PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE. Report No.: Project Name

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1 Public Disclosure Authorized Public Disclosure Authorized PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: Project Name GPOBA W3 Expanding Piped Water Supply to Surabaya s Urban Poor Region EAST ASIA AND PACIFIC Sector Water Supply (100%) Project ID P Borrower(s) PDAM SURABAYA, GOVERNMENT OF INDONESIA Implementing Agency Surabaya Water Utility (PDAM) With Surabaya Dept of Roads and Drainage as Scheme Manager Environment Category [ ] A [] B [ ] C [ ] FI [ ] TBD Date PID Prepared August 3, 2007 Estimated Date of September 2007 Appraisal Authorization Estimated Date of Board September 2007 (GPOBA Panel, Bank Board not applicable) Approval Public Disclosure Authorized Public Disclosure Authorized 1. Key development issues and rationale for Bank involvement Key Development Issues The Indonesian water sector is in a precarious position. It suffers from, inter alia, tariffs set well below full cost recovery levels, low coverage, declining service ratios, high non-revenue water (especially from physical losses), poor levels of service, high indebtedness, political interventions and poor management capacity. These problems have led to a vicious cycle of negative cash flows, underinvestment in assets, insufficient maintenance, increasing indebtedness and defaults/arrears on loans. The situation has been exacerbated by the absence of any supporting national water strategy to accompany the 2001 decentralization of responsibility for service provision to local governments. Prior to the 2001 decentralization program, the Ministry of Finance (MoF) used to provide financing to the country s hundreds of local water supply companies (PDAMs) by means of subloan agreements, bearing much of the risk and burden of any unpaid loans. Although fiscal accountability has now been transferred to local governments, the PDAMs remain heavily indebted to central government. Current PDAM indebtedness stands at around IDR 5.2 trillion (USD 570 million). Of the 338 PDAMs, less than ten percent are deemed financially healthy. Most generate insufficient funds to cover operating costs, let alone invest in network expansion and/or in service improvements to increase cash flows in order to service debts. Currently, only 17 percent of households have access to piped water. For Indonesia to achieve its Millennium Development Goal (MDG) for water, sector investment must increase from IDR 450 billion (USD 50 million) to at least IDR 4.15 trillion (USD 450 million) per year until Not surprisingly, Indonesia is below the coverage required to be on track to fulfilling the MDGs for 1

2 both water and sanitation in Disaggregated data for urban and rural areas show that urban water coverage has fared particularly badly with coverage actually regressing from 1990 (92 percent) to 2004 (87 percent). 1 In the absence of a connection to piped supplies, households rely on shallow and deep wells. Ongoing use of such sources is becoming increasingly unsustainable, particularly in urban areas. Lack of adequate sanitation has led to contamination of shallow groundwater sources and an increase in the associated incidence of water-borne diseases. The over-pumping of deep wells has led to salt water intrusion in coastal aquifers and ground subsidence. In addition to wells, poor households buy water from small-scale vendors and from neighbors with access to piped supply. Vended water costs many times more than piped water and poor households can spend more than 20 percent of their income on vendor-distributed water. In general, ability and willingness to pay is not an issue in terms of water tariffs, but steep connection charges can, and often do, constitute a barrier to entry for the poor. There is evidence that most unconnected households that would like to connect are poor, with a large proportion of them being very poor 2. A recent customer satisfaction survey of 12 PDAMs across the country revealed that nearly half of the unconnected poor would like to become PDAM customers if they could afford to. 3 Connections fees are typically USD $50, but sometimes as high as $400. Most poor people do not have the disposable income to pay these fees unless they are spread out over 3 to 5 years. Rationale for Bank Involvement The proposed project fits well with existing development objectives and strategies developed by both the World Bank and by the Government of Indonesia. For example: The project supports the Bank s latest Country Assistance Strategy (CAS) for , which focuses all lending and grant activity on two areas impeding rapid poverty reduction: (1) a weak investment climate; and (2) low quality service delivery to the poor. Within the goal of improving the climate for high quality investment, building Indonesia s infrastructure is a key objective in the CAS. Within the goal of improving the quality of service delivery to the poor, Bank Group support is devoted to making providers more directly accountable to their clients. More specifically, the project supports two of the Bank Group s four stated business platforms from which CAS objectives are to be reached. These are: (1) the Community Driven Development Platform, (2) the Local Services Platform, (3) the Public Utility Platform, and (4) the National Lending Platform. About 40 percent of lending is allocated to the Local Service Platform to help create local accountability in service delivery, and about 15 percent of lending is allocated to the Public Utility Platform to support 1 JMP Database, 2004 latest data. 2 Indonesia Enabling Water Utilities to Serve the Urban Poor, World Bank The Local Government Water Services (LGWS) survey, see above report, p.7. 2

3 investments in both governance and efficiency in the water supply and energy sectors specifically. The project supports the recommendations of the World Bank s 2006 policy report entitled Making the New Indonesia Work for the Poor. The report specifically states that existing targeting and subsidy mechanisms in the water sector are flawed and that mechanisms need to be put in place to target the poorest specifically. The OBA project supports several of the specific solutions outlined in the report, including geographic targeting (e.g. injection of subsidy into spatially defined poor areas), means testing (e.g. selection by income or other robust proxy variables), and lower service-levels (e.g. provision of stand pipes or other forms of bulk supply in order to increase access). The project also supports the stated need to encourage water utilities to institutionalize propoor approaches, reconsider service levels, develop pro-poor financing strategies, and target the needs of the very poorest households. 4 The project supports the attainment of the Millennium Development Goal (MDG) for water by specifically targeting those least able to afford connection fees and network extensions. This is important not only because coverage is behind schedule for the sector as a whole, but because the urban water sector is faring particularly badly. The proportion of the urban population with access to sustainable water supply has actually decreased from 92 percent in 1990 to 87 percent in Moreover, coverage for piped water supply is less than 20 percent. This means the majority of urban citizens with access to improved water supply are dependent on vended water and groundwater of increasingly poor quality, and well-organized projects are needed to reverse the declining trend so that Indonesia can get back on track to achieving the water MDG. Finally, the project supports the Government of Indonesia s latest national medium-term development plan (RPJM) which aims to provide 40 percent of households with access to piped water by the end of The National Action Plan on Clean Water (NAP-CW), issued by the Ministry of Public Works in 2004, supports the attainment of the MDG and proposes achieving this by improving access to piped water supply from 17 percent to 62 percent in 2015, and reducing dependency on other water sources. Among other things, this requires a major push for system expansion and increasing the number of household connections both of which strategies are directly supported by the OBA project. 2. Proposed objective(s) The objective of the OBA scheme is to extend piped water connections to low-income households. The primary benefits will be significant time and cost savings for households otherwise reliant on alternative supplies, as well as health benefits associated with an 4 The World Bank, Making the New Indonesia Work for the Poor, Chapter 5, p JMP Database. 6 World Bank, Flow of Funds, Flow of Water: Strategic Priorities for Financing Piped Water Services in Indonesia,

4 improvement in water quantity and quality of service. Improved service is defined as three months of working connections subject to verification by an independent auditor 3. Preliminary description The project targets approximately 15,000 households from the population of poor people in Surabaya residing in high pressure water zones and without an existing utility connection. Beneficiaries will be targeted through a mix of geographic and individual targeting using existing official city poverty lists and criteria already used by the PDAM as proxy variables for poverty (e.g. street width and plot size). The project output is the delivery of 3 months verified water service to be confirmed by the project auditor. In line with the existing tariff structure, each household will be billed for a minimum consumption of 10 cubic meters per month, regardless of actual consumption. The precise definition of a working connection will be confirmed during detailed project preparation but is likely to include presence of a working meter and both consistent meter reading by the water utility (the PDAM ) and consistent billing by the private contractor over a three month period. Three kinds of connections are proposed as a means to achieving the delivery of water service for the urban poor: (a) The utility may connect the urban poor by means of an in-fill connection to an existing tertiary network. (b) The utility may connect the urban poor by expanding the distribution network to un-served areas, and then connecting households to the new network. (c) The project proposes to trial the innovative use of bulk meters or master meters to serve low-income communities. This approach will target particularly poor, dense, or informal areas where streets do not allow for utility construction standards or where lack of legal paperwork prevents the utility from supplying water at all. The PDAM will supply a community with a master meter at the entrance of the area linked to the utility s distribution network. Inside the community, an NGO or a community-based organization will organize the community, install pipes and meters, and establish internal billing and collection mechanisms such that the monthly utility bill is covered. 4. Safeguard policies that might apply Safeguard Policies Triggered (please explain why) Yes No TBD Environmental Assessment (OP/BP 4.01) The project triggers the World Bank s Environmental Assessment Policy (OP4.01) due to potential safety, construction, and traffic related adverse impacts. These impacts are short-term, 4

5 Safeguard Policies Triggered (please explain why) Yes No TBD minor, largely reversible, and can be mitigated through easily implemented measures. Practical and simple environmental guidelines will be developed for the project through requirements for the construction contractors and associated standard operating procedures. These guidelines will be incorporated into the construction contracts and the project implementation manuals for the Scheme Manager and the PDAM. In addition, monitoring and reporting will be undertaken as part of the program by the OBA Technical Auditor. Examples of contract clauses for construction contracts include: Waste Management Contractor shall keep the work site and other areas in a neat and clean condition, free from accumulated rubbish. Materials No use of asbestos or other hazardous material. Restoration of Damages Expansion of tertiary distribution network and bulk supply through master meters will restore any damages to the original status of the affected assets. Minimization of Disruption To minimize the inconvenience associated with construction of buried pipes, the following requirements will be invoked: (a) Construction activities will be limited to the hours of am to pm except when extenuating circumstances require work performed beyond these hours; (b) All roadway lanes will be made passable at the end of each day by backfilling or steel sheeting the trench. In addition, the Implementation Manual for the PDAM will specify that in-fill connections to the network will only be undertaken when a household has specifically requested the service, and indicated their willingness to bear any minor construction impacts associated with connection to the tertiary street-level network. The OBA Auditor will be responsible for (1) making sure such clauses are included in construction contracts, (2) monitoring the implementation of these clauses/guidelines on the ground, and (3) incorporating any environmental and social aspects into their regular reporting back to the Scheme Manager. Clear principles for what constitutes damage, restoration of damages, and other terms will be spelled out at appraisal stage. Natural Habitats (OP/BP 4.04) Forests (OP/BP 4.36) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Indigenous Peoples (OP/BP 4.10) Involuntary Resettlement (OP/BP 4.12) The project will reject any connection that involves land acquisition and resettlement. Although such outcomes are rare for making connections to mains and for small network extensions, the 5

6 Safeguard Policies Triggered (please explain why) Yes No TBD OBA Auditor will check that no land acquisition and resettlement have occurred. Safety of Dams (OP/BP 4.37) Projects on International Waterways (OP/BP 7.50) Projects in Disputed Areas (OP/BP 7.60) 5. Tentative financing Source: ($ million) PDAM Surabaya & Household Contributions US Agency for International Development (USAID).15 Global Partnership on Output-based Aid Total Contact point Contact: William D. Kingdom Title: Lead Water & Sanitation Specialist Tel: (202)