Document of The World Bank Report No: 80443-BR INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$225 MILLION TO THE STATE OF ESPIRITO SANTO WITH THE GUARANTEE OF THE FEDERATIVE REPUBLIC OF BRAZIL FOR THE ESPIRITO SANTO INTEGRATED SUSTAINABLE WATER MANAGEMENT PROJECT February 26, 2014 Water and Sanitation Unit Sustainable Development Department Latin America and Caribbean Region This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank's policy on Access to Information. CURRENCY EQUIVALENTS (Exchange Rate Effective February 12, 2014) Currency Unit = Brazilian Real (R$) R$2.41 = US$1 US$0.41 = R$1 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ANA National Water Agency FBS Fixed Budget-based APP Area of Permanent Selection Protection Fundigua State Fund for Water ARSI Regulatory Agency for Resources Water, Sanitation and Road GDP Gross Domestic Product Infrastructure GEOBASES State's Integrated ATER Technical Assistance to Geospatial Database Rural Producers GVMR Greater Vit6ria BOD Biochemical Oxygen Metropolitan Region Demand IBGE Brazilian Institute of CadUnico Federal Government's Geography and Statistics Social Programs Registry IBRD International Bank for CEL Special Bidding Reconstruction and Commission Development CESAN Espirito Santo Water and IDAF State Agriculture and Sanitation Company Forestry Defence Institute C-GIP Overall Coordination body IDF Family Development Index for Project Execution IEMA State Institute of COMDEVIT GVMR Metropolitan Environment and Water Council Resources CONAMA National Environmental IJSN Jones dos Santos Neves Council Institute CPS Country Partnership INCAPER State Rural Technical Strategy Assistance Research and CQS Consultant's Qualification- Extension Institute based selection INTERAGUAS Federal Integrated Water CTG Core Thematic Groups Project DA Designated Account IS Project Implementation DEM Digital Elevation Model Support DPL Development Policy Loan LCS Least Cost Selection DRM Disaster Risk Management M&E Monitoring and Evaluation EIA Environmental Impact NCB National Competitive Assessment Bidding EMF Environmental ORAF Overall Risk Rating Management Framework Explanation EMP Environmental PCR Physical Cultural Resources Management Plan PES Payments for SECONT Secretariat of control and Environmental Services Transparency PforR Program for Results SEDURB State Secretariat of PGE State Attorney General Sanitation, Housing and PNAD National Household Urban Development Surveys SEFAZ State Secretariat of Finance PNAS National Social Assistance SEG State Secretariat of Policy Government POA Annual budget SEPAM State Secretariat of Special QBS Quality Based Selection Projects and Metropolitan QCBS Quality and Cost Based Government Selection SES State of Espirito Santo RAP Resettlement Action Plan SIAFEM Integrated Administrative RPF Resettlement Policy and Financial State and Framework Municipal System RFP Request for proposal SIGEFES State budgeting and SAFF Financial and Physical accounting system Monitoring System SMC Coastline Modelling SBD Standard Bidding System Documents UASB Up-flow Anaerobic Sludge SEAG State Secretariat for Blanket Agriculture UGP Project Management Unit SEAMA State Secretariat of Environment and Water Resources Regional Vice President: Hasan A. Tuluy Country Director: Deborah L. Wetzel Sector Director: Ede Jorge Ijjasz-Vasquez Sector Manager: Wambui Gichuri Task Team Leader: Lizmara Kirchner BRAZIL Espirito Santo - Integrated Sustainable Water Management Project TABLE OF CONTENTS Page I. STRATEGIC CONTEXT .................................................................................................1 A. Country Context ......................................................... 1 B. Sectoral and Institutional Context. ....................................... 1 C. Higher Level Objectives to which the Project Contributes ................... 3 II. PROJECT DEVELOPMENT OBJECTIVES ...........................................................4 A. Project Development Objectives..................4..... ..............4 B. Project Beneficiaries ..................................... ........ 4 C. PDO Level Results Indicators......................4.... ............4 III. PROJECT DESCRIPTION ......................................................................................... 4 A. Project Components ..................................... ........ 4 B. Project Financing .......................................... ..... 6 C. Lessons Learned and Reflected in the Project Design. ......... ............. 6 IV. IM PLEM ENTATION .................................................................................................. 8 A. Institutional and Implementation Arrangements ..................... ..... 8 B. Results Monitoring and Evaluation .......................... ......... 8 C. Sustainability......... ......... ............................... 9 V. KEY RISKS AND MITIGATION MEASURES..........................................................10 A. Risk Ratings Summary Table ...................................... 10 B. Overall Risk Rating Explanation .............................. ...... 10 VI. APPRAISAL SUM M ARY ..............................................................................................1 1 A. Economic and Financial Analyses .......................... ............ 11 B. Technical .................................................... 12 C. Financial Management............................................ 12 D. Procurement ......................................... ......... 13 E. Social (including Safeguards) ...................................... 13 F. Environment (including Safeguards) .................................. 14 Annex 1: Results Framework and Monitoring .................................................................... 16 Annex 2: Detailed Project Description...................................................................................18 Annex 3: Implementation Arrangements ............................................................................. 30 Annex 4: Operational Risk Assessment Framework (ORAF)..............................................42 Annex 5: Implementation Support Plan ................................................................................ 45 Annex 6: Economic and Financial Analysis ......................................................................... 48 Map (IBRD 39815) ...................................................................................................................... 64 PAD DATA SHEET Brazil Espirito Santo Integrated Sustainable Water Management Project (P130682) PROJECT APPRAISAL DOCUMENT LATIN AMERICA AND CARIBBEAN LCSWS Report No.: PAD545 Basic Information Project ID Lending Instrument EA Category Team Leader P130682 Investment Project B - Partial Assessment Lizmara Kirchner Financing Project Implementation Start Date Project Implementation End Date 01-Nov-2014 31 -Oct-2020 Expected Effectiveness Date Expected Closing Date 27-Sep-2014 30-Apr-2021 Joint IFC No Regional Vice Sector Manager Sector Director Country Director Prsdn President Wambui G. Gichuri Ede Jorge Ijjasz- Deborah L. Wetzel Hasan A. Tuluy Vasquez Borrower: State of Espirito Santo Responsible Agency: State Secretariat of Government (SEG) Contact: Tyago Ribeiro Hoffmann Title: Secrettrio de Estado de Governo Telephone: 55-27-3636-1221 gabinete(&,seg.es.gov.br Email: Project Financing Data(US$M) [X] Loan [ ] Grant [ ] Other Credit I ] Guarantee For Loans/Credits/Others Total Project Cost (US$M): 323.10 Total Bank Financing 225.00 (US$M): Financing Source Amount(US$M) Borrower 98.10 International Bank for Reconstruction & 225.00 Development Total 323.10 Expected Disbursements (in USD Million) Fiscal Year 2015 2016 2017 2018 2019 2020 2021 Annual 2.00 10.00 37.00 43.00 50.00 50.00 33.00 Cumulative 2.00 12.00 49.00 92.00 142.00 192.00 225.00 Institutional Data Sector Board Water Sectors / Climate Change Sector (Maximum 5 and total % must equal 100) Major Sector Sector % Adaptation Mitigation Co- Co-benefits % benefits % Water, sanitation and flood protection Water supply 40 Water, sanitation and flood protection General water, sanitation 30 and flood protection sector Water, sanitation and flood protection Sanitation 30 Total 100 I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project. Themes Theme (Maximum 5 and total % must equal 100) Major theme Theme % Public sector governance Other public sector governance 20 Rural development Rural services and infrastructure 40 Rural development Rural policies and institutions 40 Total 100 Project Development Objective(s) Proposed Development Objective(s) The objectives of the Project are to: (a) improve sustainable water resources management, and (b) increase access to sanitation in the Borrower's territory. Components Component Name Cost (USD MiHions) Integrated Water Management and Disaster Risk 59.5 Management Efficient Water Supply Services and Increased Access to 215.6 Sanitation Watershed Management and Restoration of Forest Cover 23.6 Project Management, Supervision and Institutional 23.8 Strengthening Compliance Policy Does the project depart from the CAS in content or in other significant Yes [ ] No [X] respects? Does the project require any waivers of Bank policies? Yes [ ] No [X] Have these been approved by Bank management? Yes [ ] No [ ] Is approval for any policy waiver sought from the Board? Yes [ ] No [X] Does the project meet the Regional criteria for readiness for implementation? Yes [X] No [ ] Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 X Natural Habitats OP/BP 4.04 X Forests OP/BP 4.36 X Pest Management OP 4.09 X Physical Cultural Resources OP/BP 4.11 X Indigenous Peoples OP/BP 4.10 X Involuntary Resettlement OP/BP 4.12 X Safety of Dams OP/BP 4.37 X Projects on International Waterways OP/BP 7.50 X Projects in Disputed Areas OP/BP 7.60 X Legal Covenants Name Recurrent Due Date Frequency Institutional Arrangements (Schedule 2, X N/A Continuous Section I.A) Description of Covenant - 1. The Borrower shall, until completion of the Project: (a) operate and maintain the Project Steering Committee, with qualified staff in adequate numbers, funds and resources, acceptable to the Bank, to enable it to execute its consultative and decision making powers for carrying out the general supervision of the Project, and for developing strategies during Project implementation; (b) operate and maintain an Executive Secretariat, headed by the Borrower's Subsecretaria de Captaqdo de Recursos, to assist the Project Steering Committee the Coordenagdo Institucional and C-GIP in the carrying out of its respective functions under the Project, and to be responsible for accompanying Project implementation and liaising with the Bank on the Borrower's obligations under the Project. (c) operate and maintain SEG, with qualified staff in adequate numbers, funds and resources, acceptable to the Bank. (d) operate and maintain C-GIP within the Coordenagdo Institucional with qualified staff in adequate numbers headed by a project coordinator, funds and resources, acceptable to the Bank, to enable C-GIP to discharge its responsibilities under the Project. (e) operate and maintain the Project Management Unit within C-GIP, with qualified staff in adequate numbers (including, inter alia, a project manager, one staff to carry out administrative-financial management responsibilities, one staff to carry out procurement, and one staff to carry out environmental and social supervision), funds and resources, acceptable to the Bank. 2. The Borrower shall, through the Project Steering Committee, establish, and thereafter operate and maintain, until completion of the Project, a Special Bidding Commission, with functions and responsibilities, acceptable to the Bank. 3. (a) For purpose of carrying out Part 3 (a) of the Project, and prior to the provision of any Environmental Services, the Borrower shall, through SEAMA, enter into an Environmental Services Agreement with each Land User on terms and conditions, acceptable to the Bank, which shall include, inter alia, the obligation of said Land User to comply with the pertinent provisions set forth in this Agreement, including compliance with the Anti- Corruption Guidelines and the provisions set forth in Section I.C of this Schedule, as applicable. (b) The Borrower shall exercise its rights and carry out its obligations under each Environmental Services Agreement in such manner as to protect the interests of the Borrower and the Bank and to accomplish the purposes of the Loan. Except as the Bank shall otherwise agree, the Borrower shall not assign, amend, abrogate, terminate, waive or fail to enforce any Environmental Services Agreement or any of their provisions thereof. Name Recurrent Due Date Frequency Subsidiary Agreement (Schedule 2, X N/A N/A Section I.B) Description of Covenant 1. To facilitate the carrying out of Parts 1 (g) and 2 of the Project by CESAN, and of Part 3 (b) of the Project by INCAPER, the Borrower shall make part of the proceeds of the Loan available to CESAN and to INCAPER, respectively, under a separate Subsidiary Agreement entered into between the Borrower and each CESAN and INCAPER (the "CESAN Subsidiary Agreement" and the "INCAPER Subsidiary Agreement", respectively), all under terms and conditions approved by the Bank. 2. The Borrower shall exercise its rights and carry out its obligations under the pertinent Subsidiary Agreement in such manner as to protect the interests of the Borrower and the Bank and to accomplish the purposes of the Loan. Except as the Bank shall otherwise agree, the Borrower shall not assign, amend, abrogate, terminate, waive or fail to enforce any Subsidiary Agreement or any of their provisions thereof. Name Recurrent Due Date Frequency Safeguards X N/A N/A Description of Covenant Schedule 2, Section I.D. 1 The Borrower shall implement Parts 1 (excluding 1 (g)) and 3 (a) of the Project, and cause CESAN and INCAPER to carry out the activities which fall within its respective administrative jurisdiction under the Project, in accordance with the Environmental Management Framework and Environmental Management Plan, all in a manner acceptable to the Bank. Schedule 2, Section I.D.2 (a) The Borrower shall implement Parts 1 (excluding 1 (g)) and 3 (a) of the Project, and cause CESAN and INCAPER to carry out the activities which fall within its respective administrative jurisdiction under the Project, in accordance with the Involuntary Resettlement Framework, and implement and/or cause to be implemented, the Involuntary Resettlement Plan or the pertinent resettlement action plan, all in a manner acceptable to the Bank. Schedule 2, Section I.D.2 (b) The Borrower, shall ensure, and/or cause CESAN and INCAPER to ensure, that the terms of reference for any consultancy in respect of any Project activity shall be satisfactory to the Bank following its review thereof and, to that end, such terms of reference shall duly incorporate the requirements of the Bank Safeguards Policies then in force and as applicable. Conditions Name Type Legal Opinion - Borrower (Article V; Section 5.01(a)) Effectiveness Description of Condition The Additional Legal Matters consist that "The Borrower, through a legal opinion satisfactory to the Bank, issued by the Borrower's counsel acceptable to the Bank, indicates that the CESAN Subsidiary Agreement and the INCAPER Subsidiary Agreement have been duly authorized or ratified by, executed and delivered on behalf of, the Borrower and is legally binding upon the Borrower in accordance with its respective terms." Name Type Legal Opinions - CESAN and INCAPER (Article V; Section 5.01 (b) Effectiveness Description of Condition The Additional Legal Matters consist that "CESAN and INCAPER, through a legal opinion satisfactory to the Bank, issued by CESAN and INCAPER's respective counsels, acceptable to the Bank, indicate that its pertinent Subsidiary Agreement has been duly authorized by, and executed and delivered on behalf of, CESAN and INCAPER, and is legally binding upon CESAN and INCAPER, all as the case may be, in accordance with its respective terms." Name Type Loan Registration (Article V; Section 5.01 (c) Effectiveness Description of Condition The Loan has been duly registered with the Guarantor's Central Bank. Team Composition Bank Staff Name Title Specialization Unit Stefano P. Pagiola Senior Environmental Senior Environmental LCSSD Economist Economist Platais Senior Environmental Senior Environmental Economist Economist Martin Gambrill Lead Water & Lead Water & LCSWS Sanitation Specialist Sanitation Specialist . . Senior Water & Lizmara Kirchner . Team Lead LCSWS Sanitation Specialist Marcos T. Abicalil Senior Water & Senior Water & LCSWS Sanitation Specialist Sanitation Specialist Patricia Miranda Senior Counsel Senior Counsel LEGLE/LEGOP Tatiana Cristina 0. de. Tabrea isa 0Finance Analyst Disbursements CTRLN Abreu Souza Jose C. Joaquin Toro Senior Disaster Risk Senior Disaster Risk Landivar Management Specialist Management LCSDU Specialist Miguel-Santiago da Silva . . iveia . Senior Finance Officer Disbursements CTRLN Ohiveira Senior Disaster Risk Senior Disaster Risk Michel Matera . Management LCSDU Management Specialist pecialist Etel Bereslawski Senior Procurement Procurement LCSPT Specialist Jean-Martin Brault Water and Sanitation Water and Sanitation LCSWS Specialist Specialist Paula Restrepo Cadavid Young Professional Impact Evaluation ECSUW Miriam Muller Extended Term Gender Specialist LCSPP Consultant Maria Jodo Pagarim Ribei Financial Management Financial Management LCSFM Kaizeler Specialist Monica Joyce Junior Professional Junior Professional LCSDU McDonough Associate Associate Pamela Sofia Duran Team Assistant Team Assistant LCSWS Vinueza Ndeye Awa Diagne Junior Professional Junior Professional LCSWS Associate Associate Non Bank Staff Name Title Office Phone City Environmental.. Alexandre Fortes .Eialist Brasilia Specialist Carlos Tucci Integrated Urban Water Porto Alegre Management Specialist Flavia Fonseca Carbonan Social Development . Specialist/Crime Buenos Aires de Almeida&Voec &Violence . Economist and. Luz Maria Gonzalez F.nil als Ohio Financial specialist . Water Resources Monica Porto Speialist Sdo Paulo Specialist Paulo Canedo De Engineer Rio de Janeiro Magalhdes Soraya Melgago Social Specialist Belo Horizonte Locations Country First Location Planned Actual Comments Administrative Division Brazil Espirito Santo Espirito Santo X State  I. STRATEGIC CONTEXT A. Country Context 1. In the last two decades, Brazil has made significant advances in economic management, poverty reduction, and social indicators. Growth in employment and labor incomes, as well as the implementation of targeted social assistance programs, such as Bolsa Familia, have contributed to reducing the share of Brazilians living below the extreme poverty line of R$70 a month from 9.7 percent in 2003 to 4.3 percent in 2013, as well as reducing inequality, as reflected in a fall of 15 percent in the Gini coefficient to 0.53 over the same period. 2. Despite the economic and social progress of the past two decades, Brazil's development is at a crossroads. Economic growth slowed from 7.5 percent in 2010 to only 0.9 percent in 2012, and is not expected to exceed 2.4 percent in 2014. The slowdown was associated with external events, and was mitigated by fiscal and monetary policy responses, as well as a sound banking system, large reserves and moderate debt levels. Nevertheless, future growth appears to be limited by structural bottlenecks in infrastructure, human capital, and poor financial intermediation. 3. At the same time, a growing middle class (the result of growth and improved income distribution) is drawing attention to the shortcomings of the political system, and its inability to deliver public services such as education, health and transport efficiently and cost-effectively. Mass demonstrations in most major cities in Brazil during June 2013 left little doubt as to the political importance of good governance and effective service delivery in Brazil. 4. Water resources and associated infrastructure services are essential elements for Brazil's sustainable and equitable development. Basic services such as water supply and sanitation as well as the quality of water resources have not kept pace with Brazil's rapid population growth and urbanization (82 percent of the population lives in urban areas). Access to sewage collection in Brazil stands at about 46 percent, and as a result of insufficient coverage and treatment, only 38 percent of the sewage generated is treated before it is discharged into the environment. Furthermore, even existing supplies are threatened by watershed degradation. 5. Brazil ranks among the top 10 countries in terms of deaths due to natural disasters and in the number of reported events. Adverse natural events are recurrent in Brazil, especially those of a hydrometeorological nature, with significant negative social and economic impacts. Since 2008, according to damage and loss assessment studies conducted in four states (Rio de Janeiro, Santa Catarina, Alagoas and Pernambuco), disaster-related costs have totaled close to R$15.3 billion. Disaster Risk Management (DRM) in Brazil is a new area in the development sphere. High population concentration in urban areas is the main determinant of vulnerability to natural hazards in the country, mostly driven by poor land use and planning that characterizes Brazilian cities. B. Sectoral and Institutional Context 6. The State of Espirito Santo (SES) is currently confronted with these challenges, particularly as it faces rapid population growth in the Greater Vit6ria Metropolitan Region (GVMR),2 which holds close to half of the State's 3.5 million population and contributes 62 1 Brazil's National Sanitation Information System, 2010 2 The urban population of Espirito Santo increased from 79.5 percent in 2000 to 83.4 percent in 2010 (IJSN, 2010). 3 Brazilian Institute of Geography and Statistics (IBGE), 2010. 1 percent of the State's GDP. The GVMR's population density increased from 620 inhabitants per km2 in 2000 to 728 in 2010.4 7. The rapid urbanization process in the SES has been largely unplanned. Population growth and concentration has increased pressure on the State to provide adequate access to water and sanitation services and ensure the quality of water resources, and due to population growth and increased industrial water consumption, it is projected that within the next 20 years the GVMR may be forced to seek additional water sources to meet its water demand. This stress on the availability and quality of water resources is further exacerbated by threats to water resources in areas upstream of the GVMR. Watershed degradation is resulting in high levels of erosion and insufficient coverage of sewerage collection and treatment is resulting in contamination. While sewerage coverage in the GVMR, under the management of the State Water and Sanitation Company (CESAN), has increased from 20 to 60 percent between 2004 and July 2012, municipalities in the Jucu and Santa Maria da Vit6ria watersheds continue to generate pollution loads that compromise the quality of the downstream water resources and coastal areas because of inadequate wastewater collection and treatment. 8. In 1998, State Law 5818 introduced the State's first policy framework specifically for the management of water resources. It defined the principles of integrated water resource management with other sectors, such as sanitation and agriculture, and established the Espirito Santo Integrated Management and Monitoring System for Water Resources. However, the SES has only recently initiated implementation of the system after improving the governing institutional structure and the capacity of the State's Water Basin Committees as well as of the State Secretariat of Environment and Water Resources (SEAMA). Additionally, with many actors present in the water sector, actions need to be better coordinated at the metropolitan level, particularly the management of storm water which relies on drainage master plans developed independently and with little inter-municipal coordination. This becomes particularly problematic when managing land use evolution and flood impacts on the entire metropolitan region. 9. The SES has experienced an increased intensity and frequency of extreme events in recent years. From December 15 to 27, 2013, heavy rainfall resulted in flood and landslide events and the declaration of a state of emergency in more than 50 municipalities, causing more than 20 deaths and displacing 70,000 people. These floods have been described as the worst to hit Espirito Santo in 90 years and reconstruction costs are estimated at RS$600 million. Of a total of 376 extreme events in the past decade, 276 were related to flash floods and landslides, and 69 to droughts, increasing water scarcity in some municipalities. 10. These extreme events have accentuated the conflicts between the various water uses, leading to the construction of ad-hoc hydraulic infrastructure without adequate planning. The SES has recognized the importance of DRM and its integration with long-term water resources management and is committed to a more proactive approach. 11. Extensive environmental degradation over the past 50 years has also contributed to putting stress on the quantity and quality of water resources. The SES is located in the Atlantic Forest biome which, due to its exceptional level of biodiversity and vulnerability to continuous threats, is among the world's highest priority areas for conservation. Less than 8 percent of its original cover remains in the State and it is estimated that only 4.2 percent of Espirito Santo's 4 Jones dos Santos Neves Institute (IJSN) - www.ijsn.es.gov.br. The Espirito Santo Water and Coastal Pollution Management Project (PO87711), US$107.5 million. 2 watersheds are covered with native forests.6 The loss of forest coverage has contributed to the reduction in groundwater recharge as well as the increased velocity of surface runoff. Detrimental land use patterns in the Santa Maria da Vit6ria and Jucu watersheds upstream of the GVMR have resulted in severe erosion, substantially increasing sediment loads and reducing the quality and timely delivery of water supplies. These two watersheds are not only crucial to the GVMR in that they supply 95 percent of its drinking water, but also because they retain more than 40 percent of their original forest cover and represent more than a third of the remaining forests in the State. 12. The State has made forest and watershed conservation and sustainable management of its natural resources one of the central themes in its latest 20-year development plan7 which also commits to sustaining and building on the results in sanitation to promote the integrated management of water and environmental resources. The SES has also expressed its commitment to perform a comprehensive review, to be supported by the proposed project, of the way in which water resources and hydraulic infrastructure are being managed in the State, particularly in the GVMR. This review is expected to indicate potential institutional improvements, measures and tools to better plan and manage infrastructure investments (drainage, dams, etc.) as well as to reduce risks and better respond to natural disasters. 13. The Bank has a long relationship with the SES. With the closing of the Water and Coastal Pollution Management Project in 2011 and the anticipated closing of the Biodiversity and Watershed Conservation and Restoration Project in 2014, the proposed project will provide critical support for institutional strengthening and prioritized works and projects in order to leverage gains in the water, sanitation and environmental sectors made over the past 15 years. C. Higher Level Objectives to which the Project Contributes 14. The proposed project contributes to the SES's goals put forward in its 2025 Development Plan in improving the quality of life of the population through environmental preservation and conservation. The proposed project will be active in strategic urban and rural areas that will have a high impact on equitable access to sanitation services, quality of water resources, environmental conservation and climate change mitigation and adaptation, identified as priority sectors by the State. 15. The proposed operation is consistent with the World Bank Group Country Partnership Strategy for Brazil (2012-2015) [Report 63731-BR], discussed by the Executive Directors on November 1, 2011. The CPS recognizes water as an important element to achieve higher rates of inclusive and sustainable growth, highlighting the importance of integrated water resources management and improved environmental management. The CPS also highlights the need for strategic infrastructure investments such as those needed to expand access to improved basic sanitation and for more effective DRM. To further improve the sustainable management of natural resources and enhance resilience to climatic shocks, efforts are needed to reduce the vulnerability of Brazil's territory (including coastal zones) to climate change. 6 Sustainable Development Indicators (IBGE, 2010). 7 Government of Espirito Santo 2025 Development Plan (2006). Since 2008 the World Bank, through a grant from the Global Environment Facility Trust Fund, supports the Espirito Santo Biodiversity and Watershed Conservation and Restoration Project (P094233), or Florestas para Vida Program, a pilot project to implement environmentally friendly land use practices and PES in the Santa Maria da Vit6ria and Jucu watersheds. 3 16. Due to its complex and innovative multi-sectorial nature and to its implications for metropolitan management, the Project will serve as a catalyst and as a model for integrated urban water management in Brazil, the Latin American and Caribbean region and beyond. 17. By expanding access to water and sanitation services and ensuring the quality of water resources, the Project is aligned with the institutional goals of eliminating extreme poverty and increasing shared prosperity. The Project will intervene in the Capara6 Region, one of the State's regions with higher incidences of poverty, with 40.4 percent of its population considered poor, and more specifically in the municipality of Ibatiba, where 55 percent of the population is considered poor,9 as well as in five out of the ten municipalities with the lowest Family Development Index (IDF), namely Divino Sdo Lourenqo, Irupi, lina, Ibatiba and Santa Maria do Jetibd. Finally, 41.7 percent of the households in Capara6 do not have access to an adequate sanitation solution, highlighting the link between sanitation and poverty. II. PROJECT DEVELOPMENT OBJECTIVES A. Project Development Objectives 18. The objectives of the Project are to: (a) improve sustainable water resources management, and (b) increase access to sanitation in the Borrower's territory. 19. It will be achieved by: strengthening the State's water sector institutions, providing increased wastewater collection and treatment services, supporting reforestation and sustainable land management practices, and improving the state's capacity to identify, monitor and prepare for disaster risks. B. Project Beneficiaries 20. Investments in sewerage, urban water management, environmental and water resources management will benefit the GVMR's population of 1.7 million with improved drinking and coastal water quality, as well as the population of the river basins where the Project will intervene (770,000). Sewerage investments will ensure adequate wastewater collection and treatment in: (i) Vila Velha and Cariacica (GVMR), and (ii) 9 municipalities in the interior, for a total of 166,000 people. As such, the number of direct beneficiaries is estimated at 2.63 million people. With the inclusion of planning and regulation instruments for integrated water management, the Project will benefit the State's 3.5 million people, with the objective of securing water availability and quality. C. PDO Level Results Indicators 21. The PDO will be measured against the following indicators (i) biochemical oxygen demand (BOD) pollution loads removed by activities supported under the project; (ii) population in urban areas provided with access to improved sanitation facilities under the project; (iii) number of plans, studies and systems carried out/executed under the project following an integrated approach. III. PROJECT DESCRIPTION A. Project Components 22. The proposed project will finance four components described below (for further details see Annex 2). Brazilian Institute of Geography and Statistics (IBGE, 2008). 4 23. Component 1: Integrated Water Management and Disaster Risk Management (US$59.5 million, of which US$44.6 million IBRD). Improving water resource management and metropolitan coordination and planning mechanisms for the management of urban water, and develop adequate planning and monitoring instruments for risk reduction as well as preparedness and response to adverse natural events. 24. This will be achieved by: (a) Developing a State Water Resources Management Plan; (b) Developing and/or revising River Basin Management Plans; (c) Strengthening the State's hydrological and water quality monitoring network and institutional capacity by inter alia: (i) expanding and upgrading the Borrower's hydrological monitoring network, and (ii) expanding the Borrower's capacity to monitor its water sources and coastal pollution for water resources planning by establishing a water quality analyses laboratory within SEAMA, and strengthening environmental and water resources management; (d) Strengthening coastline management by implementing a coastline modeling system; (e) Mapping groundwater resources by developing an online platform for individual self-reporting of well and groundwater usage in the Borrower's territory; (f) Strengthening SEAMA by: (i) developing a state environmental management plan, (ii) providing training on environmental and water resources management and on integrated urban water management, (iii) developing studies on, and designs for, the development of an environmental management information system, and (iv) acquiring equipment for SEAMA's environmental management information system; (g) Strengthening the State's capacity in formulating state and municipal public policies in integrated urban water management in the GVMR; (h) Strengthening the State's DRM capacity by, inter alia, (i) developing methodologies and guidelines for assessing hazard, vulnerability and risk, (ii) developing guidelines for incorporating risk into territorial planning and public investments, including the carrying out of workshops, (iii) designing and implementing an integrated information system to identify and monitor risks, (iv) strengthening the State Civil Defense System and the State Monitoring and Alert Center, and (v) establishing an integrated operations center. 25. Component 2: Efficient Water Supply Services and Increased Access to Sanitation (US$215.6 million of which US$141.5 million IBRD). Increasing the efficiency of water supply services and the coverage of sewage collection and treatment services in the Borrower's territory by, inter alia: (a) Developing an operational efficiency strategic plan for CESAN; and (b) Carrying out: (i) sewerage investments for wastewater collection and treatment in Selected Urban Areas, and (ii) household sewerage connection program, including supervision. 26. Component 3: Watershed Management and Restoration of Forest Cover (US$23.6 million of which US$14.5 million IBRD). Improving the quality of surface and coastal waters through coordinated interventions in selected watersheds by inter alia: (a) Inducing land use change in selected watersheds by supporting and extending implementation of and strengthening the State's capacity in implementing Reflorestar, and (b) Implementing the Mangarai River Pilot aimed at reducing sediment load originating in the Mangarai River sub-watershed by combining reforestation and improved land management (through Reflorestar) with interventions that include improvements to road construction, operation and management, as well as to water supply, sanitation and solid waste in the Mangarai River sub-watershed, including impact evaluations of selected interventions. 10 10 Reflorestar was developed with the support of the Biodiversity and Watershed Conservation and Restoration Project (P094233), currently under implementation. Its goal is to increase forest cover by 30,000 ha by 2014 and by 20,000 ha by 2025. The Program uses a Payment for Environmental Services (PES) scheme to provide payments for 5 27. Component 4: Project Management, Supervision and Institutional Strengthening (US$23.8 million of which US$23.8 million IBRD). Strengthening: (a) the State's capacity in Project management and implementation, including the provision of training and technical assistance for the carrying out of activities associated with Project execution, monitoring and evaluation and the provision of technical, administrative and financial management support for Project supervision; and (b) the capacity of Espirito Santo's Regulatory Agency for Water, Sanitation and Road Infrastructure (ARSI) by developing an economic and financial regulatory model for water supply and sewerage services. B. Project Financing 28. Lending Instrument. The lending instrument will be an Investment Project Financing (IPF) Loan in the amount of US$225 million to the State of Espirito Santo with a guarantee from the Federative Republic of Brazil. This instrument was preferred to other lending instruments such as Development Policy Loan (DPL) or Program for Results (PforR) given the nature and scope of project activities in support of a new approach which takes a broader look at water management issues and encompasses a wide array of institutional strengthening activities to accompany the SES's sustainable growth agenda. 29. Project Cost and Financing. The total project cost is US$323.10 million. The Borrower will provide US$98.10 million in funding. Project costs include physical and price contingencies. IBRD Project Components Prjc cost Financing % Financing (US million)million) 1. Integrated Water Management 59.50 44.60 75% 2. Efficient Water Supply Services and Increased Access to Sanitation 3. Watershed Management and 23.60 14.50 61% Restoration of Forest Cover 4. Project Management, Supervision and Institutional 23.80 23.80 100% Strengthening Total Project Costs 322.50 224.44 70o Front-End Fees 0.56 0.56 100% Total Financing Required 323.10 225.00 70% C. Lessons Learned and Reflected in the Project Design 30. The World Bank's worldwide experience in the water sector, as well as long-term involvement in the water resources management and water supply and sanitation sectors in Brazil and in the SES have provided valuable lessons, which are reflected in the proposed project's design. Among the lessons incorporated in the Project's design are the following: 31. Integration in implementation arrangements used in previous Bank operations in the SES brought together a number of State Secretariats and improved cross-sectoral collaboration and integration. The proposed operation will rely heavily on this integration in implementation arrangements, through the oversight of the Project Steering Committee. These arrangements, reforestation, followed by longer-term payments for forest conservation, as well as short-term payments for the adoption of environmentally-friendly productive land uses such as agroforestry or silvopastoral practices. 6 which evolved through the long-term partnership established with the Bank since 1994, also mainstreamed social and environmental sustainability amongst representatives of both the State Government and project executing agencies. 32. Connecting households to the sewerage network. To increase the chances of a high rate of household connection to the sewerage network, a solid communication effort and strong partnership with local governments are critical, since responsibility for enforcing connections (and the political will needed for enforcement) lies with them. Furthermore, a social tariff and the provision of subsidies to connect low-income households are particularly important to realize the environmental and health benefits arising from access to sanitation. As learned in the previous operation, connections will be included in the works contracts that are installing the network, and related social and communication activities will be put in place before and during construction, as well as when collection and treatment works are initiated. 33. Payment for Environmental Services (PES). The Project draws on the experience of previous projects that have implemented PES approaches, including Costa Rica's Ecomarkets and Mainstreaming Market-based Instruments for Environmental Management, Mexico's Environmental Services and Regional Integrated Silvopastoral Ecosystem Management Project and the Espirito Santo Biodiversity and Watershed Conservation and Restoration Project (Florestas para Vida), on a review of lessons from PES programs in Brazil,1 and on other PES experiences worldwide. In addition to numerous detailed lessons on PES mechanism design, the broad lessons of these previous efforts that are applicable to this project include: (i) clearly identifying the specific needs of service users in the watersheds (in this case, reducing sediment loads in CESAN's water sources), and (ii) clearly establishing which land uses, in which areas, can help generate the specific services needed by the water users (this analysis was undertaken during the implementation of the Florestas para Vida Project). 34. The inclusion of disaster risk management aspects in this operation has taken into account lessons learned from previous global disasters and from 25 years of Bank operations and programs in the area of DRM. The 2005 World Bank Independent Evaluation Group report "Hazards of Nature, Risks to Development: An Evaluation of World Bank Assistance for Natural Disasters" recommends that the Bank assists its clients most vulnerable to natural disasters in shifting from focusing entirely on disaster response to implementing programs and policies for comprehensively managing disaster risk. 35. Turnkey contract approach. The design, build and operate ("turnkey") contract model was used in the execution of most works in the previous operation12 in Espirito Santo and proved to be robust and effective. This contract model can be attractive to firms of quality with proven capacity to tolerate risks and provides an incentive to the firm to resolve issues rapidly. Fewer contract amendments are necessary, leading to faster execution of works. In the previous operation, amendments to turnkey contracts, even though they were more complex technically, were on average 3.7 times inferior in terms of time and 4.6 times inferior in terms of cost when compared to amendments in traditionall3 contracts. 1 Pagiola, S., H. Carrascosa von Glehn, and D. Taffarello (Eds.). 2012. Experiencias de Pagamentos por Servi(os Ambientais no Brasil. Sio Paulo: Secretaria de Estado do Meio Ambiente. 12 The Espirito Santo Water and Coastal Pollution Management Project (PO87711), US$107.5 million. 1 A "traditional" contract refers to a contract using standard unit prices. 7 IV. IMPLEMENTATION A. Institutional and Implementation Arrangements 36. SEAMA will be in charge of leading the execution of the activities related to water resources, reforestation and DRM (Components 1 and 3) and INCAPER will be in charge of executing the activities related to the Mangarai Pilot Project (Component 3). CESAN will be the entity in charge of executing the activities related to water supply and sanitation (Component 2), related to urban water management and other institutional aspects related to the GVMR (Component 1) as well as support the execution of the Mangarai Pilot Project. 37. Project implementation arrangements will rely on: (i) the oversight of a Project Steering Committee, (ii) the State Secretariat of Government (SEG), (iii) an overall coordination body responsible for the overall project implementation (C-GIP), and (iv) an independent Project Management Unit (UGP). The UGP is supported by three Core Thematic Groups (CTG), an Administrative-Financial Management sub-unit and an Environmental and Social Supervision sub-unit. Each CTG coordinates activities on behalf of each institution involved which will help facilitate and operationalize inter-sectoral planning. 38. The Project Steering Committee will have consultative and decision making powers, as well as be responsible for the general supervision of the Project's activities. It will be chaired by a high-level government official and will comprise high-level representatives from key State entities participating in the Project. The SEG, as the Project's institutional coordinator, is responsible for budget decentralization and transfer of resources for project execution, as requested by the C-GIP. C-GIP will be responsible for the overall project execution, including planning and oversight of UGP activities. 39. The UGP will be responsible for the technical (through the CTGs led by CESAN, SEAMA and INCAPER), administrative, financial, environmental and social management and execution of project activities. The Administrative-Financial Management sub-unit will cater to the three CTGs and establish the communication channels with the State entities' financial management units and with the State Secretariat of Finance (SEFAZ), responsible for the internalization and provision of World Bank and State Government counterpart funds. An Environmental and Social Supervision sub-unit will also be in place at the UGP to accompany the implementation of the Environmental Management Plan (EMP), the Environmental Management Framework (EMF) as well as the Resettlement Action Plan (RAP) and Resettlement Policy Framework (RPF) and supervise corresponding activities. Annex 3 explains these arrangements in more detail. B. Results Monitoring and Evaluation 40. Overall responsibility for project monitoring and evaluation (M&E) will lie with the C- GIP, which with support from the UGP, will consolidate all reports and provide timely information about its progress and execution to the Bank, including qualitative and quantitative information on the execution of selected interventions, procurement and contractual decisions, accounting and financial recording and other operational and administrative matters. The UGP will be assisted by other institutions involved in the execution of the Project and specialized consultants, as required. The Project's Operational Manual will provide specific details regarding monitoring and evaluation responsibilities, including data collection requirements and timing. 41. CESAN will be responsible for reporting on indicators related to the company's operational performance and on the quality of service provision, while SEAMA will continue to monitor water quality and coastal pollution, on a weekly basis, through a water quality sampling 8 network in the State's main hydrographic basins and a coastal pollution sampling network on 46 beaches along the State coast (totaling 71 sampling locations). This information will be reported to the Bank every six months. 42. The Mangarai Pilot Project also benefits from the distributed hydrology model developed under the Florestas para Vida Project. This model responds dynamically to climate, vegetation changes, and soil moisture conditions and will be used to model the effects of land use change on water services that affect downstream water users. SEAMA will be responsible for sharing the results of the modeling exercises with CESAN and the Bank. Details on M&E arrangements are provided in Annex 3. C. Sustainability 43. The proposed project is part of a long-term program which has evolved since 1994 and was able to successfully put in place and solidify internal and external incentives at the sector and utility levels critical for sustaining the Project's main objectives and benefits. This project will build on the previous operation's achievements in making a significant contribution to the sustainability of environment, water and sewerage services in the SES, particularly in developing a strong partnership between SEAMA and CESAN. 44. The activities financed under the Integrated Water Management Component will be targeted to those state and municipal institutional stakeholders that have a direct role in ensuring the sustainability of these interventions and can contribute to building up the physical and institutional basis for sustained integration in the strategic planning and policies concerning water resources, water infrastructure and the environment. 45. Important parts of the sustainable land management practices supported by the Project are expected to be not only environmentally beneficial but also in the farmers' interest, so that they are expected to maintain them after the Project ends.14 To ensure that this is the case, technical assistance will help farmers adopt practices that are best suited to their conditions and help implement them effectively. Initiatives such as silvopastoral practices and organic farming have the potential to be highly productive if well implemented, but can be marginal if implemented poorly. These extension services will also include specific work with women in the target communities to not only improve their skills to market their products, but also train them on rights and citizenship issues in the effort to empower them economically and socially. 46. The creation of the State Fund for Water Resources (Fundigua) in 2008, gave the State water resources policy an instrument to secure and apply funds to improve management of water resources and the environment. These funds, executed by SEAMA, come from petroleum royalties and contribute to the long-term availability of resources to be applied in PES programs, including the one supported by the Project. 47. Climate Change Adaptation and Mitigation Co-Benefits. The Project will finance activities with climate change co-benefits in that it will support: (i) improving water resource management, particularly in the areas of planning and monitoring to allow for the integration of policies concerning water resources, water infrastructure and the environment; (ii) establishing early warning and disaster assessment systems; (iii) developing a comprehensive operational efficiency strategic plan for CESAN, including water loss reduction; as well as (iv) sustainable land management practices and watershed function restoration through the Reflorestar Program 14 some cases, reducing sediment loads may require adoption of practices that are less profitable for farmers than available alternatives. To address such cases, Reflorestar offers long-term payments that compensate farmers for the opportunity cost of adopting the conservation practice. 9 as well as through the Mangarai River Pilot project combining reforestation and improved land management, which will also contribute to increasing vegetative cover. V. KEY RISKS AND MITIGATION MEASURES A. Risk Ratings Summary Table Stakeholder Risk Moderate Implementing Agency Risk - Capacity Moderate - Governance Moderate Project Risk - Design Moderate - Social and Environmental Low - Program and Donor Low - Delivery Monitoring and Sustainability Moderate Overall Implementation Risk Moderate B. Overall Risk Rating Explanation 48. The risk rating for implementation of the Project is "Moderate", given the State's commitment to the Project, its current institutional capacity and the relatively high level of integration among State institutions (which will help facilitate implementation), as well as proven experience with Bank projects. Key implementation risks include: 49. Agreement within the State Government's key aencies/secretariats and with municipalities in the GVMR on adequate arrangements for integrated water management may not be reached. The Project will work with the SES to establish adequate governance frameworks and coordination mechanisms for metropolitan management of urban water issues such as drainage and water resources, across sectors and with the municipalities involved. The different agencies within the SES already possess a relatively high degree of integration and coordination, so seeking integration at the municipal level poses the greater challenge. The Project Steering Committee will have representatives from each of the key sector secretariats and, through SEPAM, will coordinate with the GVMR Metropolitan Council (COMDEVIT), which has representation from the municipal level. Close supervision of technical assistance activities during project implementation will ensure that diagnostics and proposed alternative arrangements have solid technical justifications, and draw on best practice experiences. Furthermore, the Steering Committee will be in charge of coordinating discussions with the different stakeholders to reach a satisfactory agreement. 50. The lack of up-front buv-in from households in connecting to the sewerage network increases the chances of a low rate of connection and of achieving key project results. CESAN recently experienced a gap between network availability and the rate of connection, and has used a number of approaches to deal with this issue. The company now has a specific division dedicated to improving communication related to connecting to the sewerage network with households and accelerating connections to the sewerage networks being delivered and under construction. This division was able to mobilize funding from the SES to subsidize connection costs15 to low income households and has created a multi-faceted program to scale-up the 15 The connections mostly refer to in-house connections and related work and plumbing (grease traps, for example) and CESAN currently estimates connections to cost on average approximately R$1,000. 10 communication efforts with the community in order to increase the rate of household connections to the network and promote the health and environmental benefits of doing so. 51. Although the State has experience in implementing World Bank projects, the number of integrated/cross-sector activities to be undertaken and the level of scaling up in the PES activities may result in delays related to procurement, financial audits and processing of contractual documents and financial transactions. The Project's implementation arrangements, financial management and procurement aspects will be clearly reflected in the Project's operational manual. In addition, as successfully done in previous Bank operations, these aspects will benefit from the support of a project management and engineering consulting firm, who will provide support to the UGP in preparing bidding documents and reporting on fiduciary issues. As for the PES activities, the project cycle has been clearly identified as well as the respective roles, responsibilities and the level of support needed by the agencies involved. VI. APPRAISAL SUMMARY A. Economic and Financial Analyses 52. The economic analysis shows that Components 2 and 3 are likely to generate benefits well in excess of their costs, and that Component I will position the SES to substantially reduce the impacts of possible future disasters and better manage its water resources. Component 2 has a net economic benefit of US$139 million and an Internal Rate of Return (IRR) of 37 percent, while Component 3 has a net economic benefit of US$13 million to US$18 million and IRR ranging from 12.7 to 16.8 percent. 53. Water services consumers are the main beneficiaries of Component 2, with improvements in health, increase in labor productivity, and appreciation of property value substantially exceeding the higher tariff rates they will have to pay. Water consumers will also benefit indirectly from Component 3 from avoided increases in treatment costs (which may result in higher water tariffs). Landholders are the other main beneficiaries of Component 3, primarily through higher income from more productive practices. 54. The bulk of investment costs will fall on the SES. The long-term financial costs of operating the additional water infrastructure will fall on CESAN, but projected revenue increases are more than sufficient to cover these added costs. The long-term costs of conservation payments represent a small fraction of Fundigua's annual budget. 55. A financial analysis of CESAN was undertaken to evaluate its financial capability of sustaining and operating the investments included in the Project. This assessment differs from the financial analysis of the Project as it takes into account not only the Project, but also all other operations that CESAN is planning to implement. The evaluation of CESAN's financial statements in the last five years shows a sound financial situation, and the financial projections show that revenues will increase in real terms due to: (i) a new tariff structure approved by ARSI, which will be fully implemented by 2014, and will result in a 26 percent real increase in the sewerage tariff; and (ii) an investment plan that will expand sewerage coverage and maintain universal coverage in the water service. As a consequence, sewerage revenues are expected to increase by 54 percent and total revenues by 16 percent. Cost recovery will maintain its current level of about 120 percent, covering all operating costs plus 20 percent to fund investment costs. The capital structure will show a sound position with debt participation of 30 percent of assets and equity 70 percent. Additional details on the analysis can be found in Annex 6. 11 B. Technical 56. The proposed project relies on approaches, methodologies, technical designs and technologies appropriate for the Brazilian context and no significant technical obstacles are expected during implementation. 57. Integrated Water Management and Disaster Risk Management. Terms of reference for a number of the activities financed under this component have been reviewed and take into account best practices from similar experiences in Brazil and other parts of the world. For example, the River Basin Management Plans will be developed through a participatory process and establish the allocation parameters for the cities, and will also identify and prioritize water resources infrastructure works needed for the management of the basins. They will analyze the source of different pollutants and contemplate adoption of alternative solutions (such as combined or non-combined systems, reuse of treated effluents, utilization of new technologies, risk management approaches, etc.). 58. Efficient Water Supply Services and Increased Access to Sanitation. The rehabilitation and construction works will follow Brazilian standards for system dimensioning and the standards of quality of the National Environmental Council (CONAMA) for effluent discharged and sludge disposal, including continuous monitoring of treated wastewater and sludge reuse, which are in line with the IFC/World Bank Group Environmental, Health and Safety Guidelines for Wastewater and Environmental Water Quality. 59. Engineering designs and associated estimated costs for sewerage works were reviewed during preparation. Variations in costs per capita per municipality can be attributed to: (i) topography (which influences the number of pumping stations required); (ii) population density; (iii) the state of the existing roads along which pipes will be laid (i.e., requiring work on paved or dirt roads, repaving, etc.); and (iv) the presence of rock beds in the areas where pipes are to be laid, requiring additional work and equipment. These per capita costs are comparable with costs from previous contracts in the Bank's previous Espirito Santo Water and Coastal Pollution Management Project in the SES, adjusted for inflation. 60. The suggested wastewater treatment technology (Upflow Anaerobic Sludge Blanket, UASB) for most of the new systems to be built or rehabilitated is appropriate for Brazilian climatic conditions. This technology was selected during the design process particularly for its low operating costs with regards to energy consumption and for the experience that CESAN has with operating these systems in both urban and rural areas. 61. Watershed Management and Restoration of Forest Cover. The Project is appropriate for the needs of the SES and will address constraints it is attempting to overcome in maintaining water quality and environment conservation. The Project builds on the interests and actions of the government, utilities, municipal governments, and NGOs to further develop an environmental service market to reduce watershed degradation as well as threats to globally important biodiversity from agricultural production systems and increase habitat for species in key rainforest watersheds of the Atlantic Forest. The PES scheme is an innovative approach that draws on several operational examples, including national programs in Costa Rica and Mexico and programs in other Brazilian states. C. Financial Management 62. An Financial Management (FM) assessment was carried out by the Bank and the risk associated with the Project has been assessed as "Moderate" mainly due to the following factors: the involvement of a high number of agencies and secretariats in project implementation that can 12 make it difficult to exercise the proper oversight and control of project execution; the dependency on SEFAZ to transfer the resources; and the non-integration of the Financial and Physical Monitoring System (SAFF) with the Integrated Administrative and Financial State and Municipal System (now SIAFEM, to become SIGEFES). 63. Mitigation measures include: (i) the preparation of the audit terms of reference; (ii) ensuring that SIGEFES, the new budgeting and accounting state system, and SAFF, the monitoring system, are fully operational and capable of running the agreed Interim Unaudited Financial Reports (IFRs) and satisfy Bank requirements; and (iii) put in place close monitoring and follow up by the UGP staff, assuring proper field supervision missions to provide training on the FM and disbursements procedures throughout project implementation. FM supervision missions are expected, in the beginning, to be undertaken on a bi-annual basis, subject to an adjustment based on the FM risk and adequacy of the FM arrangements. D. Procurement 64. Procurement for the proposed project will be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated January 2011, "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated January 2011 and the provisions stipulated in the Legal Agreement. A Procurement Plan acceptable to the Bank was prepared for the first 18 months and subsequent procurement plans will be prepared and updated at least annually, or as deemed necessary. 65. As the procurement arrangements established for the previous Bank-financed Espirito Santo Water and Coastal Pollution Management Project (P087711) have worked well, it is proposed that the same type of organizational procurement structure be adopted in this project. The SEG, the Special Bidding Commission (Comissdo Especial de Licitaq5es, CEL), the UGP and its CTGs led by CESAN, SEAMA and INCAPER will be the entities with procurement responsibilities. The overall Project risk for procurement is "Moderate," due to (i) the limited capacity of the implementing agencies to prepare procurement documents and processes, and (ii) concerns about the capacity of some agencies to prepare timely and good quality terms of reference and reliable budgets. E. Social (including Safeguards) 66. The Project will bring positive social impacts by increasing access to sanitation, and improving the State's capacity for better integrated water management, which includes aspects related to DRM. In order to ensure regular consultations with key stakeholders and periodic communication of project activities and results, the Project's EMP includes the elaboration of a communication plan to be implemented during construction, which will draw on the existing CESAN and State procedures, such as their customer service/citizen call centers and complaint hotlines. In addition, the State and CESAN will continue to act transparently, periodically disseminating operational, economic, financial, environmental and social indicators, as well as project results to the public. 67. In the areas where sewerage investments are being undertaken, the Project will also support the implementation of a socio-environmental plan for wastewater collection system connections in support of CESAN's "Connect to the Network" Program ("Se Liga Na Rede") to scale-up the rate of household connections to the sewerage network (particularly low-income households) and promote the health and environmental benefits of connecting to the network. 68. The Project will build on INCAPER's participatory approach to produce local diagnostics and hold focus group meetings with women in the Mangarai River pilot region in order to 13 develop an understanding of gender dynamics, especially with regards to different needs and interests of women and men; helping plan concrete initiatives suited to the specific needs of men and women. The Project will support implementation of training aimed to empower women economically (e.g., overseeing programs/activities designed to add value to products, business- related skills, basic market analysis skills), paired with training on citizenship and rights, aimed at empowering women socially. 69. Involuntary Resettlement (OP/BP 4.12). As part of the social assessment, the Bank reviewed the main civil works identified for implementation and found that no involuntary resettlements of households are expected to take place. However, land acquisition and easements will be required for wastewater treatment and collection works, as well as for potential drainage works. As such, a RAP and a RPF have been prepared, respectively, for the works already identified, and to guide any future resettlement in the case it becomes necessary. Three public consultations were carried out from May 20 to 22, 2013 (one in the GVMR, one in Capara6 and one in the Santa Maria and Jucu river basins) for both social and environmental aspects. Draft final versions of the RAP and RPF were made available to the public 10 days before the public consultation. Appropriate grievance redress mechanisms and arrangements for monitoring the implementation of the RAP are put in place. F. Environment (including Safeguards) 70. The Project is expected to promote several environmental benefits as the interventions related to the expansion of wastewater services are expected to lead to an increase in sewage collection with health and environmental benefits both for local residents along polluted waterways and for the users of Espirito Santo's beaches more generally. 71. The Project is classified as Category B, and an Environmental Impact Assessment (EIA), which includes an EMP, was prepared in accordance with the World Bank's Environmental and Social Safeguard Policies. An EMF guides the works and activities that will be further detailed and identified during implementation (including studies and policy work), and provide good practices and procedures for treatment of Quilombola communities in accordance to national and local legislation.16 Draft final versions of the EIA and EMF were made available to the public 10 days before the public consultation. Appropriate grievance redress mechanisms and arrangements for monitoring the implementation of the EMP are put in place. 72. No potential large scale, significant and/or irreversible impacts have been identified. The impacts considered most relevant are those related to: (i) sewerage systems (Component 2), and (ii) the increase of forest cover and recovery of Areas of Permanent Protection (APP) (Component 3). Activities are expected to generate positive impacts that outweigh the negative impacts associated with works implementation phase (impacts are localized, temporary, small scale, and controlled and mitigated with the EMP) and during operation of the systems. 73. The EMP covers the following thematic programs: (i) project-specific environmental and social management plan that includes mitigation measures for the specific investments as needed, definition of implementation responsibilities during the construction and operation phases, monitoring arrangements, and implementation schedule with adequate budget; and (ii) sludge management that includes short- and long-term solutions for the treatment, disposal and reuse of sludge generated from the wastewater treatment plants. Furthermore, included in the 16 There is one Quilombola community in the Mangarai sub-basin that may be a project beneficiary. Quilombola communities do not meet the criteria to be considered indigenous communities for the purposes of the Bank's Indigenous People Safeguard Policy - OP/BP 4.10. 14 provisions of the EMP is the adoption of an Environmental Construction Manual during the construction of planned works. This manual will be included in the bidding process for all works, and the adoption of the adequate environmental practices established in the manual is deemed a contractual obligation to be fulfilled by the contracted companies. 74. Natural Habitats (OP/BP 4.04). Preliminary assessments of the wastewater collection and treatment works as well as other planned interventions indicate that natural habitats will not be adversely affected by the Project. Sewerage interventions will not be conducted in protected areas. Certain sections of the systems fall in APPs; the impacts on these areas will be minimized by the adoption of guidelines as specified in the Environmental Construction Manual, which forms part of the EMP. Because they are considered to be of public utility, the interventions are subject to licensing by the State Institute of Environmental and Water Resources (IEMA). Although specific areas of reforestation have not yet been identified, they may include protected areas and are expected to have a positive impact on natural habitats. As established in the EMP, only native species of the Atlantic forest will be used in the reforestation interventions. Some specific interventions may also take place in APPs and will aim at recuperating and restoring them. 75. Forests (OP/BP 4.36). The Project will support management of forests, as it will include reforestation of approximately 3,850 hectares of forest in selected river basins and a pilot demonstration unit linking the recovery of forests and the quality of water sources. Interventions are expected to have a positive impact. As established in the EMP, only native species of the Atlantic forest will be used in the reforestation interventions. 76. Pest Management (OP 4.09). Since Component 3 will deal with the generation of opportunities and revenue for rural producers, it was noted during the preparation of the EIA that forest cover restoration activities will use low toxicity herbicides and formicides for pest management (mostly ants) during the seedling planting phase of the program. An Integrated Pest Management Plan was prepared and is an integral part of the EMP. The assessment also indicates that the Project is unlikely to require the purchase, application or storage of pesticides and will not lead to an increased use of pesticides. No pesticides for rodent control will be necessary under flood control, drainage or reforestation initiatives. 77. Physical Cultural Resources (OP/BP 4.11). Brazil has a well-developed legislative and normative framework for management of physical cultural property. Although no impact on Physical Cultural Resources (PCR) is expected, "chance find procedures" for PCR are included in the EMP to safeguard against potentially impacting physical cultural property during implementation. 15 Annex 1: Results Framework and Monitoring BRAZIL: Espirito Santo Integrated Sustainable Water Management Project Project Development Objective (PDO): The objectives of the Project are to: (a) improve sustainable water resources management, and (b) increase access to sanitation in the Borrower's territory. I lu nio Cumulative Target Values ResrDatoSouce!i aUnit oCu lFregteucy r Responsibility Description (indicator definition Indicators a Baseline Frequency for Data Measure YR2 YR3 YR4 YR5 YR6 Methodology Collection etc.) PDO Level Indicators Volume(mass) of BOD Reduction in Biochemical Oxygen pollution load removed by tons/year 0 680 780 1,590 Annual CESAN CESAN/UGP Demand (BOD) pollution loads treatment plant under the resulting from Component 2 project investments1 People in urban areas provided with access to Cumulative number of people that will "improved sanitation 0 0 - 20,000 50,000 80,000 164,485 Annual CESAN CESAN/UGP have access to a sewerage connection as facilities" under the a result of project investments project Number of plans, studies Plans, studies and systems described and systems carried under components 1, 2 and 3 that have out/executed under the [l # 0 0 1 4 6 9 Annual UGP UGP the participation of three or more institutions of the state, federal and/or project following an municipal governments, as well as civil integrated approach society. Beneficiaries: Direct Millions Direct beneficiaries are people or project beneficiaries. 2 of 0 0 0.06 0.81 0.93 2.63 Annual UGP UGP groups who directly derive benefits people from an intervention. Female beneficiaries % % 0 0 50% 50% 50% 50% Annual UGP UGP Percentage of direct beneficiaries INTERMEDIATE RESULTS Component 1: Integrated Water Management Intermediate Result: Improve the State's capacity for and efficiency in managing its water resources and mainstream disaster risk management 12 The BOD pollution loads were calculated using (i) influent BOD concentrations as sampled and measured by the engineering firms in charge of the designs, as well as (ii) estimated influent sewage flows and (iii) average BOD removal efficiencies of 90 percent for both the "integrated UASB" and activated sludge processes. 1 Potential activities to be measured by this indicator -- (i) state water resources management plan, (ii) 3 river basin management plans, (iii) hydrological and water quality monitoring network, (iv) coastline modeling system, (v) mapping of groundwater resources, (vi) drainage master plan for the GVMR, (vii) development of methodologies and guidelines for hazard, vulnerability and risk assessment, (vii) involuntary resettlement framework for immitigable risks, (viii) integrated operations center, (ix) updating of CESAN's water master plan, (x) impact evaluation of the Mangarai pilot. 16 Unit of Cumulative Target Values Data Source! Responsibility IndicatorsDescription (indicator definition P,o r Measure YR2 YR3 YR4 YR5 YR6 Methodology Collection etc.) Percentage of territory within the State of Espirito Santo covered by E % 0 - - - 20% 70% Annual SEAMA SEAMA/UGP timely and accurate warning for hydro- meteorological events Percentage of territory within the State of Esiint Sat on e E % 30% - - 40% 55% 60% Annual SEAMA SEAMA/UGP Espirito Santo monitored by the hydromet network Percentage of coastal development projects licensed using the coastal % 0 - 15% 30% 60% 100% Annual SEAMA SEAMA/UGP management model developed under the project Component 2: Sewage Collection and Treatment Intermediate Result: Increase the coverage of sewage collection and treatment services in the State CESAN's operating ratio The operating ratio is the division of the r # 0.85 < 0.90 < 0.90 < 0.90 < 0.90 < 0.90 Annual CESAN CESAN/UGP company's operating expenses by its remains 0.90 joperating revenues. New household sewer Cumulative number of piped household connections constructed # 0 - 4,000 10,000 16,000 32,897 Annual CESAN CESAN/UGP sewerage connections built under the under the project project. Component 3: Watershed Management and Restoration of Forest Cover Intermediate Result: Increase forest cover and the use of sustainable land management practices Area restored or Cumulative area that is covered by the re/afforested Z Hectares 0 - - 500 1,000 2,000 Annual SEAMA SEAMA/UGP payment for environmental services for conservation and/or reforestation Land area where sustainable land Cumulative area that is covered by the management practices 0 Hectares 0 - - 300 800 1,850 Annual SEAMA SEAMA/UGP payment for environmental services for were adopted as a result improved land management practices of the project Number of women participating in training aimed at economic and H # 0 30 50 100 150 150 Annual INCAPER INCAPER/UGP social empowerment under the Mangarai River pilot project 17 Annex 2: Detailed Project Description BRAZIL: Espirito Santo Integrated Sustainable Water Management Project 1. The project has been designed to go a step beyond previous Bank partnerships with the SES to achieve enhanced and more equitable access to sanitation services and support a move towards a long-term, innovative approach to integrated water management. This entails having a broad outlook to water management, through strengthening stakeholder institutions, as well as developing instruments, mechanisms and institutional arrangements (if needed) that foster coordination of policies, planning and interventions/investments across sectors (water supply and sanitation, agriculture, urban, environment, water resources management) as well as across different levels of government (federal, state, municipal). Table A2.2 presents the project costs by component. 2. Component 1: Integrated Water Management and Disaster Risk Management (US$59.5 million, of which US$44.6 million IBRD). This component supports activities aimed at (i) improving water resource management, particularly in the areas of planning and monitoring to allow for the integration of policies concerning water resources, water infrastructure and the environment, including the institutional strengthening of SEAMA; (ii) improving metropolitan coordination and planning mechanisms for the management of urban water; and (iii) developing adequate planning and monitoring instruments for risk reduction as well as preparedness and response to adverse natural events. The lead entity for the activities related to water resources management will be SEAMA, while CESAN will lead the activities related to urban water management. 3. Water Resources. The Project will finance the development of a State Water Resources Management Plan (US$3.1 million), which will have an expanded scope than what is traditionally done in Brazil and will establish strategic objectives for the water resources sector and is aligned with the SES's Economic and Social Development Plan. The Plan will identify critical areas and specific regional needs, such as those in water infrastructure, as well as identify the necessary institutional arrangements and guidelines for its execution, including the direct involvement of the State's municipalities. Although this activity will be financed by the Project, there will be coordination with the Bank-financed Federal Integrated Water Project (INTERAGUAS), throughout its development. In parallel to the development of the State Water Resources Management Plan, this component will also finance, inter alia, the following activities: a. Development of River Basin Management Plans (US$2.0 million). The River Basin Management Plans will identify and target priority investment needs for water infrastructure as well as develop water allocation scenarios for each studied river basin. The Project will finance the development of River Basin Management Plans for at least three individual river basins which do not already count on existing plans (Sdo Mateus, ItaCinas and Itapemirim) and will finance the revision of existing plans (as needed), in order to harmonize the methodology used, particularly in terms of the categorization of actions (short-, medium- and long-term actions) and prioritization of investments. Water body classification studies will be prepared as part of the River Basin Management Plans to classify water bodies according to their current level of development and sensitivity to 18 development, in order to provide a range of protection, restoration, and enhancement strategies as well as various management actions and allow the management plans to be tailored to the needs of the resource as well as the priorities of the community. b. Strengthening the State's Hydrological and Water Quality Monitoring Network and Institutional Capacity (US$7.0 million). The SES's existing hydrological monitoring network is currently limited to two hydrological monitoring stations (operated by SEAMA) which complement the National Water Agency's (ANA) network of 41 hydro- meteorological stations in the State. SEAMA also oversees the Water Resources Quality Monitoring Network which collects data on freshwater quality in the State's main river basins and on coastal pollution on 46 beaches along the state coast (totaling 71 sampling locations). To complement these existing networks, the Project will finance, inter alia: i. Hydrological Network: the expansion and upgrading of the hydrological monitoring network, in order to collect valuable data on precipitation and water levels for the water resources planning and management process and provide the SES with an increased capacity to prepare and plan for adverse hydrological events such as floods and droughts. This will require, inter alia, the acquisition and installation of 34 automatic pluviometric and fluviometric monitoring stations, 53 limnimetric rulers, as well as related training, vehicles and office equipment, and development of a database and website to disseminate the current information on water quality and quantity. ii. Water Quality Network: the expansion of the existing Water Resources Quality Network's capacity to monitor the State's water sources and coastal pollution for water resources planning, by establishing a Water Quality Analyses Laboratory within SEAMA, as well as capacity building activities aimed at strengthening environmental and water resources management. This will require, inter alia, the preparation of the architectural, structural, electrical and electronic designs for the laboratory, as well as its construction, acquisition of software for the laboratory's information and quality control systems and equipment for water quality analyses, and reagents storage facilities. c. Strengthening Coastline Management (US$3.8 million). Espirito Santo's 1,140 kilometers of coastline have recently seen significant growth in port-related activities, real estate and tourism, which has put pressure on the coastal environment, particularly in terms of contributing to increased coastal erosion. The Project will support the implementation of a coastline modeling system (Sistema de Modelagem Costeira - SMC), a model-based decision-making tool which relies on topographic and bathymetric data as well as on information on ocean dynamics (ex.: currents, waves, tides and winds). This tool will help the State better understand the causes and the current and future impacts of increased coastal erosion, as well as help with the definition of coastal planning guidelines and environmental licensing. The software for this model is already available to the State via a cooperation agreement with the Government of Spain. More specifically, the Project will finance, inter alia, (i) the analysis and processing of available coastal aerial and high resolution satellite images for at least three different time periods in order to develop coastline evolution maps, (ii) topographic surveys of 16 19 beaches along the SES coast and beach sediment analyses, along a period of three years, (iii) the collection of bathymetric data along the SES coast for depths between 0 and 15 meters, along a period of three years, (iv) the collection of data on ocean dynamics at three locations along the SES coast (Anchieta, Serra and Linhares), along a period of one year and (v) the calibration and validation of the coastline modeling system with the acquired data, as well as related training. d. Mapping of Groundwater Resources (US$0.6 million). This activity will support the development of an online platform on which citizens can self-report their usage of wells and groundwater in the SES. This platform will serve as the primary data collection mechanism for the mapping exercise and will allow the SES, in the medium- to long- term, to establish a groundwater usage regulatory framework (currently inexistent). This will also include public consultations, a communication campaign to inform the public about the program, hydrogeological data collection through selected site visits to validate the available data, as well as related training. 4. Institutional Strengthening of SEAMA (US$4.0 million). Activities under this sub- component include the elaboration of a state environmental management plan, training in environmental and water resources management as well as in integrated urban water management, studies and designs for the development of an environmental management information system, as well as consulting services and the acquisition of equipment related to the development of that information system. 5. Integrated Urban Water Management (US$19.1 million). The management of storm water and flood impacts in the GVMR is not well coordinated, particularly as it relies on drainage master plans developed independently and with little inter-municipal coordination. The Project will support technical assistance and a participatory process that will result in the formulation of state and municipal public policies, as well as capacity building in integrated urban water management in the GVMR, particularly at the municipal level. This will include the participatory development of an integrated urban water management plan, as well as a metropolitan urban drainage master plan for the GVMR, the structuring of a metropolitan institutional framework for the management of urban water, as well as preparation of detailed engineering designs and/or works identified as priority in the drainage master plan, which may include some urban requalification. Given the many issues related to water and flood management being faced at the metropolitan level on a regular basis, there is a lot of interest from all of the Municipalities that integrate the GVMR in participating in this process. 6. Disaster Risk Management (US$19.8 million). Until recently, the SES's approach to the growing number of disasters and increasing vulnerability due to urbanization was similar to that of the Federal Government, i.e., of a reactive nature, focused on disaster management. However, the SES has indicated the need to shift the focus to promoting a culture of prevention, by looking at strengthening its capacity for disaster risk management (DRM), better understanding its risk, in order to respond to disasters more efficiently. 7. The process of creating a DRM program comprises the identification of entities and coordination mechanisms to avoid redundancy in efforts and resources. The Bank and the SES are studying the different options in terms of ownership and structuring an adequate framework 20 for DRM in the State, and although an agency to manage the DRM program has not yet been defined given that DRM is new and involves all areas of the State government, SEAMA will take the lead in the implementation of DRM activities. It is also expected that institutions which may potentially take on this role will be identified during project implementation. More specifically, the Project will support the State's efforts in, inter alia: a. Institutional Strengthening for DRM (US$0.8 million). Supporting capacity building at the state and sectorial levels, with adequate training; development of methodologies and guidelines for hazard, vulnerability and risk assessment; development of workshops and guidelines on how to incorporate risk into territorial planning and public investments, with a focus on water and sanitation. At the same time, studies will be produced to understand the economic and fiscal impacts of disasters on the State, developing an involuntary resettlement policy framework for immitigable risks and developing guidelines for the incorporation of risk management in zoning land use planning. b. Identifying and Monitoring Disaster Risks (US$4.8 million). To complement the existing data sets, data acquisition campaigns will be undertaken to support the preparation of hazard, vulnerability and risk analyses and maps. It will include the acquisition and processing of geospatial data (i.e., high-resolution aerial photography, field survey, light detection and ranging remote sensing survey, etc.), and the creation of Digital Elevation Models (DEM), with a focus on urban areas. Associated DRM Plans will be prepared in two priority municipalities (Cariacica and Vila Velha) to guide investment decisions, avoid urban development in areas at risk and propose risk mitigation options. The Project will also include the design and implementation of an integrated information system which would incorporate data generated by various networks and institutions, including the Water Hydrological and Water Quality monitoring networks described above, to the State's approach to identifying and monitoring risks, using the existing State's integrated geospatial database (GEOBASES), a multi-institutional system, already in widespread use, which integrates public and private institutions of different sectors in order to populate, maintain, use and harmonize geospatial information for the SES. Data collected on water quantity and quality will be centralized and integrated with data collected by the State Monitoring and Alert Center described below. Data will form part of GEOBASES and be made available to all agencies across the State as well as to the general public. c. Warning System and Disaster Preparedness (US$14.3 million). This sub-component will support the strengthening of the State Civil Defense System and of the State Monitoring and Alert System. It will include the revision of the State Strategic Emergency Management Plan, the acquisition and installation of 25 weather automatic stations, the design and implementation of warning systems and the training and equipping of emergency response teams and firefighters. At the same time, support will be provided to the establishment of an integrated operations center, its requirements and basic operating procedures, which basic functions would include at least the following: (i) receive, monitor, and assess disaster information - a starting point for this will be GEOBASES; (ii) receive, assess, and track available resources; (iii) conduct preliminary damage assessments and maintain documentation on extent of damage; (iv) make policy decisions and proclaim local emergencies as needed; (v) provide direction and control for emergency response operations, set priorities and establish strategies; (vi) keep local jurisdictions informed; 21 (vii) develop and disseminate public information warnings and instructions; (viii) monitor, assess, and track response units and resource requests; and (ix) coordinate operations of all responding units. 8. Component 2: Efficient Water Supply Services and Increased Access to Sanitation (US$215.6 million of which US$141.5 million IBRD). This component supports investments that aim at increasing the efficiency of water supply services and increasing the coverage of sewage collection and treatment services in the SES. The lead entity for this component will be CESAN. This component will finance, inter alia, the following activities: a. Operational Efficiency Strategic Plan for CESAN (US$6.0 million). Support will be provided to CESAN in the development of an Operational Efficiency Strategic Plan, that may include water loss reduction, commercial efficiency and the long-term strategic planning and effectiveness of its water and sewerage services. The specific scope of this plan will be defined in the early stages of project implementation. CESAN will likely mobilize additional investment resources from the Federal Acceleration Growth Program for the implementation of the activities outlined in this Operational Efficiency and Strategic Plan. b. Sewerage Investments (US$209.6 million). These investments will ensure adequate wastewater collection and treatment in the selected urban areas of: (i) the municipalities of Vila Velha and Cariacica in the GVMR, and (ii) nine municipalities located in the interior of the State in the Capara6 Region and the Santa Maria da Vit6ria and Jucu river basins. The following tables provide details on the works to be financed and are based on information extracted from the engineering designs available for the nine municipalities in the Interior.19 As for the GVMR municipalities, CESAN's engineering department has provided estimates from internal feasibility studies and the detailed engineering designs will be contracted under turn-key contracts. The cost of this component includes supervision contracts for the municipalities in the Capara6 Region and the Santa Maria da Vit6ria and Jucu river basins, which is estimated at US$2.2 million. Supervision for the works in the GVMR is part of the contract with the project management firm to be financed under Component 4. These investments will include the financing of goods, works and services related to the implementation of CESAN's household connection program2o to scale-up the rate of connections to the sewerage network in the areas where sewerage investments are being undertaken (particularly low-income households) and promote the health and environmental benefits of connecting to the network. An assessment of issues influencing decision-making around connection to the network will include 19 Piping and equipment sizing, as well as hydraulic and organic capacities have been defined for all municipalities. For those municipalities which only count on preliminary engineering designs, the development of the detailed designs including the architectural, structural, mechanical, and electrical designs will be part of the works contracts. 20 The program will be included as part of the construction contracts and comprise of (i) the physical connection of households and their intra-domiciliary facilities to the sewerage network; (ii) a communication and marketing campaign; (iii) mobilization at the community level; and (iv) door-to-door campaigns on the importance of connecting to the sewerage network. 22 information on how to develop gender-sensitive communication strategies around connectivity. Table A2.1 Detailed description of the sewerage investments. .Estimated Beneficiary . .i aei Estimated Municipality Population ceage Description cost ($ (urban) sere (% million) services (%) Expansion of existing Araqys plant capacity from From 51.8 to 400 to 650 L/s, installation of new networks (39.7 29,87266 km) and construction of 2 raw sewage pumping 62.9 stations. The current treatment plant uses the Vila Vellia activated sludge process. Expansion of existing Ulisses Guimaries plant From 11I to capacity from 30 to 150 L/s, installation of new 41,915 100 networks (55.4 km) and construction of 4 raw 60.1 sewage pumping stations. The current treatment plant uses the "integrated UASB process."(1) Expansion of the existing Bandeirantes sewerage networks with the installation of new networks (75.0 31,100 68 km) and the construction of 8 raw sewage pumping 17.0 stations. The current treatment plant uses the Cariacica activated sludge process (capacity of 250 L/s). Expansion of the existing Nova Rosa da Penha From 1.4 to sewerage networks with the installation of new 5,173 100 networks (13.1 km) and the construction of 2 raw 15.4 sewage pumping stations. The current treatment plant uses oxidation lagoons (capacity of 48 L/s). Rehabilitation of existing plant and expansion of From 0* to capacity from 7.5 to 32.5 L/s, installation of new Ibatiba 13,792 100 networks (41.9 km) and construction of 6 raw 11.2 sewage pumping stations. The current treatment plant uses the "integrated UASB process."1) Construction of new treatment plant** (capacity of 12 L/s), installation of new networks (11.2 km) and Irupi 4,461 100 construction of 3 raw sewage pumping stations. The 3.4 treatment plant will use the "integrated UASB process."(1) Construction of new treatment plant (capacity of 6 Dores do Rio 2From 0 to L/s), installation of new networks (7.0 km) and Preto 2,197 100 construction of 2 raw sewage pumping stations. The 2.4 treatment plant will use the "integrated UASB process."(1) Construction of new treatment plant (capacity of 5 Divino SAo 2From 0 to L/s), installation of new networks (6.6 km) and Loureno2,041 100 construction of 3 raw sewage pumping stations. The 3.0 treatment plant will use the "integrated UASB process."(1) Rehabilitation and expansion of existing treatment From 7* to plant from 20.5 to 36.0 L/s, installation of new luna 13,817 100 networks (44.5 km) and construction of 3 raw 9.6 sewage pumping stations. The treatment plant will use the "integrated UASB process."1) 23 .Estimated Beneficiary .ncreaed Estimated Municipality Population ceage Description cost ($ (urban) sere of million) services (%) Construction of new treatment plant (capacity of 11 ConceiqAo do 4From 8 to L/s), installation of new networks (16.8 km) and Castelo 4,859 100 construction of 4 raw sewage pumping stations. The 5.5 treatment plant will use the "integrated UASB process."(1) Rehabilitation of existing treatment plant (capacity of 27.3 L/s), installation of new networks (8.3 km), Santa Maria From 59 to rehabilitation of 2 raw sewage pumping stations and de Jetib 7,460 100 construction of 3 new stations. The treatment plant 4.0 will use the "integrated UASB process."(') The current treatment plant uses the activated sludge process. Installation of new networks (17.9 km) and Marechal From 0 to construction of 3 new raw sewage pumping stations. 5,461 The construction of the corresponding treatment 6.0 plant will not be financed by the Project and will use activated sludge process (capacity of 12.6 L/s). Rehabilitation of existing treatment plant (capacity Santa From 40* to of 6 L/s), installation of new networks (14.6 km) and . 2,776 construction of 5 new raw sewage pumping stations. 5.0 The current treatment plant uses the "integrated UASB process."(1) * The wastewater treatment plants in these cities are currently not in operation. ** These municipalities currently have collective septic tank systems. The "integrated UASB process" concentrates in a one treatment unit an Upflow Anaerobic Sludge Blanket Reactor (UASB), a submerged aerated biofilter and a settler. 9. Component 3: Watershed Management and Restoration of Forest Cover (US$23.6 million of which US$14.5 million IBRD). The quality of surface and coastal waters is strongly affected by conditions in upper watersheds. Untreated effluents are a significant source of contamination, as are some agricultural practices. Poorly sited and designed roads and inappropriate land uses are important sources of sediment.21 This component will focus on improving the quality of surface and coastal waters through coordinated interventions in selected watersheds. Addressing only one of the problems affecting downstream water users (poor roads, poor sanitation, and inappropriate land uses) is unlikely to result in improved water quality. The project, accordingly, includes activities to address each of the three. These interventions ultimately will result in a better quality of drinking water in the GVMR, as a large portion of the areas proposed for intervention are the source of water supply to the GVMR. This component will achieve this, inter alia, by supporting the following SES programs: a. Reflorestar Program (US$16.2 million). SEAMA is the lead secretariat to implement this activity. The project will help induce land use change in selected watersheds by supporting, extending and strengthening the Borrower's capacity in implementing a program of Payments for Environmental Services (PES), also known as Reflorestar in 21 For a review of the links between upstream land use and downstream water quality, see, inter alia, Bruijnzeel, L.A., 2004. "Hydrological functions of moist tropical forests: Not seeing the soil for the trees?" Agriculture, Ecosystems and Environments, 104, pp.185-228. 24 SES, aimed at encouraging conservation of existing forest cover, and restoring degraded ecosystems in the watersheds supplying the GVMR. Box A2.1 describes in more detail the Reflorestar Program. The PES in SES was originally developed with the support of the Biodiversity and Watershed Conservation and Restoration Project (Florestas para Vida - P094233), currently under implementation. In 2012, based in part on inputs and technical assistance provided under Florestas para Vida, the SES passed a new PES law and replaced its previous PES program, titled ProdutorES de 22 Agua, with a new PES program called Reflorestar. Reflorestar includes, inter alia, (i) training and technical assistance to the rural producers (Assist6ncia Tecnica de Extensio Rural - ATER) in terms of selecting appropriate forest recovery and land- use modalities; (ii) financing short-term payment for environmental services 23 schemes, and (iii) carrying out an impact evaluation (initiated under Florestas para 24 Vida) of Reflorestar's impact on land use change in the target areas. With the project's support, the SES intends to expand its Reflorestar program to 21 municipalities and restore approximately 3,850 hectares of forest.25 This will 26 contribute to 12 percent of the goal set by the State-wide Program for 2014. The lead entity for the reforestation program will be SEAMA/IEMA. The land uses supported by Reflorestar tend to increase infiltration, reduce runoff, and limit access to rivers by livestock, thus reducing erosion, and hence sediment loads in the rivers from which CESAN obtains water for the GVMR, as well as serve several hydroelectric power plants and the port of Vit6ria. Priority areas identified for the implementation of Reflorestar include the Santa Maria da Vit6ria and Jucu River Basins, where small scale farming practices have fragmented forest cover and reforestation is crucial to reduce sedimentation in the rivers due to erosion, and the micro-region of Capara6 because of its importance in supplying water to surrounding regions. 22 Espirito Santo was the first state to adopt an explicit PES law (Law 8995 of 22 September 2008); this law was recently revised (under Law 9864 of 26 July 2012) to allow for a broader application of the approach. The state has also established a Water Fund (Fundagua) to finance PES in the state. 23 Payments made under the Payment for Environmental Services Scheme will be made through the already established State Water Fund (Fundagua). Bank disbursements will be made on a lump sum basis, using statement of expenditures that list the contracts signed as the required supporting documentation. 24 The project will support an impact evaluation of Reflorestar's impact on land use changes begun under the Florestas para Vida project. This impact evaluation will focus on three river sub-watersheds (Mangarai, Sio Sebastiio de Cima, and Sio Paulinho de Arace) and on control areas of similar geographic and socio-economic characteristics. 25 Every PES program requires an organization to undertake the required fieldwork - negotiating with and then contracting eligible farmers, providing TA, monitoring compliance, making payments, etc. Given that Espirito Santo had already established such an organization for its ProdutorES de Agua program (now replaced by the Reflorestar Program), it was decided that it would be more efficient to use this same organization to implement the Florestas para Vida PES program rather than set up an entirely separate organization. Reflorestar will thus implement the PES payments during the remaining time of the Florestas para Vida Project, and will continue to do so under the proposed project. 26 The Reflorestar Program set to increase the State's forest cover by 31,500 hectares (from 2012 to 2014) and by 200,000 hectares by 2025. 25 Box A2.1 PES in Espirito Santo Espirito Santo's Reflorestar PES Program was established in 2012, building on the earlier ProdutorES de Agua program. ProdutorES de Agua was created under Law No.8995 of 1998, and was the first state-wide PES program in Brazil. It supported forest conservation in hydrologically important areas, paying participating landholders about R$100-400/ha/year (based on a formula that considers the extent of forest cover and the slope) to preserve existing forests, using funding from Fundagua, which was also established in 2012, under Law No.8960. Fundagua receives a portion of oil royalties paid to the state and must devote 60 percent of its resources to PES; in 2010, for example, this amounted to potential financing for PES of R$5 million. Implementation began in the Rio Benevente watershed in 2010, and was then extended to the Sio Jos6 and Guandu watersheds. By 2012, 1,910 ha were enrolled. The relatively limited enrollment in ProdutorES de A'gua (for comparison, Costa Rica enrolled about 200,000 ha in its first three years) was due to three main factors: (1) a very small implementation team in IEMA, coupled with relatively complex implementation requirements; (2) a wait-and-see attitude among many landholders towards conservation, in light of the then-ongoing debate over the new forest law, which proposed to substantially modify conservation requirements; and (3) the relatively low level of payments offered (the amount being fixed in Law No.8995), which were insufficient to induce restoration of degraded areas. Reflorestar was intended to build on and extend ProdutorES de A'gua. A revised PES law (No.8954) was approved in 2012, which allowed for substantially higher payment levels, thus making restoration attractive for landholders. A new approach was adopted, with a short-term payment for restoration coupled with a separate longer-term payment for conservation. Restoration payments range from R$980/ha for natural regeneration to R$3040/ha for direct planting. They are intended to cover the costs of undertaking restoration, and are paid over three years, with 50 percent of the amount paid in the first year, when the bulk of expenditures occur. Restoration payments are also offered for the establishment of certain productive practices that are expected to generate environmental benefits relative to current land uses, including agroforestry (R$1350/ha) and silvopastoral practices (R$3200/ha). Conservation payments range from R$76/ha/year for natural regeneration to R$90/ha/year for standing forest. They are intended to cover the opportunity costs of maintaining land under conservation practices. They are paid over five years and are renewable. Productive practices such as agroforestry and silvopastoral practices are not eligible for long-term conservation payments. A management plan is developed for every participant, which shows existing forest areas and areas to be restored. NGOs and private companies have been contracted to undertake activities in the field (development of management plans, provision of TA, monitoring of compliance), thus avoiding the problem of IEMA's limited field implementation capacity. These fieldwork contracts are relatively expensive, however, in part because of the small area covered in early contracts, which drives up the cost per hectare. Efforts will be needed to reduce the per hectare costs. Participants are not obligated to bring their entire property under compliance with environmental laws, but receive lower payments if they do not; conversely, they receive higher payments if they exceed requirements. This approach avoids the all-or-nothing approach that has proven a major obstacle to participation in similar programs in other states and creates an on-going incentive to meet or exceed conservation requirements. With the revised Forest Law having been adopted over a year ago, uncertainty over its requirements is no longer expected to be an important factor in participation decisions. b. Reflorestar Program (US$16.2 million). SEAMA is the lead secretariat to implement this activity. The project will help induce land use change in selected watersheds by supporting, extending and strengthening the Borrower's capacity in implementing a program of Payments for Environmental Services (PES), also known as Reflorestar in SES, aimed at encouraging conservation of existing forest cover, and restoring degraded ecosystems in the watersheds supplying the GVMR. Box A2.1 describes in 26 more detail the Reflorestar Program. The PES in SES was originally developed with the support of the Biodiversity and Watershed Conservation and Restoration Project (Florestas para Vida - P094233), currently under implementation. In 2012, based in part on inputs and technical assistance provided under Florestas para Vida, the SES passed a new PES law and replaced its previous PES program, titled ProdutorES de 27 Agua, with a new PES program called Reflorestar. Reflorestar includes, inter alia, (i) training and technical assistance to the rural producers (Assist6ncia Tecnica de Extensio Rural - ATER) in terms of selecting appropriate forest recovery and land- use modalities; (ii) financing short-term payment for environmental services schemes,28 and (iii) carrying out an impact evaluation (initiated under Florestas para 29 Vida) of Reflorestar's impact on land use change in the target areas. With the project's support, the SES intends to expand its Reflorestar program to 21 municipalities and restore approximately 3,850 hectares of forest.30 This will contribute to 12 percent of the goal set by the State-wide Program for 2014.31 The lead entity for the reforestation program will be SEAMA/IEMA. The land uses supported by Reflorestar tend to increase infiltration, reduce runoff, and limit access to rivers by livestock, thus reducing erosion, and hence sediment loads in the rivers from which CESAN obtains water for the GVMR, as well as serve several hydroelectric power plants and the port of Vit6ria. Priority areas identified for the implementation of Reflorestar include the Santa Maria da Vit6ria and Jucu River Basins, where small scale farming practices have fragmented forest cover and reforestation is crucial to reduce sedimentation in the rivers due to erosion, and the micro-region of Capara6 because of its importance in supplying water to surrounding regions. c. Mangaral River Pilot project (US$7.4 million). CESAN has identified the Mangarai River sub-watershed as being a major source of silt loads affecting the water quality at its Santa Maria and Carapina treatment plants. The Mangaral River Pilot project seeks to reduce silt loads originating in this sub-watershed through a holistic approach 27 Espirito Santo was the first state to adopt an explicit PES law (Law 8995 of 22 September 2008); this law was recently revised (under Law 9864 of 26 July 2012) to allow for a broader application of the approach. The state has also established a Water Fund (Fundagua) to finance PES in the state. 28 Payments made under the Payment for Environmental Services Scheme will be made through the already established State Water Fund (Fundagua). Bank disbursements will be made on a lump sum basis, using statement of expenditures that list the contracts signed as the required supporting documentation. 29 The project will support an impact evaluation of Reflorestar's impact on land use changes begun under the Florestas para Vida project. This impact evaluation will focus on three river sub-watersheds (Mangarai, Sio Sebastiio de Cima, and Sio Paulinho de Arace) and on control areas of similar geographic and socio-economic characteristics. 30 Every PES program requires an organization to undertake the required fieldwork - negotiating with and then contracting eligible farmers, providing TA, monitoring compliance, making payments, etc. Given that Espirito Santo had already established such an organization for its ProdutorES de Agua program (now replaced by the Reflorestar Program), it was decided that it would be more efficient to use this same organization to implement the Florestas para Vida PES program rather than set up an entirely separate organization. Reflorestar will thus implement the PES payments during the remaining time of the Florestas para Vida Project, and will continue to do so under the proposed project. 31 The Reflorestar Program set to increase the State's forest cover by 31,500 hectares (from 2012 to 2014) and by 200,000 hectares by 2025. 27 that combines reforestation and improved land management with a range of other interventions, such as improvement to roads and sanitation in the watershed. The Project will first finance consulting services to elaborate a general diagnostic of the situation in the sub-watershed with a focus on erosion reduction and transport of materials to rivers and streams. It will also support improved land use (through the Reflorestar program) and finance specific investments within the Mangarai sub-watershed, such as improvements to roads and sanitation, by financing consulting services to (i) identify critical roads and priority works in terms of sediment production; (ii) develop the technical designs for those works as well as ensure the corresponding supervision; and (iii) develop rehabilitation and maintenance norms for rural roads with the objective of reducing silt load production and train the entities in charge of rehabilitating and maintaining these roads in the Mangarai sub-watershed, as well as across the SES; (iv) identify sustainable institutional arrangements for operation and maintenance of rural roads; (v) identify appropriate sanitation solutions (including water supply, sewerage and solid waste) or equipment of collective use such as public areas and sport facilities, for the communities in the sub-basin, through consultations. According to IBGE information, 15.9 and 10.2 percent of households are headed by women in the municipalities of Cariacica and Santa Leopoldina, respectively. However, estimates from local INCAPER agronomists estimate that this figure drops to about 8 percent in the pilot area of Mangarai. The PES will be made to the head of the property which in most cases is expected to be the male. There is thus a need to empower women socially and economically, to avoid a widening of the power gap within households. Based on INCAPER's experience in working with women in rural areas of the State through its Economistas Domesticas (professional social workers), and in order to ensure gender-sensitive implementation of the pilot project activities, a professional social worker will be hired for the Mangarai River Pilot area and will be responsible for working with women and women's groups to implement training aimed to empower women economically (such as overseeing programs/activities designed to add value to products, business related skills, basic market analysis skills), paired with training on citizenship and rights, aimed at empowering women socially. This professional will assist women to become empowered and participate more fully in decision-making in the target region, become agents and protagonists of the Project and increase their economic status as well. Previous experiences with similar interventions have shown improvements in women's bargaining power within the household due to changes in families' income structure. Focus groups will also be held with women in the pilot region to develop a primary diagnosis and better understand gender dynamics, especially with regards to potentially different needs and interests of women and men. This will specifically involve two local organized women's groups. In addition, the Project will build on INCAPER's participatory approach to produce local diagnostics. In the upcoming 28 diagnosis process for the target municipalities of Santa Leopoldina and Cariacica,32 some specific exercises and questions will be included to have a stronger focus on gender. This will help to plan concrete initiatives best suited to the specific needs of men and women in these municipalities. Finally, the Project will support impact evaluations to determine the effectiveness of selected interventions. The lead agency for the Mangarai Pilot will be INCAPER, with input from CESAN, SEAMA and IDAF. 10. Component 4: Project Management, Supervision and Institutional Strengthening (US$23.8 million of which US$23.8 million IBRD). In line with successful experience from previous operations in the State, this component finances institutional support and strengthening the State's capacity in Project management and implementation, including the provision of training and technical assistance for the carrying out of activities associated with Project execution, monitoring and evaluation of the Project and the provision of technical, administrative and financial management support, as well as the supervision of sewerage works to be implemented in the GVMR. This component will also strengthen the Capacity of the Espirito Santo Regulatory Agency for Water, Sanitation and Road Infrastructure (Ag6ncia Reguladora de Saneamento Bdsico e Infraestrutura Vidria do Espirito Santo - ARSI) by developing an economic and financial regulatory model for water supply and sewerage services that can guarantee its sustainability and social equity (i.e., affordable tariffs for low income population). 32 The Mangarai River sub-basin area is enclosed in the two municipalities of Santa Leopoldina and Cariacica. 29 Annex 3: Implementation Arrangements BRAZIL: Espirito Santo Integrated Sustainable Water Management Project Project Institutional and Implementation Arrangements 1. Project implementation arrangements will build on the lessons learned from past operations in water and sanitation in the SES which proved to be robust and effective at meeting objectives in a timely and efficient manner. These arrangements will rely on: (i) the oversight of a Project Steering Committee (Comit Diretivo do Projeto), (ii) the State Secretariat of Government (SEG), which has been designated as the Project Implementing Entity, responsible for, responsible for institutional project coordination, (iii) an Overall Coordination for Project Execution (C-GIP), will function under SEG and be responsible for the overall project implementation, (iv) an independent Project Management Unit (Unidade de Gerenciamento do Projeto, UGP), comprising a project operational supervisor with support from three Core Thematic Groups (CTG), an Administrative-Financial Management sub-unit and an Environmental and Social Supervision sub-unit. Each CTG will coordinate activities on behalf of each institution involved which will help facilitate and operationalize inter-sectoral planning. These arrangements are illustrated in Figure A3.1. 2. The Project Steering Committee will have consultative and decision making powers, as well as be responsible for the general supervision of the Project's activities and for establishing strategies to overcome obstacles encountered during project implementation and catalyze the development of new strategies to move forward. The Project Steering Committee will be chaired by a high-level government official and will comprise high-level representatives from key State entities that are participating in the Project. The Project Steering Committee has already been created through Decree No. 3450-R issued on December 4, 2013. 3. An Executive Secretariat, chaired by the Borrower's Subsecretaria de Captaqdo de Recursos, to assist the Project Steering Committee, the Institutional Coordination and the C-GIP in the carrying out of its respective functions under the Project and be responsible for accompanying Project implementation, and liaising with the Bank on the Borrower's obligations under the Project, including procurement matters and execution of the Project's procurement plan (including the use of the procurement system). 4. The State Secretariat of Government (SEG), as the Project's institutional coordinator, is responsible for programming the budget in accordance to the plans approved by the Project's Steering Committee and requested by C-GIP, and will be responsible for the budget decentralization and transfer of resources for project execution as requested by C-GIP. 5. C-GIP will function under the Institutional Coordination (SEG) and will be responsible for the overall project execution, including planning and oversight of UGP activities on project management and implementation. 6. Through Portaria No. 002-S dated February 6, 2014 the Project Steering Committee created a special bid evaluation commission (Comissdo Especial de Licitaqdo, CEL), consisting of representatives from CESAN, SEAMA, SECONT, SEDURB, SEPAM, Subsecretaria de Estado de Saneamento e Habitaqdo and the Executive Secretariat, provided with sufficient assistance as needed, responsible for ensuring the carrying out of procurement under the Project 30 as well as legal support (i.e., validation of procurement processes) from the State Attorney General (PGE). GOVERNMENT OF THE STATE OF ESPIRITO SANTO Steering Committee * Office of the Vice-Governor and State Entities SEG - SEPAM - Sub-Secretariat of Financial Resources Management - SEAMA - CESAN - INCAPER - IDAF - CEPDEC - CBMES - Sub-Secretariat of Saneamento** and Housing Institutional Project Coordination (SEG) Overall Coordination for Project Execution (C-GIP) * Project Management Unit (UGP) * Operational Supervisor Water Resources, Reforestation and Disaster Risk Management Core Thematic Group Led by SEAMA -------- - -Water Supply and Sanitation and Support from the Urban Water Management Core State Attorney ' Thematic Group o General (PGE) Led by CESAN External Audit < Mangarai Pilot Project Core 0 Thematic Group Led by INCAPER * Established officially by State Decree No. 3450-R (issued on December 4, 2013). ** Saneamento in Brazil includes water supply, sanitation and solid waste management. Figure A3.1 Institutional and implementation arrangements. 31 Project administration mechanisms 7. The UGP will be responsible for the technical (Core Thematic Groups, CTGs), administrative, financial, environmental and social management and execution of the Project's activities, under the helm of the C-GIP, and will be responsible for the preparation of bi-annual project progress reports, which are to be submitted to the Bank 45 days after the end of each semester of the calendar year. The Administrative-Financial Management sub-unit will cater to the three CTGs and establish the communication channels with the State entities' financial management units and with the State Secretariat of Finance (SEFAZ), responsible for the internalization and provision of World Bank and State Government counterpart funds. An Environmental and Social Supervision sub-unit will also be in place at the UGP to accompany the implementation of the Environmental Framework, the Environmental Management Plan as well as the Resettlement Plan and Framework and supervise corresponding activities and coordinate its activities with all three CTGs. Table A3.1 describes the responsibilities of each of the State entities. Table A3.1 Institutional and implementation arrangements: responsibilities ofState entities. State entity Responsibilities * Steering Committee: participation of a high-level representative SEAMA * UGP - Water Resources, Reforestation and Disaster Risk Management CTG: entity in charge of leading the execution of the activities related to Water Resources, Reforestation and Disaster Risk Management (Components 1 and 3) * Steering Committee: participation of a high-level representative * UGP - Water Supply and Sanitation and Urban Water Management CTG: entity in charge of executing the activities related to executing the activities related to Water CESAN Supply and Sanitation (Component 2) as well as Urban Water Management and other institutional aspects related to the GVMR (Component 1) * UGP -Mangarai Pilot Project CTG: will support the execution of the Mangarai Pilot Project (Component 3) * Steering Committee: participation of a high-level representative INCAPER * UGP - Mangarai Pilot Project CTG: entity in charge of executing the activities related to Mangarai Pilot Project (Component 3) 8. An external consulting firm will provide support to the UGP in the implementation of the project. This firm will provide specific technical expertise and support to the following areas: (i) administrative and financial management support, (ii) implementation of the Resettlement Plan and Framework as well as the Environmental Management Plan and Framework, including preparation of additional environmental studies and plans as required, (iii) reviewing and updating designs and terms of reference for various project activities and assist in the preparation of the documents related to the bidding and consulting selection processes, and (iv) providing specialized individual consultants (with specific technical expertise, such as disaster risk management), as required to support and provide added value to project implementation. Financial Management, Disbursements and Procurement Financial Management 9. A Financial Management (FM) assessment was carried out in accordance with Bank guidelines. The FM risk associated with the Project has been assessed as "Moderate" mainly due to the following factors: the involvement of a high number of agencies and secretariats in the 32 project's implementation that can make it difficult to exercise the proper oversight and control of the project execution, the dependency on SEFAZ to transfer the resources and the non- integration of the Financial and Physical Monitoring System (SAFF) with the Integrated Administrative and Financial State and Municipal System (now SIAFEM and in the future SIGEFES). The assessment evaluated the Project's FM arrangements, for the time being, as "Moderately Satisfactory", due to the need to: adapt the budget, charts of accounts, systems (SAFF, SAP and SIGEFES) and controls to the project; hire/designate the financial management team; prepare the Operational Manual; and conclude the development and implementation of SIGEFES (the new Administrative and Financial System of Espirito Santo). 10. Mitigation measures include: (i) preparation of the audit terms of reference, (ii) SIGEFES - the new budgeting and accounting state system - and SAFF- the monitoring system should be fully operational and capable of running the agreed Interim Unaudited Financial Reports (IFRs) and satisfy Bank requirements and (iii) close monitoring and follow up by the UGP staff, assuring proper field supervision missions to provide training on the financial management and disbursements procedures throughout project implementation. FM supervision missions are expected, in the beginning, to be undertaken on a bi-annual basis, subject to an adjustment based on the financial management risk and adequacy of the financial management arrangements. 11. SIGEFES - the State budgeting and accounting system - and SAFF33 - the monitoring system - will be fully operational and capable of running the agreed Interim Unaudited Financial Reports (IFRs) and satisfy Bank requirements at the beginning of project implementation. The UGP maintains and manages the SAFF system that has been used to manage other donor- financed projects, and as such, the system is considered acceptable for this project as well. Annual budget (POA) amounts approved by the Steering Committee will be updated in the system which will be accessible to the UGP for budget execution and project monitoring. 12. Disbursements for Payment for Environmental Services (PES) will be made to Funddgua (a fund that is managed by SEAMA). The disbursements will reimburse Funddgua for payments already made from a segregated operational account to rural producers under the PES contracts. A custom report, as defined in the disbursement letter, will establish the documentation required to disburse funds for PES payments. In addition, the annual audit will review that the payments made from Funddgua's segregated operational account were (i) to rural producers/land users under signed PES contracts, (ii) that the payments covered activities carried out within the eligible period, and (iii) that the activities carried out were verified to be consistent with the PES contract. 13. Interim Unaudited Financial Reports (IFRs) will be prepared on a cash-basis and will show the budgeted and expenditure figures by quarter, accumulated for the year and accumulated for the project. A specific ledger will be created in the system to record all loan transactions, and will be aligned with the structures of the loan cost and disbursement tables to record transactions by category and component/subcomponent. They will be sent not later than 45 days after each " Under previous projects SAFF, a full service financial management system created by CESAN that enables all annual budget planning, review and approval, execution, and monitoring to occur in a secure, efficient, and transparent environment was developed and implemented. Under this project an updated version, will be adopted which will allow the system to be internet based and permit the online consultation of the information. 33 calendar year quarter. All counterpart contribution supporting the loan's activities will be reflected in the IFRs. THE WORLD BANK SIAFEM/SIGEFES Environment Counte rpart Account SEFAZ 22 *1 Fundigua SEAMA INCAPER SEG CESAN (SEAMA) operational Operational Operational Operational Operational Account Account Account Account Account Producers Suppliers and Contractors (PES) Notes: * Transfers through the designated account ** Transfers through the designated account and/or the counterpart account. Note that transfers to CESAN wil be done by Capital Increase phased upon the payment of the invoices Figure A3.2 Flows involving the movement offunds throughout implementation. 14. An audit of the Project's financial statements will be conducted by an independent audit firm acceptable to the Bank, carried out in accordance with terms of reference acceptable to the Bank and the Bank's audit policy under a multiyear contract. The audit's terms of reference will be subject to review that will require the respective "No Objection" by the Bank. The audit will be due no later than six months after the end of the fiscal year. The audit report will contain a single opinion on the project financial statements and the designated account and a management letter (report on internal controls). The audit report will be subject to the World Bank policy on Access to Information. 34 15. Figures A3.2 and A3.3 illustrate the flows involving the movement of funds and flows .involving documentation or supply of goods and services, respectively, throughout implementation. THE WORLD BANK IFRs SOEs SEFAZ Progress Reports List of invoices1contacts invoices/contracts invoices UGP *Invoices1contracts Invoicesecontracts Invoices/contracts FundfAgua SEAMA INCAPER SEG CESAN (SEAMA) Notes: * Inoices wil be sent to the UGP which will then prepare and send a list to SEFAZ for processing transferspayments Figure A3.3 Flows involving documentation or supply of goods and services throughout implementation. Disbursements 16. Designated Account. Disbursements will be made primarily via the Advance disbursement method. SEFAZ will open a segregated Designated Account (DA), in US Dollars, in the Banco do Brasil, with a Fixed Ceiling of US$20 million. Supporting documentation required for documenting eligible expenditures paid from the DA are Statements of Expenditures and Summary Sheets with Records. Payments made under the Payment for Environmental Services Scheme will be made through the already established State Water Fund (Funddgua). Bank disbursements to the Funddgua will be made on a lump sum basis, using statement of expenditures that list the contracts signed as the required supporting documentation. The frequency for reporting eligible expenditures paid from the DA is quarterly. The Reimbursement and Direct Payment disbursement methods will also be available and Reimbursements would also be documented by Statements of Expenditures and Summary Sheets with Records and 35 Direct payments will be documented by Records. The Minimum Application Size for Reimbursements and Direct Payments will be US$2 million equivalent. 17. The Project will have a Disbursement Deadline Date (final date on which the Bank will accept applications for withdrawal from the Borrower or documentation on the use of Loan proceeds already advanced by the Bank) four months after the Project Closing Date. This "Grace Period" is granted in order to permit the orderly project completion and closure of the Loan account via the submission of applications and supporting documentation for expenditures incurred on or before the Closing Date. 18. Expenditures incurred between the Closing Date and the Disbursement Deadline Date are not eligible for disbursement, except as otherwise agreed with the Bank. The information required for the compilation of Statements of Expenditure and Summary Sheets will be maintained by the FM sub-unit in the UGP. The transfers from SEFAZ to the partners will be made upon a list of invoices sent by the UGP attesting the proper delivery of the products and/or of the services. The counterpart values will be added by SEFAZ on a pari-passu model. Transfers to CESAN will be done by Capital Increase (from SEDURB) phased upon the payment of invoices. 19. Other accounts: Each partner will open an operational account which will receive the transfers from SEFAZ and pay the suppliers, contractors and the PES. There will be 5 operational accounts (to account the cash inflows from SEFAZ and the cash outflows to the suppliers and PES): two in SEAMA (one of which in Funddgua), one in INCAPER, one in SEG and one in CESAN. Since transfers from SEFAZ will be made against the list of invoices and PES submitted, the operational accounts will serve mainly as a registering and controlling process and they will always be kept "zeroed". 20. Retroactive Financing: Payments made prior to the Signing Date of the Loan Agreement but on or after October 1, 2013 for Eligible Expenditures, up to an aggregate amount not to exceed US$20,000,000 equivalent will be eligible in order to finance some of the activities that are at an advanced stage of preparation. 21. The loan withdrawal schedule is as follows: Amount of the Loan % of Expenditures to be financed Category Allocated (expesse in SD)(inclusive of taxes) (expressed in USD) 1. Goods, works, consulting services, non-consulting services and training 44,600,000 75% under Component 1 2. Works under Component 2 133,400,000 65% 3. Goods, consulting services, non- consulting series and training under 8,100,000 80% Component 2 4. Goods, works, non-consulting and consulting services and training under 8,200,000 75% Component 3 5. Payment for Environmental Services 6,337,500 500 under Component 3 36 Amount of the Loan % of Expenditures to be financed Category Allocated (expesse in SD)(inclusive of taxes) (expressed in USD) 6. Goods, consulting services, non- consulting services and training under 23,800,000 100% Component 4 7. Front-end Fee Amount payable pursuant to Section 2.03 of the Loan 562,500 Agreement in accordance with Section 2.07 (b) of the General Conditions 8. Interest Rate Cap or Interest Rate Amount due pursuant to Section Collar premium 2.07(c) of the Loan Agreement Total 225,000,000 Procurement 22. Procurement for the proposed Project will be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated January 2011; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated January 2011 and the provisions stipulated in the Legal Agreement. A Procurement Plan acceptable to the Bank was prepared for the first 18 months and subsequent procurement plans will be prepared and updated at least annually, or as deemed necessary. Template bidding documents for International Competitive Bidding, National Competitive Bidding and Request for Proposal documents will be made available online at the Implementing agencies' website. 23. As the procurement arrangements established for the previous Bank's financed Espirito Santo Water and Coastal Pollution Management Project (P087711) have worked well, it is proposed that the same type of organizational procurement structure be adopted in this project. The Overall Coordination for Project Execution (C-GIP), the Special Bidding Commission (Comissdo Especial de Licitaq5es, CEL), the UGP and the Implementing Agencies (CESAN, INCAPER, SEAMA) will be the entities with procurement responsibilities and with involvement in the procurement flow. The role of each of these entities will be as follows: a. The Executive Secretariat will be the Bank's focal point and will be responsible for submitting to the Bank the terms of reference, procurement documents and procurement plan for no objection, for setting up and organizing the CEL's meetings, and for implementing the procurement plan with the assistance of the Project Management Unit's procurement specialists. b. A Special Bidding Commission (CEL) will be set up specifically for this project and will comprise members from SEDURB, SEPAM, CESAN, SEAMA and SECONT (Secretaria de Controle e Transpar6ncia), Subsecretaria de Estado de Saneamento e Habitaqdo and the Executive Secretariat. The CEL will be responsible for approving the shortlists, bidding documents and RFPs, reviewing the advertisements for shortlisting and bidding opportunities, clearing the evaluation reports, opening the bids and preparing the bid opening records, conducting contract's homologation, responding to bidder's queries and complains and monitoring the procurement plan. The CEL members must have the flexibility and availability to meet as often as needed to ensure the smooth execution of the procurement processes. 37 c. Implementing agencies, CESAN, SEAMA, INCAPER, will be responsible for the (i) preparation of terms of reference, budgets and technical specifications, (ii) advertising the shortlisting and bidding opportunities (iii) elaboration of shortlists, including clear evaluation shortlisting criteria, (iv) providing inputs for the issuance of the RFP and Bidding Documents, (v) evaluation of technical and financial proposals, (vi) preparation and submission of evaluation reports, (vi) assistance to the bidding commission on clarification requested from bidders during bidding preparation period, and (vii) conducting the e-reverse auction processes. d. The C-GIP and the UGP will need to ensure that the implementing agencies and the Executive Secretariat both comply with the procurement processes' milestones. It will provide support to the Implementing Agencies in all the activities described above. In addition, the C-GIP with support from the UGP will help with the supervision of contractors, firms, consultants and suppliers. The UGP will be supported by an external management consulting firm staffed, among other specialists, with at least one full-time procurement specialist familiarized with the Bank's procurement processes. Capacity assessment of the entities to conduct the procurement processes. 24. The overall Project risk for procurement is "Moderate" due to the (i) the limited capacity of the implementing agencies to prepare procurement documents and processes, and (ii) concerns about the capacity of some agencies to prepare timely and good quality terms of reference and reliable budgets. 25. The procurement capacity assessment conducted on February 2013 draws the following findings: a. The Executive Secretariat and the CEL have both acquired sufficient experience on Bank's procurement procedures during the implementation of the previous project (Espirito Santo Water and Coastal Pollution Management Project) and also with the execution of the current Bank's GEF grant "Espirito Santo Biodiversity and Watershed Conservation and Restoration Project". Both entities have produced good quality of procurement documents, therefore it is envisaged that there would not be major constraints with the interpretation of Banks rules and bidding procedures, so no delays on the procurement processes are expected. b. SEAMA is familiarized with Bank's consulting procedures and it counts with a permanent team that will provide support on the bidding process. Given that INCAPER does not have any exposure to Bank's procurement process, the UGP should support INCAPER to ensure that the procurement activities and contracts are being implemented timely, with the adequate quality and according to the Bank's rules. c. The PGE will appoint staff with previous experience on Bank's procedures to conform to the State's requirement to have the PGE reviewing and clearing all the procurement processes carried out by the State. It is expected that the PGE will spend on average 5 working days in each procurement processes' review. The PGE is very familiar with the Bank's procurement procedures, and therefore no delays are expected. d. The UGP's staff will be supported by an external consulting management firm for the entire life of the project. The terms of reference for selecting this firm have already been 38 prepared and the RFP is under preparation. The consulting firm should be hired within two months of loan effectiveness. The Bank's selection procedures will be adopted for the selection of this firm and this process will be subject to Bank's prior review. e. Several terms of reference and consulting budgets are in an advance status of preparation and dedicated staff of the Implementing Agencies, PGE, CEL and the Executive Secretariat have benefited from a procurement training carried out during project preparation. In addition all these entities will continue benefiting from Bank support and training during project execution. f. More than 40 contractors are registered under CESAN's contractors' registration data base. It is therefore envisaged that a sufficient number of firms will participate in the NCB works bidding processes. Works will be grouped to increase the size and attractiveness of the contract as to draw the interest of a sufficient number of contractors. Procurement thresholds 26. Procurement of Works: will initially comprise the construction and rehabilitation of wastewater collection and treatment plants in 9 municipalities in the interior of the State, a turnkey contract for the expansion of the wastewater collection network of the GVMR, rural roads construction works in the Mangarai river Basin, construction of a water analysis laboratory and construction of the Emergency Operation Center. All work contracts above US$25,000,000 will be procured through International Competitive Bidding (ICB) procedures and Standard Bidding Documents (SBD) will be adopted. Works above US$200,000 and below US$25,000,000 will be procured through National Competitive Bidding (NCB) procedures with Bidding Documents acceptable to the Bank. Shopping procedures can be adopted for contracts below US$200,000. 27. Procurement of Goods will consist of the acquisition of small wastewater treatment plants, pluviometric and fluviometric monitoring stations, fertilizer, seedlings, hydrogel and rural metal fences. Goods estimated to cost more than US$3,000,000 will be procured through ICB procedures and SBD will be used in the ICB bidding processes. Goods estimated to cost less than US$3,000,000 equivalent per contract may be procured under contracts awarded on the basis of NCB procedures and with bidding document acceptable to the Bank. In particular, contracts estimated to cost less than US$3,000,000 may be procured with e-procurement known as pregao eletr6nico under Law 10,520 provided that this e-procurement procedure is previously approved by the Bank. Goods estimated to cost less than US$100,000 equivalent per contract may be procured on the basis of shopping procedures. 28. Procurement of Non-Consulting Services: will involve a bathymetry survey, collection of ocean dynamic data (currents, waves, tides), technical assistance training to the rural producers (Assist6ncia Tecnica de Extensdo Rural, ATER), etc. Non-consulting services estimated to cost more than US$5,000,000 will be procured through ICB procedures and SBD will be used in the ICB bidding processes. Those services estimated to cost less than US$5,000,000 equivalent per contract may be procured under contracts awarded on the basis of NCB procedures and bidding document acceptable to the Bank. In particular, contracts estimated to cost less than US$5,000,000 per contract may be procured with e-procurement known as pregdo eletr6nico under Law 10,520/02 provided this e-procurement procedure is previously approved by the 39 Bank. Services estimated to cost less than US$100,000 equivalent per contract may be procured on the basis of shopping procedures. 29. Selection of Consulting Services, will include the selection of a consulting management firm for strengthening the UGP for the duration of the project, consulting services for the development of management plans for the Sdo Mateus, Itainas and Itapemirim river basins, the development of a State Water Resources Management Plan, project design of the water quality laboratory facilities, development of a Water Resources Quality Monitoring Network and risk management plans. Selection of consultants will follow Quality and Cost Based Selection (QCBS) in general or Quality Based Selection (QBS) for complex or highly specialized services. Depending on the complexity and standardization, the consulting services costing less than US$300,000, may also be procured following Least Cost Selection (LCS), Fixed Budget-based Selection (FBS), and Consultants' Qualification-based Selection (CQS) procedures. In exceptional cases, Single Source Selection (SSS) may be appropriate for consulting firms and/or individual consultants, if properly justified. Short lists of consultants for services estimated to cost less than US$500,000 equivalent per contract may be composed entirely of national consultants. Individual consultants will be selected in accordance to the procedures described in Section 5 of the Guidelines. The need for special arrangements regarding engaging universities, government research institutions, public training institutions, NGOs or other types of organizations was not identified during project preparation. Bank Reviews 30. Prior review thresholds for the Project are US$3,000,000 for goods, US$5,000,000 for non-consulting services, US$25,000,000 for works, US$300,000 for consulting services and US$50,000 for individual consultants. All ICBs and single-source selection of consultants, as well as direct contracting for goods, non-consulting and works, and the terms of reference for all consultancies shall be prior reviewed by the Bank regardless of the amount involved. The Bank intends to prior review all procurement and consulting processes during the first year of the Project. The following years the Bank will prior review the first two NCB processes for goods, works or non-consulting services per year. The ratio of Bank reviews shall be no less than one in 20 contracts. In addition to the prior review supervision to be carried out from Bank offices, at least one annual procurement post-review mission will be carried out during Project implementation. 31. The Procurement Plan is available on the Procurement Plan Execution System (SEPA) website at www.sepainitiative.org, and indicates whether other contracts are subject to prior review. In all cases of Single Source Selection (contracts with firms or with individual consultants), the Bank will provide the "no objection" to the proposed assignment. 32. Bidding documents for sewerage works in four municipalities of the Capara6 Region have been prepared. Environmental and Social (including safeguards) 33. An Environmental and Social Supervision team will be created within the project management unit to be responsible for supervising and monitoring the implementation of the environmental and social management plan in all of the project activities being undertaken, as well as adherence to the project's environmental management and resettlement frameworks 40 developed during preparation. This will also include the gender actions that have been agreed on during appraisal, which are mainly focused around the Mangarai pilot project. 34. CESAN, who will be responsible for the implementation of most of the sewerage works, has solid experience on the implementation of projects that adhere to Bank safeguard requirements. Previous Bank operations have helped strengthen CESAN's environmental management, and the company has adopted the Environmental Construction Manual (developed for previous Bank operations) as a standard operating procedure in all of its construction contracts. CESAN has also partnered with the State's Environmental and Agricultural Institutes (IEMA and INCAPER) to research and develop adequate uses for the sludge generated from its wastewater treatment plants in agriculture, and is already implementing some pilot projects. CESAN also has significant experience with land acquisition and resettlement, as the company's investments, particularly in small towns, often require acquisition of small parcels of land for the construction of pumping stations and wastewater treatment plants. 35. As part of the gender actions taken forward through this project, a workshop will be held with all relevant stakeholders at the beginning of implementation to ensure gender issues will be mainstreamed throughout the implementation of the activities of the project. Monitoring & Evaluation 36. The C-GIP with support from the UGP will monitor and evaluate project perfomance based on the results framework (detailed in Annex 1). In addition, as was done under the previous operation, CESAN will produce a report containing key performance indicators for the company, related to operational, financial and quality of service provision. The UGP will submit the monitoring indicators twice a year. The primary sources of data will be the implementing agencies (CESAN, INCAPER, SEAMA) and indicators will be included in the Operational Manual. Additional qualitative data will be collected before and after implementation of the Mangarai pilot to assess issues related to women's agency in the target region. 37. The Project will support an evaluation of Reflorestar's impact on land use change. This impact evaluation will focus on three river sub-watersheds (Mangarai, Sdo Sebastido de Cima, and Sdo Paulinho de Arac6) and on control areas of similar geographic and socio-economic characteristics. The evaluation will include a perspective on gender dynamics and issues in the target area. 41 Annex 4: Operational Risk Assessment Framework (ORAF) BRAZIL: Espirito Santo Integrated Sustainable Water Management Project 1. Project Stakeholder Risks Rating Moderate Description: Stakeholder support: Key stakeholders such as local farmers/producers Risk Management: Project efforts will build on local knowledge of state organizations and might not support efforts to improve surface water quality in selected watersheds by NGOs with extensive on-the-ground experience in the selected areas, and will be developed in adopting the Payment for Environmental Services model. a participatory way with substantial consultations with farmers and community representatives. Res: SAMAStage: Preparation Du ae 13/01 Status: On Res: SAMAand Implementation Du ae 13/01 going Risk Management: The implementation of the GEF-Financed Biodiversity and Watershed Potential implementation delays on implementation of Component 3 (Watershed Conservation and Restoration Project (P092433) has already set the stage and put in place the Management and Restoration of Forest Cover) could occur, associated with required administrative structure for the Reflorestar program, and has carried out numerous behavioral changes related to land use as well as bringing legislative provisions and communication campaigns about the program to rural producers, which will continue administrative structure for effective PES implementation throughout the implementation of Reflorestar. SEAMA and the Bank team will closely monitor in the initial implementation of these activities to ensure that any issues that could potentially cause delays on the implementation of this component are addressed during the early stages of implementation. CESAN's customers are reluctant to connect to the sewerage network. Resp: SEAMA Stage: Preparation Due Date: 01/31/2021 Status: On Sand Implementation going Risk Management: CESAN has a specific division within the company dedicated to improving communication related to connection to the sewerage system with households and accelerating connections to the sewerage networks being delivered and under construction. This division will be involved in project design and implementation to ensure adequate customer engagement. In addition, connecting households to the sewerage networks being built will be included in the works contracts. Stage: Preparation Status: On Relsce t CESAN and Implementation Due Date: 01/31/2021 going 2. Implementing Agency Risks (including fiduciary) 2.1 Capacity Rating: Moderate Description: Risk Management: Bank staff and consultants have been providing technical assistance Despite SES solid track record in Bank-financed projects and adequate processes in during project preparation in the preparation of terms of reference for most of the water place, there is a risk associated with the capacity of some agencies to prepare timely resources management studies as well as in reviewing the proposed budget estimates. This and good quality terms of reference and reliable budgets. assistance will continue through project implementation. In addition, all the implementing agencies and the UGP will be supported by an external consulting management firm throughout project implementation that will also provide them with the needed technical assistance for the preparation of terms of reference, technical specifications and reliable budget estimates. Resp: Steering Stage: Preparation Due Date: 01/31/2021 Status: In Committee & UGP and Implementation progress 42 2.2 Governance Rating: Moderate Description: Risk Management: The State already enjoys a high degree of inter-sectorial coordination in Given the number of agencies and secretariats involved in the project's implementation, part fostered by similar implementation management approaches adopted in other projects. it could be difficult to exercise proper oversight of project execution. Project management will be guided by a Steering Committee with representatives from each of the key sector secretariats and will have a consultative nature and decision-making abilities. Roles and responsibilities of each of the agencies/secretariats involved in the project will be clearly defined and recorded in the project's operational manual. Resp: Steering Stage: Preparation Due Date: 09/30/2015 Status: Not yet Committee stand Implementation due Risk Management: The State plans to undertake a participatory process with the Challenges related to metropolitan governance and coordination between State and municipalities during project implementation, and through SEPAM, will coordinate activities Municipal levels may delay and affect activities related to providing coordinated and interventions with the GVMR Metropolitan Council (COMDEVJT) which has institutional solutions for integrated urban water management and disaster risk representation from the municipal level. Priority will be given to flood management, where management. there is expressed interest by the municipalities in the GVMR to work together. Resp: Steering Stage: Due Date: 01/31/201 Status: Ino Committee, Implementation progress COMDEVJT, UGP 3. Project Risks 3.1. Design Rating: Moderate Description: The lack of up-front buy-in fr7om households in connecting to the Risk Management: Physical household connections to sewerage networks will be included in sewerage network increases the chances of a low rate of connection and of achieving the works contracts that are building the network, and related social and communication and key project results, outreach activities will be put in place before and during construction. CommittE,N Stage: Preparation Due Date: 01/31/2021 Status: In COMDEIT and Implementation progress key projeprresults AgreementRisk Management: The Project will work with the SES in establishing adequate governance Agmnltiwitin the State Govaen teaagment's key agecis/erratsead wth frameworks and coordination mechanisms for the management of metropolitan issues (such as municipalities in e rade drainage), and water resources management. The Steering Committee will have managementrepresentatives from each of the key sector secretariats and through SEPAM will coordinate with the GVMR Metropolitan Council (COMDEVJT) which has representation fr7om the municipal level. Close follow up to technical assistance activities will ensure that diagnostics and proposed alternative arrangements have solid technical justifications and the Steering Committee will be in charge of coordinating discussions with the different stakeholders to Project cost overruns. Project costs are not accurately estimated and actual costs are resp:aSteri Sta signficatlyhighr thn etimaes.Resp: CSArng Stage: Ipeartation Due Date: 013/01 Status: Noye sgrCommittee 01/31/2021 due Risk Management: Project cost estimates, particularly investment costs have been reviewed in detail with CESAN and are based on the engineering designs available and actual market costs that CESAN is currently incurring for similar works, plus contingencies. The UGP will closely monitor estimated versus actual costs, and in the event of significant overruns, work with the Steering Committee in finding an appropriate solution, which could range from increased counterpart funds or reduction in the project's overall scope. Resp: Steering Stage: Preparation Due Date: 01/31/2021 Status: n Committee and UGP and Implementation progress 3.2. Social & Environmental Rating: Low Description: Even though activities and works proposed under the project are not Risk Management: The SES is preparing an environmental impact assessment that will expected to generate negative environmental or social impacts, some activities should evaluate and propose mitigation measures to the potential environmental impacts generated by 43 be closely monitored to ensure that they do not lead to future safeguard risks. the project. In addition, an environmental framework has been prepared and will be applied to components for which the specific works proposed will only be identified as a result of a study yet to be undertaken (i.e., the drainage master plan). The SES will engage in extensive consultation with project stakeholders on the results of the environmental assessment. Preliminary assessments indicate that there will not be involuntary resettlement of households. However, land acquisition and easements may still be required for wastewater treatment and collection works, as well as for potential drainage works; therefore, a Resettlement Policy Framework will be prepared to guide the resettlement process if this becomes necessary. Resp: Steering Stage: Preparation Due Date: 01/31/2021 Status: In Committee and Implementation progress 3.3. Program & Donor Rating: Low Description: There are no risks posed by program dependencies, donor Risk Management: There are no risks posed by program dependencies, donor collaboration, collaboration, or donor delivery. or donor delivery. Resp: Client Stage: Due Date: N/A Status: In Implementation progress 3.4. Delivery Monitoring & Sustainability Rating: Moderate Description: The pilot demonstration project aimed at building a sustainable Risk Management: An impact evaluation will be undertaken to evaluate the potential of watershed-based water treatment model might not achieve results that can be scaling-up the pilot demonstration project. During project preparation the methodology and replicated/scaled-up. design of the impact evaluation was developed and the work for the establishment of the baseline is being contracted, after the proposed interventions have been carried out the impact evaluation will analyze whether the results achieved can be replicated/scaled-up. Resp:_SEAMA and Stage: Preparation Deat:0 1/31/2021 Sau:I CESAN aand of progress Risk Management: The proposed implementation arrangements will build on a previously An inadequate monitoring and evaluation system might make it difficult for project successfully implemented M&E system which included indicators with real world relevance managers to assess project implementation and the success of the Project in achieving and meaning for the concerned institutions' day-to-day management and strategic planning. its PDOs. Resp: Steering Stage: Preparation Due Date: 01/31/2021 Status: In Committee and Implementation progress Risk Management: The Bank team has reviewed with SES in detail the proposed design of The sustainability of the payments for environmental services scheme may be an issue the payment for environmental services scheme and by these will have an initial duration of after the project's completion. three to at most five years. SEAMA will ensure that sufficient funds will be available beyond the project, i.e., through Funddgua before renewing or signing agreements that go beyond the project timeframe or are beyond the scope of the project, so as to ensure the sustainability of these payments in the long-term. Resp: Steering Stage: Preparation Due Date: 01/31/2021 Status: In Committee, SEAMA and Implementation progress Comments: Given the State's commitment to the project, its current institutional capacity and the relative higher level of integration among State institutions (which will help facilitate implementation), as well as proven experience with Bank projects, the overall project risk rating is assessed as Moderate. 5. Project Risk Rating 5.1. Preparation Risk Rating: Moderate 5.2 Implementation Risk Rating: Moderate 44 Annex 5: Implementation Support Plan BRAZIL: Espirito Santo Integrated Sustainable Water Management Project Strategy and Approach for Implementation Support 1. The strategy for the Bank's Project Implementation Support (IS) reflects the nature of the Project and its risk profile (outlined in Annex 4) and aims to enhance the quality of the client's delivery of proposed project interventions. As such, the IS focuses on identified risk mitigation measures and standard Bank supervision, including technical, institutional, environmental and social safeguards) and fiduciary aspects (financial management and procurement). 2. This Project builds upon the implementation experience of previous Bank projects in the State of Espirito Santo, namely the Espirito Santo Water and Coastal Pollution Management Project (P006522), its Additional Financing (P102818), the second Espirito Santo Water and Coastal Pollution Management Project (P087711) and the ongoing Espirito Santo Biodiversity and Watershed Conservation and Restoration Project (P094233). These projects have undertaken similar activities in water resource management, sanitation and reforestation and have worked with many of the same state agencies including CESAN and SEAMA. Similar to these projects, the proposed operation institutes a Steering Committee comprised of relevant State entities, heavily overlapping with the previously instated Steering Committees, thus reducing implementation risks. A single State entity (SEPAM) is in charge of overall project oversight and an independent Project Management Unit will be used, as with previous operations. Component 4 of this Project allocates funds to provide support and training to the State entities that comprise the project management unit to ensure strong implementation and sustainability of activities even after the project is closed. Implementation Support Plan 3. Semi-annual Bank supervision (including field visits to investments financed under Components 1-4) would concentrate on the following areas: * Strategic: To the extent possible, supervision missions will meet with the Project Steering Committee to: (i) review project activities; (ii) reconfirm strategic alignment of the project's multisectoral aspects; and (iii) ensure the necessary coordination across respective stakeholders. * Technical: Supervision will concentrate on the implementation of the institutional strengthening, works and capacity building with regard to Components 1-3 as well as on ensuring the State's ability to provide quality assurance for the project's interventions, both within the GVMR as well as the more rural areas in the Santa Maria da Vit6ria and Jucu River basins and the Capara6. Randomized field visits by the in-country Field Coordinator and team will serve to verify compliance with the Project Operational Manual and encourage adjustments to project design, as needed, given results on the ground. Integrated water management and disaster risk management specialists (Component 1), Sanitation specialists (Component 2), Environmental specialists (Component 3) will complement the Bank supervision team through short-term cross- support and, as warranted, targeted engagement of external technical experts. Ongoing 45 support by Bank specialists for monitoring and evaluation as well as contracted evaluation expertise, as needed, will strengthen the State's ability to both monitor project progress and assess the impact of interventions. The Bank team will review technical inputs including terms of reference and bidding documents of the Project Management Unit and State entities such as CESAN and SEAMA to ensure adequate technical specifications, proper assessment of the bids and commercial aspects. * Safeguards: The Bank worked with and advised State representatives on the preparation and consultation of the Environmental Assessment and Resettlement Plan for the proposed project. This support will continue throughout project implementation with regard to the investments financed under the Project. The Bank also worked closely with the client's team in preparation and consultations will continue during project implementation. * Fiduciary: The Bank will provide timely, targeted training to the client prior to project effectiveness and through periodic supervision during project implementation. These training courses and supervision will: (i) prepare State representatives to work with procurement under their respective investments, in compliance with the project Operational Manual; (ii) ensure the capacity of State entities to manage the flow of funds and accounting procedures, in line with financial management guidance; and (iii) work with SEPAM and co-executing agencies in building their overall financial management and procurement capacity to improve and facilitate project management. Supervision of the project's financial management arrangements would be conducted semiannually and as needed in response to client needs. Procurement supervision will also be carried out semiannually during regularly scheduled Bank supervision. * Client Relations: The Task Team Leader (TTL) will: (i) coordinate Bank supervision to ensure consistent project implementation, as specified in the legal and project Operational Manual; and (ii) meet regularly with the client's senior representatives (i.e., SEPAM, CESAN, SEAMA/IEMA) to gauge project progress (including the mid-term review) in achieving the PDO and address implementation roadblocks, as they may arise. * Mid-Term Review: A mid-term review will be carried out in the third year of project implementation in which a comprehensive review of the project implementation experience will be undertaken and adjustments made to improve the project's design and/or execution, if needed. What would be the main focus in terms of support to implementation during: Resource Time Focus Skills Needed Estimate Partner Role (Staff Weeks, SW) Procurement Training, Procurement UGP and First Procurement review of bidding Specialist 5 implementing agencies twelve documents trained months Technical review of the terms of Technical reference, technical reports and Specialists10 bidding documents 46 Resource Time Focus Skills Needed Estimate Partner Role (Staff Weeks, SW) UGP and FM training and supervision FM Specialists 3 implementing agencies trained and equipped Social Safeguards - Supervision Social Specialist 2 and Training UGP and Gender Specialist Gender Specialist 2 implementing agencies Environmental Safeguards - Environmental 3 trained, equipped and Supervision and Training Specialist providing assistance to Project Management and project Task Team Leader 8 State agencies supervision coordination Procurement review of bidding Procurement 3 documents Specialist Technical review of the terms of Technical reference, technical reports and Specialists After bidding documents month FM training and supervision FM Specialists 2 N/A 13 Social Safeguards - Supervision 2 and Training Environmental Safeguards - Environmental 3 Supervision and Training Specialist Project Management and project Task Team Leader 8 supervision coordination Skills Mix Required Skills Needed # Staff Weeks per FY #I Trips per FY Comments Task Team Leader (Supervision) 6 3 HTQ-based Procurement Specialist 3 2 Country-based Financial Management Specialist 3 2 Country-based Environmental Specialist 3 2 Country-based Social Specialist 3 2 Country-based Gender Specialist 3 2 HQ-based Legal Counsel 3 1 HQ-based Integrated Water Management Specialist 3 2 Country-based (water resources and drainage) Sanitation Specialist 3 2 S aQ-based Natural Resources Management/PES 3 2 HEQ-based Specialist Disaster Risk Management Specialist 3 2 HQ-based Monitoring/Evaluation Specialist 3 2 CtQ-based Partners Name Institution/Country Role Project Oversight SEPAM Provide overall project oversight Water and Sanitation Partners CESAN, SEDURB Implement sanitation works, planning and State sanitation strategy Environmental Partners SEAMA/EMA Implement Payment for Environmental Services Private Sector Partners TBD Commercial partners to support the State's Water_and_Saniation_Partner CESAN,____SEDURB__ implementation and supervision of works. 47 Annex 6: Economic and Financial Analysis BRAZIL: Espirito Santo Integrated Sustainable Water Management Project Project Economic and Financial Analysis Summary 1. A cost-benefit analysis was used to determine the financial and economic feasibility of the project, and evaluate the risk profile of the investment. The economic analysis shows that components 2 and 3 are likely to generate benefits well in excess of their costs, and that component I will position the SES to substantially reduce the impacts of possible future disasters. Project Objective and Components 2. The objective of the project is to improve sustainable water resources management and increase access to sanitation in the State of Espirito Santo. It will be achieved by: strengthening the State's water sector institutions, providing increased wastewater collection and treatment services, supporting reforestation and sustainable land management practices, and improving the state's capacity to identify, monitor and prepare for disaster risks. The project will enhance the access to sanitation services and support a move towards a long-term, innovative approach to integrated water management and a more systematic approach to DRM. 3. The project consists of four components (Table A6. 1). This evaluation focuses primarily on component 2 (efficient water supply services and increased access to sanitation), which accounts for 67 percent of total project costs of US$323.10 million, and on component 3 (watershed management and restoration of forest cover), which accounts for another 7 percent of total project costs. Table A6. 1 Estimated costs by component. Million % of Component US$ total 1. Integrated water management and disaster risk management 59.5 18 2. Efficient water supply services and increased access to sanitation 215.6 67 3. Watershed management and restoration of forest cover 23.6 7 4. Project management and supervision 23.8 7 Total 322.5 100.0 Component 1: Integrated water management and disaster risk management 4. Component I supports activities aimed at (i) improving water resources management, particularly in the areas of planning and monitoring to allow for the integration of policies concerning water resources, water infrastructure and the environment; (ii) improving metropolitan coordination and planning mechanisms for the management of urban water; and (iii) developing adequate planning and monitoring instruments for risk reduction as well as preparedness and response to adverse natural events. 48 5. The nature of the activities supported by Component 1 precludes a full economic analysis. However, these activities are expected to provide important benefits to the SES by improving the management of water resources as well as developing adequate planning and monitoring instruments for risk reduction as well as preparedness and response to adverse natural events. 6. Risk mitigation investments covered under this component include the development of an integrated early warning and response system as well as capacity building in disaster risk management. The benefit of the overall risk mitigation investment is the avoided cost of damage and losses as a result of this component. During the period 2000-2009, average damages and economic losses due to natural disasters in Espirito Santo are estimated at US$71.94 million. However, the estimation of the benefits of DRM investments is complicated given their probabilistic nature. 7. Justification for public sector provision. Resources under this component are targeted at correcting public sector failure, such as strengthening and increasing the efficiency of the State's Environmental Secretariat for adequate management of water resources as well as the development and use of instruments for risk reduction and responding to adverse natural events. 8. World Bank value added. As Brazil and the SES move towards a culture of disaster prevention, the Bank is uniquely positioned to provide expert technical input based on the lessons learned from 25 years of Bank operations and programs in the area of disaster risk management and make the shift towards an approach for comprehensively managing disaster risk. In addition, the Bank team also has extensive accumulated experience in water resources management and integrated urban water management in order to ensure that the activities and studies being planned are pragmatic and will yield on-the-ground results in terms of improved water management. Component 2: Efficient water supply services and increased access to sanitation 9. Component 2 supports a variety of activities aimed at increasing the efficiency of water supply services and increasing the coverage of sewage collection and treatment services in the SES. Sewerage investments in the GVMR and in nine municipalities located in the interior of the State account for the bulk of the component's cost (US$205.5 million of US$215.7 million); the analysis focuses on these investments. 10. Justification for public sector provision. Component 2 is aimed at remedying market failures; without an intervention, these market failures would continue to generate negative externalities for the environment and the population without access to sewerage services. Given the high investment costs associated with sewerage provision, it would be prohibitive, particularly for low income households, to finance via the tariff such large investments. As such public subsidies are needed in order to ensure adequate sanitation coverage and affordable services to the poor. 11. World Bank value added. Aside from the extensive experience and sector expertise from our global interventions on utility management and provision of sanitation services, the Bank can particularly contribute and add value to the execution of this component through supporting innovative and efficient procurement and contracting arrangements for the large works to be implemented, such as turnkey contracts. 49 12. Current situation of the sanitation sector. Sewerage coverage remains relatively low in the SES, with the exception of parts of the GVMR (Table A6.2), due to: (a) low or inexistent sewerage coverage; (b) low or inexistent sewage treatment; and (c) low response of households to connect to the sewerage system even in areas where the network exists. 13. Impact of the project. Without the project, there would be no improvement in sewerage coverage, and the number of people not connected would gradually increase as the population 34 grows. The project's investments under component 2 are expected to increase sewerage coverage in the affected areas substantially (Table A6.2). 14. Operating costs and revenues. Operating costs projected for the "with" and "without project" situations are estimated according to the investments planned for each locality. For the without project situation, operating costs are projected based on CESAN's current operating costs in each of the localities where the service is provided. Operating revenues are based on the projected number of connections and the new tariff approved by ARSI, which increase sewerage rates by 26 percent in 2014, relative to rates in 2011. Table A6.2 shows the projected annual operating costs and revenues for each of the systems. Overall, the net present value of sewerage tariffs collection is estimated at US$148 million.35 In all cases, the projected revenues exceed the projected operating costs, indicating that operation of the new infrastructure, once it has been built, will be financially sustainable for CESAN. 15. Economic costs and benefits. In addition to the revenues collected from sewerage tariffs, increased sewerage coverage is expected to result in a reduction in the incidence of gastrointestinal disease. In turn, this results in avoided treatment costs and loss of wages. The benefits of the project are estimated using data from a study of the economic benefits of sewerage expansion in Brazil (Trata Brasil, 2010), which provides estimates for each state. In each case, the benefits were estimated by adjusting the estimated benefit to 2012 prices, and applying it to estimated number of project beneficiaries (taking into account population growth). Benefits were estimated over a 30-year period, and discounted at 10 percent. a. Connecting a dwelling to sewerage results in a 39 percent decrease of gastrointestinal infections. In Espirito Santo, the annual number of occurrences of gastrointestinal disease is 6,108, and the average treatment cost is R$568/incidence (in 2009 prices). With these assumptions, the estimated present value of health benefits at 2012 prices is about US$1 million. b. Households in Espirito Santo that are newly connected to sewerage would also experience a 3.5 percent increase in their average monthly income (thanks to avoided time lost to illness), estimated at R$868 per household (in 2009 prices). The estimated value of this benefit is about US$169 million. 34 Current coverage is 36 percent in the project areas of the GVMR, and 11 percent in the interior. Yet only 60 percent of dwellings are actually connected to the network, turning the percentage of effective coverage to 21 percent in the GVMR and 9 percent in the interior. With the project, the network will be expanded to 63 percent of households in the areas in the GVMR, and 100 percent in the interior; and increase the connection rate from current 60 percent to 90 percent in the specific areas of intervention in the GVMR. Note that tariff revenue is not an economic benefit; it is a transfer payment from consumers to CESAN. 50 c. In Espirito Santo, a sewerage connection increases the property value of a dwelling (estimated in R$75,000 in 2012 prices36) by 3.4 percent. The estimated value of this benefit is about US$85 million. a. The property value of the dwellings located nearby current sewage discharges will increase when wastewater is treated. It is estimated than the costs caused by proximity to an odor emission source ranges from about 3% to 10% of the value of real state (Longo and Hughes 2010). The estimated value of this benefit is about US$55 million. 16. Thus the benefits obtained from health improvement and higher income from avoided loss of working days (US$170 million across all sites), would be sufficient to justify the project's investments and operating costs, as they exceed their present value during the lifetime of the project (US$162 million). Adding the increase in property values further increases this margin.37 17. The economic analysis of component 2 thus shows a net economic benefit of US$139 million and an internal rate of return of 37 percent. The distributive analysis shows that customers receive the bulk of benefits (US$138 million). The government, however, will bear net costs of about US$89 million, as a result of having to bear the investment costs. 18. The financial analysis of component 2 shows that revenues from tariffs are not enough to cover investment and operating cost generating a net financial loss of US$54 million. When subsidy from the Government is included, the project generates positive returns of US$66 million, as revenues from tariffs are higher than operating cost. 19. Sensitivity. These results are robust to significant changes in assumptions. Costs would have to increase as much as 100 percent, for example, for the component to become non-viable, or the effective connection rate would have to fall below 50 percent. 20. Risk. To enhance the accuracy of the financial and economic analysis, a risk analysis was carried out using the Crystal Ball. This software works with Monte Carlo simulation sampling probability distribution for each of the variables selected and produced hundreds or thousands of possible outcomes. The assumed probability distributions and their respective specifications for each variable are as follows. Probability Distribution selected for each variable Triangular distribution with parameters: Minimum -15% Investment Cost Likeliest 0% Overrun Maximum 30% 36 The property value at 2012 prices was obtained from information provided by local state agencies. 37 However, it is not evident that it is appropriate to add the increase in property values, as it might in part reflect a willingness to pay for a healthier environment with a lower likelihood of illness. To the extent that this is true, adding the entire amount of property value increase may represent double-counting of benefits. However, part of the increase in property values represent benefits not captured in health benefits, such as reduced odors. 51 Triangular distribution with parameters: Minimum -15% Operating Cost Likeliest 0% Overrun Maximum 30% P d.IWI 0 Custom distribution with parameters: Value Probability 0 0.50 Project Delay 1 0.30 1 0.30 2 0.10 3 0.05 4 0.05 Custom distribution with parameters: Minimum Maximum Probabil ty Connection Rate 40% 50% 0.05 50% 60% 0.10 -_-_-_-_-_-_ 60% 70% 0.15 70% 80% 0.20 80% 90% 0.50 Beta distribution with parameters: Minimum -50% Reduction on benefits Maximum 10% Alpha 2 Beta 3 21. The results for the economic analysis show a very sound project with 90 percent probability of having positive results. 52 Table A6.2 Current and expected sewerage coverage. Estimated costs and revenues Sewerage Effective (US$ million) coverage connection rate Annual With With Planned sewerage and treatment Investment Operating Annual Beneficiary Current project Current project Municipality works costs costsa Revenuesa population (0%-) (0%-) (0%-) (0%-) Greater Vitoria Metropolitan Region (GVMR) Cariacica Expansion Bandeirantes 32.4 4.9 10.7 31,100 39 68 51 90 Expansion Nova Rosa Penha 3.5 6.7 5,173 39 100 51 90 Vila Velha Expansion AraqAs 62.9 8.4 17.3 29,872 33 66 68 90 Expansion Ulisses Guimar5es 60.1 0.1 0.3 41,915 33 100 68 90 Total GVMR 155.4 0.2 0.5 108,060 36 63 60 90 Interior 0.2 0.5 Conceiqio do Castelo Expansion 5.5 0.1 0.3 4,859 17 100 0 90 Divino Sio Lorenqo New system 3.0 0.0 0.2 2,041 0 100 0 90 Dores do Rio Preto New system 2.4 0.1 0.6 2,197 0 100 0 90 Ibatiba New system 11.2 0.4 1.4 13,378 0 100 0 90 Irupi New system 3.4 0.5 1.3 4,461 0 100 0 90 lIina New system 9.6 0.2 0.7 13,792 0 100 0 90 Marechal Floriano New system 6.0 1.8 5.8 5,461 0 100 0 90 Santa Leopoldina New system 5.0 10.3 23.1 2,776 0 100 0 90 Santa Maria de JetibW Expansion 4.0 4.9 10.7 7,460 45 100 100 90 Total interior 50.1 3.5 6.7 56,425 11 100 85 90 Total 205.5 8.4 17.3 164,485 34 65 60 90 Notes: a. Present value discounted at 10 percent over 30 years. 53 Component 3: Watershed management and Restoration of Forest Cover 22. This component will focus on improving land use in upper watershed areas so as to improve water quality for downstream water users in the GVMR (primarily by reducing the silt loads in surface water) and generate new opportunities and revenue for rural producers. It will do so, inter alia, by supporting the following SES programs: (a) Reflorestar - to induce land use change in the target watersheds using Payments for Environmental Services (PES); and (b) the Mangarai River Pilot - which seeks to reduce silt originating in the Mangarai River sub- watershed through a holistic approach that combines reforestation and improved land management (through the Reflorestar program) with a range of other interventions, such as improvement to roads and sanitation in the watershed. The Mangarai sub-watershed, which has been identified as one of the primary sources of sediment affecting CESAN's water intake in the Santa Maria River, which provides 32 percent of the water used in Grande Vit6ria. The component's activities would eventually be extended to other parts of the Santa Maria watershed, and to other watersheds. The analysis here focuses solely on the activities in the Mangarai sub- watershed. 23. Sediment loads in the Santa Maria river have increased over the years, causing significant problems to the water sector. CESAN draws water from an intake at Santa Maria to supply the Carapina and Santa Maria treatment plants, which together produce almost 40 percent of Vit6ria's water and serve over 35 percent of its population. Figure A6.1 shows how average and maximum turbidity have increased in the last decade. Average turbidity was about 28 NTU in 2002-03, but almost 50 NTU in 2012-13. Sediment loads also affect two hydroelectric plants (Rio Bonito and Sui9a) along the river; and the Port of Vit6ria, where the river ends its journey. 21,0(0 Maximum turbiditi fr tretment 400 4 W V S100 0 '10 Average turbidity - Maximum turbidity Year Figure A 6.1 Turbidity of water delivered to the Carapina Treatment Plant. 24. Justification for public sector provision. Component 3 is aimed at remedying market failures; without an intervention, these market failures would continue to generate negative externalities for downstream water users. In principle, a user-financed system of payments for 54 environmental services (PES) could be developed, and indeed that was the plan under the previous Espirito Santo Biodiversity and Watershed Conservation and Restoration Project (P094233), which initiated the work on a PES program for the watersheds supplying Vit6ria. As the SES had also, in parallel, developed its ProdutorES de Agua program (now replaced by the Reflorestar program), it was more efficient to rely on that program for field arrangements. CESAN will, however, provide funding for activities in the watersheds, complementing funding from Funddgua. 25. World Bank value added. The World Bank has accumulated considerable knowledge and experience in the design, implementation, and support of PES programs in developing countries. Nine Bank-financed projects that use PES are currently under implementation in LCR, making payments of over US$100 million a year and conserving over 2.5 million ha of forest. In parallel, the Bank has been undertaking research on PES and sharing the results with practitioners through capacity building efforts. No other institution has the same depth of experience in implementing PES approaches. 26. Without project. The turbidity of the water used in the Santa Maria water system has increased substantially over the years (Figure A6.1). Average turbidity levels doubled from 2002-03 to 2011-12, increasing water treatment costs. CESAN invested R$2.8 million in 2005 to install dissolved air flotation units at the Carapina Treatment Plant to reduce input costs, but as shown in Figure A6.2, input costs are still strongly affected by average turbidity levels.38 Filters must also be cleaned much more frequently at times of higher turbidity, further increasing costs. Furthermore, treatment must be interrupted when turbidity exceeds about 400 NTU, potentially resulting in service interruptions.39 As can be seen in Figure A6.1, turbidity peaks have become both higher and more frequent. Treatments were interrupted four times due to excessive turbidity in 2012. 27. Without improved management in the Santa Maria da Vit6ria watershed, it is likely that these costs would continue to increase, as they have throughout the last decade. From Figure A6. 1, average turbidity had doubled to just under 50 NTU in the last decade. From Figure A6.2, this has resulted in average treatment costs increasing by about R$0.01/m3, even after a R$3 million investment in air flotation units designed to reduce treatment costs (about R$4 million in 2012 prices). At current production levels of about 60 million M3, this increase in turbidity has thus increased treatment costs by about R$0.6 million a year. 3 The data in Figure A6.2 are for the period 2006-2013, and thus incorporate the effect of the air flotation units. 39 The Santa Maria treatment plant, which also draws its water from the same intake, is less vulnerable to interruptions because its newer design allows treatment at turbidity levels up to 1,000 NTU. Moreover, Santa Maria is much smaller, with less than 10 percent of Carapina's capacity. 55 0.07 S0.06 "U 0 02 Vm 0.05 4D~0.04 0.02 0 20 40 60 80 100 120 Average turbidity (NTU) Note: Data from 2006-2013, following installation of air flotation units at Carapina Source: World Bank calculations based on data from CESAN. Figure A6.2 Impact of turbidity on water treatment costs at Carapina. 28. Without intervention, it is assumed that average turbidity would continue to increase according to the trend observed in the last decade, reaching about 80 NTU in a decade and causing average input costs for water treatment to increase by an additional R$0.01/M3. At current average annual production levels of about 60 million m3, this would increase annual input costs for water treatment by about R$0.6 million at Carapina within a decade and about R$1 million by 2030. Beginning in 2018, CESAN is planning to ramp up annual production at Carapina from 60 million m3 to 115 million m3 by 2030. Taking this increased production into account, the additional costs will reach almost R$2 million a year in 2030. Further investments in filtration measures are likely to be required to keep pace with rising average turbidity levels, probably at about 10-year intervals. Assuming such investments are similar in magnitude to those in air flotation units, the additional cost would come to about R$2.4 million in present value terms. The higher peaks of maximum turbidity, and their increased frequency, impose additional costs. 29. The Port of Vit6ria is also likely to suffer from the need for more frequent dredging to maintain the water depth necessary for the safe passage of ships. Current annual dredging costs average about R$1.5 million (US$2.6 million), but are expected to increase to about R$2.5 million once the on-going program to deepen and widen the shipping channel is completed. 30. With project costs. (1) Reflorestar would support a mix of productive practices (agroforestry, silvopastoral practices) and pure conservation practices (reforestation of riparian corridors) that would reduce erosion compared to current practices. Landholders would be offered payments ranging from R$2300/ha (about US$1150) for natural regeneration to 56 R$7200/ha (about US$3600) for adoption of agroforestry, over three years, with pure conservation uses also receiving longer-term payments of US$90-1 10/ha/year to maintain forest cover. We use as an illustrative example a farm adopting agroforestry on 1 ha, silvopastoral practices on 2 ha, and regenerating forest on 1 ha, and which also has I ha of standing forest eligible for a conservation payment; it would receive total payments of about R$16,400 (about US$8200), and conservation payments of R$295/year (US$145/year). About 15-20 percent (about 2,600-3,500 ha) of the Mangarai sub-watershed would need to be conserved or converted to less erosive uses to achieve substantial reductions in erosion, assuming the most erodible areas are targeted.40 The total cost of payments would thus be about US$5.6 million to US$7.9 million in present value terms over 30 years. 31. The transaction cost of implementing the program would increase total costs to about US$7.5 million to US$10.6 million.41 (2) Table A6.3 shows the other investments that would be undertaken in the Mangarai watershed with the aim of reducing erosion and improving water quality downstream, and their expected cost. Adding the cost of these measures would further increase the total cost in Mangarai by about R$4.11 million, or US$2.2 million. The total cost of activities in Mangarai would thus be about US$9.7 million to US$12.8 million. Table A6.3 Other investments in Mangaral watershed. Estimated cost Activity (R$ million) Diagnostic and detailed investment plan 0.45 Community water and sewage treatment 0.50 Restoration of rural roads (including installation of sediment traps) 2.60 Community education 0.56 Total 4.11 32. With project benefits. The planned interventions would generate three main benefits: a. CESAN would benefit from reduced water treatment costs. There is considerable evidence, from Espirito Santo itself, other sites in Brazil, and elsewhere in the world, that turbidity levels are closely related to erosion in the watershed.42 It is difficult to predict how much turbidity might fall with improved watershed management. If the interventions succeed in stabilizing turbidity at current levels (that is, avoid any further increase in turbidity), they would result in savings in average input costs at Carapina alone of R$8.2 million (US$4.3 million) over 30 years.43 Stabilizing 40 The area that would need to be conserved or converted to improved land uses to have a meaningful impact on sediment loads is not yet known; a hydrological model is being developed that will allow this area to be estimated. Here we use the upper end of the likely range so as to have more conservative estimates of expected project benefits. 41 Based on current Reflorestar transaction costs of about R$1000/ha. In may be possible that average costs would be lower in Mangarai because of a greater concentration of contracts in a small area. 42 Teixeira and Senhorelo (2000; cited in Hercowitz and Figueiredo, 2011) find that turbidity is closely correlated to sediment transport in the Jucu watershed. Similar results were obtained in watersheds in Rio Grande do Sul by Chaves (2010) and Carvalho and others (2004). The proportion of sediment eroded that finds its way to river outlets tend to be higher in smaller watersheds such as that of Mangarai (Walling, 1999). 43 The benefits of reduced turbidity would have been higher had conservation measures been undertaken prior to the 2005 investments in additional filtration units, as unit water treatment costs were higher then; moreover, the capital cost of the additional filtration units would also have been saved. 57 turbidity at current levels would avoid the need for further investments in new filtering equipment, resulting in additional estimated savings of RS$2.4 million (US$1.2 million) in present value terms. Further savings would come from reductions in the number of interruptions in treatment, in avoiding the higher costs for washing filters, in reduced need for additional investments in storage capacity. In the absence of strong data on the magnitude of these costs and how they would have increased, we round up total benefits to US$6 million. If the measures being undertaken succeed in actually reducing turbidity from current levels, the benefits would be higher. Returning average turbidity levels to those observed at the beginning of the century would reduce the cost of inputs for water treatment by R$5.5 million (US$2.9 million) over 30 years, bringing total benefits to almost US$9 million. b. The Port of Vit6ria would also benefit from reductions in sediment delivery, by avoiding the need for more frequent dredging. There are no data on which to base predictions of possible sedimentation impact due to watershed degradation in the new, deeper channel. If dredging costs would have risen by 20 percent over the next thirty years in the absence of watershed conservation, maintaining sediment loads at current levels would avoid about R$3.6 million (US$1.9 million) in additional dredging costs. 44 c. Participating landholders would benefit from increased income, partly from the payments they receive to maintain protective land uses such as forests, but mostly from the higher profitability of land under agroforestry or silvopastoral practices.45 IEMA estimates that annual income (including payments) on a typical 15 ha farm would increase from about R$10,000 to about R$12,000 within 3 years and to about R$22,000 in 10 years. Assuming, conservatively, that net income increases by only 10 percent of these amounts, income would increase by about R$2,900/ha (US$1,500/ha) in present value terms, over 30 years, or a total of about US$6.8 million over the area covered by the project in Mangarai. 33. Total benefits for Component 3 activities in the Mangarai sub-watershed are thus estimated to be about US$13 million to US$15.5 million, assuming that turbidity is stabilized at current levels, or about US$15.9 million to US$18.4 million if turbidity is reduced to the levels 46 observed a decade ago. Even at the lower estimate, these benefits exceed the estimated US$9.7 million to US$12.8 million costs for this component's activities in the sub-watershed, giving an NPV of about US$2.9 million to US$3.7 million (with IRR of 12.7 to 14.1 percent) if turbidity is stabilized at current levels and of about US$5.8 million to US$6.5 million (and IRR of 15.6 to 16.8 percent) if it is reduced to the levels of a decade ago. 34. The bulk of benefits would be received by CESAN (US$5.5 million to US$8.4 million) in the form of reduced treatment costs and avoided investments and by participating landholders 4 The two hydroelectric power plants in the Santa Maria da Vit6ria watershed are also affected by sedimentation. However, they are both located higher in the watershed, and so would not benefit from conservation in the Mangarai micro-watershed. They might benefit if the program were later expanded to other parts of the watershed. 45 Although these practices are profitable, they are not adopted because of the high initial investments required; the project's payments would help overcome this constraint. 46 Although the Mangarai sub-watershed is only part of the Santa Maria watershed, it has been identified as a principal source of the sediment affecting water turbidity at the Santa Maria intake. Many of the proposed land use changes would reduce erosion in Mangarai, thus offsetting possible increases in erosion elsewhere in the watershed. 58 (US$5.6 million to US$7.9 million) in the form of higher income from farming activities. The bulk of costs would be borne by the SES (via the Fundigua fund), through its support to the Reflorestar program and other investments. The financial burden of long-term conservation payments would fall on Fundigua, but would be relatively low (less than US$200,000/year) and easily borne, given Fundigua's budget of about US$2.5 million a year. 35. Sensitivity. These results are robust to significant changes in assumptions. In part, this is due to the costs and benefits of land use changes being tied together: if adoption is lower than forecast, the benefits would decline (as the impact on erosion and the increase in landholder benefits would be lower), but so would the costs (as both payments and transaction costs would decline). The component would still be economically beneficial even if the estimated benefits of the new practices to landholders were reduced by a third. Financial Analysis of CESAN 36. The financial analysis allows evaluating CESAN's financial capability for sustaining and operating the project. The World Bank loan will be paid by the SES and therefore is not included in the analysis. This assessment differs from the financial analysis of the project as it takes into account not only the project, but also all other operations that CESAN is planning to implement. 37. This analysis is based on the audited financial statements from 2008 to 2012, and the projected financial situation according to CESAN's forecasts. A sensitivity analysis was carried out to assess the financial impact when changes on transfers form the Government occur, and when a potential planned concession of sewerage service is awarded to private sector. 38. Financial Performance 2008-2012. In general terms the historic financial performance of CESAN in the previous shows a stable situation. Operating and net profits have been generated in all the period. Revenues cover operating and financial expenses, and allow a tiny margin to finance a portion of the investment. The State Government has funded an important percentage of the investment, through transfers, some of which have been converted to shares. The cash flow generated from operation has been enough to cover debt obligations. The capital structure shows a sound situation with debt indicators within acceptable levels for the industry's standards. 39. During the period, the income statement shows an average operational margin of about 16 percent and a net margin of 12 percent. In 2011 net income dropped to 7 percent, most likely as the result of the initiation of the tariff restructuring process, and in 2012 it presented previous levels. This illustrates that tariffs cover not only operating and financial cost but also allows a remnant of about 20 percent to finance investment (More details of financial statements and indicators in Attachments 1 and 2). Revenues have increased steadily on about 10 percent per year, which corresponded to 2 percent real increase after adjusting for inflation. Operating expenses on the other hand have had a more erratic fluctuation with the lower increase in 2010. 59 Revenues, O&M, EBITDA, Net Inome Annual Variation ofRevenues, O&M 2008-2012 30% - -- EBITDA - - - Net Income 25% 4 O&M 600 520% 500 - 15% O&M wi 400 10% . ..- Revenues . 300 5% S200 . .2,009 2,010 2,011 2,012 100 2,008 2,009 2,010 2,011 2,012 Figure A 6.3 Historic financial performance of CESAN. 40. The tariffs have been adjusted annually to cover mainly adjustment for inflation. The actual increase in revenues is explained in expansion of the services and higher volume of water and sewerage billed. 41. From 2008 to 2012, the SES has provided funds in the amount of R$482 million to finance about 50 percent of the company's capital expenditures. Of these transfers 21 percent have been converted into shares and the remaining 79 percent have been registered as a grant without financing charges for CESAN. The remaining of investment cost has been financed with CESAN's own resources, and 25 percent with debt. The capital structure of CESAN shows 40 percent debt and 60 percent equity. Interest payments have been in average 4 percent of billed revenues. 42. Projected Financial Situation. Projections of CESAN's future financial situation included: (i) the tariff framework recently established by the regulatory agency-ARSI; (ii) the investment plan and associated targets in service expansion and unaccounted for water; and (iii) the proposed financing plan. 43. In June 2011, ARSI approved a comprehensive new tariff structure with a clear subsidy framework.47 In the Resolution, ARSI defined the scheme for gradual implementation of the new structure until August 2014, when the new tariffs should be in place. The main changes are as follows: (a) a social tariff is established, with beneficiaries being those customers who belong to the Federal Program known as Bolsa Familia (Family Grant); (b) all other residential customers are grouped in one category; eliminating the previous four categories; (c) industrial and commercial customers are also grouped in one category; (d) the tariffs for sewerage and wastewater treatment will be 80 percent of the water tariff for the residential sector and 100 percent for non-residential customers in 2014; increasing gradually from current percentages (52 percent to 79 percent depending on the category) - the tariffs for sewerage (with no sewage treatment) correspond to 25 percent of water tariffs for all categories of customers; (e) water and sanitation tariffs will be the same for all municipalities, eliminating the differences that exist between the GVMR and others; (f) the subsidy on the social tariff will be applicable as discount on residential tariff, as follows: up to 15 cubic meters per customer per month the discount will 47 Resolucao ARSI-Agencia Reguladora de Saneamento Basico e Infraestrutura Viaria do Espiritu Santo. do de No 012, de 14 Junho de 2011. 60 be 60 percent; from 16 to 20 cubic meters the discount will be 20 percent; and for consumption higher than 20 cubic meters there will be no discount. 44. The resulting increase on the sewerage tariff will be of about 26 percent in real terms, as it goes from current 71 percent of water tariff to 90 percent in 2014. Table A6.4 CESAN's tariff increase. 2011 2014 Increase Average water tariff (R$/m3) 2.12 Average sewerage tariff R$/m3) 1.51 1.91 26% Sewerage tariff/water tariff (Percentage) 71% 90% 45. The increase in sewerage tariff will have an important impact on revenues, as most of the investment program will go to sewerage and sanitation expansion. Sewerage coverage will increase from 34 percent to 72 percent by 2020 (Figure A6.4). Water coverage is already universal and it is expected to expand at the same pace as population. Results show that projected sewerage revenue will have a 54 percent real increase from 2011 to 2014, as consequence of tariff and coverage increases. Water revenues, on the other hand, will increase with population growth. Table A6.5 CESAN's revenue increases from 2011 to 2014. Real Revenue Increase Water revenue Increase 8% Sewerage revenue Increase 54% Other revenue Increase 10% Total revenue Increase 16% Number ofconnections and coverage (water and sewerage) 2012-2020 700 100% S600- %' LL.hthhhhi ~~~~0% Wae cnecin 2O12 291 29~ 2pf6 29'6 291 2" 29 2920 -Sewerage connections 0 Water coverage (%) Sewerage coverage Figure A6.4 CESAN's water and sewerage connections and coverage. 46. Investment Program 2013-2017. CESAN has an investment plan that is estimated to cost R$1,485 million (about US$765 million) for the next five years; 33 percent of which will go to the water sector, 60 percent to sewerage and wastewater treatment, and the remaining 7 percent to institutional strengthening. According to CESAN's projection 47 percent of the investment plan will be financed through transfers from the State Government; 9 percent with loans; and the remaining 44 percent from CESAN's own resources. 61 47. Results of the financial projection. The base case scenario includes the increase in tariffs approved by ARSI; the projected investment plan and its associated targets; and the financing plan with 47 percent of investments financed by the State Government. The results show that EBITDA48 will maintain its current level of about 15 percent during the whole period. Net margin will increase from 3 percent in 2013 to 9 percent at the end of the period (Figure A6.5). The percentage of cost recovery will maintain its current level of about 120 percent, which means that tariffs will be enough to pay for all operating costs with a 20 percent margin to fund investment costs. The capital structure will show a sound position with debt participation of 30 percent of assets and equity with the 70 percent remaining. This structure will be even better than shown in previous years. Revenues, O&M, EBITDA, Net Income Financing of Investment 2013-2020 2013-2020 1,000 100% 900 ----- EBITDA - - - Net Income 800 _0% 700 600 -0% 0 Debt 500 e I e' 'e D~fownreocs 400 n e reouc% 200 20% 100 40% 2,013 2,014 2,015 2,016 2,017 2,018 2,019 2,020 2,013 2,014 2,015 2,0 2,01 2,01 2,0119 2,020 Figure A6.5 Results of CESAN's financial projections. 48. Sensitivity Analysis. The financial situation of CESAN can deteriorate if some changes occur in the variables included in the base case scenario. Two variables were evaluated as those of having the highest risk for the financial feasibility of CESAN: (i) a concession of the sewerage service to a private operator in the Municipality of Serra; and (ii) a decrease of transfers from the State Government to finance investments. a. Private sector participation (PSP): CESAN is inviting the private sector to build and operate the systems needed for improving service provision, such as coverage expansion of sewerage and wastewater treatment services. Serra has been selected as a municipality with special conditions for a PSP transaction, and feasibility studies have been carried out by CESAN. Preliminary conditions for a 30-year contract have been published on the web as well as the payment scheme, which consists of both fixed and variable payments according to the volume of wastewater treated.49 CESAN will retain the responsibility of billing the customers under PSP contract, and at the same time, will be fully responsible for all the payments to the private operator, with no funding from the Government. The preliminary conditions established in the draft contract show that the tariffs collected would be lower than the payments CESAN has to make to the operator. This will bring a financial burden for CESAN as the sewerage tariff does not cover the full cost of providing the service, since the PSP payments correspond to both investment and 48 EBITDA: earnings before interest, taxes, depreciation and amortization. The term is arrived at by subtracting operating expenses from operating revenues. 49 CESAN. Plano de Negocios Referencial para a cncessao administrative dos servicos de saneamento no sistema de esgotamento do municipio de Serra. 2012 62 operating costs. By year 10 of the concession, the share of the payments to the operator will be 27 percent of operating costs and 23 percent of total revenues, and they alone will be 64 percent of total sewerage revenues of CESAN. Results show that EBITDA will gradually decrease and become negative with a net loss of 4 percent on average and by 2020 the loss will represent 9 percent of revenues. The operating cost recovery will decrease from 115 percent in 2012 to less than 100 percent in 2020, signaling that tariff increases will be required in order to maintain the company's long-term financial sustainability. Table A6.6 Impact ofpayments of PSP on CESAN's financial accounts. Year ] Year 5 Year 10 Share on total operating costs (%) 7% 17% 27% Share on total operating revenues (%) 5% 13% 23% Share on sewerage revenues (%) 28% 43% 64% b. Reduction of Funds Transferred from the SES. In case the State Government is not able to maintain the agreed levels of funding to CESAN as a result of deterioration of its fiscal capabilities, the company's finances will also be negatively affected. If there are no transfers from the Government and the PSP for sewerage in the Municipality of Serra is awarded, net losses will occur during the whole period and reaching 11 percent of revenues by 2020. Additional loans needed for CESAN will increase to 91 percent of investments and its capital structure will change significantly to 70 percent debt and 30 percent equity. If there are no transfers from the Government and the concession is not awarded, the financial situation will deteriorate albeit at a slower pace. New loans will be needed to finance 68 percent of investment, and the company's capital structure will be 50 percent debt and 50 percent equity. In both cases, there will be a need to prepare a comprehensive financial strategy to guarantee CESAN's financial viability involving the State Government, Regulator, the company itself and customers. REFERENCES Carvalho, K.S., R.M. Paranhos, and J.B.D. Paiva. 2004. "Limitaq6es ao uso da relaq5o entre turbidez e concentraq5o de sedimento em suspensao em duas pequenas bacias em Santa Maria, RS." Paper presented at the XXI Congresso Latinoamericano de Hidriulica. S5o Pedro, SP, Outubro 2004. Chaves, H.M.L. 2010. "Relaq6es de aporte de sedimento e implicaq6es de sua utilizaq5o no pagamento por serviqo ambiental em bacias hidrogrdficas." Revista Brasileira de Cidncias do Solo, 34:1469- 1477. Hercowitz, M., and G.R. Figueiredo. 2011. "Teste de viabilidade do uso de reverse auction como mecanismo para pagamentos por serviqos ambientais." PRMC Produtos T6cnicos No.4. Sao Paulo: SMA. Trata Brasil. 2010. Beneficios econ6micos da expansdo do saneamento Brasileiro. Rio de Janeiro: Fundaq5o Getulio Vargas/Instituto Brasileiro de Economia. Walling, D.E. 1999. "Linking land use, erosion and sediment yields in river basins." Hydrobiologia, 410: 223-240. 63 BRAZIL ESPIRITO SANTO INTEGRATED SUSTAINABLE DEVELOPMENT PROJECT This mp was produced by the Map Design Unit of The World Bank. 41 W 40°w Theboadaries,calors,denomimationsandanyotherinformation dLinhaires shown o his map do notimply, on the poet of Thorld Bank Group, on odgment on the legal ototos of ony te y,r any endorsemen or acceptonce of such bound Rio DO oBaixo Guandu 0 Colatina RIVER BASIN ,-Y RIACHO r 5 So Roque Joo Neiva RIVER BASIN S do Canaäã GERAIS r9 SLaraj trn 0 da Terra OSanta Teresa Fndo 20°S ' ' I'' R 20°S oAfonso STA. 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