements are in place and functioning. The first supervision mission after effectiveness will take the form of a launch workshop where a seminar on Bank rules, regulations and guidelines will be presented. The project will be supervised every four months for the first eighteen months, then every six months thereafter. Bank supervision missions will consist of visits to the MOJA, MJAO, MGRWC and the MPO to review financial management practices, budget accounts balances, procurement methods, payment procedures and documentation, in addltion to field visits to the project sites. XI. Action Plun 1EngageProject FOs at bothentities I Done Installthe accountingsoftware-this system is April 2005 Icurrently being testedunder a separate project Finalize the project Financial OperationManual I April 2005 I 65 Annex 8: Procurement I. Introduction Duringthe missions that took place inDecember 2003, and February and May 2004, the Bank's team, including the procurement specialist, assessedthe procurement capacity of the MOJA and MGRWC and discussed with the counterpart team the impact of the procurement process on each of the proposed project activities. The team provided detailed advice on the design of the various project components, including ways and means of simplifyingto the extent possible, the proposed components and their related activities. While the complexity of the project activities brings the need for a structured procurement approach to the execution of the various components, the GOI's project team has made progress in enhancing its procurement capacity. Below is a summary discussion of the main factors influencingthe project. 11. Overall Country Public ProcurementEnvironment The Public Accounts Law governs the current procurement system in han, and the relevant section of the law has not been changed since 1971. The law requires the use of the competitive process inthe conduct of public procurement ina decentralized environment. However, there are wide flexibilities with respect to direct contracting and the single source process. This law i s complemented by regulations issued by MPO for procurement of Works and Engineering Consulting Services and by the Ministry of Commerce for procurement of Goods. The MPO plays a prominent role in the procurement of Works and Services activities through (a) pre-qualification and ranlung of contractors andconsultants, (b) development of unit costs for works related activities, and (c) determination of consulting fees based on the use of percentage estimates of total works contracts (i.e., 5 percent of works contracts for design and 7 percent of works contracts for supervision related activities). The above regulations and information are updated and published on an annual basis and their use i s mandatory for all public funds contracts. Another law protects national consultants and accordingly hiring of the foreign consultants can only be made inexceptionalcircumstances and with prior approval of the MPO. Regulations issued by the Ministry of Commerce for procurement of Goods controls the importation of goods manufactured outside the country and imposes a ban on such imports except for cases where explicit exceptions are obtained from either the Ministry of Commerce or Mmistry of Industries dependingon the type of goods procured. The Ministry of Commerce also publishes list prices for various Goods and monitors their application through their office of protection of consumers. Furthermore, under the current regulations, public entities may use the direct contracting methodif the Goods are procured from a public enterprise. The government has changed the procedures for Works related to the bidding process and consultancy selection. A draft law i s currently under discussion in the Parliament. Review of these drafts has shown that further revisions are necessary to make the procedures acceptable for the Bank financed projects. The wide differences between Bank and government procurement guidelineshles as discussed above together with the fact that in Iran the project funds are treated the same as the general 66 public funds3i s considered one of the main causes for exceptionally low disbursement rates for the current Bank financed projects in Iran. The situation is expected to improve substantially following the signing on October 2, 2004, of an M O U on Procurement between the GO1and the Bank. The MOU addresses the generic impedimentsto the execution of Bank financed projects inIran and asserts solutions for the same through a series of provisions applicable to ICB, NCB and the selection of consultants. It also includes an explicit statement confirming that the Procurement provisions of the Loan Agreement and of the Guidelines will prevail upon the national Law in case of contradiction between those provisions and the Law. The MOU i s henceforth an integral part of the Loan Agreement for this project and the MOEF will be responsible for its dissemination amongst all the PIUsinvolvedinBank assistedprojects in Iran. To this end a vital aspect of project implementation that requires due attention is the early involvement of the Ministry of Finance assigned FCs with the implementing agencies responsible for execution of the proposed project. Under the Public Accounts Law, these officials have overall responsibility for the public funds expenditure which comprises their participation in public procurement activities including selection/evaluation committees and approval of payments for the contracts. The involvement of the Financial Controllers both in Tehran and, at a later stage, in Mazandaran throughout the preparation periodhas contributed to their clear understanding of the project's objectives and implementing arrangements and should ensure a more seamless implementation process. The budget lines required, as per applicable laws, to facilitate the channeling of the project funds have been opened by the MPO within each of the implementing entities (MOJA andMGRWC). 111. Proposed Project Overview The proposed project will be the first of its kind in Iran to introduce an integrated river basin approach to land and water resources management and it will enable water resources to be managedina sustainablemanner. The project will assist the GO1inpiloting a basin-wide XWRM by: (a) sustainably increasing agricultural productivity through the improved irrigation and drainage system and participatory management mechanism; (b) reducing soil erosion and sediment yields into the Alborz Dam, which i s currently under construction using GO1 funds, through improved upper watershed management; and (c) protecting the water environment inthe downstream portion of the Babol River and other water bodies through improved hydrologicaVwater quality monitoring, reservoir operation, and pest management. The components of the project include: (1) Upper Watershed, Forestry and Rangeland Management; (2) Irrigation and Drainage Management; (3) Integrated Water Resource Management; (4) Environmental Management; and (5) Institutional Support & Capacity Development . The range of activities in these components varies from large multi-million dollar Works contracts and large Consultancy and Goods contracts to CDD type activities. Accordingly, the level of implementation complexity varies considerably from one component to another. Considering the length and complexity of the main activities of the proposed project, it is crucial The funds are channeled through annual MPO allocations based on the Public Agencies' needs for the year and in line with the FYDP. MPO also has oversight responsibility for the allocated funds and if within the year the allocated funds are not fully utilized the concerned agency receives reduced funds from the MPO for the following year. The annual allocation may also be reduced within the year if the estimated revenues do not materialize. 67 to plan and initiate the main procurement activities in the first year of the project implementation period. This will ensure that sufficient time i s provided for the procurement and contracting process. Below i s an overview of the proposed components as designed at this stage: Upper Watershed and Forestry Management (US$13 million): This will include watershed management (46,500 ha), forestry and rangeland management (5,000 ha), and livestock management. The component aims to establish and improve sustainable watershed, forestry and rangeland management using a participatory approach4 for the construction of erosion control structures and gabion check dams, replanting and protection of forest clearings, construction and maintenance of forest roads, etc. This component includes a large consultancy contract (US$680,000) for preparation of the master plan for preservation and protection of the watershed and forests including mitigatiodimplementation plans. Other main activities subject to confirmation by the consultant could include purchase of large quantities of goods including seeds, seedlings, etc. The plans also include development of income generating activities for the local community in forest conservation relatedactivities. To this end: The TORs for the main consultancy contract have been developed and the Request for EO1 has been preparedandpublishedinthe UNDevelopment Business News; The TORs are prepared in a phased manner so that the feasibility study and the environmental assessment of the proposed forest roads are completed based on the master plan. This will ensure that sufficient time i s made available for the procurement process and implementation of the related activities for the construction of forest roads, including the detailed desigdsupervision as well as the works contract; Takmg into account the Bank guidelines and government regulations, a detailed mechanism will be developed on the use of the local communities for the protection and conservation of the forests under the BWF. Preliminary arrangements for procurement and financial management for this activity are proposed in the Operations Manual and will be finalized within 18 months after project effectiveness. Irrigation and Drainage Management (US$129 million): This component will cover a total area of about 52,000 ha, of which 33,000 ha are traditional irrigation areas and 19,000ha will be new irrigation areas. These include a number of multi-year (30 to 48 months), multi-million dollar (US$2 million to above US$20 million) Works contracts with limitedimplementation time of about 6 months each year for the existing canals due to the use of the affected canals for agricultural activities. Another consideration for the works activities i s that the stated yearly construction periods are during winter time, when the affected project area receives extensive rains. The implementation schedule has been prepared considering these local conditions and will be adjusted duringthe preparation of a detailed design and construction schedule. The above conditions create a complex environment that requires precise planning and implementation arrangements starting at an early stage in the project design. Very strong contract To befully developedanddefinedduringyear 2 of the project. 68 management oversight needs to be exercised by both the supervision consultant and the implementing agenciesresponsible for these contracts. To this end: Due attention has been given to the packaging of these contracts in the implementation schedule and to the extent possible the number of procurement actions will be reduced as detailed design is finalized. The "slice and packageyy5method will be considered where feasible; The GO1 will retain the services of a national consulting firm on a sole source basis for conducting cadastral and topographic surveys and producing detailed engineering design under its own financing. Inorder to ensure qualitative and timely delivery of detailed design, an international consulting service for irrigation and drainage management support has been agreedupon; The pre-qualification process for the Works contracts over US$15 million should start as soon as the Consultant has sufficient detailed information on the expectedWorks Quantities; Inpreparation of the BiddingDocuments for the Works contracts, and the requirements for Works methodology/approach, the contractors will be requested to take the implementation limitations into account and provide a plan to mitigate these limitations to the extent possible including provision of more than one construction crew to accommodate the short yearly periods under which they cancarry out the related activities. The GO1 agreed to procure the irrigation and drainage management support consultancy for conducting quality assurance of the detailed design and leading social mobilization activities for establishment of W A Sin a coordinated manner.The TORShave been prepared and the request for EO1has been issued. Integrated Water Resources Management (US$5 million): This component will comprise the following sub-components: (1) a Basin Water Council (BWC) establishment and support (US$1 million), (2) a Basin Water Fund(BWF) (US$3 million); and (3) an IntegratedWater Resources Management System (estimated budget U S $ l million). The component promotes the institutionalization of the cross-sector BWC and the inclusion of various stakeholders such as NGOs and regional government institutions. The BWC will oversee and manage the BWF for community-based land and water conservation activities andincome-generating activities. Inter-sectoral consultation and information dissemination activities will include the development of a Geographic Information System (GIS) and local workshops. The preparation and management of an integrated water distribution system for optimized water delivery covering the dam reservoir and farm areas will include: (a) improvements to hydrometric data collection and processing; (b) an integrated water management unit; and (c) system development for optimized water release and distribution for irrigation areas, including abbandans. The implementing agency will beMGRWC. For a project requiring similar but separate items of equipment or works, bids may be invited under alternative contract options that would attract the interest of both small and large firms, which could be allowed, at their option, to bid for individual contracts (slices) or for a group of similar contracts (package). All bids and combinations of bids shall be receivedby the same deadline and opened and evaluated simultaneously so as to determine the bid or combination of bidsoffering the lowest evaluatedcost to the Borrower. 69 This component does not have any large procurement actions. The key activities for sub- components (1) and (2) will be integrated along with the activities for the environment management component into single consultancy, for which the TORs havebeen prepared and the request for EO1has beenissued. The sub-component (2) for BWFwill mainlyuse simplifiedprocurement methods as provided in the Guidelinesfor CDD type activities. This requires the development of a detailed procedure for use by all the concerned parties, including a cost recovery procedure similar to the ones under ongoing projects in Egypt and Yemen. A streamlined mechanism and procedure have been preparedinthe Operations Manual. For procurement and fund disbursement, standardprocedure will be employed inthe same manner as for other components, except for proposals submitted by beneficiary groups. Environmental Management (US$8 million): This pertains to the implementation of the ESMP of the ESA Report, including integrated pest management as well as various capacity building activities. This component includes procurement of monitoring and compliance equipment valued over US$1 million. A provisional list of the required equipment has been preparedin accordance with the ESMP and detailed technical specifications will be developed in the first year of the project. All key activities will be packaged along with the Zntegrated Water Resources Management Componentinto a single consulting service (under the coordination of the CLO andthe MGRWC PIU). This consultancy will be responsible for preparing the detailed technical specifications for monitoring and equipment and provilng initial training. The TORs of this consultancy have beenprepared andthe request for EO1has beenissued. Project Implementationand Coordination Support (US$4million): This will include (a) project implementation and coordination support for the liaison office and PIUs; and (b) monitoring and evaluation (M&E),reporting and auditing. This component will be supported by the project management support consultancy for overall project coordination and monitoring and evaluation activities. The TORs for this consultancy have been prepared and the request for EO1has been issued. In addition, annual financial audits, individual consultants' contracts for technical assistance-related activities (including the international procurement advisor), and procurement of goods (including office equipment) will bepreparedby the consultancy. Capacity Development: Almost all the proposed components have extensive capacity development related activities. Indesign of this element, the following has beenconsidered: 0 To the extent possible all the major consultancy services include capacity development and transfer of knowledge as an integral part of their TORs. The implementing agencies will ensure that the consultants carry out this aspect of their services as per the contract terms; 0 Training needs will be assessed on an annual basis and the CLO will consolidate and submit to the Bank one annual training plan for the whole project. The plan will be as detailed as possible providing the means for the Bank to issue one "no objection" for the project's annualtraining activities. 70 IV. ProjectImplementationArrangements Project implementation will be handledby the PIUSof MGRWC and the MJAO in coordination with the CLO. The MJAO is responsible for work on both the upper watershedforestry management component and the irrigation and drainage management component. The MGRWC i s responsible for the trunk drainage and irrigation component as well as overall WRM. The h4DOE will supervise the implementation of the environmental management component in compliance with the ESMP. The CLO and both Plus will be provided with adequate implementation capacity through the aforementioned project management support consultancy and the recruitment of additional staff from the private sector when necessary. The CLO and PIU will work inclose coordination inorder to ensure successful implementation. V. ProcurementCapacity Assessment The assessment has shown very limited capacity for implementation of the procurement activities of the project in line with Bank Procurement Guidelines. The assigned MOJA Procurement Officer in the CLO worked on the last two years of the previous Bank financed Zmgation Project, yet his knowledge of the Bank Procurement Guidelines and Standard Documents i s not at a level that he can independently manage the procurement activities of the project. The same i s true of the assigned Procurement Officer from the MGRWC, who has limited knowledge of the Bank procurement processes and Guidelines. Takmg into account the complexity of the proposed project together with the large number of complicated procurement actions, the need for a structured approach for project procurement ' activities cannot be over emphasized. This approach should take into account all the main players inthe project and ensure that the level of procurement support both in terms of expertise and number of officers corresponds to the needs of the project. Accordmgly, the following are recommended: 0 The functions of procurement quality assurance and supervision of compliance with the procurement provisions of the LoadProject Agreements will be centralized within the CLO. In particular, the CLO, assisted by the International Procurement Advisor, will be directly responsible for all procurement activity under MJAO and for assisting with and conducting quality assurance of the procurement activities of MGRWC. The CLO, within this framework, will also represent the only counterpart to the Bank in all procurement related activities and issues; 0 Small value procurement actions, where the type of goods i s such that they can be procured locally with more efficiency and cost effectiveness, can be implemented in the Mazandaran PIUs using the Shopping method, as per the thresholds set for this method (i.e,, US$lOO,OOO). In order to utilize this process, each of the related offices should assign one individual to be trained in Bank Procurement using the Shopping method, including how to develop technical specifications and requirements for records management as well as information on Bank Procurement Post Reviews. The technical officers working in Tehran and Mazandaran should participate in the procurement activities including preparation of technical specifications/TORs, technical evaluation of bids/proposals, and contracts management. Two Procurement Officers have received specific procurement training in Turin and additional events will be arranged immediately after project effectiveness; 71 An International Procurement Advisor with extensive procurement experience in Bank financed projects has started working for the CLO to provide the much neededprocurement support. The Advisor will establish the project's procurement operations, and provide support to the CLO and PrUs in implementation of project procurement activities including preparation of the Bidding DocumentsRequest for Proposals, evaluation reports, draft contracts, and annual Procurement Plans. The initial contract terms includes nine man months of services within an 1%month period, with in-country procurement support before and after project effectiveness, including the first six to nine months of project implementation. From there on support should be provided during the various stages of the large procurement actions. The Advisor's TORS includes hands-on and formal capacity development of the project's Procurement Officers as well as the FCs both in Tehran and Mazandaran. Additional specialist support may be required based on the procurement capacity evaluation at the end of the initial six months; There is a need for extensive Bank Procurement capacity development for the Procurement Officers and accordingly, the project will provide funds for training of these individuals. The PPF has been utilized to enable two procurement staff to participate in Bank sponsored training courses in Turin. These training courses will be continued to provide for the level of expertise needed for the implementation of the project and will be complemented with the experienceof the InternationalProcurement Advisor. In order to head start the capacity development and project procurement activities, PPF has been used for hiring of the International Procurement Advisor and the training of the assignedProcurement Officers inTurin, Italy; The Bank's operations team will monitor the performance of the procurement team and provide the necessarysupport where required. VI. ProcurementPlan A draft Procurement Plan for the first eighteen months has been prepared by the CLO and submitted to the Bank. The procurement plan acceptable to the Bank has already been submitted andwas agreedon duringnegotiations (see Appendix). VII. RiskAssessment Subject to the implementation of the above recommendations, the level of project procurement risk is consideredaverage to high.To this end, the procurement performance should be assessed every three months for the first two years of the project and every six months thereafter by the Bank. In addition to these reviews, ad-hoc Procurement Post Reviews should be carried out periodically. Duringthe first year of implementation, compliance with the recently agreed MOU on Procurement will be closely monitored and fine tuning of procurement arrangements will be made as needed. VIII, PriorReview All ICB andNCB procurement for Goods and Works will require prior review by the Bank. The first three goods contracts using the Shopping method will require prior review by the Bank. 72 Contracts with consultingfirms costing the equivalent of US$lOO,OOO or more andcontracts with individual consultants costing the equivalent of US$70,000 or more will require prior review by the Bank. All single sourced selection of consultants and direct contracting of supplierskontractors will require prior review by the Bank. IX. Use of Bank Guidelinesand Standard BiddingDocuments Procurement of goods and works will be carried out in accordance with the Bank's Guidelines for Procurement under IBRD Loans and IDA Credits (May 2004). For ICB and NCB procurement of Goods and Works, the Bank standard Bidding Documents for procurement of Goods, small Works, and large Works (depending of the value of the procurement action) will be used while for the Shopping method, the CLO and PIUs should use simplified documents and procedures that are acceptable to the Bank. For all evaluation reports under ICB and NCB methods, the standard bid evaluation form for the "Procurement of Goods or Works" will be used. Procurement of services will be carried out in accordance with the Guidelines: Selection and Employment of Consultants by World Bank Borrowers (May 2004). Standard Request For Proposal (RFP) for Selection of Consultants and the standard forms of contract will be used for all contracts above US$lOO,OOO equivalent. A simplified version of the standard RFP and contracts will be used for contracts below US$lOO,OOO equivalent and short term assignments. Selection of individual consultants will be carried out by comparison of CVs and using simplified contracts, acceptable to the Bank. For the selection process of firms, the Sample Form of EvaluationReport for Selection of Consultants will be used. X. Advertising A General Procurement Notice (GPN) has been published in the United Nations Development Business (UNDB) before negotiations. The GPN lists all contracts for Goods that will be procured under ICB, and all contracts for consulting firms. The GPN will be updated annually for all outstanding procurement. Specific Procurement Notices (SPN), and Expressions of Interest (EOI) for consulting contracts estimated to cost more than US$200,000 will be prepared for the individual procurement actions where necessary. With respect to consulting contracts, only the shortlisted firms identified through EO1will receivethe Request for Proposals (RFP). Table A: Project Costs by ProcurementArrangements (US$ million equivalent) ProcurementMethod' ExpenditureCategory ICB NCB Other' N.B.F. Total Cost 1.Works 132.595 14.716 2.091 0.00 149.402 (74.745) (9.797) (1.366) (0.00) (85.908) 2. Goods 1.597 4.398 0.480 0.00 6.475 (1.368) (3.573) (0.421) (0.00) (5.361) 3. Services 0.00 0.00 29.727 0.00 29.727 (0.00) (0.00) (21.258) (0.00) (21.258) 4. Training 0.00 0.00 3.362 0.00 3.362 (0.00) (0.00) (3.022) (0.00) (3.022) 5. IncrementalOperation 0.00 0.00 1.ooo 6.777 7.777 73 costs ~~ ~ (0.00) (0.00) (0.850) (0.00) (0.850) 6. BWF 3.000 3.000 (3.000) (3.000) Total Costs with 134.192 19.114 39.660 6.777 199.743 Contingencies (about 20% for Physical and Financial) (76.113) (13.370) (29.917) (0.00) (119.400) 'Figures inparenthesesare the amounts to be financed by the Loan. All costs include contingencies. * Includes civil works and goods to be procured through national shopping, consulting services, services o f contracted staff of the project management office, training, TA services, and incremental operating costs related to: (i)managingtheproject;and(ii)re-lendingprojectfundstolocalgovernmentunits. Note: (9 Inabove, Bank financing of Works assumed58%, Goods assumed 85% and Servicesltraining assumed 90%. Contingencies taken as given in current summary sheet of Cost Tab as being about 20%. (ii) Figures in brackets indicate Bank financing. (iii) ICB for contracts greater than US$2 million for works and US$0.35 million for goods. (iv) NCB for contracts less than and equal to US$2.0 million for works including Simplified NCB for works contracts less than US$l.O million. (v) Other: IncludesBWF. Table Al: Consultant Selection Arrangements Selection Method Consultant Services Total Expenditure Category QCBS QBS SFB LCS CQ Other N.B.F. A. Consultants: Firms 28.026 0.00 0.00 0.00 0.00 0.651 0.00 28.677 (19.886) (0.00) (0.00) (0.00) (0.00) (0.543) (0.00) (20.429) B. Consultants: Individuals 0.00 0.00 0.00 0.00 1.049 0.00 0.00 1.049 (0.00) (0.00) (0.00) (0.00) (0.828) (0.00) (0.00) (0.828) C. Training 3.362 3.362 (3.022) (3.022) Total 28.026 0.00 0.00 0.00 1.049 4.013 0.00 33.088 (19.886) (0.00) (0.00) (0.00) (0.828) (3.565) (0.00) (24.279) Figures inparenthesis are Bank financed QCBS: Quality and Cost-Based Selection SFB: Selectionunder a fixed budget LCS: Least-Cost Selection CQ: Selectionbasedon consultants qualifications Other: Selection for individual consultants (per Section V of Consultant Guidelines), Commercial Practices, etc. (vii) NBF:NonBank financed 74 Table B: Thresholds for Procurement Methodsand Prior Review' Contract Value Contracts Subject to Expenditure Category Threshold Procurement Method Prior Review (US$thousands) (US$ thousands) 1.Works =>US$2,000 ICB All Contracts $1,000 =>US$lOO and first 3 contracts >$loo cus$loo Shopping As per procurement plan 2. Goods =>US$350 ICB All Contracts US$lOO cus$loo Shopping Bank to review fust 3 contracts using shopping method. All others post-review As per procurement Direct contracting As per procurement Plan plan 3. Services =>US$lOO QCBS/CQS/QBS/other All contracts =>US$lOO Firms (for firms) US70 Section V of All contracts Consultants Guidelines =>US$70 CUS$70 Section V of Firstthreecontracts and Consultants Guidelines all SS 4. Training, Workshops, >=US$20 Other Post-review,but annual Study Tours plans to be reviewedby the Bank Note: ICB: International Competitive Bidding NCB: National Competitive Bidding QCBS: Qualification & Cost-Based Selection CQS: Selection basedon Consultant Qualification QBS: Quality Based Selection Total value of contracts subject to prior review: US168 million (about 84% of project cost based on baseline value) Overall Procurement RiskAssessment: Average to High Frequency of procurement supervision missions proposed: One every six months (includes special procurement supervision for post-review/audits) 75 Table __ Allocation of IBRDLoanProceeds C: - ~~ ~~ ~~~ __ Expenditure Category ~. Amount inUS$ million Financing Percentage 1.Works 82.497 75% 2. Goods 4.375 100%foreign expenditure 100%local expenditure (ex- factory) 80% Localexpenditure 3. Consultants Services 14.700 Consulting services 95% of foreign cost and 88% of local cost Training 100% Operational costs 100% 4. Training, Workshops and 2.486 100% Study Tours 5. Works, Goods and Services 3.OOO 100%-Follow the same rules for (for BWF) works, goods, and consultant services based on the communities' proposals 6. Incremental Operation Costs 0.850 85% 7.Refundingof Project 1.464 Preparation Advance 8. Unallocated 10.028 Total Project Costs 119.400 Interest during construction Front-end Fee 0.600 Total 120.000 Use of SOEs: See Annex 7. Special Account: See Annex 7. Financingpercentage indicates the maximumfor eachcategory. 76 Appendix Procurement Plan I.General 1. Project Information: Country: Iran Borrower: The Islamic Republic of Iran ProjectName: Alborz IntegratedLandandWater Management LoadCredit No. ProjectImplementingAgencies (PIA): MOJA; MGRWC 2. Bank's Approval Date of theProcurementPlan: [Original May 27,2004, Revision October 10,2004 andJanuary11, 20051 3. Date of GeneralProcurementNotice: November 22,2004 4. Period covered by thisProcurementPlan: Firsteighteenmonthsfrom effectiveness 11.GoodsandWorks andNon-consulting Services 1. Prior Review Threshold: ProcurementMethod Prior Review Threshold Comments 1. ICB (Goods) All contracts 2. NCB (Goods) =>$1oo,OOo 3. ICB (Works) All contracts 4. NCB(Works) =>$1,OOO,OOO andfirst three contracts4 1,OOO,OOO 5. Shopping(Goods and Works) As for procurementplan 6. 1Direct Contracting (Goodsand Works) 1As for procurementplan 2. PrequaliJication: Bidders for Works contracts estimated to cost US$15 million equivalent or more shall be prequalifiedin accordance with the provisions of paragraphs 2.9 and2.10 of the Guidelines. 3. Proposed Proceduresfor CDD Components (asper paragraph. 3.17 of the Guidelines: CDD project implementationdocument (Goods and Works) is scheduled to be prepared duringyear 2 of the project. 4. Reference to (ifany)Project OperationaUProcurementManual: Not applicable. 5. Any Other SpecialProcurement Arrangements: A PPFinthe amount of US$1.5 million i s effective since May 13, 2004, and it involves of procurement of Goods, Works, and Servicesas detailedinthe PPFprocurementplan. 77 00 12 Y & 8 Y rl) 8 2 E 2 2 2 n" 2 E 2 .5 M Q 0-2 M .E a EB E g. VY m 16 Q\ 0 G I 6 3 r M M 2 2 2 c1 z" 3 ?; z" z" z" z" w E E !$ n i 3 3 13 - Do 3 4 \D .e 8 Y 'C 8 CA a a E E z" E z" m t f 0 s E d m m I- ? m 3 3 3 n" n" n" n" n" n" n" n" en c $ en .-.I E? a .-.I c .I !3 c c 0 v1 . . B c v1 v1 30 i 4 a h e. F zd 2 2 E 2 E 8 * M C .I a a C 0 Vl 111.Selection of Consultants 1. Prior Review Threshold:Selection decisions subject to Prior Review by Bank as stated in . Appendix 1 to the Guidelines on Selection and Employment of Consultants: SelectionMethod I Prior Review Threshold Comments 1. I Competitive Methods (Firms) IAll contracts=>$100,000 and II first three contracts <$100,000 2. Individuals All contracts=>$70,000 and first three contracts~$70,000 2. Short List of National Consultants: Short list of consultants for services, estimated to cost less than US$200,000 equivalent per contract, may be comprised entirely of national consultants in accordance with the provisions of paragraph 2.7 of the ConsultantGuidelines. 3. Any Other Special SelectionArrangements: Not Applicable. 4. ConsultancyAssignmentswith Selection Methods and Time Schedule 1 2 3 4 5 6 7 ~~ Ref. No. Descriptionof Estimated Selection Review Expected Comments Assignment cost Method by Proposals Bank Submission (Priori Date (US$ Post) 000) 1. (MOJA) Upper Watershed 776 QCBS Prior April 25, PhaseI($lOO,OOO) Resources 2005 will be funded Management underPPF. Services Com onent2 Irrigationand 6,126 Prior I May 23, Quality Assurance (MGRWC Drainage 2005 of designand andMOJA) Management construction, and WUA and agricultural development support 1. IntegratedWater 6,969 QBS Prior June 06, :MGRWC Resources and 2005 mdMOJA) Environmental Management Services 86 1 2 3 4 5 6 7 Ref. No. Description of Estimated Selection Review Expected Comments Assignment cost Method by Proposals Bank Submission CUM (Prior 1 Date Post) 000) 1,(MOJA International 30 Individual Prior March09, TA for evaluation and water resources consultant 2005 (CVs) of consulting MGRWC) and irrigation services proposals. specialist (for CLO) 2. (MOJA International 30 Individual Prior March09, TA for evaluation and environmental consultant 2005 (CVs) of consulting MGRWC) specialist(for services proposals. CLO) 3. (MOJA Project 3,664 QCBS Prior May09, and Management 2005 MGRWC) SupportServices (for CLO) Subtotal 17,595 - IV. ImplementingAgency Capacity BuildingActivities with TimeSchedule Inthis section the agreedcapacity buildingactivities (some itemscouldbefrom Country Procurement Assessment Report recommendation) are listedwith time schedule. No. Expected outcome / Estimated Estimated Activity Description cost Duration Comments WS$OOO) 1. InternationalProcurement 270 9 months for Advisor the first 18 year project months period period I I 87 Annex 9: Economic and Financial Analysis6 I.ECONOMIC ANALYSIS Main Objectivesand ExpectedBenefits from the Project The objective of the proposed project i s to enhance sustainable integrated land and water management at the river basin level through: (a) rehabilitation and development of new irrigation and drainage infrastructureto improve water use efficiency and increase productivity; (b) improvement of land and soil conservation in the upper watershed to reduce erosion and sediment runoff; and (c) training and capacity buildingin outreach and stakeholder participation inthe sustainable management of water resources. Given the main objectives of the project, the expected benefits are as follows: Increased agricultural productivity, in both the improvement and development areas, hence benefiting all stakeholders inrural areas; Improved water use efficiency, which i s expected to enhance the municipal water supply in the upper improvement area (where surface water from the project will replace groundwater for irrigation), and to reduce or halt saline water intrusion in lower development area aquifers (the plannedfuture with-project situation i s one of continued abstractions at current rates but with increased recharge from percolation of water from the new surface water irrigation systems); 0 Reduction of the risks of soil erosion and siltation inthe reservoir; and 0 Improved stability of natural stands, better ecosystem functions and possible increased timber production in the long run. Interrelations among Project Components with respect to Achievement of Objectives Figure 1 shows how the five components of the project are intended to concur in the achievement of project's benefits. Major input for the achievement of the objectives will come from the Upper Watershed and Forestry Management component and from the Irrigation and Drainage Management component. The Environmental Management and Integrated Water Resources Components are expected to play a role in the achievement of the objectives, but their contribution i s difficult to assess a priori. Finally, the Project Implementation and Coordination Support component i s indispensable for the practical realization of all other components and hence for reaching the objectives of the overall project. BasedonILWMPWorkingPaper:Financialand Economic Analysis, FAO/(TCIP). 88 Figure 1 "..................." i I I , conservation in the upper stands and enhanced I f .f Increased IReduced salinity 1 productivity inaquifers Legend: Projectcomponent 7 1 Projectbenefit -.. * Support to other components Minor impact and/ or highlevel of uncertainty -b Major impact and/ or low level of uncertainty 89 Rationale under the InclusiodExclusion of Costs and Benefits inthe Analysis An economic analysis was undertaken of the costs and benefits of the irrigation and drainage component and the pest management plan from the environment component. The reason for exclusion of the other components and sub-components i s that their contribution to the achievement of project benefits i s secondary and very difficult to assess a priori. Costs were also included for project implementation and coordination support. With respect to benefits, only the expected increase in production has been assessed, considering also its impact on beneficiaries in rural areas. Other benefits, namely the enhanced urban water supply in the improvement area, the reduced salinity in the aquifers, the reduction in soil loss in the Upper Watershed, the effects of reduced siltation in the reservoir, the improved stability of natural stands and the enhanced ecosystem functions, are difficult to quantify in physical and economic terms and hence are excluded from the cost-benefit analysis. Nevertheless, these benefits should be considered, in addition to the calculated economic performance of the project. Methodology and MainAssumptions A cost-benefit analysis was undertaken of the irrigation and drainage component which comprises about 80% of total AILWMP project costs. The project is to be implemented over a 7-year period. The project economic and financial analysis i s undertaken over a thirty-year time span7. The benefits are in the form of: (a) higher crop yields; (b) higher cropping intensity; (c) more and timely use of irrigation water; (d) support for the W A S ;and (e) agricultural support services. Costs are in the form o f (a) irrigation construction costs; (b) cost of support for W A S ;and(c) agricultural support services costs (see Table 1). Key EconomicParameters 0 Marketprices: all project prices are expressed in constant June 2003 prices, excluding price contingencies. 0 Exchange rate: the prevailing exchange rate of US$1 = 8,400 h a l s was used. 0 Discount rate: NPV has been calculatedbased on a 10% discount rate. Assumptionsunderlying Costs and Benefits costs Construction costs: All construction costs relative to the irrigation and drainage systems have been included, except for the costs relative to the construction of the dam and part of the MCC. The excludeditems are being effected under a non-project contract and have been considered as sunk costs. Cost allocations for individual items are based as appropriate on approximate flow capacity allocations and/or areas concerned. 'There are not likely to be any substantial further incremental costs for O&M or other costs or other incremental benefits associated with the irrigation system for at least thirty years. Moreover, carrying the financial and economic analysis beyond thirty years would not appreciably change the rates o f return due to discounting. 90 Table 1 Irrigation and Drainage Component and Other Costs (US$ million) '' 1.Improvement and Developmentof Infrastructure2/ TraditionalIrrigationArea 34.35 New IrrigationArea 92.22 Sub-Total 126.57 2. IncrementalEnergy PumpingCosts 3/ 0.01 4. WUAs InstitutionalSupport 6.06 5. Agricultural Support Services and IPMPlan 6.26 6. Project Implementationand CoordinationSupport 4/ 1.95 Total Cost 140.85 1/Costs are estimatedin2003 constantprices-pricecontingenciesnot included. 2/ Includes construction, design, supervisionand physical contingencies costs. 3Ancrementalenergy costs for life of the project estimatedat US$9,375/year andphasedto coincide with completion of construction. 4/ Charged50% of total ProjectImplementationand Coordination Costs. Other costs related to construction: Detailed design: 5% of constructions costs. e Construction supervision: 7% of construction costs. e Physical contingencies: 10%of baseline costs (construction, detailed design, supervision). Project incremental recurrent costsfor O M : Included as a cost inthe crop budgets. Investment costs and O&M conversionfactor: A conversion factor of 0.8 has been applied to all project financial costs (investments) to derive corresponding economic values. Economic values for fertilizers: Economic values of fertilizers are estimated on the basis of long-term (2015) world market price forecasts. Economic values for other farm inputs (mechanization, seeds, pesticides and herbicides): Financial prices were assumedto reflect economic prices for most seeds. A conversion factor of 1.6 was used for input prices for pesticides, fungicides and herbicides and a conversion factor of 1.5 was used for machinery costs (based on input from Mahab Ghodss Consulting Engineer, a national consulting firm), reflecting prevailing subsidies and other distortions in the domestic and foreign exchange markets. Labor: There is seasonal labor surplus in the project area. On the other hand, current financial prices of many agricultural outputs are below economic prices, leading to a downwards bias in financial wages as indicators of the opportunity cost of labor. To reflect both aspects, economic 91 value of labor has been considered as equivalent to financial value both for skilled and unskilled labor. Agricultural Support Services: Farmers will begin to use the new irrigation facilities in the 4th and 5thyears (depending on the area) of the project. Therefore, the bulk of the costs for the four activities under the support services will start in Year 4 of the project. However, some training costs, especially international training, will be undertaken in Years 1to 3 so that those trained will be back in the 4thand 5'h project years. This results in the main support program being 4 years. Benefitsfrom Incremental CropProduction Croppingpattems: Present cropping patterns and the anticipated with-project cropping patterns are presented in Table 2. With-project traditional area cropping patterns are expected to shift to planting more rice, with an increase in the cropping intensity from 119% to 126%. Alternatively, a scenario based on the assumption of Iran's access to WTO i s analyzed. In this case, rice production decreases by two thirds compared to the present situation, and more high valued crops are grown.* For the new irrigation areas, five scenarios were outlined for possible with-project cropping pattems, starting with cropping pattern CPl (50% of development area planted to rice) to CP5 (90% of development area planted to rice). Cropping patterns CP4 and CP5 are based on increasing the rice cropping area thereby increasing water requirements per hectare. This limits the total cropping area in cropping patterns because of available irrigation water. A scenario based on the assumption of Iran's access to WTO i s analyzed (WTO/CP6), with only 30% of the areaplantedwith rice and a large area inhighvalue crops. Cropping pattem CP3 i s used as the base cropping pattern for the economic and financial analysis. Farmers, at least in the initial stages, are likely to want to plant as much rice as possible, but farmers will also want to cultivate the maximum available area which makes CP3 the most likely initial choice. Later, farmers will likely grow more high value crops as markets open up with the support from WUAs and agricultural support services. It can then be anticipatedthat cropping patterns CP2 and CP1 will become more attractive to farmers. If Iran i s accepted into the WTO, CP6 becomes the most appealing scenario in the long run. Commodityprices: Basedon WorldBank Commodity Price projections as of June 24,2003. Conversionfactors: Economic prices were derived for rice (Tarom), rice (highyielding), wheat, soybean and rapeseed using import parity prices. Conversion factors were calculated at 0.62, 0.69, 1.16, 0.99 and 0.88 of local farm gate prices for the above products, respectively, Financial prices were assumed to reflect economic prices for the remaining output prices. Quality adjustmentfactors: Local rice variety (Tarom) i s a delicacy in the project area and trades at prices well above the price of imported rice (Thai - 5% broken). Farm gate prices of At present, this scenario is hypothetical, since no back-up studiers concerning the market potential of these products have been conducted. However, the project provides agriculture support services that will help achieve a move towards increasing high value crop production. In addition, the Bank will continue country dialogue regarding agriculture sector reform. 92 Tarom paddy inthe project area receive a premiumof 180% to 200% over high-yielding paddy varieties. In the market, the ratio of Tarom rice to imported rice is 7,500/3,500 = 2.1. Local high-yielding rice (HY)rice in the market is higher priced than imported rice by 4,300/3,500 = 1.2 ratio. A quality adjustment factor of 210% has therefore been applied to local Tarom rice and 120%to local HY rice. Table2 Present andWith-ProjectCroppingPatterns Traditional New Irrigation(Development)Area Hectares (Improvement)Area Hectares Present With- With- Present With-ProjectAlternativesa/ Project Project WTO CP1 CP2 CP3 CP4 CP5 CP6 (WTO) Main Crops Paddy 14,880 15.180 5,308 5,800 4,648 5,577 6,507 6,628 7,067 2,789 (Tarom) Paddy 13,470 13.790 4.645 3,865 4,648 5,577 6,507 6,628 7,067 2,789 (HY) Wheat 300 6,635 3,620 3,105 2,324 1,543 696 0 3,160 Soybean 240 0 2,510 0 0 0 0 0 0 Tomato 30 0 265 1,543 1,171 781 348 0 0 Lettuce 0 3,317 1,487 Green 130 0 240 0 0 0 0 0 0 Bean Strawberry 25 0 3,317 390 2,789 2,082 1,394 613 0 3,718 Faba 85 0 0 310 0 0 0 0 0 0 Rapeseed 180 0 0 1,235 0 0 0 0 0 0 Citrus 4,245 4,205 9,953 1,665 1,859 1,859 1,859 1,657 1,570 4,647 Total 33,585 33,175 33,175 19,900 18,590 18,590 18,590 16,571 15,704 18,590 Double Cropping Rapeseed 1,635 2,290 1,659 770 1,822 2,194 2,565 2,618 2,795 1,115 Clover 3,405 4,840 1,991 1,150 2,826 3,383 3,941 4,010 4,287 1,860 Soybean 180 0 4,976 2,110 3,105 2,324 1,543 696 0 3,160 Faba 0 550 0 0 0 0 0 0 0 0 Lettuce 1,170 940 0 260 0 0 0 0 0 0 Tomato 0 0 0 0 1,543 1,171 781 348 0 1,487 Total 6,390 8,620 8,626 4,290 9,295 9,072 8,830 7,672 7,067 7,622 Total 39,975 41,795 41,801 24.190 27,885 27,662 27,420 24,243 22,771 26,212 Cropped Area Cropping 119% 126% 126% 122% 150% 149% 148% 146% 145% 141% Intensity Source: Mahab Ghodss Consulting Engineers. a/ Basedon an increasing percentageof rice hectaresmoving from CPl to CP5.Total cropping hectaresdecrease inCP4andCP5 becauseof available irrigation water constraints. 93 Timing: Incremental crop production benefits are assumed to be phased over a period of years following completion of engineering works, i.e., starting in the year when improved or new systems become operational. Based on the schedule of construction, it is estimated that 25% of the traditional irrigated areas will be available under the project in year 4, 55% in year 5, 75% inyear 6,90% inyear 7 and 100%inthe remaining years. Similarlyfor the new irrigated areas, it i s estimated that 35% of the project area will be available in year 6, 80% inyear 7 and 100% inthe remainingyears. Results 1.Benefits, Costsand Rate of Return Table 3 presents the economic rate of return data for the base case. For the base case, the overall financial rate of returni s 17.4% with a NPV of US$57.8 million. The overall economic rate of returnis 16.2% with a NPV of US$38 million. Table 3 Benefits and Costs and Rates of Return to Irrigation and Drainage Component Present Value of Flows inMillion US$ a/ Economic Analysis Financial Analysis Benefits: 109.0 145.7 costs: 71.0 87.9 Net Benefits: m: 38.0 57.8 17.4% 16.2% a/ 10%discount rate. 2. Annual Incremental Net Benefls Crop budgets were constructed to identify the change in net income between the present situation and the with-project (future) situation for both financial prices and the economic values. The budgets incorporate the present yields and the with-project (future) yields, and the change ininputsusedunder the two scenarios (data and informationsupplied by Mahab Ghodss Consulting Engineer). Table 4 presents a summary of the net incremental benefits using both financial prices andeconomic values. Sensitivity Analysis 1.Alternative CroppingPatterns Table 5 presents the change in the economic rate of return from alternative new irrigation area cropping pattern scenarios from Table 2. Relative to the base case (CP3), the ERR increases with cropping patterns CP1 and CP2 but decreases with cropping patterns CP4 and CP5. The cropping patterns for both traditional and new irrigation areas change in the WTO scenario (CP6) and show the best economic performances. 94 2. Changein the EconomicPrice of Rice The economic price of Tarom paddy rice was derived with a 210% quality adjustment which resultedin a conversion factor of 0.59 times the farm gate price. When the quality adjustment i s changed to 150% (conversion factor = 0.46), the overall ERR decreases to 14.9% relative to the base ERR of 16.2%. When the quality adjustment coefficient for both Tarom and high-yielding paddy rice i s changed to 100% (i.e., no quality adjustment), which results in conversion factors of 0.33 and 0.59 respectively, the ERR decreases to 13.0%. Table 4 Annual Crop Productionand Incremental Net Benefits, Base Case (millionRials) CropProductionNet Benefits IncrementalBenefits Financial Economic Financial Economic Present With- Present With- Project Project TraditionalArea MainCrops 320,475 404,847 163,074 224,425 84,372 61,351 DoubleCrop 19,430 35,340 17,043 29,947 15,910 12,904 Total 339,905 440,187 180,117 254,372 100,282 74,255 MainCrops New IrrigationArea104,070 225,041 51,127 138,588 120,971 87,461 DoubleCrop 11,447 35,503 9,785 31,611 24,056 21,827 Total 115,517 260,544 60,912 170,200 145,026 109,288 Total 455,422 700,73 1 241,029 424,572 245,308 183,543 Source: Table 8. Financial and Economic Analysis Working Paper, LWMFMay, 2004 Mission. Table 5 Economic Rate of Return: Alternative Cropping Patterns New IrrigationArea CroppingPatterns CP1 CP2 CP3 CP4 CP5 WTO/CP6 (BaseCase) % Economic Rate of Return Traditional Areas 30% 30.0% 30.0% 30.0% 30.0% 91.8% New Areas 16.0% 15.0% 14.0% 10.0% 7.0% 21.5% Total Project 17.9% 17.0% 16.2% 13.9% 12.5% 38.4% Source: Table 8. Financial and Economic Analysis Working Paper, ILWMF' May, 2004 Mission. 3. Switching Values Decreases in output prices and increases in input prices would be the most critical elements that would change the base ERR from 16.2% to below 12%. The with-project traditional area crops 95 that are most dominant in terms of area and incremental benefits are rice and citrus (Table 2). The with-project new irrigation area dominant crops are rice, citrus and strawberry. Output price declines in the remaining crops would have to be dramatic before there was a significant decrease in the ERR because of their small contribution to overall benefits. On the input side, fertilizer prices are likely to be the most volatile. Table 6 below presents the product and input price sensitivity and switching value analysis. A 25% decrease in dominant crop prices (rice, citrus and strawberry) would lead to a ERR of 11.7% and a NPV of 81,000 million Rials (US$9.8 million). The decrease in dominant product prices would have to be between 30% and 35% for the ERRto fall to 10%with a 0.0 NFV. The ERR decreases by only 0.1% from a doubling of fertilizer prices. A simultaneous decrease in dominant crop prices by 20% and a doubling of fertilizer prices decreases the ERR from 16.2% to 12.3%. Table 6 Product and InputPrice Sensitivity and Switching Value Analysis % Change FinancialReturns Economic Returns inPrice FRR % NPV@10% ERR % NPV@10% (m. Rials) (m.Rials) Base Case 17.4% 485,500 16.2% 318,900 1.DeceaseinProductPricesa/ la. 10% 16.9% 446,400 14.4% 224,100 lb. 20% 16.3% 407,300 12.6% 129,300 IC. 25% 16.0% 387,700 11.7% 81,900 Id. 30% 15.8% 368,200 10.7% 34,500 le. 35% 15.5% 348,700 9.8% -12,900 2. Increase inFertilizer Prices 2a. 50% 17.3% 481,300 16.0% 311,400 2b. 100% 17.2% 477,100 15.9% 304,000 3. Simultaneous Change inProductand Fertilizer Prices 1band 2b 16.2% 398,000 12.3% 114,400 a/ Products includerice, citrus and strawberry. FinancialAnalysis 1.CostRecovery of 0&M By law, annual water charges for surface irrigation are assessed as a proportion of the value of gross agrrcultural production. The proportion depends on the irrigation system. There are three main irrigation systems: (a) traditional systems assessed at 1%; (b) combination of traditional/ modem systems assessed at 2%; and (c) modem systems assessed at 3%. The value of gross production is calculated using the following information: (a) the OMC determines the cropped area; (b) MOJA determines the average crop yields; and (c) prices for agricultural commodities are set by a national committee. 96 With-project O&M costs will be higher than at present. The estimated costs are presented in Table 7 and comprise the O&M costs that include the dam through to the tertiary level and below. The O&M costs for the traditional irrigation area system are estimated to be US$64/ha. The O&M costs for the new area irrigation system are estimated to be US$84/ha. The O&M costs for the 3,000 ha area under field drainage i s estimated to be US$lO/ha more, or US$94/ha. With-Project Beneficiary Contributionto O&M Costs Traditional Area: Water charges would be 2% of gross revenue of all irrigated crops. The total water charge receipts would be US$1.41 million or US$42.43/ha.' If farmers paid the water management charge (US$19/ha from Table 7) and the system maintenance charge (US$26/ha from Table 7) as they have done in the past along with the US$42/ha water charge, they would be paying a total of US$87/ha against a total O&M cost of US$64/ha (Table 7). New Area: Water charges would be 3% of gross revenue of all irrigated crops. The total water charge receipts would be US$1.28 million or US$69/ha.' If farmers paid the water management charge (US$19/ha from Table 7) and the system maintenance charges (US$43.5/ha from Table 7) as they have done in the past along with the US$69/ha water charge, they would be paying a total of US$131.5ka against a total O&M cost of US$84/ha or US$94 in the sub-surface drainage area (Table 7). Table 13b, ILWMPFinancial and Economic WorkingPaper. 97 Table 7 Irrigation With-Project AnnualOperation and Maintenance Costs (US$/ha) A.DamO&M Improvement IrrigationArea (33,175 ha) Costs 04.00 O&M Costs (primary and above) a/ 15.00 Water ManagementCosts (secondary and below) b/ 19.00 SystemMaintenance(secondary) b/ 0.00 SystemMaintenance(tertiary & below) b/ 26.00 Total O&M Costs/ha 64.00 B. New IrrigationArea excludingsub-surfacedrainage(15,590 ha) DamO&M Costs 04.00 O&M Costs (primary and above) a/ 17.50 Water ManagementCosts (secondary andbelow) b/ 19.00 System Maintenance(secondary) b/ 08.50 SystemMaintenance(tertiary & below) b/ 35.00 Total O&M Costslha 84.00 C. New IrrigationArea includingsub-surfacedrainage (3,000 ha) DamO&M Costs 04.00 O&M Costs (primary and above) a/ 17.50 Water ManagementCosts (secondary andbelow) b/ 19.00 SystemMaintenance(secondary) b/ 08.50 SystemMaintenance(tertiary & below) b/ 35.00 Sub-surfaceDrainageMaintenanceb/ 10.00 Total O&M Costslha 94.00 Source: Table 12. Financial and Economic Analysis WorkingPaper, ILWMP May, 2004 Mission. a/ OMC responsibility b/FarmerNUAresponsibility The full recovery of O&M costs i s government policy. The above estimates of O&M beneficiary contributions indicate that O&M costs can be fully recovered. In the traditional area, water charges exceed costs by 36%. Inthe new area, water charges exceed costs by 56.5% inthe non sub-systemdrainage area andby 39.9% inthe sub-systemdrainage area." The actual allocation of water charges between the RWC, OMC and the farmers/WUAs is yet to be determined. 2. Capital CostRecovery and Water SubscriptionFee Iranian law requires beneficiaries to contribute 30% of the capital costs of on-farm development works. The two main on-farm works are: (a) land leveling costs including tertiary canal and road works; and (b) field drainage system costs. Land leveling and drainage system works will only be undertaken in the new irrigation area (18,590 ha less the present 1,665 ha in orchards). Fielddrainage will be undertaken, for now, on 3,000 of the 18,590 hectares. The cost of land leveling including tertiary canal and road work i s estimated to be US$3,037/ha (US$51.4 loFurther studies needto be done by OMC on water charges and O&M costs. The analysis uses prices, yields and hectares that may not fully represent the data and the methodology that OMC will use to arrive at the water charges. Also, the true O&M costs will only be apparent when the new irrigation systems are inoperation. 98 million in total with beneficiaries paying 30% or US$15.4 million). The estimated cost of field drainage i s US$715/ha (US$2.1 million in total with beneficiaries paying 30% or US$0.63 million). Beneficiaries can pay for capital cost recovery on a yearly basis without interest over a period of ten years. Beneficiaries would thus pay about US$91 each year over ten years for land leveling capital cost recovery. For the 3,000 hectares of field drainage, beneficiaries would pay about US$21S/ha each year. Farmers also pay a one-time subscription fee for water rights in the new irrigation area. The current subscription fee i s US$833/ha (7 million Rialska). This can also be paid yearly over a ten-year period at US$83/ha. In the Tajan irrigation project under the previous IIP, water subscription charges were reducedby 20% to encourage the use of W A S .The yearly payment would then be about US$66/ha. Under current regulations, farmers would also pay a one-time water subscription fee in the traditional irrigation area. However, the amount paid would be prorated depending on the difference between the mount of surface irrigation water received without-project and the amount received with-project. For example, if farmers now receive about 75% of the total water that they would receive with-project, then they would pay a subscription fee of 25% of US$833/ha or US$208/ha. Intotal, farmers inthe new irrigation areawho pay the landlevelingplusthe water subscription fee charge would pay US$174/ha. If the subscription fee i s decreasedby 20%, farmers would pay US$157/ha. Costs for farmers in the 3,000 hectare field drainage area would increase by US$21.5/ha and total US$195.5/ha. 3. Beneficiaries' Incremental Income and Capacityto Pay Incremental Costs Incremental income Incremental net benefits to the estimated 77,000 beneficiaries, after paying for incremental production costs, irrigationO&M costs and water subscription fees, are in the order of 245,308 million Rials (US$29.2 million) per year. This is equal to an average net benefit/hectare/year of US$564.00. The average incremental net benefit per beneficiary i s US$380 per year. It i s important to relate these figures with information derived from the Social Assessment: 0 Inthe development area, almost 100%of employed people are involvedinfarming, 50% of which own less than 1 ha. The monthly income is