PROJECT PERFORMANCE AUDIT REPORT

PROJECT PERFORMANCE AUDIT REPORT

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ASIAN DEVELOPMENT BANK PPA:LAO 24104 PROJECT PERFORMANCE AUDIT REPORT ON THE SOUTHERN PROVINCIAL TOWNS WATER SUPPLY PROJECT (Loan 1122-LAO[SF]) IN THE LAO PEOPLE’S DEMOCRATIC REPUBLIC December 2000 CURRENCY EQUIVALENTS Currency Unit – Kip (KN) At Appraisal At Project Completion At Operations Evaluation (October 1991) (May 1997) (August 2000) KN1.00 = $0.0014 $0.0004 $0.0001 $1.=KN700 KN2,400 KN8,000 ABBREVIATIONS ADB – Asian Development Bank ADTA – advisory technical assistance BME – benefit monitoring and evaluation EIRR – economic internal rate of return FIRR – financial intee of return ICB – international competitive bidding IS – international shopping Lao PDR Lao People’s Democratic Republic Lpd – liters per day MCTPC – Ministry of Communication, Transport, Post and Construction mg/L – milligrams per liter ML/d – megaliters per day NORAD – Norwegian Agency for Development Cooperation NPL – Nam Papa Lao (Lao Water Supply Authority) NPV – net present value OEO – Operations Evaluation Office PCR – project completion report PIO – implementation office PMU – project management unit PPAR – project performance audit report PPTA – project preparatory technical assistance SDR – special drawing rights TA – technical assistance NOTES (i) The fiscal year of the Lao PDR ends on 31 December. (ii) In this report, “$” refers to US dollars. ...

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ASIAN DEVELOPMENT BANK PPA:LAO 24104     PROJECT PERFORMANCE AUDIT REPORT  ON THE  SOUTHERN PROVINCIAL TOWNS WATER SUPPLY PROJECT (Loan 1122-LAO[SF])  IN THE  LAO PEOPLE S DEMOCRATIC REPUBLIC      December 2000
   
     KN1.00 $1.00    
 
 
   CURRENCY EQUIVALENTS Currency Unit – Kip (KN)
 At Appraisal At Project Completion At Operations Evaluation  (October 1991) (May 1997) (August 2000) = $0.0014 $0.0004 $0.0001 = KN700 KN2,400 KN8,000
ABBREVIATIONS Asian Development Bank advisory technical assistance benefit monitoring and evaluation economic internal rate of return financial internal rate of return international competitive bidding international shopping Lao People’s Democratic Republic liters per day Ministry of Communication, Transport, Post and Construction milligrams per liter megaliters per day Norwegian Agency for Development Cooperation Nam Papa Lao (Lao Water Supply Authority) net present value Operations Evaluation Office project completion report project implementation office project management unit project performance audit report project preparatory technical assistance special drawing rights technical assistance
ADB – ADTA – BME – EIRR – FIRR – ICB – IS – Lao PDR – Lpd – MCTPC – mg/L – ML/d – NORAD – NPL – NPV – OEO – PCR – PIO – PMU – PPAR – PPTA – SDR – TA –     NOTES  (i) The fiscal year of the Lao PDR ends on 31 December. (ii) In this report, “$” refers to US dollars.
Operations Evaluation Office, PE–562
   CONTENTS
  BASIC DATA EXECUTIVE SUMMARY MAP I. BACKGROUND  A. Rationale  B. Formulation  C. Purpose and Outputs  D. Cost, Financing, and Executing Arrangements  E. Completion and Self-Evaluation F. OEO Evaluation  II. PLANNING AND IMPLEMENTATION PERFORMANCE A. Formulation and Design B. Achievement of Outputs C. Cost and Scheduling D. Consultant Performance, Procurement, and Construction E. Organization and Management  III. ACHIEVEMENT OF PROJECT PURPOSE A. Operational Performance B. Performance of the Operating Entity C. Economic Reevaluation D. Sustainability  IV. ACHIEVEMENT OF OTHER DEVELOPMENT IMPACTS A. Socioeconomic and Sociocultural Impacts B. Environmental Impact C. Impact on Institutions and Policy  V. OVERALL ASSESSMENT  A. Relevance  B. Efficacy  C. Efficiency  D. Sustainability  E. Institutional Development and Other Impacts  F. Overall Project Rating G. Assessment of ADB and Borrower Performance  VI. ISSUES, LESSONS, AND FOLLOW-UP ACTIONS  A. Key Issues for the Future  B. Lessons Identified  C. Follow-Up Actions APPENDIXES
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   BASIC DATA Southern Provincial Towns Water Supply Project (Loan 1122-LAO[SF])
  A. Project Preparation/Institution Building  TA No. TA Name Type Consultant Amount Approval  Person- ($) Date Months       759-LAO Southern Area Development Master Plan Study ADTA 150,000a 13 Mar 1986  1143-LAO Southern Area Development Multiproject PPTA 95,000 4 Apr 1989  1339-LAO Southern Provincial Water Supply PPTA 8.2 362,000 24 Jul 1990 1606-LAOb Strengthening of the Water Supply Institutional Sector ADTA 630,000 19 Nov 1991  1607-LAOb Provincial Towns Water Supply Northern Development Project PPTA 14.4 420,000 19 Nov 1991       ADTA = advisory technical assistance; = not available; PPTA = project preparatory technical assistance; TA = technical assistance. aby the United Nations Development Programme for $600,000. was cofinanced  TA b TA. Accompanying  B. Key Project Data   Item Currency As per ADB Loan Actual Documents     Total Project Cost $ million 12.00 11.04 Foreign Exchange Cost $ million 8.90 8.64 Local Currency Cost $ million 3.10 2.40     ADB Loan Amount/Utilization $ million 9.60 9.11  SDR million 7.05 6.25 Foreign Exchange Cost $ million 8.90 8.64 Local Currency Cost $ million 0.70 0.47 ADB Loan Amount /Cancellation $ million 0.00 1.22  SDR million 0.00 0.80     ADB = Asian Development Bank; SDR = special drawing rights.    C. Key Dates  Item Expected Actual    Fact-Finding 31 May-21 Jun 1991 Appraisal 20 Aug-5 Sep 1991 Loan Negotiations 22-23 Oct 1991 Board Approval 19 Nov 1991 Loan Agreement 13 Dec 1991 Loan Effectiveness 12 Mar 1992 2 Jul 1992 First Disbursement 2 Jul 1992 Project Completion 31 Dec 1995 30 Jun 1997a  Loan Closing 30 Jun 1996 12 Nov 1997 Months (effectiveness to completion) 45 60    a First revised closing date. The original closing date was 30 June 1996.  D. Key Performance Indicators (%)
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 ItemAppraisal PCR PPAR     Financial Internal Rate of Return 4.3 0 <  Part A: Pakse 6.6 4.7 < 0  Part B: Attapeu 5.3 3.7 < 0  Part C: Saravane 5.7 0.2 < 0  Part D: Sekong 6.2 8.7 < 0     Economic Internal Rate of Return 12.1 20.0  Part A: Pakse 11.8 25.1  Part B: Attapeu  0 <  Part C: Saravane 24.6 11.3   Part D: Sekong 0 < 16.4     = not calculated; PCR = project completion report; PPAR = project performance audit report.   E. Borrower    F. Executing Agency  G. Mission Data  Type of Mission  Fact-Finding Appraisal Project Administration:  Inception  Review  Project Completion  Subtotal Project Administration Operations Evaluation  Total  = not available.
Government of the Lao People's Democratic Republic Ministry of Communication, Transport, Post and Construction
No. of Missions   1  1   1  11  1  13  1  16  
Person-Days   68  6 166 25 197 33 298  
 
EXECUTIVE SUMMARY   In 1991, only about 33 percent of the urban population and 15 percent of the rural population in the Lao People's Democratic Republic (Lao PDR) had access to treated water supplies. Reliable supplies of water were available in only 7 out of 17 provincial capitals. Water supply in Vientiane and Savannakhet was acceptable but, in other towns, it was poor and did not meet the recommended World Health Organization standards. Water supply systems were generally old, in poor condition, and unable to provide for existing and future demand because investment was insufficient and there was a lack of planning and skilled personnel to manage them. No significant investment in urban water supply had been made since 1981.  The main objective of the Southern Provincial Towns Water Supply Project (Loan 1122-LAO[SF]) was to rehabilitate and upgrade the water supply systems in Pakse, Attapeu, and Saravane and to construct a new water supply system for Sekong, with a view to assisting the Government in meeting its water supply targets and thus improve the health of the population and support economic growth. Upon completion, the Project was to benefit 82,000 people in the four towns. ADB provided SDR7.05 million ($9.6 million equivalent) from the Asian Development Fund to finance the entire foreign exchange cost of the Project and $0.7 million of the local currency cost. The Government of the Lao PDR provided budgetary funds for the balance of the local currency cost. The actual project cost at completion amounted to $11.0 million, with a foreign exchange cost of $8.6 million (78 percent of the actual total cost) and a local currency cost of $2.4 million. The lower actual cost of the Project was primarily because gravity-operated infiltration galleries were used for the water treatment plants. The Project was expected to have been implemented over four years, from 1992 to 1995, with loan closing in 1996. However, some project delays were incurred and loan closing was postponed to 1997, about a year later.  The Project was generally consistent with ADB’s country operational strategy. Moreover, it had a poverty-reducing dimension, even though this was not an explicit intention of the strategy. In terms of current ADB strategic priorities, the Project is relevant. The Project was also implemented satisfactorily in the main part, with only a small delay. However, there were several shortcomings. In two of the project towns, Attapeu and Sekong, the proposed conventional water treatment plant was replaced with a gravity-operated infiltration gallery without an adequate investigation of the hydrology at the water intake location. As a result, the infiltration galleries are either ineffective or not in use. In Pakse, the water treatment plant is underutilized because too few consumers are connected to the distribution system. The Project was also inadequately designed from an institutional perspective. The finance and accounting systems of Nam Papa Lao (Lao Water Supply Authority) were not upgraded to international standards and the accounting skills of the staff were not strengthened. The amount of consulting services provided under the Project was insufficient and contributed to the poor performance of the Project in Attapeu and Sekong.  The main objective of the Project of providing potable water supply to four provincial towns was only partly achieved. Only about half of the 82,000 intended beneficiaries benefited from the Project. In two of the four project towns (Attapeu and Sekong), the Project did not bring potable water to residents and there has been no improvement in water supply. In Pakse, more consumers could be served by the Project if additional households were connected. Only in Saravane did the Project successfully meet its objectives. However, the Project did have a substantial impact on the populations of Pakse and Saravane. The overall economic internal rate of return (EIRR) was estimated at 20 percent in real terms. The high EIRR is attributable to the large size of Pakse relative to the other three towns and the substantial economic benefits from the Project in Pakse.
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  The financial position of the water utilities in the four project towns is precarious. Revenue is insufficient to cover operating expenses, depreciation, and interest payments; the water utilities reported losses in 1998 and 1999 on the income statement. The lack of financial viability is already affecting the operation of the water supply systems through neglect of necessary maintenance. The water tariff in the four project towns is low and recovers only minimal costs. Consequently, water is provided virtually free, and as a result, the financial net present value of the Project is negative.  The sustainability of the Project at Pakse and Saravane is doubtful. The lack of resources to finance maintenance has already caused operational difficulties in Pakse and will likely shorten the life of the Project. Sustainability is also affected by shortcomings in the technical abilities of water utility staff that need upgrading to ensure proper operation and maintenance of the plants. Even though the EIRR is high, based on a shorter than expected economic life of the Project, the Project was rated as less than successful.   The evaluation identified several lessons. designs of water supply systems areAlthough relatively standard, they need to take into account local conditions, particularly in developing countries where geological and environmental conditions vary greatly. Siltation of rivers is a well-known phenomenon in Asia and water supply designs need to incorporate data on water characteristics, such as turbidity, during project preparation or implementation when major design changes are being considered. The design should also include a thorough needs analysis of engineering design and supervision for project implementation.   In addition, the successful operation of a water utility depends on skilled and experienced staff. Therefore, project design needs to make adequate provision for staff training based on a thorough needs analysis. In certain developing countries, such as those in transition from central planning to a market orientation, relatively more institutional strengthening may be needed. In such cases, a relatively greater amount of technical assistance may be necessary in the initial projects in the sector to create a critical mass of skilled staff to ensure both the proper operation and maintenance, and the financial operations, of the project facilities. Institutional strengthening also needs to address the financial information issues of a water utility.   A key issue facing the Government is the nonperformance of project facilities in Attapeu and Sekong. The engineering firm that designed and constructed these facilities is likely to have a legal responsibility for rectifying the problems or providing some compensation.
 
 
 
I. BACKGROUND  
A. Rationale  1. In 1991, only about 33 percent of the urban population and 15 percent of the rural population in the Lao People's Democratic Republic (Lao PDR) had access to treated water supplies. Reliable supplies of water were available in only 7 out of 17 provincial capitals. Water supply in Vientiane and Savannakhet was acceptable but, in other towns, it was poor and did not meet the recommended World Health Organization standards. Water supply systems were generally old, in poor condition, and unable to provide for existing and future demand because investment was insufficient and there was a lack of planning and skilled personnel to manage them. No significant investment in urban water supply had been made since 1981.
B. Formulation 2. The Government of the Lao PDR recognized the deficiencies in the water supply systems in the country and undertook a study of urban and rural water supply financed by three agencies: United Nations Development Programme, United Nations Children’s Fund and the World Bank. The study identified a number of towns that required urgent rehabilitation and development of water supply systems, among them Pakse, Attapeu, Saravane, and Sekong. To address the water supply needs of these towns, the Government requested the Asian Development Bank (ADB) to provide a project preparatory technical assistance1a feasibility study of these towns’ water(PPTA) to carry out supply needs. The PPTA was completed in August 1991. 3. The PPTA study made a thorough investigation of the options and resulted in a generally high-quality report that made reasonable recommendations. However, the study had three shortcomings. First, the planning horizon of the PPTA was too short—only five years. A 20-year planning horizon would have been more appropriate to take into account population and economic growth. Second, the study underestimated the degree of difficulty in operating rapid sand filters in a water treatment plant compared to slow sand filters. The operation of the former needs considerably more technical expertise and funds for maintenance. The study did not consider these aspects. Third, the study overlooked the possibility of rehabilitating the existing water treatment plant at Pakse. 4. The ADB’s Board of Directors approved a loan on 19 November 1991 for the Southern Provincial Towns Water Supply Project by summary procedure. The Project included two technical assistance (TA) grants, one advisory2and one project preparatory.3 
C. Purpose and Outputs 5. The main objective of the Southern Provincial Towns Water Supply Project was to rehabilitate and upgrade the water supply systems in Pakse, Attapeu, and Saravane, and to construct a new water supply system for Sekong, to help the Government meet its water supply                                                   1 TA 1339-LAO:Southern Provincial Water Supply, approved on 24 July 1990, for $362,000. 2 1606-LAO: TAInstitutional Strengthening of the Water Supply Sector, approved on 19 November 1991, for $630,000. 3 TA 1607-LAO:Northern Provincial Towns Water Supply Development Project, approved on 19 November 1991, for $420,000.
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targets and thus improve the health of the population and support economic growth.4 Upon completion, the Project was to benefit 82,000 people in the four towns. The Project had six components: (i) at Pakse, construction of a new 15 megaliters per day (ML/d) water treatment plant, temporary rehabilitation and then decommissioning of the existing water treatment plant, and rehabilitation of the existing distribution network; (ii) at Saravane, construction of a new 2 ML/d water treatment plant, extension of distribution water mains and rehabilitation of existing mains, installation of service connections, and provision of water meters; (iii) at Sekong, construction of a new gravity-fed 2 ML/d water treatment plant and a new distribution network, installation of service connections, and provision of water meters; (iv) at Attapeu, construction of a new 2 ML/d water treatment plant, extension of distribution water mains and rehabilitation of existing mains, installation of service connections, and provision of water meters; (v) provision of institutional support through establishing a project management unit (PMU) and four project implementation offices to support the Executing Agency in project implementation, and through financing the supply of equipment for maintenance, repair, and leak detection of existing water supply networks; and (vi) provision of consulting services for engineering design and construction supervision.   D. Cost, Financing, and Executing Arrangements  6. ADB approved Loan 1122-LAO(SF) for the Southern Provincial Towns Water Supply Project for SDR7.05 million ($9.6 million equivalent) from the Asian Development Fund to finance the entire foreign exchange cost of the Project and $0.7 million of the local currency cost (Basic Data Sheet and Appendix 1). The Government provided budgetary funds for the balance of the local currency cost incurred by the Project. The loan had a term of 40 years, including a grace period of 10 years, with a service charge of 1 percent per annum. ADB financing covered 80 percent of the total project cost of $12 million as estimated at appraisal. The Borrower was the Government of the Lao People’s Democratic Republic. The Government relent the loan funds to Nam Papa Lao (NPL), the Lao Water Supply Authority, at 6.6 percent per annum for 25 years with a five-year grace period. The Government bears the foreign exchange risk.  7. The Executing Agency for the Project was the Ministry of Communication, Transport, Post and Construction (MCTPC) and the Implementing Agency was NPL. A PMU, headed by a project manager, was to be established in NPL in Vientiane to coordinate all project activities. A project implementation office (PIO) was also to be established in the NPL office in each town, headed by a project implementation officer. The overall project management structure was to have a staff of 20. Overall coordination was to be carried out by a project implementation coordination committee that met at least quarterly in each of the four towns on a rotation basis and, as needed, in Vientiane.  E. Completion and Self-Evaluation  8. A project completion report (PCR) for the Southern Provincial Towns Water Supply Project was prepared in June 1998 and discussed the design, scope, implementation, and operational aspects of the Project, and provided detailed project information. The PCR identified the main issues, including the apparent presence of iron and manganese in the raw water at Attapeu, which was deposited on the infiltration gallery screens and blocked water meters. However, the PCR did not provide evidence of the presence of these impurities; a chemical analysis would have been appropriate. An economic reevaluation was prepared, but the details of the analysis were not                                                   4 town is about three times the size of the other three towns together. Pakse
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provided. A summary discussion of the assumptions of the economic analysis was provided in the appendix, but these assumptions were not quantified. The PCR did not assess the financial health of NPL. There was no analysis of its income statement, balance sheet, or source/application of funds statement. Furthermore, the PCR did not assess the benefit monitoring and evaluation system that was covenanted under the Loan. The PCR rated the Project as generally successful, although there was insufficient evidence to support this rating.  F. OEO Evaluation  9. This project performance audit report (PPAR) focuses on the pertinent aspects of the Southern Provincial Towns Water Supply Project and presents the findings of the Operations Evaluation Mission to the Lao PDR during 31 July–11 August 2000. The PPAR presents an assessment both of the Project’s effectiveness in terms of achieving its objectives and generating benefits, and of the sustainability of the Project’s operations.  10. The PPAR is based on a review of the PCR, the appraisal report, material in ADB files, a report by a consultant engaged by the Operations Evaluation Mission, and discussions with the Government and MCTPC. Copies of the draft PPAR were provided to the Government, MCTPC, and ADB staff concerned for review and comments. Comments received were taken into consideration in finalizing the PPAR.  
II. PLANNING AND IMPLEMENTATION PERFORMANCE  A. Formulation and Design  11. The primary thrust of ADB’s country operational strategy in the Lao PDR was to assist the Government in its transition to a market economy through policy reform to develop competitive markets and encourage private sector development and direct capital investments in support of private sector activity. This strategic objective was to be achieved by, among others, “addressing basic needs and human resource development.” The Project is to a certain extent in line with this concept, but the Project had no measures to develop competitive markets in water supply or encourage private sector participation in the provision of potable water. However, it was unlikely that private sector participation could have been successfully promoted in the provinces at the time. The Project has a poverty-reducing dimension, even though this was not an explicit intention of the country operational strategy. In terms of current ADB strategic priorities, the Project is relevant.  12. The Project was adequately prepared for the most part from a technical perspective. However, the size of the water treatment plant at Pakse was inappropriate with respect to the number of current and future consumers. The Project component for Pakse should have ensured that the distribution system was appropriately expanded to connect consumers and utilize the water treatment plant’s design capacity. There also seems to have been insufficient attention to the institutional aspects of the Project. The finance and accounting systems of NPL were rudimentary and remain so. Accounting at NPL does not comply with international standards and staff skills in accounting are weak. The TA associated with the Project did not address these shortcomings.