Public Disclosure Authorized

Document o f
The World Bank

FOR OFFICIAL USE ONLY

Report No: 38457-MW

Public Disclosure Authorized

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

INTHE AMOUNT OF SDR 18.4 MILLION

(US$27.5 MILLION EQUIVALENT)

AND A
Public Disclosure Authorized

PROPOSED GRANT

IN THE AMOUNT OF SDR 15.O MILLION

(US$22.5 MILLION EQUIVALENT

TO THE

REPUBLIC OF M A L A W I

FOR A

SECOND NATIONAL WATER DEVELOPMENT PROJECT

Public Disclosure Authorized

April 27,2007

Water and Urban Unit 1 (AFTU1)

Malawi Country Department
Africa Region

This document has a restricted distribution and may be used by recipients only in the performance o f their
official duties. I t s contents may not otherwise be disclosed without World Bank authorization.
 CURRENCY EQUIVALENTS

(Exchange Rate Effective {Date})

Currency Unit = Malawi Kwacha

US$1 = 1 4 0 . 2 M W K
1 SDR = 1.50 US$

FISCAL YEAR
July 1 - June 30

ABBREVIATIONS AND ACRONYMS

AfDB African Development Bank

BWB Blantyre Water Board
CIDA Canadian International Development Agency
CMA Catchment Management Authority
CRWB Central Regional Water Board
EA Environmental Assessment
EAD Environmental Affairs Department o f MMNRE
EIA Environmental Impact Assessment
EIB European Investment Bank
EIRR Economic Internal Rate o f Return
ESMF Environmental and Social Management Framework
ESMP Environmental and Social Management Plan
EUWF European Union Water Facility
GOM Government o f Malawi
GPOBA Global Partnership for Output Based Aid
ICR Implementation Completion Report
IDA International Development Association
IFR Interim Financial Reports
JICA Japan International Cooperation Agency
JPCC Joint Permanent Commission o f Cooperation
LWB Lilongwe Water Board
MCRPWSS Market Center and Rural Piped Water Supply and Sanitation
M&E Monitoring and Evaluation
MDG Millennium Development Goals
MMNRE Ministry o f Mines, National Resources, and Environment
MEPD Ministry o f Economic Planning and Development
MGDS Malawi Growth and Development Strategy
MIS Management Information Systems
MIWD Ministry o f Irrigation and Water Development
MOF Ministry o f Finance
MWERA Malawi Water and Energy Regulatory Authority
NGO N o n Governmental Organizations
 NPV N e t Present Value FOR OFFICIAL USE ONLY
NRW Non Revenue Water
NRWB Northern Regional Water Board
NWDP National Water Development Program
NWDP I First National Water Development Project
NWDPII Second National Water Development Project
m National Water Resource Authority
O&M Operation and Maintenance
OPEC Organization o f Petroleum Exporting Countries
PC Privatization Commission
PIU Program Implementation Unit
PMU Program Management Unit
PPF Project Preparation Facility
PPP Public Private Partnership
RAP Resettlement Action Plan
RPF Resettlement Policy Framework
RWB Regional Water Boards
RWSS Rural Water Supply and Sanitation
SADC Southern Africa Development Community
SRWB Southern Regional Water Board
SWAP Sector Wide Approach
TOR Terms o f Reference
UNDP United Nations Development Program
UNICEF UnitedNations Children's Fund
uwss Urban Water Supply and Sanitation
WRM Water Resources Management
wss Water Supply and Sanitation
WUA Water User Association

Vice President: Obiageli K. Ezekwesili

Country Director: Michael Baxter
Country Manager Timothy R. Gilbo
Sector Manager: Jaime M. Biderman
Task Team Leader: Robert J. Roche

This document has a restricted distribution and may be used by recipients only in the performance o f
their official duties. I t s contents may not be otherwise disclosed without W o r l d Bank authorization.
1
 MALAWI

Second National Water Development Project

CONTENTS

Page

.
I STRATEGIC CONTEXT AND RATIONALE ................................................................. 1
A . Country and Sector Issues................................................................................................... 1
B. National Water Development Program.,............................................................................. 4
C . Rationale for Bank Involvement., ....................................................................................... 7
D. Higher Level Objectives to which the Project Contributes ................................................ 7

I1 . PROJECT DESCRIPTION ............................................................................................. 8

A . Lending Instrument............................................................................................................. 8
B. Project Development Objective and Key Indicators........................................................... 8
C. Project Components ............................................................................................................ 8
D. Lessons Learned and Reflected in the Project Design ...................................................... 17
E. Alternatives Considered and Reasons for the Selected Instrument .................................. 19

I11 . IMPLEMENTATION .................................................................................................... 19

A . Partnership Arrangements ................................................................................................. 19
B. Institutional and Implementation Arrangements .............................................................. 19
C . Monitoring and Evaluation of OutcomesResults ............................................................. 22
. . .
D. Sustainability..................................................................................................................... 23
E. Grant Conditions and Covenants ...................................................................................... 25

IV . APPRAISAL SUMMARY ............................................................................................. 26

A . Economic and Financial Analysis.. ................................................................................... 26
B. Technical ........................................................................................................................... 30
C. Fiduciary ........................................................................................................................... 31
D. Social................................................................................................................................. 32
E. Environment ...................................................................................................................... 32
F. Safeguard Policies ............................................................................................................. 33
G. Policy Exceptions and Readiness ...................................................................................... 35
Annex 1: Country and Sector or Program Background ......................................................... 36
Annex 2: Major Related Projects Financed by the Bank and/or other Agencies .................39

Annex 3: Results Framework and Monitoring........................................................................ 40

Annex 4: Detailed Program Description................................................................................... 46

Annex 5: Project Costs ............................................................................................................... 72

Annex 6: Implementation Arrangements ................................................................................. 76

Annex 8: Procurement Arrangements...................................................................................... 91

Annex 10: Safeguard Policy Issues .......................................................................................... 109

Annex 11: Project Preparation and Supervision ................................................................... 111

Annex 12: Documents in the Project File ............................................................................... 112

Annex 13: Statement of Loans and Credits............................................................................ 113

Annex 14: Country at a Glance ............................................................................................... 114

Annex 15 MAP IBRD 35457 .................................................................................................... 116

 MALAWI

SECOND N A T I O N A L WATER DEVELOPMENT PROJECT

PROJECT APPRAISAL DOCUMENT

AFRICA

AFTUl

Date: April 27, 2007 Team Leader: Robert J. Roche

Country Director: Michael Baxter
Sector ManagerDirector: Jaime M. Bidennan
Project ID: PO96336
Lending Instrument: Specific Investment Loan
Sectors: Water supply (85%); Sanitation
(15%)
Themes: Rural services and infrastructure
(P); Water resource management (P);Access to
urban services and housing (P)
Environmental screening category: Partial
Assessment

[ ] Loan [XI Credit [ XI Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others:
Total Bank financing (US$m.): 50.0

(IDA) Credit
Total: 18.0 32.0 50.0

Borrower:
Republic o f Malawi

ResponsibleAgency:
Ministry o f Irrigation and Water Development

ResponsibleEntities:
Blantyre Water Board, Lilongwe Water Board, Northern Regional Water Board, Central
Regional Water Board, Southern Regional Water Board
 Estimated disbursements (Bank FY/US$m)
FY 08 09 10 11 12
4nnual 5.0 10.0 12.0 15.0 8.0
Cumulative1 5.0 I 15.0 I 27.0 I 42.0 I 50.0 I
Project implementation period: Start October 31,2007 End: October 31,2012
Expected effectiveness date: October 3 1, 2007
Expected closing date: October 31,2012
Does the project depart from the CAS in content or other significant respects?
[ ]Yes [XINO
Re$ PAD A.3
Does the project require any exceptions from Bank policies?
Re$ PAD D. 7 [ ]Yes [XINO
Have these been approved by Bank management? [ ]Yes [ IN0
I s approval for any policy exception sought from the Board? [ ]Yes [XINO
Does the project include any critical risks rated “substantial” or “high”?
[XIYes [ ] N o
Re$ PAD C.5
Does the project meet the Regional criteria for readiness for implementation?
[XIYes [ ] N o
Re$ PAD D. 7
Project development objective Re$ PAD Para 27, Page 8
Increased access to sustainable water supply and sanitation services for people living in cities,
towns, market centers, and villages and improved water resources management at the national
level.
Project description [one-sentence summary of each component] Re$ PAD, TechnicalAnnex 4
The project has four components.
Component A: Urban Water Supply and Sanitation for the cities o f Blantyre and Lilongwe will
consist of: (i)priority investments for essential spare parts and materials to prevent water supply
disruptions in Blantyre and urgent rehabilitation works in both cities: (ii) reaching the unserved
areas, through piloting o f water supply and sanitation services to l o w income areas in Blantyre,
carrying out sanitation and hygiene promotion activities, expanding the water supply distribution
network, and installing customer connections; and (iii) aqueduct planning in Lilongwe.

Component B: Town, Market Center, and Rural Piped Water Supply and Sanitation will consist
of: (i) expansion o f water supply facilities and improvements in operational efficiency in some
o f their largest, fastest-growing towns including MZUZU, Kasungu, Mangochi, and Zomba, and
other smaller towns; (ii) development o f community-managed water supplies in market centers
and rural piped systems; and (iii) training for the regional water boards, the staff o f program
implementation unit, district assemblies, and local communities.

Component C: Water Resources Management will consist o f (i) development and support for the
promulgation o f enabling legislation for the National Water Policy o f 2005; (ii) development o f
an integrated water resources investment strategy; (iii) design and independent environmental
and social assessments for L a k e Malawi level control; (iv) strengthening o f institutional capacity
for water resource management including the establishment o f National Water Resources
Authority; and (v) feasibility studies, designs, and environmental and social assessments for the
development o f future water sources.

Component D: Sector Management and Urban Water Sector Reform will consist of: (i)
support
to MIWD in the establishment o f a management system for the sector investment program
including investment planning, donor coordination, accounting, procurement, monitoring and
evaluation, safeguard tracking, and information technology and communications; (ii)
development o f a strategic sanitation plan for Lilongwe and Blantyre; and (iii)
design and
implementation o f a sustainable reform plan for Blantyre and Lilongwe, including a regulatory
framework, public awareness campaign, and institutional framework for a lease or similar
contract with a private operator.
Which safeguard policies are triggered, if any? Re$ PAD F.138, Technical Annex 10
The project has triggers OP 4.01 Environmental Assessment, OP4.12 Involuntary Resettlement,
and OP 7.50 Projects o n International Waterways. The ESMF and RPF have been disclosed in
the country and at the Bank’s Infoshop. The safeguard screening category i s S2, and the
environmental screening category i s B.

Significant, non-standard conditions, if any, for:

Re$ PAD C.7
Board presentation: None

Loadcredit effectiveness: None

Covenants applicable to project implementation:

Outstanding water bills from the public institutions will be paid to the Water Boards and
thereafter timely payment o f dues will be ensured.
0 The five water boards to at least cover their operations and maintenance through revenues by
fiscal year ending 2008/9, with continuous improvement to also cover depreciation and debt
service obligations by year ending 201 1/12.
c
I. STRATEGIC CONTEXT AND RATIONALE

A. Country and Sector Issues

Country Background

1. Malawi i s one o f Sub-Saharan Africa’s most densely populated countries with about
12,884,000 people (according to July 2005 estimate) spread over an area o f 118,484 km2. The
recent Malawi Poverty and Vulnerability Assessment indicates that more than 52 percent o f the
population (6.4 million people) lives below the poverty line and 22 percent (2.7 million people)
live in ultra-poverty’. Being one o f the lowest GDPdcapita countries in the world, Malawi faces
formidable development challenges.

2. The Malawi Growth and Development Strategy (MGDS) recognizes that strong and
sustainable economic growth i s key to reducing poverty. I t emphasizes infrastructure
development as one o f the main areas o f focus, which international experience attests as a key
ingredient for economic growth. Domestic and international investors are attracted to “livable”
cities with appropriate basic urban services. However, water and sanitation services in Malawi’s
cities, towns, and market centers are now o f questionable sustainability.

Water Resources

3. The availability o f total renewable water resource (TRWR) was calculated to be 17.3
km3/year,or 1,6 17 m3/capita/year.2 While the availability o f water resources in Malawi in the
aggregate i s considered satisfactory, per capita water availability i s declining at a rapid rate due
to population growth, and Malawi may start experiencing water stress after 20253. Using the
2000 figures, Malawi had the 4th lowest per capita water availability o f the 14 Southern African
Development Community (SADC) countries at 1,840 m3/cap/year (South Africa 1,136,
Zimbabwe 1,483 and Mauritius 1,826). The SADC average i s 8,922 m3/cap/year.

4. Malawi has a large network o f surface water bodies covering 2 1% o f the country’s
120,000 km2 area. 94% o f the land area in Malawi i s part o f the Zambezi River Basin which
drains into the Indian Ocean in Mozambique. The remaining 6% falls within the Congo and
Rovuma Basins or the small internal drainage basin o f Lake Chilwa. The Zambezi River Basin
i s the second largest in the SADC region; 8% o f the basin i s in Malawi. The most prominent
water body i s Lake Malawi which is 567 km long and 28,900 km2 in area (of which 4,540 km2
is in Mozambique) making it the third largest lake in Africa, and the 10th largest in the world.
More than ten rivers drain into Lake Malawi from two o f the three riparian countries including
Ruhuhu (Tanzania), Songwe (Tanzania and Malawi), N. Rukuru, N. Rumphi, S. Rukuru,
Dwangwa, Bua, Linthipe, and Livulezi (Malawi). All o f these rivers are unregulated, and thus
subject to natural seasonal flows. However, most o f the rivers maintain at least some base flow
throughout the dry season.

I
Such that they cannot afford to meet even their recommended daily food needs.
This figure i s consistent with 5 studies between 1995 and 1998, as quoted in FA0 (2004) and Gibb (2004).
3
Under the Falkenmark definitions o f water shortage and water scarcity, Malawi i s currently water short (less than
1,700 m3/capita/year) and w i l l become water scarce (less than 1,000 m3/capita/year) by 2025.

1
5. The Lake Malawi / Shire River hydrological system represent arguably the country’s
single most important natural resource system and supports significant economic activities. The
Shire River system performs vital environmental and socio-economic functions. I t supplies over
96% o f the country’s power generating capacity; supplies water to major urban centers such as
Blantyre and Limbe and the rural water users along the length o f the river as well as to
economically important irrigation schemes. Water levels in Lake Malawi are highly variable,
and have a direct effect o n the flow rate in the Shire River (as the source o f the Shire i s the
outflow o f the Lake), which may lead at the one extreme to a no-flow situation in the river, or, at
the other extreme, to floods, causing damage to agricultural lands, infrastructure and loss o f life.

6. Rainfall Variability: Despite the noticeable surface water bodies, the availability and
reliability o f surface water in Malawi i s highly variable between the wet and dry seasons and
from year to year. The national mean annual rainfall in Malawi i s estimated at about 1100
mm/year, with the average annual rainfall varying from 650 mm in the Lower Shire Valley to
1,600 mm in the Northern Lakeshore Region. 70% o f the country receives 800 to 1,200 mrn per
year. While this i s relatively good rainfall (the second highest in the SADC region), Malawi has
an erratic rainfall pattern, which poses one o f the biggest threats to sustained economic growth.

7. Groundwater: Groundwater resources are widespread throughout the country. The total
potential groundwater yield i s estimated at 1.4 km3/year (44 m3/s), based on an average recharge
rate o f 15mm/year; however, the groundwater potential has not been comprehensively
determined. The last significant hydro-geological mapping was done in 1986, and even this was
based on limited borehole information. Groundwater abstraction i s generally unregulated and
uncontrolled. It i s probable that, in the absence o f regulation, unsustainable pumping o f the
groundwater i s occurring in some areas. Groundwater is presently exploited by 30,000 boreholes
and 8,000 shallow wells equipped with handpumps. Nationally, groundwater quality i s generally
acceptable for human consumption. However, rapid deterioration o f the rivers’ upper catchment
areas due to deforestation and poor land use practices i s causing increased sediment
transportation, and significantly affects the country’s surface water resources and river hydraulic
infrastructure. This, in turn, encourages excessive use o f groundwater resulting in the resource’s
overexploitation and depletion. *

8. International Waters: Malawi shares a number o f important rivers and lake basins with
the neighboring states o f Mozambique and Tanzania. Lake Malawi is shared with Mozambique,
and forms the boundary with Tanzania. The Shire River, which drains into the Zambezi in
Mozambique, i s the most important water resource in Malawi for water supply, hydropower and
irrigation. The Songwe River, which forms the international boundary between Malawi and
Tanzania, i s used largely for fishing and agriculture. The river changes i t s course almost
annually due to flooding. Lake Chilwa and Lake Chiuta are both shared with Mozambique.
They are important fishing and ecological sites. The Ruo River borders with Mozambique and
has the potential for irrigation, water supply and hydropower development.

9. The SADC Protocol on Shared Watercourse Systems was signed in 1995 by all SADC
member states including Tanzania, Malawi and Mozambique, and was later revised and
renamed SADC Protocol on Shared Watercourses in 2000. I t lays out the principles by which

2
common water resources in the region should be managed. Joint Permanent Commissions o f
Cooperation (JPCC) have been established between Malawi and both countries. In Malawi, the
most significant international rivers issue i s the management o f the Lake Malawi/Shire River
upper catchment areas. Unsustainable land use practices lead to devegetation and land erosion,
and sediment deposition in the river and reservoirs downstream.

10. Water Quality: Although total water resources in Malawi are considered adequate to
meet the needs o f the growing population, these resources are becoming increasingly degraded
through sedimentation, biological contamination and effluents. Silt loads in surface water runoff
lead to significant problems in water quality, including turbidity, increased suspended solids,
water flow problems and water treatment costs, especially during the wet season. High sediment
loads have caused siltation o f rivers and reservoirs, requiring costly dredging to maintain water
and electricity production. The problem is aggravated by inadequate environmental watershed
protection resulting in soil erosion and decreasing microbiological water quality. Chemical
contamination o f water resources i s increasing due to increased use o f fertilizer and pesticides in
agriculture, improper discharge o f hazardous wastes from hospitals and disposal o f industrial
waste. This has resulted in increased concentrations o f nitrogen, phosphorus and heavy metals.

Challenge o f Meeting the Millennium Development Goals and Ensuring Sustainability

11. Today, about 65 percent o f the people o f Malawi have access to improved water supply
and sanitation. To achieve the MDG by 2015, the number o f people served must double both in
rural communities and in towns and cities. This means that an additional 3.5 m i l l i o n rural and
2.5 million urban residents will need improved water supply and sanitation services. In the next
decade some 10,000 additional point sources (boreholes fitted with handpumps and small spring
catchments) must be constructed and essentially, all piped systems must double in size.

12. In urban centers and towns where water i s supplied by the two city water boards
(Lilongwe and Blantyre) and three regional water boards (Northern, Central, and Southern), the
average coverage level i s estimated to be 70-80%. However, there is a significant challenge in
maintaining the aging water systems to ensure sustainability as the urban population, especially in
the l o w income and peri-urbanareas, keeps growing. The market centers and small towns also
require special attention to provide new and appropriate water infrastructure to exploit their
economic growth potential. Currently, most o f these centers are served by communal water points
or traditional water sources that are inadequate and unsuitable for the concentrated population.
Sanitation i s particularly problematic in all these centers. Therefore there i s a pressing need to pay
attention to sanitation and improving hygiene practices.

Operational and Financial Challenges faced by the City and Regional Water Boards

13. Blantyre faces a water crisis caused by high level o f non-revenue water, intermittent
supply, and sometimes complete interruption o f water supply due to problems with electricity
supply or pump failures. Lilongwe, Blantyre, and other major towns are expected to face
increasing demand and water shortages in the future unless the non-revenue water i s reduced and
new sources are developed. Since the two city water boards are currently unable to even cover
their operation and maintenance (O&M) costs through user charges, and all five water boards are

3
unable to service their debts, there i s no internal cash generation available for reinvestment.
Unless the water boards improve their financial performance and can secure loans o n the basis o f
their o w n credit worthiness, the government would need to continue subsidizing the sector for
the foreseeable future.

14. Their poor operational and financial performance are due to several factors, including
delayed tariff increases, inefficiencies in O&M, and an organizational culture that lacks proper
performance incentives and governance. These inefficiencies are fostered by a corporate culture
that does not reward productivity and commercial discipline.

15. Capacity Constraints: W h i l e the Bank’s earlier engagements in the sector through
NWDP Iand other projects have contributed significantly to building the capacity o f the water
boards, the capacity o f the central and local government agencies i s s t i l l weak; whether in
research, data collection and dissemination, sector monitoring, enforcement, planning, or private
sector participation.

B. National Water Development Program

16. Sector Wide Approach: The Government and Bank have worked together to prepare the
National Water Development Program. The Second National Water Development Project will be
IDA’Scontribution to this Program. The National Program has catalyzed funding and technical
support from other donors, including the European Investment Bank (EIB), European Union (EU)
and the OPEC Fund for the urban and town water supply; and the African Development Bank
(AfDB), Canadian International Development Agency (CIDA), United Nations Children’s Fund
(UNICEF), and Japan International Cooperation Agency (JICA), among others, for rural water
supply and sanitation. UNDP will assist MIWD to put a program management systems in place
that can support a SWAP and build the capacity o f the personnel to support the National Program.

17. In line with the Paris Declaration, MIWD has agreed with IDA and the other donors
mentioned above to (i) adopt common implementation strategies for village, rural piped, town,
and city water supply; (ii) utilize a common Program Management Unit (PMU) within the
MIWD; (iii) harmonize sector planning and monitoring with annual joint program reviews; and
(iv) share the cost o f capacity building. For the most part parallel financing will be employed, but
MIWD i s establishing management systems to support joint investments. W h i l e a full fledged
SWAP i s not in place, the first phase o f the National Water Development Program provides the
foundation to build i t over time.

18. The PMU will provide central services for implementation o f the National Water
Development Program. I t will play a central role in (i)
donor coordination, (ii) sector investment
planning, (iii)
contract management, (iv) project supervision, (v) monitoring and evaluation, (vi)
safeguard tracking, (vii) communications, (viii) program accounting, and (ix) procurement. The
P M U will contribute to MIWD’s Water Resources Management Department and Water Supply
Department in (i) sector policy and planning and (ii)capacity building, and will rely o n these
Departments for technical and policy direction on all water resources and water supply
initiatives.

4
 19. Investment Program: The National Water Development Program i s a five year, $260
million multi-donor effort to assist G O M to improve the management o f the Nation's water
resources and to ensure the delivery o f efficient, reliable, and sustainable water supply and
sanitation services to an increasingly large number o f population in the country. The overall goal
for GOM i s to achieve universal coverage by 2025. The estimate for the existing coverage and
the targets for year 2012 are given in the following table.

Table 1: Existing Coverage

2007 Baseline
Village Market Centers Rural Piped Towns Urban Total
Total Population 8,946,619 885,755 1,620,246 1,023,566 1,596,125 14,072,312
Population Served 5,815,303 575,741 1,053,160 665,318 1,117,288 9,226,809
Population Served (%) 65% 65% 65% 65% 70% 66%

2012 Tareet
Population 2012 I O , 122,279 1,026,833 1,833,160 1,215,676 1,895,696 16,093,643
Population served 7,968,791 801,287 1,443,160 940,497 1,506,492 12,660,226
Population Served (%) 79% 78% 79% 77% 79% 79%

20. The sector program will be parallel-financed by the GOM, donors, investment
bankdfunds and NGOs. The expected investors by sub-sector are given in the following table.
IDA will contribute $50 million to the Program through NWDPII.

Table 2: Partners for NWDP

Development Partner

I Program gap (next five years) I 76 9 9 3

* US$6m may be reallocated to rural piped systems including market centers when OPECfitnds are available.
** US$2m is for PPF and unallocated

5
 National Water Development Program
Partially financed by IDA under the Second National Water Development Project

-
Urban Water Supply and Sanitation Blantyre and Lilongwe Water Boards
- Arrange for an immediate service contract and establish an institutional framework for longer-
term private sector participation in Blantyre and Lilongwe.
- Improve operational efficiency including better financial management, improved cost efficiency,
and reduced non-revenue water in both cities.
- Rehabilitate existing plant and equipment, and expand water distribution in Lilongwe.
- Replace equipment causing supply interruptions, improve water intake, increase
pumping/treatment capacity, and expand off-peak storage and water distribution in Blantyre.
- Improve water supply to low-income communities in both cities.
- Develop future water sources for both cities.
- Prepare strategic plans to address solid waste, sewerage, and excreta disposal in both cities.
- Carry out capacity building and technical assistance activities, including against HN/AIDS.
-
Town, Market Center and Rural Piped Water Supply and Sanitation Regional Water Boards
- Improve efficiency and expand water supply in some o f the largest, fastest-growing towns
including MZUZU, Zomba, Kasungu, Likuni, Mponela, Mzimba and Mangochi.
- Expand water supply facilities in small towns based on business plans that address management
arrangements, tariff structures, financial projections, and expansion plans.
- Develop water sources in towns where hydrogeologic conditions are difficult.
- Develop market center water supplies and rural piped systems as part o f integrated
infrastructure services.
- Establish a regulatory framework for financial resource allocation, monitoring operational
efficiency and water quality, and tariff setting and adjustment.
- Improve sanitation planning and services in towns including on-site systems, sewers, and
septage treatment/disposal facilities.
- Carry out capacity building and technical assistance activities, including against HIV/AIDS
Rural Water Supply and Sanitation
- Build capacity o f (i)district assemblies to prepare and implement their own rural water,
sanitation and hygiene promotion programs and (ii) local service providers to assist villages to
establish and maintain their own water supply facilities.
- Plan and construct community-managed village water supply systems.
- Plan and construct community-managed multi-village piped systems.
Water Resources Management
- Prepare enabling legislation for the National Water Policy.
- Improve water resources management in selected sub-basins including water source
development, water conservation, and erosion control.
- Strengthen MIWD and WRMB to improve planning, monitoring and assessment capability.
- Re-establish surface/groundwater monitoring system and MIS.
- Design and conduct safeguard studies/consultation for an improved level control structure at
Liwonde, and construct if in compliance with safeguard policies and procedures. Further study
backup regional grid connection and low-flow pumping scheme.
- Prepare Water Resources Investment Strategy to address Malawi’s water development needs.
- Design and carry out social/environmental impact assessments priorities identified in the Water
Resources Investment Strategy.
Program Management
- Establish capacity in MIWD to manage sector wide program including planning,
accounting procurement, M&E, and ICT systems.
- Design and implement a sustainable urbadtown regulatory framework
- Build a district-based hygiene and sanitation promotion program.

6
C. Rationale for Bank Involvement

21. Building on Earlier Bank Support: The proposed project would be a follow on to
NWDP Iwhich supported the implementation o f Government o f Malawi (G0M)’s water
resources management policy by reforming and upgrading the management o f water resources
and the provision o f water-related service. The Second National Water Development Project
(NWDP 11) would provide continuing support to GOM’s National Water Services Development
Plan, which sets forth objectives, targets, actions, an investment plan, and an implementation
strategy for increasing water supply coverage and improving water resources management.

22. Contribution to Achieving the Goals of Malawi Growth and Development Strategy
(MGDS), Africa Action Plan, and MDGs: The project, which coordinates and leverages
funding from other donors through the sector wide approach, would support the M G D S and
achievement o f the MDGs which call for reducing by half the number o f people without
sustainable access to improved water supply and sanitation by 2015. The project also contributes
to the GOM’s vision o f attaining universal water coverage by 2025. At the regional kvel, the
project will support economic and social objectives o f the World Bank’s Africa Action Plan
which, in part, focuses on closing the infrastructure gap, connecting poor populations to markets,
enhanced shared growth, developing an African private sector, and strengthening partnerships at
the country level.

23. High Level of Government Commitment to Reform: GOM’s strategy for the water
sector i s to transfer responsibility for water supply services to self sufficient water boards and
water associations, so that i t can focus i t s attention on policy formulation and water resources
management. G O M has shown commitment/ownership to this by establishing and shifting
responsibility for town water supply services to three Regional Water Boards (RWBs),
developing and demonstrating a district-based strategy for rural water supply, and establishing a
National Water Resources Authority (NWRA).

24. Support for G O M Policy: The project would serve as a major vehicle for G O M to
implement i t s new water sector policy which was finalized in August 2005. The policy balances
resource management with service provision under clear institutional arrangements and broad
stakeholder participation. The policy is also in line with other government sectoral policies, such
as the decentralization and environmental management policy. G O M i s also committed to
ensuring effective cross-sectoral collaboration and intra-sectoraUgovemance collaboration.

D. Higher Level Objectives to which the Project Contributes

25. The project will contribute to GOM’s goal o f establishing a platform for long-term
management o f water resources, increasing sustainable access to water supply and sanitation,
creating an enabling environment for small/medium-scale private sector development, and
contributing to school enrollment, employment, and improved health.

7
11. PROJECT DESCRIPTION

A. Lending Instrument
26. The proposed instrument i s a five year JDA Specific Investment GrantKredit for a total
o f US$50 million, which will contribute to GOM’s national water sector development program,
as described previously under Section I, B. Donors have agreed with Government to strong
coordination, joint monitoring, collective policy dialogue, and common implementation
arrangements.

B. Project Development Objective and Key Indicators

27. GOM’s National Development Program will be partially financed by IDA under National
Water Development Project 11. The Project’s objectives and components are described below.

28. Project Objective: The development objective o f NWDP I1i s to increase access to
sustainable water supply and sanitation services for people living in cities, towns, market centers,
and villages and improve water resources management at the national level. The project would
also contribute to building sector capacity through improved monitoring, regulation, incentive
structures, public private partnerships, and coordination among the sector stakeholders.

The development objective will be measured in terms o f the expected project outcomes (see
Annex 3):
e Improved water supply for 250,000 people and provision o f new water connections
serving about 250,000 people in cities, towns, market centers and rural communities.
e Establishment o f a national sector investment program for city, town, market center, and
rural water supply and sanitation.
e Prevention o f water supply disruptions in Blantyre through purchase o f essential spare
parts and other priority investments.
e Planning o f new sources o f water supply for Blantyre, Lilongwe, and four large towns.
e Improved operational and financial performance o f the city and regional water boards.
e Enhanced capacity o f the Government o f Malawi to manage its water resources through
development o f the water resources investment plan, preparation o f L a k e Malawi level
control, and establishment o f the National Water Resources Authority.

29. Indirect benefits would include improved health o f the beneficiary population, resulting
from improved quality o f water and sanitation services, better hygiene practices, as well as time
savings through improved access to water supply services.

C. Project Components

30. The proposed project would include the following project components: (A) Urban Water
Supply and Sanitation; (B) Town, Market Center and Rural Piped Water Supply and Sanitation;
(C) Water Resources Management; and (D) Sector Management and Urban Water Sector
Reform. GOM’s broader sector program, however, would include a component that supports
decentralized community managed Rural Water Supply and Sanitation which will be financed

8
by other donors and financiers. Implementation o f all project sub components will be undertaken
in line with the guidelines set out in the Environmental and Social Management Framework
(ESMF) as well as the Resettlement Policy Framework (RPF).

Table 3: IDA Financing for NWDP

A. Urban Water Supply and Consultants, goods, 48 19% 7 14%

Sanitation works, training
B. Town, Market Center, and Consultants, goods, 106 41% 24 48%
Rural Piped Water Supply and works, training, operating
Sanitation costs, community sub-
projects
C. Water Resources Consultants, goods, 16 6% 12 24%
Management training, operating costs

D. Sector Management and Consultants, goods, 10 4% 5 10%

Urban Water Sector Reform training, operating costs
Unallocated 1 0% 0.2 1 0%
PPF 1 0% 2 3%
Total Program 258 100% 50 100%

Component A. Urban Water Supply and Sanitation

3 1. Component A includes investments and consultancy studies that would be executed by

Lilongwe and Blantyre Water Boards (LWB and BWB)4. Policy, institutional and regulatory
reform activities for the urban water sector, under the responsibility o f GOM, are included in
Component D: Sector Management and Urban Water Sector Reform.

32. Priority Investments: Priority investments would include: (i) actions to mitigate water
urgent leak and plant repair in both cities; and (iii)
supply disruptions in Blantyre; (ii) actions to
serve customer backlog in Blantyre.

(i) Actions to mitigate water supply disruptions in Blantyre: Blantyre has been
experiencing significant problems related to frequent and prolonged disruptions in
water supply to a large part o f i t s population. Procurement o f spare parts for
pumps, motors, transformers and switch gears for raw and clear water at Walker’s
Ferry and Chileka pumping stations will mitigate water supply disruptions in

The urban water component o f the overall sector program w i l l also be supported by a consortium o f the European
Investment Bank (EIB) and the European Union Water Facility (EUWF) under the Malawi Peri-Urban Water and
Sanitation Project.

9
 Blantyre until these pumps and related electro-mechanical equipment are replaced
under EU-EIB project.

(ii) Urgent leakage andplant repair in Blantyre and Lilongwe: There i s an urgent
need to quickly repair leakages in Blantyre that are causing large water losses.
This i s important because the cost o f producing and distributing water i s
particularly expensive in Blantyre due to the high electricity costs o f pumping the
water up 800 meters. Procurement o f leakage repair materials and actual repair o f
visible leakages within the distribution network will reduce water losses before
the service contractor i s hired under the EIB/EU funded project. In Lilongwe,
urgent rehabilitation and maintenance o f plant and equipment will be carried out.
This will involve the procurement o f essential equipment spare parts for repairs
including on-site electrolyte chlorination plant and dam valves to ensure
continuous and reliable water supply. This will also involve the procurement o f
pipes and fittings for repairs o f a 525 mrn asbestos cement (AC) pumping main
from Northern Booster Station to Kanengo which i s experiencing high failure
rate.

(iii) Actions to serve customer backlog in Blantyre: There are about 2,500 customers
in Blantyre that have already applied for water connections, but are yet to be
connected due to lack o f meters. 5,000 meters will be purchased o f which half will
be used for this purpose, and the other half will be used for replacement o f non-
functioning meters to reduce wastage and leakage. Purchase o f 5,000 meters will
benefit more than 25,000 people.

33. Reaching the Unserved Areas: This component would include the following sub-
components: (i) new connections to low income/peri-urban in Blantyre; (ii)increased access to
sanitation and hygiene promotion; (iii)procurement o f meters and connection fittings; (iv) future
expansion o f distribution and new connections.

(i) Piloting of water supply and sanitation services in low income/peri-urban in

Blantyre: This component will support new connections to l o w income areas
based on a couple o f institutional modalities different from the approach being
adopted by LWB with assistance from Water Aid. The three main options would
include: (i) BWB managing water supply services in l o w income areas on their
own; (ii) BWB outsourcing only the management o f water kiosks to local service
providers; and (iii)BWB outsourcing the management o f the distribution network
and all outlets (kiosks and household connections) to local service providers. The
choice o f technology and cost recovery plans for such services would be based on
pilot studies. It i s envisaged that the outcome o f these pilots will feed into the
service contract which will be implemented under the EU/EIB funded project. In
addition to these pilots, a baseline survey will be carried out to enumerate the
basic coverage, service levels, and institutional arrangements o f service delivery
in l o w income/peri-urban areas in Blantyre and Lilongwe.

10
 (ii) Increased access to sanitation and hygiene promotion: This component would
support BWB and LWB to implement a comprehensive sanitation program which
will deliver both improved access to sanitation as well as hygiene promotion
through adoption o f the “sanitation marketing” approach.

(iii) Increased new connections: In Lilongwe, 5,000 water meters will benefit about
25,000 people directly, and two to three times that number indirectly through
shard yard tops, and also reduce the high level o f commercial losses caused by
meter under-registration.

(4 Expansion of distribution and new connections: An output-based-aid approach to

the expansion o f tertiary distribution piping and new customer connections may
be employed under the Project. Under this arrangement the Water Boards (or
delegated water service operators) would pre-finance the investments required to
connect new customers, and receive the pre-determined cost per connection
retroactively on the basis o f the number o f new customers that have been
connected and served with water. Such a mechanism would likely attract
additional donor financing, including from the Global Partnership for Output
Based Aid. The mechanism for out-put based aid i s described in Annex 4.
Implementation o f this approach requires the preparation o f an OBA agreement
between MIWD and the Water Boards, approved by IDA, that conforms to Bank
guidelines for output-based disbursements.

34. Aqueduct planning: Preliminary design, EIA and safeguard plans for aqueduct to
treatment plants will be carried out for Lilongwe. This sub-component i s aimed at mitigating the
water pollution to the raw water in Lilongwe River close to the treatment plant.

Component B: Town, Market Center and Rural Piped Water Supply and Sanitation

35. Town Water Supply and Sanitation: Under this component the three Regional Water
Boards (RWBs) will expand water supply facilities and improve operational efficiency in some
o f their largest, fastest-growing towns including Mzuzu and Mzimba in the Northern Region;
Kasungu, Mponela and Likuni in the Central Region; and Zomba and Mangochi in the Southern
Region; as well as other towns. To qualify for investments, business plans (for the target towns
and consolidated for each RWB) that include management arrangements with a performance
agreement between the utility and the town management, proposed tariffs, financial projections,
and phased expansion plans as well as social/environmental safeguards will be required.
Business plans and investment proposals will be appraised by the MIWD based on a pre-
determined criteria that includes the cost effectiveness o f the proposed design, the long term
financial viability o f the scheme, and ability to avoidmitigate negative sociaYenvironmenta1
impacts.
36. Grants may be provided to the RWBs for: (i) yard taps and public standpipes through an
‘output based aid’ approach in which the RWBs pre-finance connections and are reimbursed on a

11
cost per connection basis5; (ii)implementation o f sanitation plans that address the priority
concerns o f the town; and (iii)capacity building. Business plans will indicate the amount that
would be provided as grant and the amount to be on-lent to the RWBs. Funds for town water
supply will be maintained by the MIWD, a portion o f which will be earmarked for each o f the
three RWBs at the outset o f the project and committed upon successful appraisal o f individual
town business plans and investment proposals. Additional fimds from IDA and other financiers
can be committed to other towns on a performance basis, that i s submission o f business plans
and compliance with pre-determined appraisal criteria.

37. Market Center and Rural Piped Water Supply and Sanitation: The project will
finance the development o f community-managed water supplies in market centers and rural
piped water schemes, often a combination o f both. The RWBs in consultation with MIWD and
individual district assemblies will: (i) prepare pre-feasibility studies and introduce the project to
short listed market centers and/or rural piped schemes; (ii) establish water user associations and
contract local consultants to provide technical assistance in participating communities; (iii)
arrange and supervise works contracts to expand their water facilites; and (iv) assist the water
user associations to hire the local utility operator. The local consultants will: (i) provide
capacity building and assist the water user associations to plan their water supply facilities; (ii)
provide technical inputs to the water user associations when hiring the local utility operator and
core operating staff, and learn to oversee operations; and (iii) train local utility operators to
handle routine operations and maintenance. The water supply facilities and sanitation
interventions will be financed on a grant basis, but communities are expected to pay all recurrent
costs and part o f expansion costs. The project would fund a small part o f the investment costs in
the market centers towards meeting the technical assistance provided by the RWBs.

38. Capacity Building: This sub-component will include training and development o f the
RWB personnel to improve their j o b skills to effectively manage their water supply systems.
Operational support to the Program Implementation Unit (PIU) for supervision o f the activities
will be funded on a declining basis. Support will be provided to the RWBs in continuing
implementation o f the HIV/AIDS programs which include awareness building, promotion o f
HIV/AIDS testing, and prevention.

Component C: Water Resources Management

39. This Component will be managed by MIWD, however, the five Water Boards will
provide inputs to the sub-components related to carrying out the feasibility studies, preliminary
design, and environmental impact assessments (EM) for new water sources.

40. Enabling Legislation for NationalWater Policy: During project preparation, a Project
Preparation Facility (PPF) advance supported the development o f enabling legislation to
implement the National Water Policy o f 2005, which will provide for the establishment o f the
required institutional framework for proper water resources development and management in the
country. Under this sub-component support will be provided for the passage o f the legislation

The water boards plan to apply for additional funds from Global Partnership for Output Based Aid (GPOBA) for
t h i s purpose.

12
through parliament using information sessions, public awareness campaigns etc. and
dissemination o f information explaining the content and implications o f the new legislation.

41. Water Resources Investment Strategy: An integrated water resources investment

strategy i s urgently needed in Malawi which identifies, through a multi-sector economic analysis,
the water resources development and infrastructure needs o f the country to provide the
infrastructure platform required for growth in the different water using sectors. Determining an
investment strategy to develop the country’s water resources in the context o f conflicting
development and demand needs by different sectors and limited water resources requires
prioritization on the basis o f national development strategy, rather than an isolated sector-by-
sector approach. The emphasis will be on the development o f multi-purpose investments which
will meet a range o f water needs for productive purposes (agriculture, industrial/commercial,
energy etc.) and water supply requirements. Selected priority multi-purpose investments will be
identified for initial preparation including feasibility studies, basic design and impact
assessments.

42. L a k e M a l a w i Level Control: The outflow from Lake Malawi has been known to cease
due to natural lake level fluctuations as it did in 1915 and almost again in 1996. The resulting
social and environmental impacts would be catastrophic given Malawi’s reliance on electricity
generated by hydropower dams on the Shire River, the importance o f the fish catch in Lake
Malombe for food, and the dependence o f wildlife habitats within the national parks and reserves
along the Shire to a base flow. To improve the management o f the Lake level and to avoid the
potential o f the Shire River ceasing to flow, a feasibility study was undertaken in 2003 to
consider the utility o f a lake level control structure at Liwonde on the Shire River and a low-flow
pumping scheme at the mouth o f the Shire River. The conclusion was that better level control
can eliminate the risk o f the river going dry in all but the most severe drought sequences (less
than once in a hundred years), and the regional grid connector can ensure electric power for the
country provided Malawi can pay for and draw power from the regional connector when needed.

43. The project will finance the engineering design for the level control structure at Liwonde,
and a preliminary design for a low-flow pumping scheme at the mouth o f the Shire River. In
parallel, an independent environmental assessment for both structures, including: (i) a
resettlement action plan (as required) for the level control structure and (ii)a risk assessment for
obtaining electricity from the regional power grid when required. Financing for the construction
o f the level control structure may be possible after the design, environmental assessment,
resettlement action plan and consultation processes are complete, upon the request o f GOM, the
advice o f an international panel o f experts, and the recommendation o f the Bank’s quality
assurance group for the sub-component. This could be through additional financing for NWDP
I1or through a separate project.

44. WRM Institutional and Technical Support: The ongoing water resources sector
reform process will be strengthened through the establishment o f the institutional framework in
terms o f the national water policy. In particular, this includes the establishment o f the National
Water Resources Authority (NWRA) and support to the Ministry, enabling i t to carry out i t s core
functions in accordance with the new water policy and legislation - including policy formulation,
regulation, strategic planning, and support to the water sector.

13
45. Establishment o f the NWRA will require an entire institutional formation process. This
includes a clear determination o f fbnctions and mandates, human resource planning, business
planning, physical establishment, staffing and transfers, equipping, training and capacity
building, and all other activities required to establish an autonomous organization, including the
establishment o f a water resources funding mechanism. The organization will include a national
center and regional, catchment based offices, established in phases. Ultimately the process may
extend to the establishment o f local water user associations. Studies will be required to
determine the criteria necessary for sustainability o f the institution and effective functioning so
that it will be able to fulfill i t s role o f managing, developing and protecting the nation’s water
resources. These will build on the work already undertaken under NWDPI through a
consultancy study carried out in 2003,

46. Establishing ‘ring-fenced’ revenue streams from water user charges and other sources i s
essential to sustain the National Water Resources Authority. This will require an e€fective
licensing and administration system, based on an efficient national water resources monitoring
and information management system. A national campaign will be undertaken to assess the
current use o f water in terms o f existing licenses, and unlicensed water use. The objective will
be to increase collection rates on current licenses, promote the application and granting of new
licenses for existing unlicensed usage and curtail unauthorized water usage. This will also
require a complete re-establishment o f existing administration and information management
systems.

47. Development of Future Water Sources in Blantyre and Lilongwe: Full feasibility
studies, preliminary design, EIA, and safeguard plans will be carried out for the works for
developing new raw water sources for Blantyre and Lilongwe in the medium to longer term
based on the future demand assessment. These documents are expected to be used for future
projects funded by any source upon completion. These studies will be contracted by MIWD to
ensure that a holistic view will be adopted in identifyingnew water sources that would benefit
broader users. BWB and LWB shall further carry out Hydrographic survey for their existing
dams (Le. Kamuzu Dam I& I1 for LWB and Mudi Dam for BWB).

48. Water Source Development for Towns: Currently surface water sources are developed
and managed on an individual town basis. However, the sector i s in the process o f adopting a
holistic approach for developing new water sources to cater for the towns as well as other users
such as market centers and irrigation.

49. Under the project, this holistic approach will be used for selected towns that are in urgent
need o f water resources. MIWD in collaboration with the RWBs will commission and supervise
consultants to prepare feasibility studies, preliminary designs, and environmental impact
assessments and resettlement action plans. Preliminary designs would be based on sufficient
geophysical investigations to site the facilities and evaluate potentially negative impacts resulting
from construction and operation o f the facilities.

50. In most small towns and market centers water supply services are limited by the yield o f
existing boreholes. MIWD in collaboration with the RWBs will launch a special initiative to

14
evaluate and test measures that can be taken to site, construct and maintain higher-yielding
boreholes.

Component D. Sector Management and Urban Water Sector Reform

5 1. This component consists o f three sub-components: (i) Management o f Sector Program;

(ii) Strategic Sanitation Planning for Blantyre and Lilongwe, which will be managed by MIWD;
and (iii) Urban Water Sector Reform, which will managed by the Privatization Commission
under the guidance o f the Program Steering Committee.

52. Management of Sector Program: Donors have agreed to adopt common

implementation strategies for village, rural piped (including market center), town and urban
water supply, and to work through a single Program Management Unit (PMU) within the
MIWD. For the most part donor financing will be parallel, but MIWD will establish management
systems to support pooled investments..

53. The village, rural piped, and town sub-components o f the National Water Development
Program have been designed such that planning and implementation i s carried out in a stepped
approach within each village, rural piped system, and town. And project rules, including
selection and appraisal criteria, are set out in the respective implementation manuals. In this way
donors can invest in a tried and tested program without having to be involved in project design.

54. This sub-component will provide capacity building and institutional support to MIWD in
managing i t s sector program. PMU will provide central services for NWDP implementation o f
village, rural piped, town, and urban water supply and sanitation, and water resources
management. The PMU will rely on technical experts within the Water Resources Management
Department to guide studies, draw on the Department o f Water Supply’s zonal and district based
personnel to supervise projects, and contribute to the Planning Department’s sector policy and
planning effort. The PMU will be involved in: (i) sector investment planning; (ii) donor
coordination; (iii) sector policy and planning; (iv) capacity building; (v) contract managemen;,
(vi) project supervision; (vii) monitoring and evaluation; (viii) safeguard (ESMF and RPF)
tracking; (ix) communications; (x) program accounting; and (xi) procurement. Part o f the
operational costs o f the P M U will be financed by IDA and other investment partners. It’s
anticipated that each will contribute about four percent o f their investment costs this purpose.
Under NWDPII funds for operational costs will include payment for fixed-term contract staff,
office equipment and operations, vehicle operations and maintenance, and program management
workshops.

55. Strategic Sanitation Plan for Blantyre and Lilongwe: Blantyre and Lilongwe face
significant challenges related to sewerage and excreta disposal, including the l o w income/peri-
urban communities. This component would support MIWD to carry out a strategic sanitation
planning for the two cities plus several large towns in readiness for the operationalization o f the
National Sanitation Policy. The Policy to be adopted by the Government aims at delivering both
improved access to sanitation as well as hygiene promotion through adoption among others o f
the “sanitation marketing” approach.

15
56. Urban Water Sector Reform: G O M is embarking o n an urban water sector reform that
starts with a Service Contract in Blantyre and Lilongwe, followed by a longer term plan
involving a deeper form o f private sector participation as the environment i s ready. The reform
preparatory phase has been initiated, and this would aim at creating the appropriate environment
for a possible deeper form o f Public Private Partnership (PPP). The activities under the phase
will include: (i) entering into a service contract (implemented under a separate project funded by
EIEVEU) that will address the current operational and customer service bottlenecks; (ii) this will
be followed by a review o f the service contract performance, sector environment, and the market
conditions at mid term o f the contract scheduled after two years into the service contract. This
service contract aims to achieve improved financial and commercial efficiencies, technical and
operational efficiency, and increased access o f water and sanitation to the people living in peri-
urbadlow income areas. I t i s envisaged that the results achieved through the service contract will
create an enabling environment for sustainable improvements, and contribute baseline
information for a future private sector contract.

57. The project would support the overall reform process which includes; (i) development o f
an appropriate regulatory framework plus a regulatory institution which clearly defines tariff
setting and adjustment rules for water service provision, including that to the l o w income
communities and the ability to encourage performance o f the water boards; (ii) preparation and
implementation o f a proper institutional framework and governance system, through a
performance agreement between the water boards and the Government; (iii) preparation and
implementation o f a longer term reform option that involves PPP transaction; and (iv)
stakeholder consultation and consensus building o f the envisaged reform plan.

58. Regulatory framework: The regulatory framework to be developed will be for the water
supply services and will cover all the existing water boards. Regulation will include financial
resource allocation, operational efficiency, water quality, and tariff setting and adjustment.

59. Efforts have already been undertaken by GOM to establish Multi Sector Regulatory
Authorities to regulate the infrastructure sectors namely, communication, transport and water and
energy. For water, the regulatory authority proposed, which will also oversee the energy sector,
Malawi Water and Energy Regulatory Authority (MWERA). MWERA i s expected to be
established and fully operational within the time o f the service contract for the two urban water
boards. Activities for implementation will include: (i) review and enactment o f the proposed
Act; (ii)development o f the various regulations which would cover both the operational and
financial areas and investment; and (iii) public awareness. For effective implementation o f this
regulatory authority, there i s need for a joint effort between the MIWD and the Department o f
Energy in the Ministry o f Mines, Natural Resources and Environment.

60. Institutional and Governance Framework: Preparation o f a proper institutional

f r h e w o r k and governance system will be carried out through a possible restructuringo f the
water boards into forming an asset holding company and operating companies. The goal i s to
establish a performance agreement between the water boards and the Government to ensure a
proper accountability structure and governance system in place for the Water Boards to perform
their contractual obligations and for the Government to create an enabling environment for

16
efficient utility operation. A financial reform strategy will also be developed to ensure financial
viability and sustainability o f the water boards.

61. PPP Transaction: The possible PPP i s envisaged to transform the Urban Water Boards
into efficient operators through contracting out the provision o f water services to a water
operating company. Malawian investors and utility employees would be invited to j o i n this
partnership while the Government would retain the ownership o f the water infrastructure,
continue to be responsible for approving and financing capital works, and ensure that the poor
are not adversely affected. The Water Operating Company i s expected to take over the staff and
operations o f the Water Boards, and in the not too distant future, the Water Operating Company
could be sufficiently viable and credit worthy to l i s t on the Malawi Stock Exchange.
Investigation o f the market appetite for such a transaction will also be camed out.

62. Preparation o f such a transaction has already been initiated by MIWD through
preparation o f developing the necessary legal and regulatory framework, financial framework,
institutional and organizational framework and the required infrastructure development plan. The
actual implementation o f the deeper PPP option will be implemented, with the guidance o f an
independent Transaction Advisor, under the direction o f the Public Enterprises (Privatisation)
Act 1996.

63. Sector Reform Consensus Building and Public Awareness: The water sector i s a
politically sensitive area in the country and mindful o f this fact, i t is prudent to engage the
various stakeholders in the reform process. Government has initiated this important activity
through holding the first urban water sector workshop and by planning the following activities:
(i)base line survey o f the knowledge and perception o f the consumers, employees, the civil
society and the political wing; (ii) development o f a communication strategy including a media
plan; (iii)stakeholder consultation on the proposed reform; and (iv) a study tour to two countries
that have undertaken similar reforms in the water sector.

64. The project will finance the implementation o f the communication strategy, including
additional consultation workshops with policy makers, utility staff, and civil society and public
dissemination o f the key messages for the reform through electronic and print media.

D. Lessons Learned and Reflected in the Project Design

65. The following lessons have been learned from N W D P Iand the joint sector review, and
incorporated in the proposed project design.

66. Government Commitment and Ownership o f the Project: Under NWDP I, much
progress was made in developing a comprehensive sector program covering rural, town and
urban water supply as well as water resources management. Under the project, three Regional
Water Boards and a Water Resources Management Board were established; a district-based,
community-managed approach to rural WSS was established; a capacity building strategy for
MIWD was developed; and an Integrated Water Resources Management Plan for Lake Malawi
and the Shire River was prepared. In requesting NWDP 11, MIWD was most interested in

17
maintaining the momentum established under NWDP Iand developing a sector program that
many donors could support.

67. In preparing the sector program, MIWD i s systematically drawing o n lessons learned
from various donor fimded projects, through a consultative process and is consolidating existing
implementation manuals into one that potential financiers can support. In so doing, MIWD i s
engaging key relevant government officials as well as other stakeholders, including districts,
water boards, Non-Governmental Organizations (NGOs), the Privatization Commission (PC),
and donors active in the sector.

68. Management Changes: The Implementation Completion Report (ICR) o f NWDP I

indicated that changes in the key managers, particularly principal secretaries and ministers,
should be minimized to ensure continuity and consistency in building a sector program.

69. Sector Coordination: T o ensure readiness for implementation, it i s important to prepare

and agree on the comprehensive project implementation plan, detailing the provision to build the
requisite policy coordination, implementation capacity, to improve sector monitoring and
evaluation (M&E), and to ensure consistency in procedures for all donor and government funded
projects under the envisaged program. Lessons from the current experience in the sector also
indicates that building financial management, procurement, and M&E systems integrated into the
Government’s system reduces transaction costs for all parties involved. I t i s envisaged that a
SWAP involving the co-mingling o f hnds and common fiduciary and safeguard systems would
be prepared during the project.

70. Demand Driven Model: District-based, demand-responsive, and community-driven

rural water supply and sanitation (RWSS) and catchment management has been identified as the
most powerful factor in scaling up and ensuring sustainability. Managing services at the lowest
appropriate level has contributed to proper stakeholder participation and accountability structure
for effective service delivery.

71. Cost Recovery and Affordability: Adherence to cost recovery policies in combination
with transparent and targeted subsidies has also been demonstrated to be a key ingredient in
financial sustainability. In meeting such goals, i t i s crucial that appropriate technologies and
standards are adopted to ensure cost effectiveness o f investments. As for the sanitation sector, a
shift from sewerage to on-site sanitation and hygiene promotion programs where ever
appropriate, has contributed to more affordable and sustainable use o f sanitation facilities.

72. Proper Governance and Accountability Structure Ensures Well-Performing

Utilities: International, regional, and local experience shows that sustainable infrastructure
development needs an environment that fosters reform and takes advantage o f the local private
sector in providing the goods, works and services needed to plan, construct and maintain rural
and town water supply. Establishment o f efficient and commercially oriented urban water
utilities requires proper incentive structures and autonomy. In addition, an effective regulatory
and institutional framework needs to be established to carry out independent review and
monitoring o f the sector performance.

18
 E. Alternatives Considered and Reasons for the Selected Instrument

73. Project Approach: A simple, IDA-centered, follow-on project to N W D P Iwould have

been the simplest alternative, but would not have made much difference given the limited
investment that IDA can make in the water sector in Malawi. Therefore, this traditional project
approach was rejected and instead, a sector-wide approach (SWAp) was chosen to leverage other
donor funds and to ensure harmonization and consistency in the sector policy and guidelines.

74. Pooled Funding SWAp: In considering a SWAp, pooled funding was considered to
reduce the multiple reporting and transactions and to ensure sector wide accountability with
common implementation arrangements, fiduciary and environmental/social safeguard standards.
However, the consensus amongst donors was that such an approach was premature until the
sector had established the requisite management systems and capacity.

75. Parallel-financing was chosen because at present the donors and Ministry prefer to focus
on the development o f common implementation arrangements, and to build the capacity within
MIWD and the districts to manage a future SWAP with pooled investments. During project
implementation, capacity will be built and a necessary management system will be established to
enable implementation o f such a pooled SWAp.

111. IMPLEMENTATION

A. Partnership Arrangements
76. As described above, the project contributes to GOM’s National Water Sector
Development Program I1which will be parallel financed by other donors and financiers. The
main program partners include EWEU, CIDA, AfDB, NetherlandsLJNICEF, UnitedNations
Development Program (UNDP), Organization o f Petroleum Exporting Countries (OPEC) Fund,
JICA, Water Aid etc. The IDA funds for the project would follow the Bank’s fiduciary and
safeguards guidelines. However, the overall sector policy and operational procedures would be
common for all activities under GOM’s program. The Bank’s project team will coordinate
project implementation review activities, including the reporting, monitoring, and missions
together with other financiers to ensure consistency and harmonization in approach.

B. Institutionaland ImplementationArrangements

77. A comprehensive program implementation manual has been developed, detailing the
roles and responsibilities o f each implementing agency and sector stakeholders, as well as the
guidelines for implementation for each sub-sector. The following groups will be responsible for
implementing N W D P 11:

78. The Ministry of Finance (MOF) will be responsible for: (i) securing and channeling
resources for NWDP 11; (ii)allocating financial resources; (iii)
approving public sector
borrowing; and (iv) monitoring disbursements.

19
79. The Ministry o f Economic Planning and Development (MEPD) will be responsible for
economic validation o f the project activities and for ensuring that the project activities are in line
with the national economic agenda.

80. The Ministry o f Energy Mines, Natural Resources, and Energy and its
EnvironmentalAffairs Department (EAD) will be responsible for formulating the
environmental and social impact assessment. They will assist with the (i) preparation o f
Environmental Assessment (EA) terms o f reference; (ii) recruitment o f a consultancy to carry out
an EA; (iii)arrangements for public consultations; and (iv) review and approval o f the EA
through the national EA approval process.

81. The National Council on the Environment will be responsible for: (i) the approval o f
EA reports; and (ii)forwarding i t s recommendations to the minister responsible for
environmental affairs for endorsement.

82. The M I W D will be responsible for: (i)the development o f policies, laws, and strategies
for the water sector; and planning; (ii)coordinating, monitoring and evaluating NWDP 11; (iii)
building capacity o f implementing groups (public and private); (iv) appraising town and market
center investment proposals; (v) refining implementation arrangements through experience; (vi)
facilitating hygiene education and sanitation promotion; and (vii) overseeing the implementation
o f the ESMF. MIWD Regional Water Development Offices liaise with districts and market
centers and monitor technical assistance provided to them.

83. The Ministry of Lands, Surveys and Physical Planning, Office of the Controller of
Lands, will be responsible for: (i)
overseeing the implementation o f the RPF; (ii)
reviewing and
approving Resettlement Action Plans (RAPs) consistent with the RPF; and (iii) monitoring the
implementation o f the RAPS.

84. The Privatization Commission will be responsible for overseeing and guiding the
introduction o f private sector participation in urban water supply operations, creation o f an
enabling environment for urban water sector reform, and establishment o f a regulatory authority
for town and urban water supply.

85. The Program Steering Board will act as a collective policy and decision making body
for the whole NWDP I1program, and will consist o f members from all concerned Ministries
from the Government. This Board will ensure that there i s Government ownership and
leadership o f the program, and limit the impact o f policy level personnel changes in GOM.

86. The Program Task Force includes members o f the PKJs o f each component o f NWDP
I1and i s chaired by the MIWD. The Chief Executives from District Assemblies, Ministry o f
Local Government, Ministry o f Justice, will be invited to participate as the need arises. The Task
Force i s responsible for: (i)
preparing and monitoring work plans and budgets; (ii) improving
implementation arrangements; (iii) reviewing Terms o f Reference (TOR) for studies and review
work o f the consultants; and (iv) coordinating the implementation agencies.

20
87. The Program Management Unit which i s established within the MIWD will have the
core staff that includes a program manager, a reform specialist, a procurement officer, an
accountant, a water supply and sanitation engineer, a water resources management specialist, and
a community participation specialist. Additional staff will be recruited as they are required. The
PMU’s responsibility includes: (i) overseeing program planning and implementation; (ii)
monitoring project progress and achievements through reports; (iii) coordinating and accounting
for utilization o f project funds; (iv) coordinating review meetings; (v) establishing a proper and
effective M&E system; (vi) ensuring that implementation o f the project conforms to performance
standards; and (vii) working with project steering committee and project task force as the
secretariat.

88. Program Implementation Units will be established in each o f the five implementing
entities (Water Boards). They will be composed mainly o f designated staff already employed by
the implementing entity (water board), and by fixed-term contract staff. Engineering,
procurement and accounting personnel are already employed by the Water Boards. The PIUs will
be responsible for managing the Water Board’s part o f NWDP I1as set out in the project
description.

89. Blantyre and Lilongwe Water Boards are responsible for providing water supply
services in their respective cities, and for managing the implementation o f the Urban Water
Supply and Sanitation component o f NWDP 11. Under NWDP 11, they will be responsible for
carrying out urgent priority works, developing new water resources, increasing water production,
improving operational efficiency, and improving water supply and sanitation services in low
income communities with assistance from local private operators and working in collaboration
with city assemblies. The water boards will also prepare necessary terms o f reference and make
procurement arrangements for the studies for the new water source development (while MIWD
will have the contractual authority with the consultants).

90. Regional Water Boards are responsible for managing the Town, Market Center, and
Rural Piped Water and Sanitation component o f N W D P I1by: (i) providing efficient water
supply services in towns; (ii) expanding water supply services in towns to meet demand; (iii)
supporting districts and market centers to obtain and maintain an improved water supply,
including liaising with districts, carrying out pre-feasibility studies, and contractinghupervising
consultants and contractors; (iii) providing ongoing technical support to market centers to sustain
and expand facilities; (iv) preparing necessary terms o f reference and make procurement
arrangements for the studies for raw water and investigations for ground water development
(while MIWD will have the contractual authority with the consultants); and (v) carrying out the
environmental and social screening process for sub-projects through desk appraisals and site
visits with the assistance o f the District Environment Officer (EDO).

91. District Assemblies are responsible for: (i) managing their own rural water supply and
sanitation programs for point sources in individual villages; (ii)
facilitating and overseeing
market center water supply activities which are delegated to the RWBs and Water User
Associations; (iii) prioritizing market centers for improved water supplies and appraising
investment proposals, (iv) owning water supply assets on behalf o f villages and market centers;
and (v) initiating the environmental and social screening process for sub-projects.

21
92. City/Town Assemblies will be responsible for the review and approval o f sub-projects
based on the recommendations made by the RWBs.

93. Water User Associations are responsible for facilitating and overseeing water supply
services in market centers, groups o f villages sharing rural piped systems and in some l o w
income areas in the urban areas especially in Lilongwe. Their duties are to: (i) guide the
planning o f their water supply system; (ii) contract and supervise a local operator to handle
routine operations and maintenance; (iii) arrange for long term technical assistance to assist local
utility operators to improve efficiency, resolve problems; and (iv) expand the system over time.

94. Local Utility Operators are accountable to Water User Associations (WUA) for (i)
operating and maintaining water supply facilities in market centers and rural piped systms,
ensuring a good quality water at all times; (ii)
collecting water tariffs and managing accounts;
(iii)providing regular, accurate monitoring reports on performance to W A S ;and (iv) expanding
distribution and adding house connections.

C. Monitoring and Evaluation o f OutcomeslResults

95. A sector M&E system will be developed by MIWD under the guidance o f MEPD to
consolidate sector data and to monitor the progress o f the performance indicators with regards to
sector policy implementation and program outcomes. The key financial and operational data
would be collected from the city and regional water boards for the urban and town water
components, as well as the district local governments for the rural water component. For
Blantyre and Lilongwe, baseline survey will be carried out to collect the coverage and service
levels to be used for monitoring the progress o f achieving the performance indicators. Water
quality and issuance o f water abstraction permits will be ensured. Core monitoring indicators
required by the Bank to measure progress and success are listed in the Results Framework. The
key information required to be collected by MIWD, districts, and water utilities are defined in
Annex 3.

96. Environmental and social monitoring will be carried out at the community level by
members o f the Village Development Committees and District Executive Committees during the
construction and rehabilitation o f sub-projects; with support from the respective Area Executive
Committees who will establish members o f Monitoring Committees for this purpose.

97. The MIWD currently has a rural water supply logging system. Nonetheless, targeted
capacity building will be required to establish a more comprehensive, computer-based
Management Information System (MIS) for water supply and sanitation, and to train for sector
agencies to undertake data collection, consolidation, and evaluation. The project will finance this
effort.

98. The Bank will carry out implementation review missions twice a year with other donors
to monitor and evaluate the milestones and target indicators set for each sub-component o f the
program, as well as the overall program implementation. Two major reviews will be undertaken,
one at mid-term, and one at the end o f the project. At the mid-term review, it i s proposed that the
Bank will participate in the mid-termreview o f the service contract, expected to be h n d e d by

22
EIB/EU and provide inputs to the review process and support GOM in implementing its broader
urban wher sector reform.

D. Sustainability

99. As described in the previous sections, the key ingredient for sustainability, GOM’s
commitment and ownership o f i t s sector program and related policies, has been demonstrated
through the implementation o f N W D P Iand issuance o f i t s National Water Policy 2005.

100. Other factors that the project supports in ensuring the sustainability o f the water and
sanitation investments include: (i) capacity building o f the key sector and government
institutions to carry out i t s program; (ii)
proper monitoring and evaluation to assess the sector
performance and lessons learned; and (iii) coordination with the donors active in the sector and
government departments to ensure implementation o f a consistent policy and guidelines.

101, G O M instituted the key ingredients for sustainability for rural and town water supply
under NWDP 1. For rural water supply key principles include: (i) standardization o f a user
friendly handpump; (ii) decentralized, demand-responsive, community-based management; and
(iv) supply chains that provide for spare parts and repairs.

102. For the town water, market center, and rural piped water supply and sanitation sector, the
key principles include: (i) designs that match demand; (ii) autonomous water boards; (iii) tariffs
that cover recurrent and replacement o f short life assets; (iv) professional operators for routine
technicaVfinancia1 operations; and (v) higher level technical assistance to help towns fix
problems, improve efficiency, and plan for expansion, In going forward the Government intends
to implement i t s sanitation policy by: (i)promoting hygiene and sanitation throughout the
country and (ii) implementing environmental sanitation action plans prepared and enforced by
individual communities. The investments fbnded under the project would contribute to
enhancing their revenue base through increased production and additional number o f customers.
However, the financial and operational sustainability for the RWBs i s likely to be achieved only
if GOM creates an enabling environment for them as spelled out in the financial analysis section.

103. For the urban water sector, an official notification o f GOM’s medium term reform path
and the early initiation o f the stakeholder consultation process would contribute to ensuring the
sustainability o f the envisaged reform plan. The urban water reform plan addresses the Water
Boards’ deficient organization culture, inadequate work ethic, and lack o f commercial discipline,
as well as the financial viability o f the sector. The project supports GOM’s plan to transform the
Water Boards into efficient operators.

23
E. Critical Risks and Possible ControversialAspects
U r b a n and T o w n W a t e r Sector Issues:
GOM’s mability, or delays in implementing
the institutional and regulatory reforms
Delayed tariff increases that affect the water
boards’ financial sustainability
Delayed payment o f water bills by
government institutions.
Perceived risks* and public resistance in
involving a private operator.
W a t e r Resource Issues:
The proposed water resources legislation to
implement the 2005 National Water Policy i s
not approved by the cabinet in time t o
establish the related institutions during the
timeframe o f the project.
Project Issues
The proposed project i s complex involving
three different technical components.
M a l a w i Context:
Prevalence o f H I V / A I D S influences the
implementation capacity o f the project
Country risk o f corruption and governance
affecting the project
Overall Risk Rating
* Perceived risks could include big tariff increases or lack of incentives for the private operator to e2 x d services to
the low income households. The communication strategy developed by the Privatization Commission w i l l convey the
right messages to the public that include: (i) adoption of a fair tariff adjustment formula and subsidized tariffs to
the poor; (ii) reduction in costs resultingfiom eflciency gains; and (iii) service obligation that would spec13
immediate expansion of access to poor areas.
(i)Demonstrated and upfront commitment for High
reform through an official notification o f the m a i n
elements o f reform.
(ii)Start with a service contract to quickly improve
system reliability and service, take time for
consultation to introduce a w e l l prepared, long term
PPP contract in a suitable time frame.
Establishment o f an independent regulator that High
approves the tariffs proposed by the water boards
according to defined tariff setting guidelines.
(i)Plan for payment o f a l l o l d arrears agreed by Moderate
project effectiveness.
(ii)Retrofitting o f public institutions with water
conservation devices and individual meters, before
switching back to payment by individual
institutions.
(iiiFull
) and timely payment o f water bills by
public institutions as a covenant.
Upfront and continuous consultation with the Substantial
public and sector stakeholders to communicate the
right message regarding reform.
Pilots could be continued while the legislation i s in Moderate
the process o f being passed and formalization could
take place retroactively.
As was done under the successful N W D P I, Moderate
implementation will be delegated t o the five Water
Boards and Department o f Water Resources. In
addition, Program Management Unit will be
established in MIWD for central support services.
H I V / A I D S programs, including awareness Moderate
building, encouragement to do H I V / A I D S tests, and
prevention o f disease spreading will be carried out
under the project.
Thorough capacity and procedure assessment Moderate
carried out by appraisal. Close monitoring and
review to be carried out during implementation
review missions.
Moderate
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E. Grant Conditions and Covenants

EffectivenessConditions:
Subsidiary Agreements have been executed for each Project Implementing Entity.
The program implementation manual for all components o f the project has been adopted.
An annual work plan and budget for the first year o f project implementation has been
submitted to IDA.
P M U has been established and the key staff o f the PMU including a program manager, a
procurement officer, an accountant, a water supply and sanitation engineer, have been
recruited.

Financial Covenants include:

0 Audited annual financial statements are completed within six months o f the year end.
0 Project reports including “Interim Unaudited Financial Reports” (IFRs) submitted within
45 days after each calendar quarter covering each calendar quarter.
0 Outstanding water bills from the public institutions paid to the Water Boards by
December 3 1,2008 and thereafter timely payment o f dues ensured.
The five water boards to at least cover their operations and maintenance through revenues
by fiscal year ending 2008/9, with continuous improvement to also cover depreciation
and debt service obligations by year ending 201 1/12.

Other Covenants include:

0 Submission o f annual work plans and implementation o f such work plans.
0 Regulatory framework for the delivery o f i t s urban and town water and sanitation
services completed within 18 months o f the effectiveness date.
0 M i d - t e r n review to include decision on the shift to a lease (or similar) contract.

Conditions of Suspension include:

0 Service contract for urban water supply signed and operational within 18 months o f the
effectiveness date.
0 Finalization o f co-financing agreements within six months o f effective date.

Subsidiary Agreements between GOM and the Implementing Entities include:

0 Outstanding water bills from the public institutions paid to the Water Boards and
thereafter timely payment o f dues ensured.
Sub-loan and sub-grant terms and conditions.
0 Measures to ensure that revenues from the five water boards to at least cover their
operations and maintenance through revenues by fiscal year ending 2008/9, with
continuous improvement to achieve full cost recovery by year ending 201 1/12.

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IV. APPRAISAL SUMMARY

A. Economic and Financial Analysis

Economic Analysis
104. Introduction: For purposes o f the economic analysis, Component A - Urban Water
Supply and Component B - Town, Market Center, and Rural Piped Water Supply and Sanitation
are analyzed in detail. For Component A, IDA investments o f $7 million are complemented with
$40 million o f EIB/EU investments for the cities o f Lilongwe and Blantyre. It i s important to
note that for Component A, economic analysis is conducted for the physical investments o f the
project as a whole and not for the IDA contribution only. This i s because the economic
outcomes in the form o f new connections, expenditure and time savings need to be valued for the
urban water supply program as a whole and not as disaggregated parts. The economic benefits
are derived from new connections in unserved areas as well as from performance improving
measures such as reduction o f non revenue water (NRW) and rehabilitation and replacement o f
treatment plants. There are other non-easily quantifiable benefits from this project which is
typical o f a rehabilitation project, such as higher hours o f service, increased reliability, improved
customer service, and improved billing and collection systems. These have not been included in
the analysis.

105. Methodology: A cost-benefit analysis using a “with and without project” methodology
has been used to calculate the EIRR and NPV o f the project to which the project directly
contributes with physical investments. The goal o f the economic analysis i s to estimate the
present value o f the benefit streams to major stakeholders o f the project - the households, over a
20 year period. The net economic benefits to arrive at the ERR and NPV are based on a 10%
(the hurdle rate IDA uses in WSS projects) discount rate.

106. Component A: The measurable economic benefits o f this component are: (i) higher
expenditure from increased consumption in the previously unservedperi-urban and formal
urban; and (ii) lower distance traveled and filling times at the new connections, leading to time
savings. The rehabilitation o f existing networks undertaken during project implementation will
result in incremental water o f 10,500 m3/day in Lilongwe and 11,500 m3/day in Blantyre. In
addition, the Non-Revenue Water (NRW) i s expected to reduce from 29% to 26% in Lilongwe
and from 48% to 34% in Blantyre during the course o f the project. These investments will result
in incremental water flows o f 12,974 m3/day in Lilongwe and 21,456 m3/day in Blantyre. The
expenditure on water for the new consumers i s valued based on the average tariff for individual
connections/yard taps which i s $0.43/m3 in Lilongwe and $0.53/m3 in Blantyre. Incremental
expenditure benefits from new connections are minimal since households are paying twice the
formal domestic connection tariff at the kiosk to consume a minimal 20L bucket per capita.

107. Accessing water from yard-taps and private standpipes also means that households will
incur time savings that can be quantified by valuing the time in the form o f wages lost due to the
water collection activity. The economic benefits from the new connections primarily derive
from these time savings, since an average household spends approximately 4 hours a day
collecting water. At the kiosk, the waiting, filling and carrying time for a 2 0 L bucket i s

26
 approximately 50 minutes. In comparison, the water collection time i s 10 minutes at the yard tap
for a 20L bucket.

108. The economic analysis suggests that the Component A o f the project has a positive
economic NPV o f $97 million and an EIRR o f 48%. This implies that the project will be
beneficial to the citizens o f Lilongwe and Blantyre in alleviating their water supply concerns.

Table 1: Economic Rate o f Return - Urban Water Supply

~ Component A: Urban Water Supply I

NPV $97.109.448 ~

109. Component B: Seven towns from service areas o f the Northern Regional Water Board
(NRWB), Central Regional Water Board (CRWB), and Southern Regional Water Board
(SRWB) are selected for new capital and rehabilitation investments to improve their water
supply systems. The economic analysis i s conducted for the type o f system - gravity and
boreholes, installed in these seven representative towns and benefits are valued per user. I t i s
assumed that the tariffs charged to the users o f these new gravity and borehole facilities will be
$0.36/m3. The capital cost varies by type o f system, the typical capital cost o f building a gravity
system i s $40/capita and a borehole i s $50/capita. Given the fact that bulk o f the resources
invested in this component i s grant, investments will occur in the following way - after the initial
capital investment o f $40/capita (for gravity systems), 1.25% o f expansion cost for distribution
will be spent in the next 4 years and 10% o f expansion cost for transmission, generation will be
spent in the 5th year and this pattern will continue over the l i f e o f the project. In addition, An 0
& M cost o f $0.25/capita i s spent each year. Similar will be the investment schedule for borehole
systems.

110. As a result o f this project, the beneficiaries o f these new systems will be consuming more
water - from 15 litredcapitdday to 50 litres/capitdday. The benefits are valued for the additional
water consumed by households at a higher price and time savings as a result o f lower time spent
in collecting water.

111. The economic analysis suggests that the Component B o f the project has a positive
economic NPV o f $24.97/capita and an EIRR o f 20% for gravity systems and a NPV o f
$1 1.8lcapita and ERR o f 14% for borehole users. In summary, a quantitative valuation o f
economic gains as a result o f NWDP I1for the project beneficiaries suggests that this project will
have a positive impact on improving the productivity and overall welfare in addition to non-
quantifiable health and environmental benefits.

27
Table 3: EIRR for Gravity and Borehole Systems

i NPV (Per capita)

i Gravity System I

I
I
$24.97

i Boreholes i
I

Financial Analysis
112. Sector Financial Performance: The size o f GOM’s five year sector wide program i s
estimated to be about $258 million. It i s expected that the Government subsidies to the sector,
especially for the urban and larger towns could be reduced over time if the tariffs increase along
with the costs and contribute to the utilities’ operating cash flows. If the water boards can
achieve financial autonomy and start tapping the capital markets on their own, public funds
could be freed up to serve the poorer people in the rural areas. During project implementation,
capacity strengthening activities will be carried out to enable the key financial staff o f GOM to
create a strategy and make realistic projections for the medium to long term sector expenditure
plans for achieving i t s sector objectives.

113. Utility Financial Analysis: The financial analysis o f the urban and town water supply
sectors have been carried out using the audited financial statements o f the two city water boards
and the three regional water boards. The analysis focuses on the water boards’ ability to recover
i t s operating costs, depreciation, and financial charges through i t s revenues. It also assesses the
water boards’ future cash flow situations based on the investments carried out under the whole
program (not limited to the IDA funded portion).

114. BWB and LWB: Both city water boards have not only been unable to cover their
operating costs through user tariffs, but also been unable to service their loans or generate
internal cash for reinvestment. Total debt owed to the Government has risen to about $10.5
million. The financial deficits are due to the slow tariff increases that have not kept pace with
cost increases, non-payment o f water bills by the public institutions, and inefficiencies in O&M.

115. A financial model has been developed to assess the financial viability o f the urban water
sector and simulate the different scenarios with regard to investment plan, operational
efficiencies, service levels especially in the low income communities, and tariff level. The
analysis concludes that LWEI would achieve full cost recovery by the end o f the five year
program if they make the proposed capital investment and achieve the operating efficiency gains
expected under the program. The situation for Blantyre i s more challenging, however, there i s a
possibility o f BWB achieving full cost recovery if the following assumptions are met: (i) a real
annual tariff increase o f at least 5 percent; (ii)
implementation o f a robust non revenue water
reduction program; (iii) timely production volume increase and connection to new customers;
and (iv) debt-equity conversion o f the existing loans on-lent to them by the GOM.

28
116. Three Regional Water Boards (NRWB, CRWB, and SRWB): Annual reports and
audited financial statements have been analyzed to assess the historical performance o f the
RWBs. Since each water board covers several districts and towns, town level financial analysis
has been carried out to evaluate the business plans and the related financial proposals prepared
for each town. The historical financial performance indicates that the fastest growing towns are
all able to cover their O & M costs through their revenues, contributing to the consolidated
financial statements o f the RWBs. However, the high depreciation and debt service obligations
make i t difficult to sustain themselves due primarily to the high on-lending terms set by M O F for
their loans.

117. Financial models have been developed for the three RWBs to assess the financial
viability o f their operations incorporating the proposed investments to be carried out under
NWDP. The base case which assumes the status quo situation: (i) ad hoc tariff increase o f 5%;
(ii)70% o f the planned connections realized; (iii) cost increase along with inflation; (iv) average
historical debtor days o f 150; and (v) high portion o f the project funds assumed as loan and no
change in on-lending terms from GOM, shows that none o f the three RWBs would be able to
achieve full cost recovery in the next ten years even if it assumes that the existing debt from
GOM are converted fully into equity in 2007.

118. In order to explore the possibility o f the RWBs achieving full cost recovery within the
next 5-10 years, an improved scenario has been run, assuming: (i) an annual tariff increase o f
10%; (ii)realization o f 100% o f the planned connections; (iii)
O & M increase matching inflation,
incorporating some efficiency gains; (iv) reduction in average debtor days from the historical
average o f 150 to 60 days; and (v) 50% IDA grant, and 50% credit with the terms of inflation
plus 5%. The improved case shows that all three RWBs would have much better prospects of
reaching full cost recovery in the next 5-10 years with the improved assumptions (project cost
recovery graph attached at Annex 9).

119. Future Financial Sustainability of the Five Water Boards: In any o f the cases, the
situation beyond the project implementation period (20 12) would be particularly challenging for
all five Water Boards as the grace period for the IDA credit expires. W h i l e the Water Boards are
likely to continue covering their O&M expenses through their revenues, the debt service
obligations for the IDA credit and other loans from other financiers that kick in will give a
significant impact on their overall financial health.

120. There are some performance improvement measures that the Water Boards can take on
their own, such as increase in revenue base through connecting to new customers, bill collection
efficiency improvements, non-revenue water reduction, and other cost reduction measures.
However, i t would be highly crucial that an enabling environment i s created for the Water
Boards to perform better. The Financing Agreement o f the Project and the Subsidiary
Agreements between G O M and the water boards would address the following proposed
covenants/agreements:

(i) Outstanding water bills by the public institutions will be paid in full and
thereafter the timely payment will be ensured for future water bills: As i t i s
normally estimated that about 30%-70% o f the billed amount are attributed to the

29
 public institutions, full and timely payment would significantly improve the bill
collection rates o f the Water Boards. This would result in timely payment o f their
obligations or generation o f cash for reinvestments in new networks and
connections that lead to increased revenue base.

A time-bound action plan for carrying out debt to equity conversion of the
debt from the Government in the water boards’ balance sheets will be
prepared: Debt to equity conversion o f the existing loans from GOM would
reduce the debt service obligations o f the Water Boards significantly. For
example, the existing long-term debt will be reduced from $7.4 million to
$320,000 for BWB and from $16 million to $2.4 million for LWB.

O&M Cost Recovery by 2008/09 and Full Cost Recovery by 2011/12 for All
Five Water Boards: The five water boards will meet i t s O&M costs through their
revenues by fiscal year 2008/09, and continue to improve thereafter to meet their
depreciation and debt service obligations fully by fiscal year 201 1/12.

Regulatory framework for the delivery of its urban and town water and
sanitation services completed within 18 months o f the effectiveness date: This
would include adoption o f a tariff setting mechanism that reflects the need for the
Water Boards to improve their cost recovery levels. Tariff indexation formula is
proposed to enable automatic increase o f the tariffs along with inflation.

Grant versus Credit Elements and Conditions for Project Components A and
B: The elements that qualify for grants, as well as the on-lending terms and
conditions o f the loans to be passed on to the Water Boards will be specified to
ensure the financial viability o f the Water Boards.

B. Technical

121. Urban Water Supply and Sanitation: In the next five years, Blantyre will benefit most
from the actions taken to mitigate water supply disruptions, urgent repairs o f visible physical
leakages, and connecting new customers that have already applied for water connection but are
yet to be connected due to lack o f meters. Lilongwe will benefit from rehabilitation and
maintenance o f plant and equipment, as well as connections to new customers through purchase
o f meters. Both cities will benefit from some funds that will be reserved for new connection in
unserved areas. Through the EIB/EU funded investments, Blantyre will benefit most from the
replacement o f old high lift and booster pumps whose failure cause regular supply outages, and
both Blantyre and Lilongwe will benefit from the reduction o f non-revenue water and extending
their distribution networks to unserved areas. Within ten years, both Blantyre and Lilongwe must
produce more water to meet demand. The project, therefore, will finance the planning and design
o f water reservoirs and preparation o f environmental and resettlement action plans.

122. Town, Market Center, and Rural Piped Water Supply and Sanitation: W h i l e the
average growth rate in towns within a country may be high, growth rates and settlement patterns
in individual towns i s difficult to predict. A short planning horizon with a modular approach to

30
design and staged construction are important. The systems should be designed so that they can
be expanded as population grows and customers can afford a higher level o f service. The
emphasis will be on keeping the cost per capita l o w (maximum US$60); and designing for the
longer term in phases. Systems will be designed such that the land, reservoirs, water intakes and
transmission main diameters are designed to meet demand for ten years; boreholes, network
diameters, pump stations and treatment plants, network length and storage tanks are designed for
five years. Sanitation improvements will be carried out in conjunction with water supply
improvements. (Over $5 per capita will be proved to implement sanitation improvements
prioritized by the community. A small peaking factor for diurnal variations in water
consumption can be provided, but cost implications should be modeled and justified. Seasonal
variations would not be eligible for government financing. Capital investments o f $40 per capita
can not be exceeded without cause. A grant o f $2 per capita to support the implementation o f
community sanitation plans i s also provided under the project.

C. Fiduciary

123. Financial Management Capacity: MIWD will, through a dedicated PMU, coordinate,
control, account and monitor the utilization o f project funds by the component implementing
agencies. The two city water boards will coordinate the Urban Water and Sanitation Component
A; the three regional water boards will coordinate the Town, Market Center, and Rural Piped
Water and Sanitation Component B; the MIWD will coordinate the Water Resources
Management Component C and Sector Management and Urban Water Sector Reform
Component D.

124. The MIWD PMU has experience in managing previous Bank-fundedprojects, the PPF
has staff experienced with the Bank’s fiduciary policies and procedures. A dedicated Project
Accountant in the P M U will support the implementation and maintenance o f centralized
financial management, internal controls, disbursements and financial reporting procedures for the
project as a whole. This arrangement i s further strengthened by separating and devolving
implementation authority and budgets to the implementing agencies, with the additional control
o f their existing financial management systems ensuring that funds advanced to them are used
only for the intended purposes in an efficient and economical way, that reliable and timely
financial information is made available to the P M U and that assets are safeguarded at the
component level. In summary, after the assessment i t i s concluded that MIWD P M U has the
basic capability in place to support the financial management o f the project.

125. Quality, Transparency, and Efficiency o f Procurement: MIWD will, through the
dedicated PMU, coordinate, monitor report on procurement implementation and ensure internal
quality assurance systems for procurement in all the project component implementing agencies.
The project component implementing agencies include the LWB and BWB in charge o f the
Urban Water Supply and Sanitation Component A; the three regional water boards (SRWB,
CRWB and NRWB) which will be responsible for coordinating and implementing the Town,
Market Center, and Rural Piped Water and Sanitation Component B; the MIWD will coordinate
the Water Resources Management Component C and Sector Management and Urban Water
Sector Reform Component D. Through N W D P I, MIWD gained experience in managing Bank-
funded projects through the dedicated PMU. This includes the PPF. The staff previously

31
employed by the P M U had experience with the Bank’s fiduciary policies and procedures
including procurement,

126. The MIWD has employed a project coordinator, accountant and procurement specialist
for project preparation. Nonetheless, all positions in the PMU will be advertised as longer, fixed-
term positions to support NWDPII and NWDP. Some are likely to have had experience in
implementing other Bank supported projects, The staff o f the P M U will include a Procurement
Specialist who will support the implementation and maintenance o f the overall procurement plan
for the project. The Procurement Specialist o f the P M U will provide support and oversight
including quality assurance reviews. This h c t i o n will be further supported and strengthened by
the carrying out o f procurement by each implementing agency. Each Implementing Entity has a
dedicated Procurement Specialist who works with technical specialists. The Procurement
specialists in the Implementing Entities will provide periodic progress reports and will as
appropriate make requests to the Bank for review and clearances through the Procurement
Specialist o f the PMU. The Procurement Specialist o f the PMU will be supported by other
qualified and experienced staff o f the PMU. Systems for implementing the project will be
articulated in the Project Implementation Manual which i s reviewed by the Bank to ensure
acceptability in respect o f the Banks fiduciary responsibility.

D. Social

127. To the extent that the project’s rehabilitatiodconstruction activities require land, it i s
possible that some people will experience a loss o f livelihoods, loss o f land, impact on assets, or
loss o f access to economic assets. To address potential adverse social impacts due to land
acquisition, impact on assets, or loss o f income or livelihood, the Borrower prepared a RPF. The
RPF outlines the policies and procedures to be followed in the event that future project activities
involve land acquisition and/or the loss o f livelihoods and/or impact on assets requiring
appropriate compensation.

E. Environment

128. The ESMF identifies potential adverse environmental and social impacts o f the future
investments at the various stages o f project implementation. Thus, impacts are expected to result,
for example, from: (i) civil works requiring additional land for storage/distribution tanks,
booster stations, pipelines and for the construction o f temporary structures; (ii)rehabilitation
works requiring the demolition o f existing water supply infrastructure thereby generating wastes
that would have to be disposed o f properly; (iii)additional water abstraction resulting in changes
in ground and surface water regimes, both inside and outside the project areas; (iv) additional
water resources leading to an increase in waste water generation; and (v) the provision o f
additional water supplies that may contribute to water stagnation and sanitation problems.

129. To ensure that the potential impacts on, for example, flora, fauna, soils, water resources,
rural livelihoods or public health are addresses properly, the project implementers will apply the
steps o f the environmental and social screening process outlined in the ESMF. These steps
involve: (i) the screening o f each sub-project as part o f the desk appraisal and subsequently in

32
the field; (ii)
the assignment o f the appropriate environmental category to each sub-project; (iii)
carrying out the appropriate environmental work (either the application o f mitigation measures
with guidance from the environmental checklist); (iv) review and approval o f the screening
results and EA reports; and (v) implementation o f the environmental management and
monitoring plan; this plan i s to be adapted to the sub-projects as necessary. In addition, the
ESMF includes Environmental Guidelines for Contractors to be attached to the bidding
documents.

130. The ESMF proposes that environmental monitoring be carried out at the community level
during the construction and rehabilitation o f the water supply and sanitation facilities, as well as
during their operation and maintenance. Thus, during the rehabilitation o f the existing water
supply structures, members o f the Village Development Committees and District Executive
Committees will be responsible for the monitoring o f (i) construction techniques and inclusion
o f environmental design features as required in the architectural plans; (ii) provisions for traffic
safety, reduction in noise and dust levels; (iii)construction o f on-site waste management, proper
storage o f construction materials, sanitation, solid waste disposal, and waste water disposal; and
(iv) implementation o f plans for the restoration o f the construction sites, once the
constructionhehabilitation works have been completed. Area Executive Committees will
support the village level committees at all stages o f the work, including monitoring. To ensure
proper operation and maintenance o f the water supply and sanitation facilities in an
environmentally friendly manner, the Area Executive Committee within the proposed sites will
appoint a monitoring committee.

F. Safeguard Policies

13 1. The project has triggered OP 4.01 Environmental Assessment, OP 4.12 Involuntary

Resettlement, and OP 7.50 Projects on International Waterways due to potential adverse
environmental and social impacts related to the construction and rehabilitation o f investments
under components A and B. The safeguard screening category i s S2, and the environmental
screening category i s B. The notification process designed to inform Malawi’s riparians (Angola,
Botswana, Mozambique, Namibia, Tanzania, Zambia, and Zimbabwe) about this project has
been completed according to the requirements o f the Bank’s OP 7.50.

132. Since the precise locations and potential localized adverse impacts could not be identified
prior to appraisal, the borrower has prepared an Environmental and Social Management
Framework (ESMF) and a Resettlement Policy Framework (RPF). These documents will guide
project implementers in identifying, assessing, mitigating and monitoring future potential
adverse environmental and social impacts (potential soil and water pollution, loss o f vegetation,
soil erosion, increased generation o f waste water, increased incidences o f malaria and other
water-related diseases, noise and air pollution, loss o f assets or land). Both documents have been
disclosed in Malawi on March 19,2007, and at the Bank’s Infoshop on March 23,2007.

133. The ESMF: (i) outlines the steps o f the environmental and social screening process to be
applied by members o f the District Environment Sub-committees and Area Executive
Committees at the local level, and members o f the Regional Water Boards at the towdcity level
at the time the infrastructure investments are planned; (ii) includes Environmental Guidelines for

33
Contractors to be attached to the bidding documents; (iii)
includes a summary o f the Bank’s
safeguard policies; and (iv) includes a generic Environmental Management and Monitoring Plan
to be adapted to future sub-projects as necessary.

134. The ESMF was prepared during field visits in consultation with officials from the Water
Boards, Town and District Assemblies, members o f fishermen associations, villagers, lands
officers, and potentially affected persons. Their concerns and suggestions have been incorporated
into the above generic Environmental Management and Monitoring Plan. The stakeholders
largely viewed the project as very beneficial to their living standards. They suggested that the
project carry out public awareness campaigns to sensitize the beneficiaries on general
environmental and social management practices; put in place effective environmental and social
management plans, and use existing local community structures in the management and
administration o f the ESMF in order to promote ownership and sustainability o f the
environmental management plans.

135. The RPF provides guidance and standards for preparing a Resettlement Action Plan
(RAP). The District Environmental Sub-committee will be responsible for screening to
determine if land acquisition, impact on assets, andor loss o f income or livelihood will result
from project activities. Once i t i s determined that the resettlement policy has been triggered the
project office will be responsible for implementingthe RPF and preparing a RAP which will
need final clearance from the World Bank prior to commencing with compensation and civil
works.

136. The borrower’s capacity to implement safeguard policy recommendations needs to be

strengthened. Thus, to ensure effective implementation o f the ESMF and RPF, the project will
fund a Training Program for the Training o f Trainers. This program will train a total o f 30
personnel from District AssembliedTown Assemblies, City Assemblies, Regional Water Boards,
Urban Water Boards, Ministry o f Irrigation and Water Development, and project personnel.
Once these representatives have been trained, it is recommended that they train (under the
supervision o f a qualified facilitator) the other groups (members o f District Development
Committees, Area Executive Committees, Village Development Committees and Local Leaders
or their representatives) that will be directly involved in the project implementation. Training
topics include, for example, the screening process, the use o f checklists, preparation of terms of
reference, Malawi’s environmental policies and laws as well as the World Bank’s safeguard
policies.

137. Consistent with OP 7.50, the Bank, on behalf o f the Government o f Malawi, has notified
the riparian states (Angola, Botswana, Mozambique, Namibia, Tanzania, Zambia, and
Zimbabwe) between December 6-15,2006, except Tanzania which was notified in early January
2007. N o unfavorable responses were received from any o f the riparians based on international
waterways issues. In supporting the proposed Project, Mozambique requested that the Project
investigate practical measures that can be taken to improve the quality o f return flows and reduce
resulting aquatic plant growth in the Shire River. The Bank informed the Government o f
Mozambique that the issue would be investigated under the Project as part o f the environmental
impact assessment and stakeholder consultations to be undertaken under Component C o f the
Project in relation to the lake level control structure at Liwonde. Since no unfavorable response

34
was received from any o f the riparians, and the Project w i l l cause no appreciable harm to any o f
them, Management has approved the processing o f this Project.

138. The Bank staff have considered those aspects o f the Project that might have an effect on
the downstream riparians and are satisfied that the Project w i l l not cause appreciable harm to the
other riparians and w i l l not be appreciably harmed by the other riparians' possible water use.

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment (OPBP 4.01) [XI [I
Natural Habitats (OPBP 4.04) [I [XI
Pest Management (OP 4.09) [I [XI
Physical Cultural Resources (OP/BP 4.1 1) [I [XI
Involuntary Resettlement (OP/BP 4.12) [XI [I
Indigenous Peoples (OPBP 4.10) [I [XI
Forests (OPBP 4.36) [I [XI
Safety o f Dams (OP/BP 4.37) [I [XI
Projects in Disputed Areas (OPBP 7.60)* [I [XI
Projects on International Waterways (OPBP 7.50) [XI [I
G. Policy Exceptions and Readiness

139. There are no policy exceptions to be sought from management.

' By supporting the proposedproject, the Bank does not intend to prejudice thefinal determination of the parties' claims on the
disputed areas

35
 Annex 1: Country and Sector or Program Background
MALAWI: Second National Water Development Project

1. Water resources management: The availability o f total renewable water resource (TRWR) was
calculated to be 17.3 km3/year, or 1,617 m3/capita/year. 6 While the availability o f water resources in
Malawi in the aggregate i s considered satisfactory, per capita water availability i s declining at a rapid rate
due to population growth, and Malawi may start experiencing water stress after 20257. Using the 2000
figures, Malawi had the 4th lowest per capita water availability o f the 14 SADC countries at 1,840
m3/cap/year (South Africa 1,136, Zimbabwe 1,483 and Mauritius 1,826). The SADC average i s 8,922
m3/cap/year.

2. Malawi has a large network o f surface water bodies covering 21% o f the country’s 120,000 km2
area. 94% o f the land area in Malawi - as well as parts o f many neighboring countries - i s part o f the
Zambezi River Basin which drains into the Indian Ocean in Mozambique. The remaining 6% falls within
the Congo and Rovuma Basins or the small internal drainage basin o f lake Chilwa. The Zambezi River
Basin i s the second largest in the SADC region (second to the Congo); 8% o f the basin i s in Malawi. The
most prominent water body i s Lake Malawi. Lake Malawi i s 567 km long and 28,900 km2in area (of
which 4,540 km2i s in Mozambique) making it the third largest lake in Africa, and the 10* largest in the
world. Nine rivers drain into Lake Malawi from two o f the three riparian countries: Ruhuhu (Tanzania),
Songwe (Tanzania and Malawi), N. Rukuru, N. Rumphi, S. Rukuru, Dwangwa, Bua, Lilongwe, and
Bwanje (Malawi). All o f these rivers are unregulated, and thus subject to natural seasonal flows.
However, most o f the rivers maintain at least some base flow throughout the dry season.
The Lake Malawi / Shire River hydrological system represent arguably the country’s single most
important natural resource system and supports significant economic activities. The Shire River system
performs vital environmental and socio-economic functions. I t supplies over 96% o f the country’s power
generating capacity; supplies water to major urban centers such as Blantyre and Limbe and the rural water
users along the length o f the river as well as to economically important irrigation schemes. Water levels
in Lake M a l a w i are highly variable, and have a direct effect o n the f l o w rate in the Shire River (as the
source o f the Shire i s the outflow o f the Lake), which may lead at the one extreme to a no-flow situation
in the river, or, at the other extreme, to floods, causing damage to agricultural lands, infrastructure and
loss o f life.

3. Rainfall Variability: Despite the noticeable surface water bodies, the availability and reliability
o f surface water in Malawi i s highly variable between the wet and dry seasons and from year to year. T h e
national mean annual rainfall in Malawi i s estimated at about 1100 d y e a r , with the average annual
rainfall varying from 650 mm in the Lower Shire Valley to 1,600 mm in the Northern Lakeshore Region.
70% o f the country receives 800 to 1,200 mm per year. W h i l e this i s relatively good rainfall (the second
highest in the SADC region), Malawi has one o f the most erratic rainfall patterns in Africa. This poses
one o f the biggest threats to economic growth.

4. Groundwater: Groundwater resources are widespread throughout the country. The total potential
groundwater yield i s estimated at 1.4 km3/year (44 m3/s), based on an average recharge rate o f
15mm/year; however, the groundwater potential has not been comprehensively determined -- the last
significant hydro-geological mapping was done in 1986, and even this was based on limited borehole
information at the time (NWRMP, 1986). Groundwater abstraction i s generally unregulated and
uncontrolled. It i s assumed that unsustainable pumping o f the groundwater i s occurring in some areas

This figure is consistent with 5 studies between 1995 and 1998, as quoted in FA0 (2004) and Gibb (2004).
7
Under the Falkenmark definitions o f water shortage and water scarcity, M a l a w i is currently water short (less than
1,700 m3/capita/year) and will become water scarce (less than 1,000 m3/capita/year) by 2025.

36
leading to groundwater mining. Groundwater i s presently exploited by 30,000 boreholes and 8,000
shallow wells equipped with handpumps. Nationally, groundwater quality i s generally acceptable for
human consumption. However, rapid deterioration o f the rivers’ upper catchment areas due to
deforestation and poor land use practices i s causing increased sediment transportation, and significantly
affects the country’s surface water resources and river hydraulic infrastructure. This, in turn, encourages
excessive use o f groundwater resulting in the resource’s overexploitation and depletion.

5. International Waters: Malawi shares a number o f important rivers and lake basins with the
neighboring states o f Mozambique and Tanzania. Lake Malawi i s shared with Mozambique, and forms
the boundary with Tanzania. The Shire River, which drains into the Zambezi in Mozambique, i s the most
important water resource in Malawi for water supply, hydropower and irrigation. The Songwe River
which forms the international boundary between Malawi and Tanzania, i s used largely for fishing and
agriculture. The river changes i t s course almost annually due to flooding. Lake Chilwa and Lake Chiuta
are both shared with Mozambique. They are important fishing and ecological sites. The Ruo River
borders with Mozambique and has the potential for irrigation, water supply and hydropower development.

6. The SADC Protocol on Shared Watercourses was signed in 1995 by Tanzania, Malawi and
Mozambique, and later revised in 2000. I t lays out the principles by which common water resources in
the region should be managed. Joint Permanent Commissions (JPC) have been established between
M a l a w i and both countries. In Malawi, the most significant international rivers issue i s the management
o f the Lake Malawi/Shire River upper catchment areas. Unsustainable land use practices led to the
devegetation and land erosion, and sediment deposition in the river and reservoirs downstream.

7. Water Quality: Although total water resources in Malawi are considered adequate to meet the
needs o f the growing population, these resources are becoming increasingly degraded through
sedimentation, biological contamination and effluents. Silt loads in surface water runoff leads to
significant problems in water quality, including turbidity, increased suspended solids, water flow
problems and water treatment costs, especially during the wet season. High sediment loads have caused
siltation o f rivers and reservoirs, requiring costly dredging to maintain water and electricity production.
The problem i s aggravated by inadequate environmental watershed protection resulting in soil erosion and
decreasing microbiological water quality. Chemical contamination o f water resources i s increasing due to
improper application o f fertilizer and pesticides in agriculture, improper discharge o f hazardous wastes
from hospitals and improper disposal o f industrial waste. This has resulted in increased concentrations o f
nitrogen, phosphorus and heavy metals.

8. Water Resources Policy and Legislative Context: T h e Water Resources A c t (1969) and the
Waterworks A c t (1995) define a main legal and regulatory framework for water resources management in
Malawi. I t outlines institutional and organizational arrangements under which the water sector operates,
the pricing and tariff principles and the water supply and sanitation service delivery norms and rules. The
abstraction o f water i s regulated by the system o f licensing and water permits stipulated in Water
resources A c t o f 1969. The Waterworks A c t (1995) has established the three regional water boards and
reconstituted the Blantyre and Lilongwe Water Boards. Other laws and policies guiding the functioning
o f the water sector are the Environmental Management A c t (1 996); Fisheries Conservation and
Management Act (1997); Forestry A c t (1998); Local Government A c t (1998); Land Policy (2002);
National Irrigation Policy and Development Strategy (2000); and Malawi Vision 2020.

9. The recent National Water Policy adopted by the Government in 2005 promotes an integrated
approach to water resources management and defines the primary policy objectives as the sustainability of
both the resource and o f service delivery. The policy declares objectives and principles, which are
consistent with the DublinPrinciples, and, specifically, emphasizes the need in an integrated approach to
water resources management with “equitable” access to water; promotes the availability o f safe potable

37
water for all users; the need in preparedness and contingency plans for droughts and floods; and outlines
principles o f water utilization for the main water using sectors (irrigation, WSS, hydropower, fisheries,
tourism, forestry).

10. The National Water Policy i s complemented by the National Irrigation Policy and Development
Strategy (NIPDS) o f 2000. I t focuses o n such key issues as promoting public-private partnership in
irrigation development, full participation o f the beneficiary farmers in irrigation management, and
introduction o f cost recovery principles. The NIPDS was further elaborated in the Irrigation Act (2001).

11. The MIWD recently finalized a new 2005 National Water Policy by further reviewing and
amending the 2000 Draft Water Policy following recommendations from a consultant who carried out a
study for the Strengthening o f the Water Resources Board under the National Water Development Project
(NWDP). The new Policy has n o w been approved by Government. The Government o f Malawi intends
to translate the Water Policy into a new legal framework.

12. The recently approved M D G S recognizes the importance o f improved water resources
management and development and outlines such key strategies on water resources development in
Malawi. This includes, inter alia, empowering national authorities to manage water resources using
integrated water resource management approaches; establishing good hydrological monitoring systems;
improving the quality o f surface and ground water and developing a system for pollution control; and .
improving the reliability o f access to water by main water services (WSS and irrigation).

13. Water Resources Institutions: The main national institutions for water resources management
include the Ministry o f Water Development and Irrigation, which, in turn, i s divided into four
departments, namely, Surface Water, Ground Water, Hydrogeology, and Department o f Irrigation;
various Ministries responsible for natural resources (Forestry, Fisheries, Lands, Environment), Water
Resources Board (WRB), and five Regional Water Boards responsible for implementation of water and
sanitation services, including Blantyre Water Board, Lilongwe Water Board, Southern, Central and
Northern Regional Water Boards. The NWDP I1will provide support to strengthening the proposed
National Water Resources Authority and the MIWD to ensure that water resources development i s
environmentally sustainable, and re-establish a surface water, groundwater and water quality monitoring
system, and a management information system.

14. Water Resources Information Systems: Reliable hydrological data are necessary for effective
water resources management and informed decision making on the use and development o f water
resources. The hydrographic network established in Malawi prior to Independence i s almost completely
out o f action and the current challenge for the Ministry for Water Resources Development i s to restore the
system o f hydrological data collection and archiving. Some improvements in hydrological and water
quality monitoring systems have been introduced under the NWDPI. However there i s s t i l l a significant
need for better hydrological data monitoring, collection and processing systems.

15. The most comprehensive analysis o f the water resources situation was undertaken under the
National Water Resources Management Plan completed in 1986. Since then, regular monitoring o f the
hydrological system (meteorological stations, rain gauges, river flows etc.) was steadily on decline and
there was n o updated analysis o f the water resources situation in the country.

38
 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies
MALAWI: Second National Water Development Project

Table 3: Major Related Projects

including rural piped

svstems
Rural water supply and
I IntegratedRural Water Supply and S S
sanitation Sanitation Project (AfDB)
Rural water supply, Rural Water Supply and Sanitation S S
sanitation and hygiene (UNICEF)
promotion.
RWSS, focus on Mangochi East Groundwater S S
groundwater development Project (GTZ)

39

M A L A W I : Second National Water Development Project
Table 4: Results Framework
PDO
Increased access to
sustainable water supply
and sanitation services for
people living in cities,
towns, market centers, and
villages and improved water
resources management at
the national level.
Intermediate Outcomes
A. UrbanWSS
Increased connections
M o r e reliable supply
Improved cash f l o w
B. Town, Market Center,
and Rural PiDed WSS
Increased connections
M o r e reliable supply
Improved cash f l o w
Institutional reform
c. w R h 4
Improved WR regulation
Improved WR investment
planning
Improved Lake level control
D. Sector Management and
Urban Water Sector Reform
Improved sector
management
Institutional framework
urban water supply.
Hygiene and sanitation
improved.
Improved safeguard
practices
Annex 3: Results Framework and Monitoring
Project Outcome Indicators
Number o f people with improved water
supply and sanitation.
Enhanced capacity o f the Government o f
M a l a w i t o manage i t s water resources
Intermediate Outcome Indicators
Number o f new connections.
Number o f rehabilitated connections.
Hours per day o f supply.
Ratio o f operating revenues/expenses.
Number o f new connections.
Number o f rehabilitated connections.
Hours per day o f supply.
Ratio o f operating revenueslexpenses
Autonomous water boards
Performance-based operator contracts
National Water Resources Authority
established
Water resources investment strategy
prepared
Level control design and E I N R A P
completed.
Sector management system in place in
MIWD.
Short term service contract signed.
Regulatory and institutional framework for
urban water sector reform established.
Sanitation plans for towns and market
centers prepared and implemented .
Strategic sanitation plans prepared and HSP
strategies implemented in cities.
E S M F and RPF implemented satisfactorily
40
Use of Project Outcome Information
T o determines if access to water supply
and sanitation has increased as planned.
To determine if water resources
management has improved as planned.
Use of Intermediate Outcome
Monitoring
To determine if key inputs will serve
the targeted number o f beneficiaries.
T o assess financial viability o f utilities.
T o determine if key inputs will serve
the targeted number o f beneficiaries.
T o assess financial viability o f utilities.
To assess progress in introducing key
institutional r e f o m
To judge progress in improved water
resources management
To determine if water resource
development can be financed.
T o assess progress in planning level
control.
T o assess the capability o f MIWD to
manage the sector program.
T o assess progress in introducing key
institutional reforms.
To assess progress in improving
hygiene and sanitation.
T o assess implementation o f social and
environmental safeguard policy.
Arrangements for Results Monitoring

1. Institutional Issues: A monitoring and evaluation (M&E) system will be created to serve as a tool
for implementers, to enable them to assess project implementation and undertake modifications o n a
timely basis so that the project development objective and intermediate results can be achieved.

2. Table 6 (Arrangements for Results Monitoring): identifies institutional responsibilities for data
collection and reporting. The project’s M&E manual (an annex o f the project implementation manual)
will elaborate o n the institutional arrangements for M&E. Monitoring for rural water supply and
sanitation will be at the districthornunity level and monitoring for town and urban water supply will be
at the utility level. The SWAP Management Unit within the MIWD and the Regional Water Boards will
appoint staff who will be responsible for the coordination o f M&E activities for towns and cities. These
staff will receive initial training in M&E, with follow-up, on-the-job training organized as needed.

3. Data collection: Responsibility for data collection i s indicated in the Arrangements for Results
Monitoring table. Detailed r u l e s for the collection, processing and organization o f M&E information are
part o f the M&E manual. The project includes a budget for M&E activities including staffing, training,
mid-term and final evaluations, data collection, and technical reviews. Data collection will take place
through normal operations reports and financial accounting, plus annual audits.

4. Capacity for implementing the M&E system: Meetings, workshops and training events will take
place as required during project implementation to further develop, implement and fine tune the M&E
system and to build local capacity to manage it. An M&E capacity plan i s incorporated in the project’s
capacity building activities.

41
 I
0
0 9
2 i

I-
I-
- -

0 0 0 0
2
T
-L
2 0
Z
DATA COLLECTION Cfor calculating utility performance)

- 1. Population o f city
- 2. Average number o f persons per household Terminoloav
- 3. Average number o f persons per standpipe production = volume into supply
- 4a. Number o f residential (house & yard tap) connections consumption = volume billed (sold)
- 4b. Number o f public standpipe connections revenue = cash collected
- 4c. Number o f institutional, industrial and commercial connections income = billing
- 5. Average number o f households sharing residential connections operating expenses =
- 6. Number o f connections with operating meters salariedwageshenefits, energy,
consumables, spare parts, taxes,
- 7. Production capacity (&/day) (see 24 for actual) plus administative costs, but not
- 8. Transmission capacity (m3/day) depreciation and interest expenses
- 9. Water storage volume (m3) LC = local currency
- 10. Length o f water distribution network (m)

- 11. Hourdday that borehole and intake pumps operate

- 12. Duration o f supply in service areas A, B, C, . ., (average hourdday)
- 13. Water pressure at 6am, noon, 6 p m and midnight in service areas A, B, C, .. . (bar)
- 14. Number o f pipe breaks repaired in distribution system
- 15. Number o f leaks repaired o n service connections
- 16. Number o f n e w connections
Number o f violations o f M a l a w i National water quality standards

- 17. Tariff structure (LC/m3 for first 6 &/month, 6-15 m3/month, >15 m3/month)
- 18. Tariff at standpipe (LC/m3)
- 19. Connection charge (LC/connection)
- 20. Does the utility allow customers to repay the cost o f connection over time? (Y/N)
- 2 1. Does utility charge a flat tariff for households with yard taps shared by neighbors? (YN)
- 22. Date o f complaint and date o f response
- 23. Date o f request and date connection i s made

- 24. Volume o f water into supply (m3)

- 25a.Billings t o (income from) residential customers (LC)
- 25b.Billings to (income from) institutional, industrial and commercial customers (LC)
- 26a.Volume o f water paid by institutions (m3)
- 26b.Volume o f water paid by industriallcommercial customers (m3)
- 27a. Cash collected (revenue) f r o m residential customers, excluding connection charges (LC)
- 27b.Cash collected (revenue) f r o m institutionalhndustiaVcommercia1 customers,
excluding connection charges (LC)
- 28. Cash collected (revenue) for n e w connections (LC)

- 29. Number o f staff

- 30. Operating expenses (excluding depreciation charges)
- 3 1. Salaries and wages (LC)
- 32. Energy expenses (LC) + KWH and liters o f fuel
- 33. Total debt service (LCiyear)
- 34. End o f year accounts receivable (LC)

Replacement and expansion targets

J Production and treatment replacementlexpansion (physical works and investment)
J Distribution and storage replacementlexpansion (physical works and investment)
J N e w connections (number and investment)

44
P E R F O R M A N C E I N D I C A TORS

Impact on consumers
J Water coverage (percent o f people served by utility) ([2]*[4a]*[5] + [31*[4bl)/ [ll
J Water production (liters/capita/day) [24] 1 [1]
Percent o f people with access to house connections [2]*[4a]*[5] / [ I ] = [A]
Percent o f people with access to standpipes [3]*[4b] I [I]
= [B]
J Percent o f households without access to piped supply 1 - [A] - [B]

J Average time between complaint and response (days) [22]

J Average time between request for and installation o f connection (days) [23]
J Duration o f supply (average hours/day) [12]
Revenue per person served (LC/persodyear) [27a] {[l]*([A] + [B])}
J Annual cost o f water for a household consuming 3m3 o f water per month f r o m a yard tap. [17] * 3 * 12
J Annual cost o f water for a household consuming 3m3 o f water per month f r o m a standpipe. [I81 * 3 * 12
J Average time to collect 20 liters o f water [ii]I [iii]* 20

Financial Performance
J Amount billed per m3 into supply ([25a]+[25b]) I [24]
J Cash collected per m3 into supply ([27a]+[2%]) [241
J Amount billed (income) / operating expenses ([25a]+[25b]) / [30]
J NRW (volume billed as percent o f volume into supply) ([26a]+[26b]) / [24]
J Value o f N R W as % o f the operating expenses {([25a]+[25b]) - ([27a]+[27b])}/ [30]
J Debt service ratio (debt service / revenue) [33] / ([27a]+[27b]+[28])
J Collection ratio (cash collected / amount billed) ([27a]+[27b])}/ ([25a]+[25b])
J Collection period (days) {[34] / ([27a]+[27b])} * 365
J Operating cost coverage (operating revenue / operating expenses) ([27a]+[27b]) / [30 + depreciation (re~lacement)]

Operational Performance
J Operating expenses per m3 into supply [30] / [241
J Energy expenditure per m3 into supply [32] / [24]
J Labor costs (percent o f total operating expenses) [31] / [30]
J Staffing level (number per 1000 connections) {[29] / ([4a]+[4b]+[4c])} * 1000
J Average operating pressure (meters) [average o f 13 a,b,c, . ..]
J Metering level (percent o f connections with functional meter) [6] / ([4a]+[4b]+[4c])
J Production capacity (volume into supply (m3iday) / production capacity (&/day)) [24] / [7]
J Transmission capacity (flow capacity (m3/hour) / production capacity (m3/hour)) [8] / [7] / 24
J Storage capacity (storage (m3) / production capacity (m3/day)) [91/ [71

45
 Annex 4: Detailed Program Description
MALAWI: Second NationalWater Development Project

1. The proposed NWDP I1project will be part o f GOM’s National Water Development Program
which consists o f Urban Water Supply and Sanitation, Town, Market Center, and Rural Piped Water
Supply and Sanitation; Water Resources Management; Rural Water Supply and Sanitation; and Sector
Management and Urban Water Sector Reform.

2. This Annex summarizes all the activities proposed to be financed under GOM’s program,
including the IDA project N W D P I1as well as the projects financed by other donors.

Component A: Urban Water Supply and Sanitation

3. Component A includes investments and consultancy studies that would be executed by Lilongwe
and Blantyre Water Boards (LWB and BWB). Policy implementation, institutional and regulatory reform
activities for the urban water sector reforms categorized to be under the responsibility o f G O M are
included in Component D : Sector Management and Urban Water Sector Reform.

4. EIBEU Funded Project: The urban water component o f the overall sector program will also be
financed by a consortium o f European Investment Bank (Em) and European Union Water Facility
(EUWF) under the M a l a w i Peri-Urban Water and Sanitation Project. The EIB/EUWF project would be
about Euro 32 million in size and i t i s expected to fund a service contract and related investments and
capacity building activities that the service contractor i s mandated to carry out in Blantyre and Lilongwe.
The key areas o f focus would be; (i) improvements in production capacity; (ii) reduction o f non revenue
water; (iii)
efficiency improvement o f the two water boards; (iv) financial sustainability o f the two water
boards; and (v) serving the l o w income communities. Water Aid o f M a l a w i i s a key partner in serving the
l o w income communities.

5. The main objectives o f the above project are to: (i)

raise performance capacity to LWB and
BWB; (ii) actual restructuringheforming o f the Water Boards (not only training); and (iii)implementation
o f an investment program (improve production, reduce NRW, extend service to low-income areas). The
key performance indicators for the project include reduction in non-revenue water, improvements in
commercial efficiency, increased production volume, and population with improved access to water
supply with particular focus on the l o w income and unserved areas.

6. I D A Funded Project: The activities funded under the IDA financed project include: (Al)
priority investments; and (A2) reaching the un-served areas, described below.

7. Priority Investments: Priority investments would include: (i) actions to mitigate water supply
urgent leak and plant repair in both cities; and (iii)
disruptions in Blantyre; (ii) actions to serve customer
backlog in Blantyre.

8. Actions to mitigate water supply disruptions in Blantyre: Blantyre has been experiencing
significant problems related to frequent and long disruptions in water supply to a large part o f i t s
population. Procurement o f spare parts for pumps, motors, and switch gears for r a w and clear water at
Walker’s Ferry and Chileka pumping stations will mitigate water supply disruptions in Blantyre until
these pumps and the entire electro-mechanical equipment are replaced under EU-EIB’ project.

9. Urgent leakage and plant repair: There i s an urgent need to repair major physical leakages in
Blantyre that are causing large water losses because the cost o f producing and distributing water i s

46
particularly expensive in Blantyre due to the high electricity costs o f pumping the water up 800 meters.
Procurement o f leakage repair materials and actual repair o f visible leakages within the distribution
network will reduce such apparent water losses before the service contractor i s in place. In Lilongwe,
urgent rehabilitation and maintenance o f plant and equipment will be carried out. This will involve the
procurement o f essential equipment spare parts for repairs including On-Site Electrolyte Chlorination
plant, D a m valves to ensure continuous and reliable water supply. This will also involve the procurement
o f pipes and fittings for repairs o f a 525 mm asbestos cement (AC) pumping main from Northern Booster
Station to Kanengo which i s experiencing high failure rate.

10. Actions to serve customer backlog in Blantyre: There are about 2,500 customers in Blantyre that
have already applied for water connection but are yet to be connected due t o lack o f meters. 5,000 meters
will be purchased o f which h a l f will be used for this purpose, and the other half will be used for
replacement o f the old meters that are not functioning to reduce wastage and leakage. Purchase o f 5,000
meters will benefit more than 25,000 people.

11. Reaching the unserved areas: T h i s component would include the following sub-components:
(i) piloting o f institutional arrangements to serve the l o w income/peri-urban areas with focus on Blantyre;
(ii) increased access to sanitation and hygiene promotion; (iii) procurement o f meters and connection
fittings; and (iv) future expansion o f distribution and new connections.

12. Piloting of water supply and sanitation services in low income/peri-urban in Blantyre: In
addition to the approach being adopted by LWB with assistance from Water Aid, a couple o f different
institutional modalities for serving the l o w income areas will be piloted. The three main options would
include BWB: (i) managing water supply services in l o w income areas o n their own; (ii) outsourcing
only the management o f water kiosks to local service providers; and (iii) outsourcing the management o f
the distribution network and all outlets (kiosks and household connections) to local service providers. The /

choice o f technology and cost recovery plans for such services would be based on the studies carried out
during project preparation. It i s envisaged that the outcome o f these pilots will feed into the service
contract which will be implemented under a separate project funded by EU/EIB. In addition to these
pilots, a baseline survey will be carried out to enumerate the basic coverage, service levels, and
institutional arrangements o f service delivery in l o w income/peri-urban areas in Blantyre and Lilongwe.

13, Increased access to sanitation and hygiene promotion: This component would support BWB and
LWB to implement a comprehensive sanitation program which will deliver both improved access to
sanitation as well as hygiene promotion through adoption o f the “sanitation marketing” approach.

14. Increased new connections: In Lilongwe, 5,000 water meters will benefit about 25,000 people
and also reduce the high level o f commercial losses caused by meter under-registration.

15. Funds reservedfor future expansion of distribution and new connections: Funds will be reserved
for use on an output-based form for future expansion o f distribution and connection o f new customers. It
i s expected that the Water Boards (or any water service operators) will pre-finance the investments
required for connecting the new customers, and receive the pre-defined cost per connection retroactively
on the basis o f the number o f new customers they have connected. It i s envisaged that a mechanism will
be put in place under the project to attract other donors and financiers, including the Global Partnership
for Output Based Aid, t o finance the extensions o f water supply to low-income households in towns and
cities.

16. Mechanismfor Output-Based Approach: The Water Boards, in consultation with city and
town assemblies will select the areas on the basis o f their existing water supply coverage, with unserved
and l o w income areas given preference. The output based approach will be adopted to shift focus from

47
subsidizing the expenditure required to build infrastructure to subsidizing the delivery o f an agreed
output. The agreed output would be the number o f new connections that will be made to targeted
households via the use o f tertiary distribution pipes, pipe connections to the yard tap and yard or other
forms o f tap.

17. The Water Boards (or any water service operators) will pre-finance the construction o f the tertiary
distribution piping and connections within the selected area, and would be repaid periodically when
portions o f the work have been completed and independently verified. Although the majority o f subsidy
payment i s made after verification that outputs have been delivered, an advanced payment may be made
to help with start-up costs. Consumers are expected to pay for the connection fees according to the tariff
policy set in the sector’s regulatory framework. Such tariff policy will reflect the affordability o f the l o w
income households and allow connection subsidies for such target population.

18. The conditions that the water service provider would need to fill to receive the funds will include:
(a) consultation and facilitation with the water users in the communities; (b) compliance with E S M F and
RPF; (c) World Bank procurement requirements for the works; (d) meeting required specifications for the
connections, service delivery to the connected households at a satisfactory level for a specified number o f
months; and (e) independent verification for the compliance o f the above conditions.

19. Aqueduct Planning: Furthermore, preliminary design, EIA and safeguard plans for aqueduct to
treatment plants will be carried out for Lilongwe. This component i s aimed at mitigating the water
pollution to the raw water in Lilongwe River close to the treatment plant.

Component B: Town, Market Center and Rural Piped Water Supply and Sanitation

Background
20. The three Regional Water Boards are mandated by law to provide water supply services in 53
towns in Malawi. In addition there are about 80 market centers with a total population o f about 650,000
people.

Component B1: Town Water Supply and Sanitation

Objectives
2 1. This component i s designed to improve efficiency in the largest and fast growing towns by
implementing infrastructure development and capacity building initiatives. The Proposed component
objective i s to improve water resources management and achieve increased access to sustainable water
supply and sanitation services for people living in towns.

22. The component will support development o f T o w n Water Supply and Sanitation (TWSS) by
providing the following key inputs:
0 Expansion o f water supply facilities in towns based on appraisal o f business plans that
includes management arrangements that include performance agreement between the utility
and the town management, tariff analysis, financial projections and expansion plans as well
as social/environmental safeguards.
Establishment o f a regulatory framework for operational efficiency, water quality, and tariff
setting (implemented under component D).
0 Improved sanitation planning services in towns including o n site systems, sewers, and septic
treatmentldisposal facilities.

48
 0 Technical assistance to Regional Water Boards to establish systems for routine O&M,
financial management, customer management in order t o lower operating costs, reduce
unaccounted for water and expand system to meet increasing demand.
0 Assistance with planning for expansion and development o f existing water supply and
sanitation systems.

K e y outputs will include:

Business plans and sound management systems for the towns to ensure quality service,
efficiency, viability and sustainability .
0 RWBs with improved management systems, operational and financial capacity.
Improved cost recovery.
0 Improved water supply and sanitation facilities.
0 Increased number o f people accessing water supply and sanitation services.

Program Management for Town WSS

23. The primary responsibility for implementation o f town water supply and sanitation improvements
will rest with Regional Water Boards, who will contract and supervise consultants to assist with planning,
feasibility studies, design, capacity building, procurement and construction supervision, as well as works
contractors and suppliers.

24. The towns whose investment will be funded by IDA and other donors shall have business plans
that show how tariffs will be phased to full cost recovery; that customers are willing and able to pay the
tariffs required and h o w debt service obligations will be met. In addition, sound systems for financial and
operations management, performance reporting and annual audits o f financial statements must be in place
along with the required capacity.

25. The proposed projects themselves must be feasible - technically, environmentally, socially,
financially and economically. These projects and business plans must have been developed in
consultation with stakeholders and be endorsed by the MIWD. Grants and loans for the project sub
components are to be channeled through the RWBs from MIWD and MoF. On-lending arrangements will
be on terms normally provided for utility financing.

Design Criteria
26. T o avoid financing over-designed water supply systems that customers cannot afford, the focus in
the project will be o n affordable design. The systems should be designed so that they can be expanded as
population grows and customers can afford a higher level o f service. T h e emphasis will be on keeping
the cost per capita l o w (maximum US$60), designing for the longer term in phases. Systems will be
designed such that the land, reservoirs, water intakes, and transmission main diameters are designed to
meet demand for ten years; boreholes, network diameters, pump stations and treatment plants, network
length and storage tanks are designed for five years. In so doing it i s assumed that the system expansion
will be staged with production, treatment, and storage added at least every five years, and network
distribution and house connections added on a continuing basis. The estimated cost o f the preliminary
system design will be checked against affordability and willingness o f customers to pay for improved
service as well as the per capita ceiling o n what can be grant financed under the project, and adjusted as
necessary. Water works designed under this program shall be sound, simple to operate, manage and
maintain. Sanitation improvements will be carried out in conjunction with water supply improvements. A
$5 per capita will be provided to implement sanitation improvements prioritized by the community.

49
Selection Criteria
27. The Regional Water Boards, by law, are responsible for the provision o f water supply services in
selected towns, generally the larger and faster growing ones. Since the RWBs were established in 1996,
water supply services have improved considerably, with water available 24 hours 7 days a week. The
population in these towns i s doubling every 15-20 years, so continued investment i s required to keep up
with demand. It i s expected that these towns can n o w self finance recurrent, replacement and part o f
expansion costs. I t i s also expected that day-to-day management o f these systems i s decentralized to the
scheme level, with revenues ring fenced, with only about 40 percent o f revenues transferred to the head
office o f the RWBs in return for higher level technical support. Scheme managers are fully responsible
for managing their
facilities. RWB towns are all eligible for financing, but individually must meet certain criteria, before the
Government will finance further expansion.

Appraisal Citeria
28. Before tendering and construction MIWD will carry out an appraisal to check that the following
criteria have been met:
Cash flow covering recurrent costs.
Effective financial management, accounting, billinghollection, and monitoring/evaluation
systems in place.
Approved town business plan.
Cost-effective, staged design for water supply facilities.
Financial projection shows that revenue covers operations and maintenance, renewal and
replacement o f short life assets, and part o f expansion costs.
Bid documents prepared.
Day-to-day management decentralized and financing ring fenced at the scheme level, with
performance incentives available to operators.
0 Environmental and social assessments have been made.

Component B2: Market Centre and Rural Piped Water Supply and Sanitation

Objectives
29. The overall objective o f Market Centre and Rural Piped Water Supply and Sanitation
(MCRPWSS) sub-component i s to support decentralized provision o f water supply and sanitation services
in market centers.

The specific objectives are:

0 to establish well functioning water supply and sanitation systems in the Market Centers and
rural piped systems o f participating communities,
to increase the capacity o f participating district assemblies and communities to effectively
operate and manage their Market Center and rural piped water supply and sanitation facilities.

30. The component will support the development o f MCRPWSS by providing the following key
inputs:
Technical assistance to:
- District Assemblies to build capacity to plan and oversee the operation and management
o f MCRPWSS Programs;
- Communities to build capacity to plan and manage their own water and sanitation
facilities, and local utility operators to efficiently operate and maintain the water supply
facilities;

50
 - Local consultants to build capability to assist communities to plan, construct and
maintain their own facilities,
0 Goods, services and works for implementation o f MCRPWSS Program.
0 Financial assistance to RWBs to provide technical assistance to t o d u r b a n market centers
and to DAs to provide technical assistance to rural MCs.

K e y outputs will include:

0 Market Centre and Rural Piped Water Supply and Sanitation Schemes established.
0 District Assembly staff (District Coordinating Teams and extension workers) adequately
trained and equipped to support market centre water supply and sanitation programs.
0 Market Centre Water Associations established and able to manage and maintain systems.
0 Local utility operators contracted to operate and maintain the water supply facilities.
0 Local consultants capable o f supporting MCRPWSS at the community level.
0 Improved water supply and sanitation facilities at the community Market Centers and rural
piped systems.
0 Improved sanitation and hygiene practices in participating Market Centers and rural piped
systems.

Component Management
3 1. The implementation arrangements reflect the policy objectives o f decentralization to lowest
possible level, involvement o f all stakeholders in the process, integration o f sanitation with improvements
to water supply and recognizing water as an economic, as well as social good.
32. A demand responsive, performance based approach will be followed so that communities receive
assistance to put in place institutions and develop capacity for implementation. Communities will be able
to access more resources for development o f their market center and rural piped water supply and
sanitation systems as they demonstrate their growing capacity. A stepped approach has been designed for
market centre and rural piped water supply and sanitation to allow each community to move at i t s o w n
pace and receive further assistance when ready. RWBs, in consultation with the district assembly and
MIWD will assist these communities to plan, develop, and operate their water supply and sanitation
systems.

33. Essentially the same implementation arrangements will be employed for both rural piped systems
and market centers. This i s because both types o f systems require the same type o f management
arrangements, that i s an oversight body (Water Association, Cooperative or Trust), a full time utility
operator plus core technical and financial staff, and part time maintenance and revenue collection
personnel from within the communities. The major difference i s that for rural piped systems special
arrangements must be made for the participation o f a number o f communities in the planning and
management.

Stakeholder Consultation
34. Under the new mandate MIWD and RWBs will, in partnership with the district assemblies,
become the supporters and facilitators o f community based management, with people in communities
taking key decisions from planning and design through to execution and implementation o f facilities
including monitoring and evaluation. Increased participation o f users in scheme design and management
i s a key way to improve the chances o f new facilities being looked after properly and used effectively
hence wider stakeholder consultations shall be a prerequisite at all stages.

35. This approach will be important for the success, sustainability and to ensure a sense o f ownership
o f the MCRPWSS. Each time a task or decision that affects their subprojects i s made on their behalf, the
communities shall be consulted or involved. A special effort will be made to involve women in the

51
 planning process at the very beginning o f the consultation process, and linking water supply and
sanitation to other women’s group activities in the community. In order to realize maximum benefits from
consultation process, all subprojects shall include technical assistance and community development
, activities to ensure adequate capacity amongst the communities in making informed decisions when
preparing their Community Water Supply and Sanitation (WSS) Plans.

Capacity Building
36. Communities are responsible for planning and managing their water supply and sanitation
facilities and improving health and hygiene practices. The areas in which communities will have to be
trained include:
0 Participatory water supply planning.
0 Community management including finance management.
0 Operations and maintenance o f water and sanitation facilities.
0 Mainstreaming o f Gender, HIV/AIDS and other social issues.
0 Health, hygiene and sanitation promotion.
0 Problem solving and leadership skills.
0 Environmental and catchment protection and management
0 Monitoring and evaluation s k i l l s

Design Criteria
37. While the average growth rate in towns within a country may be high, growth rates and
settlement patterns in individual towns i s difficult to predict. A short planning horizon with a modular
approach to design and staged construction are important. Accordingly, piped systems for market centers
will be designed such that the land, reservoirs, water intakes, and transmission main diameters are
designed to meet demand for ten years; boreholes, network diameters, pump stations and treatment plants,
and network length and storage tanks are designed for fives years. For sanitation and hygiene promotion,
component would encourage households to improve their hygiene and sanitation practices. Households
will be expected to pay for their o w n l o w cost on-site sanitation, relying largely o n locally available
materials and technologies. The component will support training o f local artisans to construct sanitation
facilities.

Selection Criteria
38. The RWB will engage a consultant who in consultation with MIWD, District Assemblies, and
individual communities will identify viable market centers. At this stage the RWBs consult with District
Assemblies to confirm the institutional and financial arrangements. Recognizing that most are or could be
served by handpumps, the selection criteria will be oriented toward economic development potential:
0 socio-economic potential o f a center
0 priority in the district infrastructure plan
0 commitment o f center to meet conditions for participation
0 population in and around the center
0 existing level o f service and condition o f the water supply facilities
0 availability o f electric grid connection.
0 geographic balance

39. The Regional Water Boards will then facilitate the development o f water supply and sanitation
facilities taking into account preferences o f the communities. This will be achieved by procuring and
managing contracts, both for consultancy services and construction. A stepped approach to planning and
implementation, as described below, will be followed.

52
Stepped Approach to Implementation
40. N o t all communities can benefit from the program due to limited budget. A stepped approach at
community level shall therefore be adopted to ensure that only those communities that are willing to
fulfill their responsibilities will benefit from the program. The stepped approach thus requires
communities to develop their water supply facilities in stages, moving ahead as they build their
management capacity, and conform to program guidelines. In this way Government better ensures that
scarce financial resources are used efficiently and are sustainable. An Appraisal Committee consisting o f
MIWD, RWBs, and the district assembly will review and determine eligibility to go from one step to the
next.

STEP 0 - Regional Water Board Assistance to Market Centers

0 Pre-feasibility studies.
0 Selection o f shortlisted communities.
Agreement on project conditions for participation.
0 Establishment o f Water User Association.
0 Hiring o f local utility operator and core operating staff.
0 Selection o f consultant.

Main Criteria to Oualifi-for Step I

- Establishment o f Water Association.
- Hiring o f local utility operator and core operating staff.
- Submission o f application (business and investment plan) to participate in project.
STEP I - Initial Planning and Capacio Building
0 Conduct a baseline survey and assessment.
0 Consult with stakeholders on conditions for participation.
0 Prepare a preliminary design.
0 Identify immediate service improvements.

Main Criteria to Oualifv for Step 2a

- Application filed with baseline survey and assessment.
- Stakeholder consultations held regarding program requirements: management arrangements,
tariffs, and design - particularly layout o f the distribution system and the location o f
individual connections and community standpipes.
- Preliminary design completed and approved.
- Proposed immediate service improvements within per capita ceiling and according to positive
list.

STEP 2A - Business Planning and Desian

0 Prepare a business plan.
0 Prepare water supply facilities design and tender documents.
0 Prepare operator performance agreement.
0 Prepare sanitation investment plan.
0 Implement immediate improvement plan for existing facilities.
0 Build the capacity o f the Water Association and local utility operator, introducing improved
financial management, billinghollection, operational and monitoring procedures in existing
systems.

53
Main Criteria to Ouali@.for Step 2b (Tendering and Construction1
Before going into Step 2b the following should have been achieved:
- Approved business plan.
- Water Association meeting o n schedule and trained to manage i t s water supply facilities.
- Local utility operator trained to manage the water supply facilities with operational,
accounting, financial management, billing and collection, and monitoring and evaluation
systems in place.
- Cost-effective, staged designs for water supply facilities.
- Financial projection shows that operating cash revenue covers cash expenses.
- Agreement for provision for long t e r m external technical assistance signed.
- Stakeholder consultations completed.
- Immediate service improvements completed.
STEP 3 - Tendering and Construction
Prepare bid documents for works.
Evaluate the bids.
Rehabilitate and expand facilities.
Supervise construction.
Build the capacity o f the utility operator.
Arrange for long term professional support.
Continue capacity building o f the Water Associations and utility operator.

Main Criteria to Oualift for Steu 4 (Exuansion)

- Business plan current.
- Operations, financial management, billing and revenue collection & M&E systems in place
and efficient, as confirmed by independent audit.
- Cost recovery tariffs in place for existing system for recurrent, replacement, and part of
expansion costs.
- Utility operating efficiently with adequately trained technical and financial staff, operator
performance contracts signed, and external, higher-level technical assistance secured.
- Water user Associations’ Board meeting as scheduled and effectively carrying out i t s
oversight functions.

STEP 4 - Exuansion (following hWDPII1

Combination o f grants, commercial loans and internally generated funds for staged
expansion.

54
Figure 1: Market Centre Water Supply and Sanitation Program

STEP 0 STEP 4
R W B Assistance to Market Centers Expansion
Pre-feasibility studies, selection o f Year-by-year utility
participating communities, agreement extends distribution
on project rules, establishment o f Water system, and connects
Associations, and hiring o f system new customers. Every
STEP 26
manager and core oDeratina staff. five years utility
Rehabilitation and
expansion, continued expands production,
treatment, storage,
capacity building
primary distribution to
RWB tenders rehabilitation
keep up with growth.
STEP 2 a and expansion works.
Expansion financed
Design consultants advise
Design and immediate through utility revenues
on bid evaluation and
service improvements and cost sharing with
supervise construction, and
Phase 1: MIWD.
continue on-the-job
Assist water association and training o f water
STEP I utility operator to prepare a association and utility
Baseline, Immediate business plan. Implement operator.
Service Improvements, immediate improvement plan
and preliminary Design to repairheplace essential
Technical Assistance to equipment; install monitoring
market centers to form meters; and improve unit
Water Associations, hire operations, billing and
system manager and core collection, accounting, and
staff, consult with monitoring. Prepare
stakeholders, carry out rehab/expansion design, and Main Criteria to Oualifi foi
baseline assessment, b i d document. Introduce
contract for operators with
Stev 3
identify immediate service
performance incentives. Operations, financial
improvements, prepare
management, billing and
preliminary design and
revenue collection, and M&E
financial analysis, and
systems in place and efficient (a
prepare application for
confirmed by independent audit:
Step 2a.
Operating cash revenue covers
M a i n Criteria to Oualifi for cash expenses.
Stev 2b Utility operator under
Main Criteria to Oualifi Stetl2, Phase 2: performance contract, and
for Stev 2a Business plan acceptable. higher level external technical
Application filed with Rehabilitatiodexpansion design assistance secured from RWB 01
baseline information, acceptable. qualified consultants.
preliminary design, and Operator performance-based Board meeting as scheduled and
financialhariff analysis. contract signed. effectively overseeing system.
Stakeholder consultation on Executive Board active, meeting 01 System expansion plan and
tariffs and distribution systerr schedule. business plan acceptable.
layout competed. Stakeholder consultations completc Cost sharing plan acceptable.
Immediate service Immediate service improvements
improvement plan submitted. completed
Utility operator trained in unit
operations, billing and collection,
accounting, and monitoring.
Yard tap connection applications
and connection fees received.

55
Component B3: Capacity Building

41. Capacity building will be implemented at all levels and among all stakeholders - from the
Regional Water Boards through to participating community members.

Regional Water Boards

42. A special initiative i s needed to develop the capacity o f the Regional Water Boards to implement
the TWSS Projects effectively. The approach to capacity building will be through on j o b training during
project implementation and specialized training, local and off-shore (short and long term). On the j o b
training will be achieved by attaching some members o f staff t o work with consultants.

43. K e y members o f PIUs and Internal Procurement Committees (IPCs) will be trained on World
Bank procurement procedures and guidelines, financial management and reporting, project management,
project monitoring and evaluation, public-private partnership, among others.

44. L o n g term training will lead from Diploma to Masters level in specialized fields in water and
sanitation, in project management monitoring and evaluation, policy, etc. Details will be provided in the
training plan to be prepared.

45. Operational support to the PIU for supervision o f the activities will be funded on a declining
basis. Support will be provided to the RWBs in continuing implementation o f the H N / A I D S programs
which include awareness building, promotion o f H N / A I D S testing, and prevention.

Component on Rural Water Supply and Sanitation (notfinanced under NWDP 11)

Objectives
46. The Rural Water Supply and Sanitation (RWSS) component o f NWDPII i s designed to support
decentralization o f rural water supply and sanitation service provision by helping to build capacity for
planning and management o f systems at the lowest possible level. Funding would be provided (i) to
increase the capacity o f participating districts to effectively manage their rural water supply and sanitation
programs, (ii) to increase the capacity o f participating communities to effectively manage their water
supply and sanitation facilities, and (iii)to ensure that well functioning water supply schemes are in place
in participating communities.

47. The Rural Water Supply and Sanitation Component i s divided into two sub components one for
district-based, point source water supply and sanitation, and the other i s rural piped systems. The districts
own the assets and are responsible for both types o f systems, but the districts are directly responsible for
managing the implementation o f point sources in individual villages, whereas the districts delegate the
management o f rural piped systems to the MIWD, which in turn may draw on the expertise and capacity
o f the RWBs. The implementation arrangements for rural piped systems are identical to those for market
centers (see the town component o f NWDP 11) excepting the MIWD i s responsible for the activities
assigned to the RWBs.

48. The principal target groups for this Component will be staff o f district assemblies, (constituted as
a District Coordination Team), Community Facilitation Teams and local Technical Service Providers, and
rural communities. The DCT will be responsible for planning and managing the Program that will be
implemented at the community-level The Districts will ensure that communities get the support they
need to plan and undertake their activities and maintain their facilities.

49. The Component will support District RWSS by providing the following key inputs:
0 Consulting services to district administrations to build capability to plan and manage

56
 their RWSS Programs.
Technical assistance and training for Community Facilitation Teams who specialize
community development to promote hygiene and sanitation and build community capability
to plan, construct and maintain their o w n water supply schemes and sanitation facilities.
Technical assistance to local Technical Service Providers (artisans) who specialize in the
construction o f spring catchments, borehole aprons, and latrines; and in the installation, repair
and spare parts supply for handpumps.
Goods, services and works for implementation o f District RWSS Programs.
Capacity building at the district and zonal levels to support program implementation
(financial management, procurement, contract management) and to put in place improved
systems for monitoring and evaluation.
K e y outputs will include:
District Water Supply and Sanitation Programs.
0 District staff adequately trained and equipped to support rural water supply and sanitation at
the community level.
0 Community facilitators capable o f supporting RWSS at the community level.
Artisans/technical service capable on constructing spring catchments, handpump aprons and
latrines; and installing, repairing and providing spare parts for handpumps.
Community water and sanitation committees established and able to promote hygiene and
sanitation and to manage and maintain their water supply facilities.
Improved water supply and sanitation facilities at the community level.

50. Program Management: The primary responsibility for implementation o f rural water supply
and sanitation improvements will rest with districts and communities. The MIWD will be responsible for
assisting districts to obtain consulting services, technical assistance, appraising District RWSS Programs,
providing technical support for program implementation, monitoring and evaluation, and helping to
expedite construction. A stepped approach would be followed that will allow districts and communities
to receive support based on their performance as determined by meeting set criteria.

5 1. MIWD will contract specialists to assist districts to develop their own RWSS Programs and to
build capacity for implementation. A District Coordinating Team, with membership drawn from different
departments will plan and manage implementation o f the District RWSS Program. They will prepare a
Strategic Plan and regularly update the annual RWSS Action Plans recommending to the district
assembly the communities to participate in the program each year, arranging for community facilitators to
help communities to plan and learn to manage their facilities, assisting communities supervise the work o f
community facilitators, appraise Community Water and Sanitation Plans, and commission new water
facilities.

52. Districts will contract local community facilitators to assist communities to prepare their facilities
and management plans, train them to manage their water supply facilities, promote hygiene and
sanitation, and provide advice during construction. Districts will also contract local artisans to help
construct water points and latrines. The District RWSS team will supervise community facilitators and
artisans, monitor progress at the community level, and also help expedite implementation.

Capacity Building
District Capacity Building - Consultants will be contracted by MIWD and supervised by MIWD
Regional WSS Specialists to assist districts to develop their RWSS Programs and to build capacity
for implementation. District staff will learn about program development, management and

57
 monitoring and evaluation through workshops and on-the-job training.. The MIWD Regional WSS
Specialists will monitor progress at the district level and also provide technical assistance.
Some o f the specific areas in which district staff will be trained include:
- Preparing District WSS plans
- Establishing District WSS teams
- Procurement procedures
- Training o f District WSS teams
Community Capacity Building - Community facilitators will be contracted by districts to assist
communities to plan and manage their water supply facilities and to promote sanitation and hygiene.
The Water and Sanitation Committee and caretakers will learn necessary s k i l l s primarily through on-
the-job training. The District RWSS teams will monitor progress at the community level, and, in the
process, provide technical assistance.
RWSS Stepped Approach
District Level
Step 1 - Districts receive assistance to prepare their RWSS Programs.
Step 2 - Upon approval o f the District RWSS Program by MIWD, districts receive further assistance
for implementation.
Community Level
0 Step 1 - Communities receive assistance to form W A T S A N committees and prepare facilities and
management plans.
Step 2 - U p o n approval o f their facilities and management plans by the district, communities receive
further assistance to build management capacity and to construct their facilities.

RWSS Selection and Appraisal Criteria

District Selection; All districts within Malawi are eligible to benefit from the project. However, the
MIWD in consultation with individual donors will determine how to phase district participation since
not all can be assisted simultaneously. Selection criteria include: (i)water supply coverage, (ii)
geographic balance, and (iii) proximity to one another to shorten travel distances.

District Step 2 Appraisal; T o qualify for step 2, districts must: (i)

appoint qualified technical staff to
manage their RWSS Program; (ii) finance the operation (time, travel and equipment) o f their District
Coordinating Team; and (iii) prepare a rolling district RWSS Plan including, acceptable subproject
proposals and procurement plans.

0 Community Selection: The Program i s demandresponsive. Communities must apply for assistance
and are then selected on the basis o f need and readiness - the criteria including poverty, water supply
coverage, and proximity to one another.

Community Step 2 Appraisal: T o qualify for step 2 communities must: (i) establish a trained
W A T S A N committee, at least half o f whom are women; (ii) prepare an acceptable Community WSS
Plan and budget; and (iii) collect and deposit o f into a bank account a cash budget contribution
equal, at least, to 5% o f the projected capital cost o f the Plan (on an exceptional basis, the district
could contribute up to h a l f o f the required cash contribution from the District Development Fund).
Communities will also be required to commit themselves to an in-kind contribution that, together
with the 5% or more cash contribution, would have a value equal to 10% o f the estimated capital
costs.

58
53. Financial Policy: The community contribution for rural water supply systems would be ten
percent, at least half of which must be in cash. The cash contribution would be placed in a community-
managed bank account as an indicator of readiness prior to construction. The contribution would be
transferred to the district after the borehole has been successfully pump tested. In communities requesting
a piped system, half the community cash contribution will be paid to the district as an indicator o f
readiness before the detailed design work begins. The other h a l f o f the cash contribution will be paid
before the works contract i s signed. The in-kind contribution will be made in the construction phase. The
Project would establish a per capita subsidy ceiling, initially set at $3O/capita for all rural systems. On a
case-by-case basis the ceiling may be exceeded if source and transmission costs are exceptionally high.
Technical assistance and training for communities would be fully financed by the project. It i s not
envisioned that subsidies will be provided for household latrines. Cost sharing and construction caps will
be periodically reviewed and adjusted.

54. Technical Design Criteria: For boreholes fitted with handpumps, the program will finance a
basic level o f service o f at least 15 liters per capita per day with one water point serving a maximum o f
300 persons usually within 250m but not more than 500m. Hand dug wells should provide at least 15
liters per capita per day with one well serving a maximum o f 200 people. Small piped systems (springs
and boreholes fitted with mechanized pumps) should provide at least 20 liters per capita per day to the
existing service population. The design should allow for future expansion. For sanitation and hygiene
promotion, the emphasis will be training W A T S A N Committees and village volunteers to educate
households about hygiene and to promote sanitation. Households will be expected to pay for their own
l o w cost on-site sanitation, relying largely on locally available materials. The project will support artisans
to get into the business o f marketing and constructing pit latrines.

55. Consultation Process: All subprojects shall include technical assistance and community
development activities to ensure adequate assistance to the community in making informed decisions
when preparing their Community WSS Plan, and in training the WSS Committees to manage their
facilities including preventive maintenance and financial management.

56. Gender Equality Issues: A special effort will be made to involve women from the very
beginning o f the planning process and to ensure they have a significant role in ongoing decision-making
and program management. Community Facilitation Teams will raise for discussion in committee and
community meetings issues around the role o f men and women in the safe supply and use o f water and
the improvement o f sanitation facilities and hygienic practices.

57. HIV/AIDS: The reality o f H I V / A I D S as a major health risk and impediment to community-based
WSS management will be addressed in the committee and community meetings with a view to
reinforcing preventive messages and taking measures to negative impacts.

58. Linkage between Communities and District: Communities shall be involved in all stages o f
the project cycle. Each time a task or decision that affects their subprojects are made o n their behalf by
the district, the community shall be consulted or involved. Communities shall sign-off o n all official
documentation pertaining to subproject implementation (i.e. contract award, payment certificates,
completion certificates).

59
Figure 2: Stepped Approach to Rural Water Supply and Sanitation

District Planning and Implementation

STEP 2
Capacity building to implement Woreda
STEP 1 R WSS Programs
Technical Assistance to establish District
Consultants assist District RWSS Teams to:
R WSS Programs
0 Continue building district capacity in

Consultants assist Districts to: management, accounting, procurement and

contract management.
Prepare RWSS Plans
0 Continue training o f local service providers
Improve their management. accounting,
to help communities to plan, construct, and
procurement and contract management
manage their water and sanitation facilities.
skills.
0 Select and train local service providers

in community development, handpump

installationhepair and latrine
construction.
District RWSS Team equipped and trained.
District RWSS Program Plan prepared and approved.
0 Local service providers selected for training
Promotion and
district selection

Community Planning and Construction

STEP 2
Construction & Capacity
Building
STEP 1 0 W A T S A N committee plans
Planning & Capacity i t s water supply and
Building promotes improved hygiene
Technical Assistance to and sanitation practices.
establish W A T S A N 0 Households practice
Committee, select improved hygiene, and
technology, prepare construct latrines with
W A T S A N Plan and collect assistance o f latrine artisans.
contribution

Main Criteria to Oualifi for Stev 2

Promotion and
community selection W A T S A N committee established & trained
Facilities and management plan prepared
Community contribution t o the capital costs
secured.

60
Component C: Water Resources Management

59. The water resources component o f the National Water Development Project (NWLlP) Phase I1
project follow on from the successful completion o f N W D P Iin December, 2003. The N W D P Ihad
several components, one o f which was water resources studies. The findings and recommendations o f
these studies have formed the basis o f the preparation o f the water resources management component
under the National Water Development Project Phase II.

C1. Enabling Legislation for NationalWater Policy

60. The project supported the development o f an enabling legislation to implement the
National Water Policy o f 2005. The legislation will provide for the establishment o f the required
institutional framework for proper water resources development and management in the country.
This support was provided out o f PPF during the preparation o f the project. Under this sub-
component support will be provided for the passage o f the legislation through parliament using
information sessions, public awareness campaigns etc. and dissemination o f information
explaining the content and implications o f the new legislation.

C2. Water Resources Investment Strategy

61. An integrated water resources investment strategy i s urgently needed in Malawi which identifies,
through a multi-sector economic analysis, the water resources development and infrastructure needs o f the
country to provide the infrastructure platform required for growth in the different water using sectors.

62. Malawi faces significant water resources management challenges relating to climatic variability,
frequent droughts and floods, competing demands for water use and chronic under-investment in water
infrastructure. Water resources-related problems have a significant impact on the country’s economy, the
attainment o f i t s development goals and poverty reduction. Through the proposed sub-component o f the
NWDP I1on development o f the water resources investment strategy, the Government o f Malawi will be
able to determine the constraints which under-development o f water infrastructure will place on the
present and future national growth and poverty reduction strategies, and where strategic investments are
required to make most effective use o f limited development finance.

63. The overall objective o f the proposed sub-component i s to identify and prioritize investments in
the water resources sector in view o f the national development goals o f economic growth and poverty
reduction, sectoral development strategies and the constraining impact o f underdevelopment o f water
resources o n the country’s economic performance.

The specific objectives o f this sub-component are:

0 T o analyze the economic development objectives o f the country and how water resources
affect the country’s achievements in economic growth and poverty reduction;
T o identify key water-related challenges for the country’s economic development in the
medium and long-term;
0 To set-up priorities for the water sector interventions in time and geographically;
0 T o identify priority water resources sector investments.

64. Methodology: T o determine interventions in the water sector which should receive priority
support, it i s necessary to take into account the relevance and consistency o f selected interventions with
the country’s development objectives and poverty reduction targets identified in the national development
plans and strategies, and, specifically, in M G D S and the recently completed Poverty Reduction Strategy

61
Paper (PRSP). It i s also needed to focus on systemic and urgent challenges in the country’s water
resources development and management and the relevance o f selected interventions to these priorities.
The proposed interventions should be realistic about the nature o f the challenge they are addressing and
the timeframe and resources necessary to implement them.

65. The focus in defining responses to water-related challenges under the proposed Water Sector
Investment Strategy should be primarily o n water resources development and management issues.
However, it should also analyze the connections between resource use and service management because
the culture and principles o f water use by major water using sectors have an important influence o n water
resources management and the water security situation at the local and national scales. At the same time,
inadequate water resources infrastructure and weak water resources management imposes a risk o n the
reliability o f water services and sustainability o f investments in the water service sectors.

66. Additionally, the methodology for the development o f the water resources investment strategy
should take into account:
regional perspectives and plans for economic development to address regional disparities in
poverty and well-being that vary considerably among the districts, and between rural and
urban areas;
0 inter-sectoral perspectives in terms o f economic value o f water used in different economic
sectors;
0 the need to weight broader economic development targets against more immediate poverty
reduction objectives; and
the need to coordinate and sequence investments in water infrastructure and water
management.

67. Approach and Scope: The development o f the Water Sector Investment Strategy in the Malawi
context faces such challenges as: (i) outdated information on the status o f the country’s water resources;
(ii)a lack o f the National Water Resources Master Plan’ or Strategy, or any other preliminary analysis
undertaken by the government to screen the priority issues and identify the necessary investment
interventions; (iii)the need to place the water resources development issues in a broader natural resources
management context incorporating land use improvements and conservation measures into the investment
strategy choices; and (iv) the need to take into account international dimensions o f the water resources
and upper catchments management problems.

68. T o meet i t s objectives, the implementation o f the sub-component will need to consist o f two
distinct phases. In Phase 1, an assessment o f the water resources situation will fill the knowledge gap on
the current status o f water resources in the country, including water availability and water demands in the
main river basins, surface and groundwater quality, the status o f the existing infrastructure, etc. The study
will build upon the analysis undertaken under the National Water Resources Master Plan o f 1986 and the
information and data available with different relevant central and provincial agencies. Phase I1o f the
implementation will focus on defining the development scenarios, identification o f priority water
resources interventions and related investment options, and will result in the prioritized water resources
investment strategy.

69. Initial Proiect Preparation: Selected priority multi-purpose investments will be identified for
initial preparation including feasibility studies, basic design and impact assessments. The emphasis will
be on the development o f multi-purpose investments which will meet a range o f water needs for
productive purposes (agriculture, industrial/commercial, energy etc.) and water supply requirements.

* The latest National Water Master Plan i s dated 1986.

62
This i s in order to undertake preparatory work on priority investments so as t o enable such investments to
proceed to detailed design and construction as quickly as possible (although the design and construction
phases are not included in NWDPII).

C3. Lake Malawi Level Control

70. In 1996 Lake Malawi nearly dropped below the level needed to maintain flow in the Shire River
sufficient to protect downstream economic and environmental benefits. In fact, people feared that the
Shire River would cease to flow as i t did in 1915. The resulting social and environmental impacts would
have been catastrophic given that fact that 85% o f Malawi’s electricity i s generated by hydropower
installations on the Shire River, fish catches in Lake Malombe are an important source o f food to many
people, and wildlife within the national parks and reserves along the river are dependent on a base river
flow. The crisis was dissipated with the onset o f heavy rains.

71, Under NWDP1, which became effective in April 1996, there was time to prepare a more
thorough feasibility study and environmental assessment o f the low-flow pumping scheme, as well as
improved level control at Liwonde. It turned out that better level control, combined with the regional grid
connector, could eliminate the risk the river going dry in all but the most severe drought sequences (on
the order o f once in a hundred years), and ensure electric power for the country, provided Malawi can pay
for and draw power from the regional connector when needed.

72. Given the positive findings o f the previous feasibility study, and the fact that the risk o f the lake
dropping below the level needed to protect downstream benefits remains high, as a priority MIWD will
contract consultants to carry out the design, independent environmental assessment, resettlement plan (if
required) and consultation with national and international stakeholders in the first two years o f the project.
Given the risk that M a l a w i may not be able to pay for, or draw on, electricity from the regional grid
during prolonged regional droughts, NWDPII will also finance a preliminary design, independent
environmental assessment o f the low-flow pumping scheme, and assessment o f the risks associated with
relying o n the regional power grid during extended drought periods. A request for additional financing to
construct the level control structure could be made to the Bank’s Board o f Directors after the design,
environmental assessment, resettlement action plan, consultation and riparian notification are completed
and have been reviewed by an international panel o f experts and the Bank’s quality assurance group. This
could also include the detailed design the low-flow pumping scheme.

The objectives o f this sub-component are:

To-design and carry out safeguard studies and consultation to convert the existing barrage at
Liwonde to a permanent structure and install modem gates to better regulate Lake Malawi
levels and Shire River flows.
T o provide for more reliable electricity supply from the Shire River power plants, with lower
risks o f l o w flows curtailing power production in drought periods, as a result o f improved
flow regulation at the Kamuzu Barrage in Liwonde.
T o protect the aquatic ecology in Lake Malawi and Shire River System including fish
catches, and consequently the livelihoods o f communities that depend o n it, through the
provision o f environmental f l o w releases, restoring in part the natural conditions o f higher
flows at the end o f each wet season.
T o improve lake transportation between many lakeshore towns in M a l a w i as well as in
Mozambique and Tanzania as a result o f more stable lake levels.
T o further analyze the need for a l o w flow pumping barrage at the mouth o f the Shire River
to be constructed according to a pre-defined action sequence based on projected lake levels
during prolonged drought sequences.

63
 T o establish and maintain an Integrated Water Resources Management System for Lake
M a l a w i and the Shire River, as a strategic framework within which the water resources
planning, development, management and operation o f the Lake and River system will be
undertaken, and to provide basic tools such as hydrological modeling systems to enable fully
informed planning and management to be undertaken within this framework.

This subcomponent will achieve these objectives by:

Designing and completing safeguard studies and consultation necessary to upgrade the
existing Barrage at Liwonde.
Improving the institutional arrangements for i t s operation and maintenance.
Providing operating rules which will reduce the risk o f l o w h i g h Shire River flows and o f
l o w h i g h Lake levels, and which will enhance aquatic and streamside environments through
environmental flow releases.

The steps to be undertaken under this subcomponent include:

I.Design and upgrading of the Kamuzu Barrage at Liwonde.

Design and preparation o f contract documents for the construction o f the upgraded Kamuzu
Barrage including:
- Review and refinement of the operating rules o f the proposed barrage.
- Agreed institutional arrangements for the ownership, oversight and operation o f the
upgraded level control structure.
- Preparation o f a hydrological and environmental monitoring plan for Lake Malawi and
the Shire River.
- T o refine the hydraulic model (Integrated System Simulation Model - IWSSM), and
measure and assess barrage operations.
- Incorporation o f relevant recommendations o f the Environmental Impact Assessment into
the design o f the dam and monitoring system.
Initial operation o f the system under the new operating arrangements, release rules and other
environmental operating criteria.

11. Preliminary design o f a pumping barrage at Samama/Mponda.

Prepare a preliminary design for the l o w flow pumping structure following on the feasibility
study carried out under N W D P 1.
Prepare an independent environmental assessment refining the work done under NWDP1.
Detailed design could be financed with additional funding after EL4 i s completed.
Evaluate the proposed power sharing arrangements for the regional grid connector in terms o f
the risks to Malawi in drawing power during extended regional droughts.
Identify trigger points to construct the pumping scheme in the event o f extended drought
sequences.

111. Environmental Impact Assessment

Independent Environmental Impact Assessment o f the level control structure at Liwonde and the
l o w flow pumping scheme.

IV. Stakeholder Consultations

Consultation with the other riparians (particularly closely with Tanzania and Mozambique) from
the earliest stages in regard to all aspects o f the proposals which may affect them, including the
notifications required under the policies o f GOM, under the Z A M C O M and SADC Agreements,
and under relevant World Bank safeguard policies. Consultation will include national

64
 stakeholders, particularly the lakeshore communities, as well as international stakeholders. A
panel o f experts will review the design and environmental assessment.

C4. WRM Institutionaland Technical Support: (purtiullyfinanced by IDA)

73. The ongoing water resources sector reform process will be strengthened through the
establishment o f the institutional framework in terms o f national water policy. In particular this includes
the establishment o f the National Water Resources Authority (NWRA) and support to the Ministry,
enabling it to carry out i t s core functions in accordance with the new water policy and legislation -
including policy formulation, regulation, strategic planning, and support to the water sector.

74. Establishment o f the NWRA will require an entire institutional formation process. This includes
a clear determination o f functions and mandates, human resource planning, business planning, physical
establishment, staffing and transfers, equipping, training and capacity building, and all other activities
required to establish an autonomous organization, including the establishment o f the Water Resources
Fund. The organization will include a national center and regional, catchment based offices, established
in phases. Ultimately the process will extend to the establishment o f local water user associations.
Studies will be required to determine the criteria necessary for sustainability o f the institution and
effective functioning so that it will be able to fulfill i t s role o f managing, developing and protecting the
nation’s water resources. These will build on the work already undertaken under NWDPI through the
M o t t MacDonald Report (2003).

75. Establishing the institution will therefore require at least the following activities:
0 Enacting o f enabling framework legislation
0 Establishment o f the Water Resources Fund
0 Determination o f functions and mandates
0 Human resource planning
0 Business planning
0 Physical establishment, equipping
0 Staffing and transfers
0 Training and capacity building
Public awareness
0 Licensing system reform
0 Water Monitoring system re-establishment

76. Establishing ‘ring-fenced’ revenue streams from water user charges and other sources i s essential
to sustain the National Water Resources Authority. This will require an effective licensing and
administration system, based on an efficient national water resources monitoring and information
management system. An assessment o f potential income [undertaken as part o f the M o t t MacDonald
Study] shows that (as long as charge rates are increased four times) up to MK 66 million [approximately
$500,0001 could be realized - the estimated annual cost o f running the Authority i s in the region o f
$400,000. However, it would be unrealistic to expect: (1) the NWRA to achieve 100% income
generation given current income collection i s between 10% and 20% o f potential income; and (2) that all
persons who should have a water righddischarge consent have one (ie. some revenue sources will not be
known about). A national campaign will be undertaken to assess the current use o f water in terms o f
existing licenses, and unlicensed water use. The objective will be to increase collection rates o n current
licenses, promote the application and granting o f new licenses for existing unlicensed usage and curtail
unauthorized water usage. This will also require a complete re-establishment o f existing administration
and information management systems.

65
77. Support i s required for the re-establishment o f surface water, groundwater and water quality
monitoring systems, and the establishment o f a Management Information System (MIS) to enable the
management and development o f water resources in the country.

The estimated costs o f the initial establishment costs o f the NWRA are as follows:
Licensing reform campaign $l.lm
Water use revenue M I S $0.2m
Water Resources Fund Establishment $0.2m
NWRA establishment $0.35m
Ware resources management MIS $0.43m
Equippingthe NWRA $0.62m
Water Monitoring system $3.3m
TOTAL $6.2m

The IDA funding allocations for this sub-component will cover the following items:
Licensing reform campaign $l.lm
Water use revenue M I S $0.2m
Water Resources Fund Establishment $0.2m
NWRA establishment $0.35m
TOTAL $1.85m

Partners to provide funds for the other aspects are to be determined.

C5: Surface and Ground Water Source Development

78. Future Water Sources for Lilongwe and Blantyre: Full feasibility studies, preliminary design,
EIA, and safeguard plans will be carried out for the works for developing new r a w water sources for
Blantyre and Lilongwe in the medium to longer term based on the future demand assessment. These
documents are expected to be used for future projects funded by any source upon completion. These
studies will be contracted by MIWD to ensure that a holistic view will be adopted in identifying new
water sources that would benefit broader users. BWB and LWB shall further carryout ydrographic survey
for their existing dams (i.e. Kamuzu D a m I& I1 for LWB and Mudi D a m for BWB).

79. Future Water Source for Towns: Currently surface water sources are developed and managed
o n an individual town basis, however, the sector i s in the process o f adopting a holistic approach will be
adopted in developing new water sources which will cater for the towns as well as the needs o f the other
users such as market centers and irrigation.

80. Under the project, this holistic approach will be used for selected towns that are in urgent need o f
water resources. MIWD in collaboration with the RWBs will commission and supervise consultants to
prepare feasibility studies, preliminary designs, and environmental impacts assessments and resettlement
action plans. Preliminary designs would be based on sufficient geophysical investigations to site the
facilities and evaluate potential negative impacts resulting from construction and operation o f the
facilities.

8 1. In most small towns and market centers water supply services are limited by the yield o f existing
boreholes. MIWD in collaboration with the RWBs will launch a special initiative to evaluate and test
measures that can be taken to site, construct and maintain higher-yielding boreholes.

66
C6. Pilot Catchment Management and Development: (notjhanced by IDA)

82. Catchments throughout Malawi are degrading due to poor land use practices and population
pressure. This results in erosion, the loss o f fertile soils, decrease in groundwater recharge, flash
flooding, high sediment loads in streams and rivers, and deteriorating water quality. In strategic
catchments such as the Shire river, this results in high water treatment costs and damage to hydro-power
generation equipment. A pilot Catchment Management Authority (or Authorities) will be established
under the authority and guidance o f the National Water Resources Authority in a selected sub-catchment,
and support will be provided to small scale investments in livelihoods based catchment management
activities through the preparation and implementation o f catchment management plans aimed at reversing
the degradation o f the river’s catchment area.

83. In line with internationally accepted principles (as expressed for example in the Dublin
Principles, and in the Revised Protocol on Shared Watercourses in the Southern African Development
Community), the National Water Policy o f 2005 envisages the management o f water resources at the
lowest appropriate level, linking land and water uses across whole catchment areas or groundwater
aquifers, with full public consultation and involvement o f users. I t provides for the establishment o f
Catchment Management Authorities (CMAs) as the institutional mechanisms for implementing water
resources management at catchment level, under the authority and guidance o f the National Water
Resources Authority. The Policy envisages these bodies as being:
0 implemented in response to water resources management and development problems and
opportunities within the catchment or aquifer system, or arising downstream due to water
quality or quantity problems caused by human activities within the catchment.
0 strongly participative in both in governance and operation.
0 containing or having access to sufficient technical, scientific, social and other relevant s k i l l s
to deal adequately with the issues being faced.
0 financially self sufficient.
0 implemented progressively, with the objective o f dealing first with problems o f highest
national and local priority, without seeking to cover the entire country with such bodies.

84. The subcomponent aims to support the establishment o f the first one or two CMAs, and i t s first
three years o f operation. This pilot CMA would have as i t s objective to ensure protection, development
and management o f a selected catchment that i s strategically important to the future development o f
Malawi, particularly for:
0 the enhancement o f livelihoods in the catchment;
0 the development, protection and management o f the water resources o f the catchment; for
uses within the catchment and downstream; and
0 the preservation and enhancement o f key environmental systems.

85. The following activities will be undertaken by or under the supervision o f the C M A :
0 Establishment o f Pilot CMA. GOM establishes the Pilot CMA, empowered as necessary, and
appoints i t s Board;
0 Establish a Stakeholder Forum to solicit responses to proposals and initiate the concept o f a
Pilot CMA;

Note: These activities depend upon the establishment o f the National Water Resources Authority which will
require a considerable lead time and will therefore not be possible to implement under the NWDPII. Under sub-
component C4 the framework for the establishment o f Catchment Management Authorities will be set up.

67
 Support the establishment and functioning o f Water Users Associations made up directly o f
individual farmers and other users o f water or their representatives;
Identify and prepare designs and costing o f typical works to be undertaken in the pilot
catchment area (PCA) under the project;
Develop a Catchment Management Plan (CMP). The C M P will specify the activities to be
undertaken including the construction o f small dams, reclamation o f degraded micro-
catchments, erosion control, improved land and water management, reafforestation, etc. The
plan will indicate the role o f key players including the Stakeholder Forum, the Water Users
Association, land users, district authorities, the MIWD, Ministry o f Agriculture,
Environmental Affairs Department, Department o f Forestry and other stakeholders. Steps
required to prepare the CMP will include:
- Review o f information: Data required for the design o f a catchment management
plan will be collected, both from data already available and from the field. This will
include settlement patterns, population densities, land uses, farming methodologies,
forest encroachment, steep slope and hill-side cultivation, river bank encroachment,
erosion types and extent, river training, sediment loads, etc;
- Analysis o f land use and impacts: Examine land use patterns and economic activities
in the catchment and recommend appropriate rehabilitation and reclamation
methodologies, consistent with agricultural and environmental requirements and
minimization o f flood damages;
- Identification o f Target Areas: Identify the target areas o f intervention for the
project. This will be based on an options analysis o f different areas taking into
account the levels o f existing degradation, the potential improvements to the
livelihoods o f the communities within the target areas, and the potential strategic
down-stream impacts related for example to water supply, hydro-power generation
and environment;
- Technical guidelines: Technical guidelines, standard designs, construction
guidelines, and unit costing will be worked out for typical project activities such as
small dams, erosion control, improved landwater management, reafforestation etc.
Standard contract formats will be prepared for small contractor engagement in the
construction o f small dams, erosion protection etc. and professional TA requirements
for design and construction supervision will be assessed;
- Impact Assessments: Social, environmental and economic impact assessments will
be undertaken o f the major actions o f the CMA.
0 Implementation o f CMP. The CMA will prepare a comprehensive Catchment Investment
Plan (CIP) including institutional arrangements, fund flow mechanisms and implementation
approaches (Community Driven Development, involvement o f local government etc.) The
CMP will be implemented under the supervision o f the CMA, and with involvement o f
stakeholders including the Stakeholder Forum;
0 Business Plan. C M A prepares a business plan covering the first five years o f operation.

Component D. Sector Management and Urban Water Sector Reform

86. This component would be managed by MIWD and consists o f two sub-components; (Dl)
Management o f Sector Program; and (D2) Urban Water Sector R e f o m .

87. Management of Sector Program: Donors have agreed to adopt common implementation
strategies for village, rural piped (including market center), town and urban water supply, and to work
through a single Program Management Unit (PMU) within the MIWD. For the most part donor financing
will be parallel, but MIWD will establish management systems to support a pooled investments.

68
88. The village, rural piped, and town sub-components o f the National Water Development Program
have been designed such that planning and implementation i s carried out in a stepped approach within
each village, rural piped system, and town. And project rules, including selection and appraisal criteria,
are set out in the respective implementation manuals. In this way donors can invest in a tried and tested
program without having to be involved in project design.

89. This sub-component will provide capacity building and institutional support to MIWD in
managing i t s sector program. PMU will provide central services for NWDP implementation o f village,
rural piped, town, and urban water supply and sanitation, and water resources management, The P M U
will rely on technical experts within the Water Resources Management Department to guide studies, draw
o n the Department o f Water Supply’s zonal and district based personnel to supervise projects, and
contribute to the Planning Department’s sector policy and planning effort. The PMU will be involved in:
(i) sector investment planning; (ii)donor coordination; (iii)
sector policy and planning; (iv) capacity
building; (v) contract management; (vi) project supervision; (vii) monitoring and evaluation; (viii)
safeguard tracking; (ix) communications; (x) program accounting; and (xi) procurement.

90. Strategic Sanitation Plan for Blantyre and Lilongwe: Blantyre and Lilongwe face significant
challenges related to sewerage and excreta disposal, including the l o w income/peri-urban communities.
This component would support MIWD to carry out a comprehensive strategic sanitation planning in the
two cities in readiness for the operationalization o f the National Sanitation Policy. The Policy to be
adopted by the Government aims at delivering both improved access t o sanitation as well as hygiene
promotion through the adoption of, among others, the “sanitation marketing” approach.

91. U r b a n Water Sector Reform: GOM i s embarking o n an urban water sector reform that starts
with a service contract in Blantyre and Lilongwe, followed by a longer term plan involving a deeper form
o f private sector participation as the environment i s ready. The reform preparatory phase has been
initiated, and this would aim at creating the appropriate environment for a possible deeper form o f PPP.
The activities under the phase will include: (i) entering into a service contract (implemented under a
separate project funded by EIBEU) that will address the current operational and customer service
bottlenecks; (ii) this will be followed by a review o f the service contract performance, sector
environment, and the market conditions at mid term o f the contract scheduled after two years into the
service contract. T h i s service contract aims to achieve improved financial and commercial efficiencies,
technical and operational efficiency, and increased access o f water and sanitation to the people living in
peri-urbadlow income areas. It i s envisaged that the results achieved through the service contract will
create an enabling environment for sustainable improvements, and contribute baseline information for a
future private sector contract.

92. The project would support the overall reform process which include: (i) development o f an
appropriate regulatory framework plus a regulatory institution which clearly defines tariff setting and
adjustment rules for water service provision, including that to the l o w income communities and the ability
to encourage performance o f the water boards; (ii)preparation and implementation o f a proper
institutional framework and governance system, through a performance agreement between the water
boards and the Government; (iii) preparation and implementation o f a longer term reform option that
involves PPP transaction; and (iv) stakeholder consultation and consensus building o f the envisaged
reform plan.

Regulatory Framework
93. The Water Boards, as primary service providers to customers, were established to perform against
the terms o f Corporate Charters contracted between the Board o f Directors o f each Water Board and
MIWD. These Charters included a tariff setting methodology, service standards, and government
requirements, however, these Charters have not been implemented in full due partly to lack o f capacity in

69
the Water Boards and partly to the political influence caused by the Government. In the absence o f a
working structure, the Water Boards continue to set their o w n service targets, tariffs are reviewed on an
ad hoc basis, and the performance o f the Water Boards are deteriorating. There i s therefore an urgent need
to establish a regulatory framework for the urban and town water sector in Malawi.

94. The regulatory framework to be developed will be for the water supply services and will cover all
the existing water boards. Regulation will include financial resource allocation, operational efficiency,
water quality, and tariff setting and adjustment.

95. Efforts have already been undertaken by GOM to establish Multi Sector Regulatory Authorities
to regulate the infrastructure sectors namely, communication, transport and water and energy. For water,
the regulatory authority proposed will also oversee the energy sector and will be called Malawi Water and
Energy Regulatory Authority (MWERA). MWERA i s expected be established and be fully operational by
the time service contractor for the two urban water boards i s in place. Activities for implementation will
include; (i) review and enactment o f the proposed Act; (ii) development o f the various regulations which
would cover both the operational and financial areas and investment; and public awareness. For effective
implementation o f this regulatory authority, there i s need for a joint effort between the MWD and the
Department o f Energy in the Ministry o f Mine, Natural Resources and Environment.

96. The water related functions o f MWERA would be to ensure both economic and service regulation
o f the Water Boards. While the specific obligations on the service providers may be detailed in the
Corporate Charters, both GOM and the Water Boards will be parties to these contracts. T o ensure
adherence to the contract terms, there will also be a function for external oversight.

97. Institutional and Governance Framework: Preparation o f a proper institutional framework

and governance system will be carried out through a possible restructuring o f the water boards into
forming an asset holding company and operating companies. The goal i s to establish a performance
agreement between the water boards and the Government t o ensure a proper accountability structure and
governance system in place for the Water Boards to perform their contractual obligations and for the
Government t o create an enabling environment for efficient utility operation. A financial reform strategy
will also be developed to ensure financial viability and sustainability o f the water boards.

98. PPP Transaction: The possible PPP i s envisaged to transform the Urban Water Boards into
efficient operators through contracting out the provision o f water services to a water operating company.
Malawian investors and utility employees would be invited to j o i n this partnership while the Government
will retain the ownership o f the water infrastructure, continue to be responsible for approving and
financing capital works, and ensure that the poor are not adversely affected. The Water Operating
Company i s expected to take over the staff and operations o f the Water Boards, and in not too distance
future, the Water Operating Company could be sufficiently viable and credit worth to l i s t on the Malawi
Stock Exchange. Investigation o f the market appetite for such a transaction will also be carried out.

99. In determining the design and scope o f PPPs, it i s crucial to carefully allocate the responsibilities,
risks, rewards, and incentives. Preparation o f such a transaction has already been initiated through MIWD
through development o f the necessary legal and regulatory framework, financial framework, institutional
and organizational framework and the required infrastructure development plan. The actual
implementation o f the deeper PPP option will be implemented, with the guidance o f an independent
Transaction Advisor, under the direction o f the Public Enterprises (Privatisation) A c t 1996.

100. Sector Reform Consensus Building (Public Awareness): The water sector i s a politically
sensitive area in the country and mindful o f this fact, it was prudent to engage the various stakeholders in
the reform process. Government has initiated this important activity through holding the first urban water

70
sector workshop and by planning the following activities: (i) base line survey o f the knowledge and
perception o f the consumers, employees, c i v i l societies and the political wing; (ii)development o f a
communication strategy including a media plan; (iii) stakeholder consultation o n the proposed reform;
and (iv) a study tour to two countries that have undertaken similar reforms in the water sector.

101, The project will finance the implementation o f the communication strategy, including additional
consultation workshops with policy makers, utility staff, and civil society and public dissemination o f the
key messages for the reform through electronic and print media.

71
 Annex 5: Project Costs
MALAWI: Second National Water Development Project

Table 6: Project Cost for NWDP by Component

Bank Bank
Elnancing Financing
Component Category US$m

A. Urban Water Supply and Sanitation Consultants, works, 7.1 14%

goods, training

B. Town and Market Center Water Consultants, works, 24.1 48%

Supply and Sanitation goods, training,
operating costs,
community sub-projects

C. Water resources Management consultants, goods, 12.0 24%

training, operating cost

D. Sector Management consultants, goods, 5.1 10%

training, operating costs

E. PPFRefund 0.9 2%

F. Unallocated 0.8 2%

Total 50.0 100%

72
Table 7: Proportion of NWDPII Financed by IDA

A. Urban Water Supply and Consultants, goods, 48 19% 7 14%

Sanitation works, training
B. Town, Market Center, and Consultants, goods, 106 41% 24 48%
Rural Piped Water Supply and works, training, operating
Sanitation costs
C. Water Resources Consultants, goods, 16 6% 12 24%
Management training, operating costs
Consultants, goods,
D. Sector Management and training, operating costs 10 4% 5 10%
Urban Water Sector Reform
Unallocated 1 0% 0.8 1%
PPF 1 0% 0.9 3%
Gap ( next 5 years) 76 30% 50 100%
Total Program 258 100% 50 100%

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Table 8: Project Cost Sharing for N W D P I I

Second National Water Development Project

Project Cost Sharing

I D A Financing
Component US$

4. Urban Water Supply and Sanitation 7,065,000

A1. Priority Investment 3,750,000
A2. Reaching the unserved areas 3,315,000

B. Town, Market Center and Rural WSS 24,110,000

B 1. T o w n water supply 20,040,000
B2. Market center and rural piped systems 3,040,000
B3. Training 1,030,000
C. Water resources Management 11,990,000
C 1. Enabling Legislation 100,000
C2. Water Resource Investment Planning 2,500,000
C3. Lake Malawi Level control Studies 2,500,000
C4. WRM Institutional Strengthening and Technical support 1,850,000
C5. Surface and Ground water source development 1,600,000
C6. Raw Water Source Development 3,440,000

D. Sector Management 5,126,000

D1- Sector Management 3,000,000
D2. Urban Water Sector Reform 1,826,000

D3. Strategic sanitation planning for Blantyre and Lilongwe 300,000

E. PPFRefund 900,000

F. Unallocated 809,000

Total 50,000,000

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Table 10: Project Cost
NWDP I1 Cost Breakdown
costs Total Costs
A. Urban Water Supply Component 7,065,000
1. Priority Investments 7,065,000 3,750,000
l a - Action to mitigate water supply distribution in Blantyre and
Lilongwe 1,214,000
1b. Urgent leak and Plant repairs 1,597,000
1c. Urgent actions to serve customer backlog 689,000

I d . Preliminary design, EIA, and safeguard plans for Aqueduct (LWB) 250,000
2. Reaching the unserved areas 3,315,000
2a. New connection to low income areas in lantyre 500,000
2b. Sanitation and Hygiene promotion 200,000
2c. Urgent lmpovement in connections 615,000
2d. Funds reserved for future connections 2,000,000
B. Town, Market, and Rural Piped Water Supply Component 24,110,000 24,110,000
1. Town water supply 20,040,000 20,040,000
l a . Town water supply for the fastest growing towns
Mzuzu 4,720,000
Mzimba 2,400,000
Kasungu 2,600,000
Mponela 1,200,000
Likuni 1,800,000
Zomba 4,280,000
Mangochi 2,740,000
1b. Sanitation planning 300,000
IC. Public institutions 0
2. Market center and rural piped systems 3,040,000 4,070,000
3. Training 1,030,000
C. Water Resources Management Component 11,990,000 11,990,000
1. Enabling Legislation 100,000 100,000
2. WR Investment Planning 2,500,000 2,500,000
3. Lake Malawi Level control Studies 2,500,000 2,500,000
4. WRM Institutional Strengthening 1,850,000 1,850,000
5. Surface and Ground water source development 1,600,000 1,600,000
6. Raw water source development 3,440,000 3,440,000
6a. Feasibility studies, preliminary design, EIA for new water sources,
including hydrographic survey of Mudi dam (BWB) 1,920,000 1,920,000
6b. Feasibility studies, preliminary design, EIA for new water sources,
including hydrographic survey of existing dam (BWB) 1,520,000 1,520,000
D. Program Management and Urban Water Sector Reform 5,126,000 5,126,000
1. Sector Management 3,300,000
1a. SWAP management 1,000,000
1b. Implementation support 1,000,000
1c. Strategic Sanitation Planning for Blantyre and Liliongwe 300,000
I d . M&E 1,000,000
2. Urban water sector reform 1,826,000 1,826,000
2a. Regulatory framework 486,000
2b. Institutional and Governance Framework 50,000
2c. PPP transaction 700,000
2d. Sector reform consensus building and public awareness 590,000
E. Project preparation facility 900,000 900,000
F. Unallocated 809,000 809,000
Total 50,000,000 50,000,000

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 Annex 6: ImplementationArrangements
MALAWI: Second National Water Development Project

The National Water Development Program i s divided into five components, each o f which i s
managed by a separate group. Overall Program Management i s the responsibility o f the MIWD for all
sector specific issues, with the approval o f the Ministry o f Finance when it comes to the allocation o f
financial resources. Urban Water Sector Reform i s the responsibility o f the PC. Urban Water Suuulv and
Sanitation i s the responsibility o f the Blantyre Water Board and Lilongwe Water Board. Town. Market
Center. and Rural Piped Water Suuulv and Sanitation i s the responsibility o f the three Regional Water
Boards. Rural Water Supplv and Sanitation i s the responsibility o f the District Assemblies with the
support o f the Water Supply Department in the MIWD. Water Resources Management at the national
level i s the responsibility o f the Water Resources Department in the MIWD. Various other entities also
have key roles. The main actors and their core responsibilities are listed below. An overall schematic o f
the program structure i s given in Figure 3.

Roles and Responsibilitieso f Institutions

Ministry o f Finance
- securing and channeling resources for NWDP;
- allocating financial resources;
- approving public sector borrowing; and
- monitoring disbursements.

Ministry of Economic Planning and Development

- economic validation o f project activities;
- ensuring that project activities are in line with the national economic agenda.
Ministry o f Mines, Natural Resources, and Environment and EnvironmentalAffairs Dept.
- assisting with the preparation o f EA terms o f reference;
- recruitment o f a consultant to carry out an EA;
- arrangements for public consultations;
- review and approval o f the EA through the national EA approval process.
The National Council on the Environment
- approval o f EA reports;
- forwarding o f the recommendations to the minister responsible for environmental affairs for
endorsement.

Ministry o f Irrigation and Water Development

- developing o f policies, laws, strategies for the water sector; planning;
- coordinating, monitoring and evaluating NWDP;
- building capacity o f implementing groups public and private;
- appraising town and market center investment proposals;
- refining implementation arrangements through experience; and
- facilitating hygiene education and sanitation promotion. MIWD Regional Water development
Offices liaise with districts and market centers and monitor technical assistance provided to them;
- contract consultancy studies for raw water source development and ground water investigations
and development;
- overseeing implementation o f ESMF.

76
The Ministry of Lands, Surveys and Physical Planning, Office of the Controller of Lands
- overseeing the implementation o f the Resettlement Policy Framework (RPF);
- review and approval o f Resettlement Action Plans (RAPS)consistent with the; Resettlement
Policy Framework (RPF);
- monitoring the implementation o f the RAPs.
Privatization Commission
- Overseeing and guiding the introduction o f private sector participation in urban water supply
operations;
- Establishment o f a regulatory authority for town and urban water supply.

Program Steering Board

This Board will act as a collective policy and decision making body for the whole NWDP program, and
consist o f members from all concerned Ministries from the Government. This Board will ensure that there
i s Government ownership and leadership o f the program, and limit the impact o f policy level personnel
changes in GOM.

Program Task Force

The Program Task Force consists o f members o f the PIUs o f each component o f NWDP and i s chaired by
the MIWD. The Chief Executives from District Assemblies and Ministry o f Justice will be invited to
participate as the need arises. Their main tasks include:
- preparing and monitoring work plans and budgets;
- improving implementation arrangements;
- reviewing TOR for studies and review work o f the consultants; and
- coordinating the implementation agencies.
Program Management Unit
Program Management Unit which i s established within the MIWD will have the core staff that includes a
program manager, procurement officer, accountant, water supply and sanitation engineer, a water
resources management specialist, and a community participation specialist. Additional staff will be
recruited as they are required. The PMu’s responsibility include:
- overseeing program planning and implementation;
- monitoring project progress and achievements through reports;
- coordinating and accounting for utilization o f project funds;
- coordinating review meetings;
- establishing a proper and effective M&E system;
- ensuring that implementation o f the project conforms to performance standards;
- working with project steering committee and project task force as secretariat.
Program Implementation Units
Each implementing entity that are responsible for the project components will have Program
Implementing Units (PIUs) that will carry out the activities specified in the project description section.
The PIUs will implement the sub-components in accordance with the implementation manuals developed
for each component.

Blantyre and Lilongwe Water Boards

- providing water supply services in their respective cities;
- managing the implementation o f the U W S S component o f NWDP 11;
- carrying out priority works;
- developing new water resources;
- increasing water production;

77
 - improving operational efficiency; and
- improving water supply and sanitation services in l o w income communities.

Regional Water Boards

Managing the Town, Market Center, and rural piped WSS component o f NWDP by:
- providing efficient water supply and sanitation services in towns;
- expanding water supply services in towns to meet demand;
- supporting market centers to obtain and maintain an improved water supply and sanitation,
including liaising with districts, carrying out pre-feasibility studies, and contracting/supervising
consultants and contractors;
- providing ongoing technical support to market centers to sustain and expand facilities; and
- preparing terms o f reference, make arrangements for procurement o f consultants for surface raw
water source development and ground water investigations and development.

District Assemblies
- managing their own rural water supply and sanitation programs for point sources in individual
villages;
- facilitating and overseeing market center and rural piped water supply and sanitation activities
which they delegated to the RWBs and Water User Associations;
- prioritizing market centers and appraising investment proposals, and
- owning water supply assets o n behalf o f villages and market centers.
City/Town Assemblies
- Review and approval o f sub-projects based on the recommendations made by the RWBs.

Water User Associations

- facilitating and overseeing water supply services in market centers and groups o f villages sharing
rural piped systems;
- guiding planning o f their water supply system;
- contracting and supervising a local utility operator to handle routine operations and maintenance;
- arranging for long term technical assistance to assist local utility operators to improve efficiency,
resolve problems; and
- expanding the system over time.

Local Utility Operators

- operating and maintaining water supply facilities in market centers, ensuring a good quality water
at all times;
- collecting water tariffs and managing accounts;
- providing regular, accurate monitoring reports on performance to W A S ;and
- expanding distribution and adding house connections.

78
 Figure 3: Diagram o f Institutional Interactions

M°F
MEP&D
H
I I

MIWD 1
I 1

Board
i

Program Task
Force

I
I
I
I
Program
I
Management
I unit
I

Y
I I I
I

___ _ _ -__________ _ _ ____ _____ Commission

Under OPC Dept.

I I

I Blantyre
District Regional NWRMB
Regional & Lilongwe
Assembly Water Boards Board
Offices Water Boards
-

District
WSS Team

Market Centers
Villages & Rural Piped Catchments
Cities
(point sources) Systems

79
 Annex 7: FinancialManagement and Disbursement Arrangements
MALAWI: Second National Water Development Project

FINANCIAL MANAGEMENT ARRANGEMENTS

Introduction
1. The financial management assessment was done in line with the Financial Management Practice
Manual (November 2005) o f the FM Board. The objective o f the assessment i s to determine whether the
project implementing entity has acceptable financial management arrangements, which will ensure: (i)
that funds are used only for the intended purposes in an efficient and economical way; (ii) the preparation
o f accurate, reliable and timely periodic financial reports; and (iii)
safeguarding the entities’ assets.

Country PFM System Issues

2. The Malawi Growth and Development Strategy (MGDS) recognizes that strong and sustainable
economic growth i s key to reducing poverty.” The M G D S recognizes that, amongst other critical
preconditions, macroeconomic stability underpinned by sound fiscal control and budget management i s o f
key importance.

3. There are several ongoing initiatives” contributing to the improvement o f the PFM system:
International Monetary Fund (IMF) StaffMonitored Program (SMP) and the World Bank
Structural Adjustment Credit (SAC): Both o f these have performance criteria tied to fiscal
discipline. They both refer to the need for an effective public expenditure management
system, including through adoption o f the MTEF.
FIMTAP (Financial Management, Transparency and Accountability Project): This i s a World
Bank funded project aimed at strengthening financial accountability and reporting. A key
component i s support for the development o f I F M I S (Integrated Financial Management
information System).
Public Finance and Economic Management (PFEM): This i s designed to be an umbrella
framework for addressing fundamental weaknesses in the budget management and
accounting system. Some key legislation under the P F E M has already been enacted in the
r e f o m o f the Public Finance Management, the Public Audit and the Public Procurement
Acts.
The PEG (Project on Economic Governance): This i s a C I D A supported initiative aimed at
building the capacity o f external stakeholders to engage in economic issues and the budget
process.
MTEF Phase 11Program: Designed to improve budget credibility and make better linkages
between the Malawi Poverty Reduction Strategy and the budget. The programme i s financed
by DFID and other donors.
Macro-economic Advisory Services Project: A GTZ supported project, to strengthen
macroeconomic planning and budgeting.
Tikambirane-Support for Voice, Accountability and Rights: A DFID funded project, to
enhance the voice and influence o f Malawi citizens within accountable and responsive
systems o f governance.
Institutional Cooperation with the Swedish National Audit ofJice (SNAO): A project
supported by Norway and Sweden to produce high quality audits and increase the efficiency
o f the National Audit Office (NAO).

lo Capacity building programme for economic management and policy coordination: technical report no. 32, government o f Malawi and
European Union, February 2005

80
 Support to the Anti Corruption Bureau: Supported by the DFID, to enable the A C B
strengthen i t s competence and credibility as an effective anti corruption agency.

4. Clear commitment and action by the Government i s visible. The restoration o f fiscal control i s the
cornerstone o f i t s economic r e f o m program and good progress has been made with the implementation o f
the principles o f transparency and accountability e n s h n e d in the new Public Finance Management Act
(PFMA). The implementation o f the new I F M I S has shown commendable progress since August 2006.

5, However, the problem" identified i s that these individual components are yet to be sufficiently
integrated into a functioning whole. The systems are therefore s t i l l somewhat dysfunctional and operating
sub-optimally because o f missing or weak linkages between the component parts. Stakeholders have
assessed this to have serious negative consequences for the Government's ability to implement i t s plans.

6. For the project, the implication at this time i s that full utilization o f the Malawi PFM system i s
not yet possible. Components that will be relied upon are the following: (i) Project activities will be
subject to internal audit will be overseen by the Central Internal Audit unit o f the Government o f Malawi;
and (ii)The National Audit Office will provide or oversee the external audit service as explained in more
detail below.

Risk Assessment and Mitigation

7. The Ministry o f Irrigation and Water Development (MIWD) will, through a dedicated Project
Management Unit (PMU), coordinate, control, account and monitor the utilization o f project funds by the
component implementing agencies. The two city water boards will coordinate the Urban Water Supply
and Sanitation Component A; the three regional water boards will coordinate the Town, Market Center,
and Rural Piped Water and Sanitation Component B; the MIWD will coordinate the Water Resources
Management Component C and Program Management Component D.

8. The PMU has experience in managing previous Bank-funded projects, the project preparation
facility and has staff experienced with the Bank's fiduciary policies and procedures. A dedicated Project
Accountant in the PMU will support the implementation and maintenance o f centralized financial
management, internal controls, disbursements and financial reporting procedures for the project as a
whole. This arrangement i s further strengthened by separating and devolving implementation authority
and budgets to the implementing agencies, with the additional control o f their existing financial
management systems ensuring that funds advanced to them are used only for the intended purposes in an
efficient and economical way, that reliable and timely financial infomation i s made available to the P M U
and that assets are safeguarded at the component level.
In summary, after assessment it i s concluded that MIWD P M U has the basic capability in place to
support the financial management o f the project.

I' Capacity Building Programme For Economic Management And Policy Coordination: Technical Report NO. 32, Government o f Malawi and
European union, February 2005

81
 The FM risk assessment i s summarized in the table below:

Risk Risk MitigatingMeasures

Risk
Rating Incorporated into Project Design
herent Risks
Country S K e y FM oversight elements o f the project are entrusted to the Government - Internal
Level Audit and External Audit. Capacity for external audit i s enhanced by the use o f
private sector audit fm.
Entity Level M Existing Public Sector Agencies will implement the components, and implementation
will further come under scrutiny o f the responsible Water Boards. Also, successfully
implemented N W D P 1 without problem.
Project Level M FM functions are t o be centralized in the MIWD Project Management Unit (PMU),
who has the basic capability t o provide the required FM. This arrangement i s further
strengthened by separating and devolving implementation authority and budgets t o
the implementing agencies, with the additional control o f their existing financial
management systems at the component level.
ontrol R i s k s
Budgeting M The P M U will determine the overall framework and system for budget development
in a FM Procedures Manual. Annual budgets will be submitted to the Program Task
Force for approval and monitoring and evaluation.
Accounting M Accounting will be centrally done for the project as a whole, by staff experienced in
WB fiduciary requirements and previous WB funded projects. An accounting system
similar that used for N W D P Iwill be deployed and supported by a FM Procedures
Manual.
Internal M Internal control i s strengthened by proper segregation o f functions, use o f trained
Control staff, proper FM procedure manuals, processes and systems and also by deployment
o f independent internal audit services (at the project and component levels) to test the
effectiveness o f the control system.
Funds F l o w M Project fbnding will be disbursed through one U S $ Designated Account in the
Reserve Bank o f Malawi. In addition, project expenditures will be paid through a
limited number o f local currency accounts, but a l l transactions o n a l l bank accounts
will be centrally accounted for in the project financial statements. Quarterly
monitoring o f t h i s arrangement will be done via IFRs.
Financial M Monthly, quarterly and annual financial statements reports will be prepared t o support
Reporting monitoring o f project implementation. In-year and annual reports will be submitted to
Project Task Force, with annual reports also submitted t o the Accountant-general and
Auditor-general.
Auditing M The Central Internal Audit unit o f the Government o f M a l a w i has the mandate to
perform audits o n a l l projects, and will be supported in this project by the Internal
Audit Units at each o f the implementing entities to perform internal audits at the
component levels. An external auditor will be engaged by the Auditor-general to
carry out an annual independent audit o f the project financial statements.
Overall FM M The overall FM risk i s considered moderate; inherent risks are offset by: (a)
Risk Rating centralizing k e y aspects o f the FM system using experienced existing and contract
FM staff o f the MIWD; (b) an internal control system, which allows for segregation
o f functions and other basic internal control elements; independent internal and
external audit; (c) sound financial procedures and systems; and (d) preparation o f
quarterly consolidated FM Reports.
H-High S-Substar .a1 M-Moderate L-Low

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Strengths
9. The provision o f project FM management and control functions by qualified FM staff that has
worked o n Bank projects before i s a significant FM strength in the project. Furthermore, the independent
nature o f internal and external audit arrangements strengthens the management o f fiduciary risks.

a. Bank accounts for IDA funding opened and signatories confirmed and authorized by MIWD / MOF
Government
b. The program FM implementation manual has been completed.
Actions to be supported by the project
c. External auditors arrangements confirmed with Government and auditors appointed MIWD
d. Development o f SWAP arrangements for program - establish a mechanism t o support PMU/MWID/MOF
individual donor financed project and t o enable pooled financing and use common FM
guidelines for multiple donors and government funds.

Standard financial covenants included in the Financing Agreement are the following
0 Submission o f audited financial statements within six months after the year end
Submission o f un-audited interim financial statements within 45 days after each calendar
quarter, to cover such calendar quarter
0 Submission o f any other information as required by IDA

Implementation Arrangements
11. Annex 6 deals with the implementation arrangement in detail. Financial management and control
will be centralized in the PMU and the FM system established as discussed later. The overall FM
framework i s depicted on the next page.

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 V
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P
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Planning and Budgeting
12. Cash budget preparation will be detailed in the FPM. At a minimum an annual cash budget for the
life of the project at each level o f implementation will be prepared, by the responsible implementing
agency. The annual cash budget will be broken down quarterly and monthly, in support o f project
activities as reflected in the approved work plan and procurement plan.

Internal Control and Internal Auditing

13. Internal control comprises the whole systems o f control, financial or otherwise, established by the
PMU and implementing agencies in order to: (i) carry out the project activities in an orderly and efficient
manner; (ii) ensure adherence to policies and procedures; (iii)to safeguard the assets o f the project; and
(iv) secure as far as possible the completeness and accuracy o f the financial and other records.

14. The key elements to ensure a sound internal control system will include:
0 Segregation o f functions to authorize, execute and record
0 Physical control over fixed assets
0 Clear delegations and channels o f command
0 Monthly reconciliation and clearance o f advances for expenditures
0 Integrity and performance o f staff at all levels
0 Supervision

15. The Central Internal Audit unit o f the Government o f Malawi has the mandate to perform audits
on all projects, and will be supported in this project by the Internal Audit Units at each o f the
implementing entities to perform internal audits at the component levels. Project activities will also be
periodically audited by the Central Internal Audit unit o f the Government o f Malawi. The internal auditor
managers in this unit are qualified, an audit approach has been established and they will prepare at least
an annual audit report to the National Audit Office and the MIWD. The scope o f internal audit will
include at least periodic reviews o f project activities, assets, systems, records and accounts; ensure
effectiveness o f financial and accounting policies and procedures, as well as compliance with internal
control mechanisms; review SOEs; verify material procurements and contract management; and carry out
other functions as stated in their approved mandate. At the component level the project activities will also
come under the scope o f the internal audit units o f the implementing entities, under the normal
governance arrangements applicable to each implementing entity.

Accounting
16. Project accounts will be maintained on a cash basis, augmented with appropriate records and
procedures to track commitments and to safeguard assets. Accounting records will be maintained in
Kwacha. The opening and closing balances o f the US$Designated Account (“DA”), and o f any other
bank accounts relating to the project that are held in a currency different from the books o f account,
should be translated at the rate ruling o n the opening and closing dates, respectively. Expenditures made
out o f the DA (and other bank accounts as mentioned above) should be stated at the rate ruling on the
transaction dates. The actual exchange rates used should be disclosed in a note to the financial reports.

17. The Chart o f Accounts will facilitate the preparation o f relevant monthly, quarterly and annual
financial statements, including information on the following:
0 Total project expenditures
0 Total financial contribution from each financier
Total expenditure on each project component/activity
0 Analysis o f that total expenditure into the disbursement categories o f the project, which
would include goods, works, consultants’ services and operating costs

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 All accounting and control procedures will be documented in a FPM and regularly updated by the
Project Accountant.

FinancialReporting
18. Minimumrequirements for Interim FinancialReports (quarterly) and Annual Financial
Statements are outlined below:

Statement of Sources and Uses of Funds, showing by funding source for the period and
cumulatively (project life or year to date) inflows and outflows by project component and
disbursement category, as well as opening and closing cash balances o f the project;
Bank Reconciliation Statement for each bank account, including copies o f the respective bank
statements;
Statement of Expenditure, an itemized statement summarizing eligible expenditures incurred
during a stated period based on individual transactions. The expenditures are normally
grouped by project components and disbursement categories, comparing actual and budgeted
expenditures. The report will also include a cash flow forecast for the following two quarters;
Payments made during the reporting period against contracts subject to the Bank’s prior
review, summarizing contract payments;
Designated Account Reconciliation, showing deposits and replenishments received, payments
supported by withdrawal applications, interest earned o n the account and the balance at the
end o f the reporting period;
Procurement Reports, which provide information on the procurement o f goods, works, and
consultants and on compliance with agreed procurement methods. The reports will compare
procurement performance against the plan agreed at negotiations or subsequently updated,
and highlight key procurement issues such as staffing and building borrower capacity;
Physical Progress Reports, which include narrative information and output indicators (agreed
during project preparation), linking financial information with physical progress and
highlighting issues that require attention.

19. Indicative formats for the reports are available in a Bank guideline General formats o f FMRs are
contained in: “Financial Monitoring Reports for World Bank Financed projects: Guidelines for
Borrowers”’2. In addition Annual Financial Statements would need to comply with relevant
International Public Sector Accounting Standards (IPSAS).

20. Quarterly and annual reports are to be submitted respectively to: (i) the Accountant-General; (ii)
the Auditor-General; (iii)
IDA (for the purpose o f monitoring project implementation); and (iv) the
Project Task Force in order to ensure transparency in project activities and implementation to all
stakeholders.

External Auditing
2 1. The IDA Financing Agreement will require the submission o f audited Annual Financial
Statements for the project, within six months after year-end.

22. Qualified, experienced and independent external auditors will be appointed by the Auditor-
General, based o n TORSacceptable to IDA.

l2http://siteresources.worldbank.org/INTRANETFINANCIALMGMT/Resources/TOPICSIFMRs/FMR-BoiTowers-
English-Nov-2002.~df

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23. Besides expressing an opinion on the Annual Financial Statements in compliance with
International Standards on Auditing (ISAs), the auditors will be required to form an opinion on the degree
o f compliance with IDA procedures for the Designated Account and the balance therein at the year-end.

24. In addition to the audit report, the external auditors will be expected to prepare a Management
Letter giving observations and comments, and providing recommendations for improvements in
accounting records, systems, controls and compliance with financial covenants in the IDA agreement.

FM Supervision Plan
25. The first FM review will be carried out after 6 months o f project implementation. This detailed
review will cover all aspects o f FM, internal control systems, reviewing the overall fiduciary control
environment and tracing transactions from the bidding process to disbursements as well as SOE review.
Thereafter, given that the FM risk rating for the project i s moderate, subsequent reviews will be as
follows: review o f quarterly FMRs; annual SOE review as part o f the TOR o f the external auditors;
review o f audited Annual Financial Statements and management letter as well as timely follow up o f
issues arising; participation in project supervision missions as appropriate; and updating the financial
management rating in the Implementation Status report (ISR). The FM staff at the Pretoria Country Office
will play a key role in monitoring the timely implementation o f any action plans.

FUND FLOWS AND DISBURSEMENT ARRANGEMENTS

Bank Accounts
26. Due to the lapsed loans/grants in the Malawi portfolio, n o new projects, including NWDP I1can
make use o f the Designated Account (DA) until the balances in the lapsed loadgrant accounts are
refunded to IDA. Once this issue has been solved, the GOM will open the following bank accounts:
0 The GOM will open one US$ DA at a commercial bank in Malawi under terms and
conditions acceptable to IDA, into which IDA will advance project funds in terms o f i t s
normal disbursement guideline^'^. Any interest on DA balances will be transferred to a
separate bank account maintained by GOM. Four bank account signatories, two o f whom
need to authorize any transaction, will be designated - (either the P M or the PS MIWD and
either the Accountant-General or ST MOF). Depending on the outcome o f the current
evaluation o f the Reserve Bank o f Malawi, the DA may be shifted to the Reserve Bank o f
Malawi at a later date.
0 One “NWDP I1IDA General Operating Bank Account” in Kwacha, opened at any
commercial bank at the choice o f the GOM, under terms and conditions acceptable to IDA
into which draw-downs from the DA will be credited to fund local currency eligible
expenditures except those paid via the accounts mentioned below. This account will be
funded from the U S D DA. Draw-downs into this account will be as and when required to
avoid loss in foreign exchange. Three bank account signatories, two o f whom need to
authorize any payment, will be designated - (the P M and one o f either the Director PSD, or
the PS o f MIWD).
27. The following additional local currency bank accounts are required to: (a) facilitate the payment
o f large batches o f expenditures in the local currency; (b) allow more control over the timing o f payments
by sub-components that are not located in Lilongwe; and (c) avoid implementation bottlenecks caused by
cumbersome procedures between the sub-component and the P M U who manages the DA. These
accounts will be funded from the PMU local currency operating account, retaining balances as close to
zero as possible after payments. All transactions o n these accounts will be reported monthly and

‘3http://web.worldbank.or~/WBSITE/EXTERNAL/PROJECTS/O,.contentMDK:20
120763-rnenuPK:276 159-pageP
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substantiated with source documents to the Project Accountant, who will see to the accounting and
reconciliation o f these accounts before advancing any further amounts to these accounts:
One “NWDP I1Operating Bank Account” in Kwacha for each o f the Water Boards, opened
at any commercial bank at the choice o f the GOM. Payments from this account will be
authorized by the designated component managers and one additional person in that entity.
The DA will be operated by MIWD and the local currency accounts will be operated by the
project implementing entities, including BWB, LWB, NRWB, CRWB, and SRWB.

28. The Project Accountant will reconcile all bank accounts and advances on a monthly basis and
submit such reconciliations to the P M for review and approval. Detailed banking arrangements, including
control procedures over all bank transactions (e.g., payment signatories, transfers, etc.), will be
documented in the Financial Procedures Manual (FPM).
If, in the opinion o f the PM, there i s a need for additional local currency bank accounts, IDA
approval for the opening o f such bank accounts will be obtained.

Petty Cash Systems

29. As needed, implementing agencies will be given petty cash advances for cash payment o f small
administrative expenses and such petty cash records will be centrally recorded, controlled and reconciled
by the PMU.

World Bank Disbursement Methods

30. By effectiveness, the Project will use the transaction-based disbursementprocedures, i.e., direct
payment, reimbursement, and special commitments as described in the World Bank Disbursement
Handbook. As project implementation proceeds, the quarterly Interim Financial Reports (IFRs) produced
by the Project will be reviewed. Where the reports are adequate and produced on a timely basis, and the
borrower requests conversion to report-based disbursements,a review will be undertaken by the Bank
Task Team to determine if the Project i s eligible for report-based disbursement. The adoption o f report-
based disbursements by the Project will enable it to move away from time-consuming voucher-by-
voucher (transaction-based) disbursement methods to quarterly advances to the Project’s Designated
Account based on IFRs. Detailed disbursement procedures will be documented in the F P M which will be
part o f the PIM.

Reporting on Use of Credit Proceeds

3 1. IDA would require withdrawals from the grant accounts to be made o n the basis o f Statements o f
Expenditure for: (a) services o f individual consultants costing less than US$50,000 equivalent per
contract; (b) services o f consulting f i r m s costing less than US$lOO,OOO per contract; (c) all training; and
(d) works costing less than US$500,000; and (e) goods costing les than US$250,000, (e) training and
workshops; (0 operating costs; and (g) subprojects.

32. All requests for withdrawal o f expenditures under contracts subject to IDA’Sprior review would
be fully documented.

33. All supporting documentation will be retained by the P M U and must be made available for
review by periodic World Bank review missions, internal and external auditors.

Withdrawal of GrantKredit Proceeds

34. Withdrawal o f grant and credit proceeds to the DA will be in accordance with the World Bank
Disbursement Guidelines and the disbursement letter that the Bank may issue from time-to-time. There

89
will be one DA for both grant and credit. The grant portion will be utilized first before the credit portion
i s withdrawn.

Taxes
35. The project will pay for all reasonable taxes in terms o f GOM legislation. Equally, the project
will deduct on behalf o f the GOM “Withholding Taxes” from payments to foreign consultants, but
provision will be made during the procurement process to notify consultants o f this arrangement.

Retroactive Financing
36. Component A1 (priority works) are intended to respond immediately, before project
effectiveness, to the water crisis in Blantyre by financing: (i) essential spare parts for pumping
equipment; (ii) urgent leak and plant repair in both cities; (iii)
actions to serve customer backlog in
Blantyre. Expenditure category 1 for goods and works applies.

Disbursements Categories
37. The table below sets out the expenditure categories and percentages to be financed out o f the
grant proceeds.

Table 9: Disbursement Categories

Amount of the Amount of the
Credit Allocated Grant Allocated
(Expressed in (Expressed in
Category US$) US$)
(1) Works and Goods 12,899,000 11,670,000
(a) Part A Urban Water Supply and Sanitation 2,780,000 3,735,000
(b) Part B 1 Town Water Supply and Sanitation 9,356,000 7,320,000
(c) Part C Water Resources Management 389,000 3 15,000
(d) Part D Sector Management and Urban Sector Reform 374,000 300,000
(2) Consultant Services 10,970,000 7,020,000
(a) Part A Urban Water Supply and Sanitation 3 14,000 2 5 5,000
(b) Part B 1 Town Water Supply and Sanitation 1,838,000 1,500,000
(c) Part C Water Resources Management 7,174,000 4,095,000
(d) Part D Sector Management and Urban Sector Reform 1,644,000 1,170,000
(3) Subprojects under Part B2
Market Center and Rural Piped Water Supply and Sanitation 1,674,000 1,380,000
(4) Training 762,000 615,000
(a) Part B Town, Market Center and Rural Piped Water Supply
and Sanitation 568,000 465,000
(b) Part D Sector Management and Urban Sector Reform 194,000 150,000
(5) Operating Costs 732,000 600,000
Refund of Project Preparation Advance 0 900,000
Unallocated 463,000 315,000
TOTAL 27,500,000 22,500,000

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 Annex 8: Procurement Arrangements
MALAWI: Second National Water Development Project

A. General

1. Procurement will be carried out in accordance with the W o r l d Bank's "Guidelines: Procurement
under IBRD Loans and IDA Credits" dated M a y 2004 and "Guidelines: Selection and Employment o f
Consultants by World Bank Borrowers" dated M a y 2004, and the provisions stipulated in the Legal
Agreement. Procurement for non-ICB procurement and selection o f consultants that does not involve
international consultants will be carried out in accordance with the Malawi Public Procurement A c t (No.
8 o f 2003) and i t s accompanying regulations and desk instructions. T h e various items under different
expenditure categories are described in general below. For each contract to be financed by the Grant, the
different procurement methods or consultant selection methods, the need for pre-qualification, estimated
costs, prior review requirements, and timeframe are agreed between the Recipient and the Bank in the
Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the
actual project implementation needs and improvements in institutional capacity.

2. Procurement of Civil Works: The total cost o f works under the NWDPII i s estimated at
US$14,866,000 million. Works procured under this project would include: water and sanitation
infrastructure. The procurement will be done using the Bank's Standard Bidding Documents (SBD) for all
ICB and National SBD, which have been reviewed and found satisfactory to the Bank. Contracts for
works costing US$500,000 equivalent or more per contract will be awarded through the International
Competitive Bidding (ICB). Works estimated to cost more than the equivalent o f US$ 50,000 but less
than the equivalent o f US$500,000 will be procured on the basis o f National Competitive Bidding (NCB)
procedures. Contracts o f works estimated to cost US$50,000 equivalent or less per contract may be
procured under Shopping procedures, as described in the Procurement Guidelines.

3. Procurement of Goods: The total cost o f goods under the N W D P I I i s estimated at

US$4,602,635. Goods procured under this project would include pipes, fittings, meters, pumps, water
quality testingAaboratory equipment, equipment and tools for measuring river flows and lake levels and
other goods related water supply. The procurement will be done using the Bank's SBD for all ICB and
National SBD satisfactory to the Bank. Under the project, Goods estimated to cost US$250,000 or more
per contract will be procured under I C B procurement method. Goods estimated to cost less than
US$250,000 will be procured on the basis o f National Competitive Bidding (NCB). Goods estimated at
US$330,000 will be procured o n the basis o f Limited International Bidding (LIB) in accordance with the
provisions o f paragraph 3.2 o f the Guidelines. The Government has identified that there are at least 5
suppliers for motor spare parts and that these parts are needed urgently. Where practical, the goods to be
purchased will be grouped and be procured under I C B contracts. Goods that are estimated to cost less
than US$50,000 equivalent per contract may be procured through Shopping procedures in accordance
with the procedures set forth in the Bank Guidelines and as may be further reflected in the Procurement
manuals o f the respective implementing agencies.

4. Procurement of Non-Consulting Services: Non-consulting services under this project will

include: workshops, transport, and training. As appropriate, the procurement o f non consulting services
will be done using National SBDs acceptable to the Bank.
Training - The total cost o f training under the N W D P I I i s estimated at US$1,840,000 million.
Consultants' services for training estimated to cost more than US$50,000 equivalent per contract, but less
than US$200,000 will be procured through the Selection Based on Consultants' Qualifications (CQS)
method whenever this i s feasible. When appropriate, training may also be procured on the basis o f Single
Source Selection subject to review and approval by the Bank. The NWDPII will based on component
approved annual work plans and budget prepared and submitted to the Bank, for i t s prior review and

91
approval, an annual training program, as part o f the project annual work plan. The training will, inter alia,
identify: (i) the training envisaged; (ii)the justification for the training, h o w i t will lead to effective
performance and implementation o f the project and or sector; (iii) the personnel to be trained; (iv) the
selection methods o f institutions or individuals conducting such training; (v) the institutions which will
conduct training, if already selected; (vi) the duration o f proposed training; and (vii) the cost estimate o f
the training. Report by the trainee upon completion o f training would be mandatory.

5. Selection of Consultants: The total cost o f consultant’s assignments under the NWDPII i s
estimated at US$15,646,900 million. Consulting services under the project include: engineering,
feasibility, environmental, social, design and other studies required for planning water supply
infrastructure; assignments for construction supervision o f the works; and supply and installation
contracts. Other consulting contracts include development o f Information Management Systems (MIS),
technical, financial and procurement audit contracts. Except as detailed below, consulting services will be
selected through competition among qualified short-listed f i r m s based on Quality and Cost-Based
Selection (QCBS). Consultants for financial audits and other repetitive services estimated to cost less
than US$50,000 equivalent per contract will be selected through Least Cost Selection (LCS) method. As
appropriate, other selection methods such as selection based on a fixed budget (FBS), Selection based on
Consultants Qualifications (CQS) and Quality Based Selection (QBS) may be used for selection o f
consultants.

6. In exceptional cases, and under circumstances described under Paragraphs 3.9 through 3.13 o f the
Consultants Guidelines, the Borrower may, upon prior clearance with the Bank, hire consultants through
the single-source selection method. Consultants for services meeting the requirements o f Section V o f the
Consultant Guidelines will be selected under the provisions for the Selection o f Individual Consultants
(IC) method. Support to implementation o f certain specialized interventions, such as water quality
testing, may be contracted by identifying specialized in-country research and training institutions and
Universities subject to clearance by the IDA in the procurement plan. The procurement o f consultants
will be done using the Bank’s SRFP and Standard Bid Evaluation and Recommendation for Award forms
agreed with (or satisfactory to) the Bank.

7. Short-List of Consultants: Short-list o f consultants for services estimated to cost less than
US$lOO,OOO equivalent per contract, may be comprised entirely o f national consultants in accordance
with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

8. Prior Review of Consultants: All consultant assignments for contracts with individuals
estimated to cost US$50,000 and above and all consultants assignments for contracts with f i r m s estimated
to cost US$lOO,OOO and above and all single source selection o f consultants for individual consultants and
f i r m s will be subject to prior review by the Bank. All consultant assignments for contracts with f i r m s
estimated to cost US$50,000 and above and all single source selection o f consultant f i r m s will be subject
to prior review by the Bank.

9. Operating Costs: Operating costs will be procured using the Government o f Malawi’s
administrative procedures and or the administrative procedures o f the component implementing agency’s
administrative procedures, which were reviewed and found acceptable to the Bank.

10. Force Account: The NWDPII may use the Force Account procedures under the conditions
specified in Paragraph 3.8 o f the Bank Guidelines. T h i s will be in the particular case o f the 3 Regional
Water Boards, the Blantyre and the Lilongwe Water Boards to cover emergency repairs. Effort will be
made to enter into L o n g Term Maintenance Contracts with the contractors who could at short notice using
pre - established unit rates established on the basis o f a prior competitive process, be engaged to carry out
such work

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11. Direct Contracting (Single Source): Direct contracting for goods and works without
competition may be allowed, upon prior clearance o f the bank under the conditions specified in
paragraphs 3.6 and 3.7 o f the guidelines. Goods estimated at US$632,000 will be procured on the basis o f
Single Source Procurement. The Government indicates that there i s only supplier for the spare parts for
pumps which are o f a proprietary nature.

B. Assessment of the Agency's Capacity to Implement Procurement

12. A formal procurement capacity assessment has been undertaken o f the N W D P I I implementing
agencies. The procurement capacity assessment was finalized o n 24" February 2006 by Wedex Ilunga,
Procurement Specialist. The capacity assessment noted that procurement activities will be carried out by
several implementing agencies: (i) The Southern Region Water Board (SRWB); (ii) The Central Region
Water Board (CRWB); (iii) The Northern Region Water Board (CRWB) (iv) Blantyre Water Board
(BWB); (v) Lilongwe Water Board (LWB); and (vi) the SWAP PMU within the MIWD. The PMU will
comprise a project coordinator, engineers, water resources specialists, accountants, procurement
specialists, and monitoring and evaluation specialists have been responsible for the management o f the
PPF for the project. The Ministry o f Irrigation and Water Development (MIWD) will, through the
National Water Development Project Unit (NWDP Unit) which i s a dedicated Project Management Unit
(PMU) coordinate, monitor report on procurement implementation and ensure internal quality assurance
systems for procurement in all the project component implementing agencies. The project component
implementing agencies include the LWB and BWB in charge o f the Urban Water Component A; the three
regional water boards (SRWB, C R W B and NRWB) which will be responsible for coordinating and
implementing the T o w n and Market Center Water Component B; the MIWD will coordinate the Water
Resources Management Component D and Program Management Component E. The N W D P together
with the MIWD has in the past through the dedicated PMU gained experience in managing Bank-funded
projects. This includes the US$2,3million project preparation facility and the NWDPI (1999 - 2003).
M a n y o f the staff in the P M U and the implementing agencies had prior experience with the banks
procedures including procurement. The staff o f the P M U will include a Procurement Specialist who will
support the implementation and maintenance o f the overall procurement plan for the project. The
Procurement Specialist o f the PMU will provide support and oversight including quality assurance
reviews and monitor implementation progress o f all the components. This function will be further
supported and strengthened by the existence and carrying o f procurement by each implementing agency.
Each Implementing Agency has a dedicated Procurement Specialist who works with technical specialists.
The Procurement Specialists in the implementing agencies will provide periodic progress reports and will
as appropriate make requests to the Bank for review and clearances through the Procurement Specialist o f
the PMU. The procurement Specialist o f the PMU will be supported by other qualified and experienced
staff o f the PMU and systems for implementing the project which will be articulated in the Project
Implementation Manuals which will be reviewed by the Bank to ensure acceptance in respect o f the
Banks fiduciary.

13. The procurement management under the various components though having some differences in
institutional management i s deemed to have an average risk. Some minor deficiencies and areas needing
attention are shown in the table on the next page, including the suggested remedial actions:

93
5 I Weak contract management.
6 I Inadequate procurement monitoring
7 Weak internal quality assurance o f procurement
8 Need to update knowledge on the applicable
Consultants and Procurement Guidelines revised
October 2006.
intensive and continuous training o f key procurement staff in
Bank procurement policies and procedures, particularly for the
PMU which will be staffed by new people and may not benefit
from the experience gained in implementing the NWDPI
Project.
(i) Establishment and maintenance o f a
contractor/vendor/consultant performance monitoring and rating
system;
(ii) updating of procurement plans based on “actual” production
o f performance reports; and
(iii) establish indicators for Procurement monitoring within the
W E framework.
Institute an internal quality control / assurance system to review
quality o f documents and reports before internal and external
approvals are sought.
(i) Hold a procurement for all procurement staff and
(ii)update the procurement implementationmanuals to include
the changes.

14. N o t withstanding the areas for improvement noted above, the overall project risk for procurement
i s Average.

C. Procurement Plan

15. The Recipient at appraisal developed a procurement plan for project implementation, which
provides the basis for the procurement and selection methods. This plan was agreed between the
Recipient and the Bank at negotiations and i s available at the office o f the PMU, National Water
Development Program, MIWD, Manobec House, Lilongwe. I t will also be available in the project’s
database and in the Bank’s external website. The Procurement Plan will be updated in agreement with the
Bank annually or as required to reflect the actual project implementation needs and improvements in
institutional capacity.

D. Frequency of Procurement Supervision

16. In addition to the prior review supervision to be carried out from Bank offices, the capacity
assessment o f the Implementing Agencies has recommended supervision missions to visit the field every
six months in the first year and thereafter once a year to carry out post review o f procurement actions.

17. Annual Procurement Post Reviews and or independent procurement audits may also be carried
out and would aim to:
verify that the procurement and contracting procedures and processes followed for the
projects were in accordance with the Financing Agreement (FA);
0 verify technical compliance, physical completion and price competitiveness o f each contract
in the selected representative sample;

94
 review and comment o n contract administration and management issues as dealt with by
participating agencies;
review capacity o f participating agencies in handling procurement efficiently; and
Identify improvements in the procurement process in the light o f any identified deficiencies.

E. Contract Award Disclosure Requirements

18. Contract awards done through ICB: procurement method shall be consistent with Paragraph
2.60 o f the Guidelines: Procurement under IBRD Loans and I D A Credits, May. Within two weeks o f
receiving the W o r l d Bank's "no objection" (acting on behalf o f the cooperating partners) to the
recommendation o f contract award, the Borrower shall publishin W D B online and in dgMarket the
results identifying the bid and l o t numbers and the following information:
name o f each bidder who submitted a bid;
bid prices as read out at bid opening;
name and evaluated prices o f each bid that was evaluated;
name o f bidders whose bids were rejected and the reasons for their rejection; and
name o f the winning bidder, and the price it offered, as well as the duration and summary
scope o f the contract awarded.

19. Contract Awards done through Direct Contracting: procurement method shall be consistent
will Paragraph 3.7 o f the Guidelines: Procurement under IBRD Loans and I D A Credits. After the
contract signature, the Borrower shall publish in W D B online and in dgMarket the:
0 name o f the contractor;
price;
duration; and
summary scope o f the contract.

This publication may be done quarterly and in the format o f a summarized table covering the
previous period.

20. Contract Awards for Consultancies: shall be consistent with Paragraph 2.28 o f the
Guidelines: Selection and Employment of Consultants by World Bank Borrowers, May 2004. After the
award o f contract, the borrower shall publish in W D B online and in dgMarket the following information:
names o f all consultants who submitted proposals;
technical points assigned to each consultant;
0 evaluated prices o f each consultant;
final point ranking o f the consultants; and
name o f the winning consultant and the price, duration, and summary scope o f the contract.

The same information shall be sent to all consultants who have submitted proposals.

21. Contract Awards for Selection Based on the Consultants' Qualifications (CQS) shall be
consistent with Paragraph 3.8 o f the Guidelines: Selection and Employment of Consultants by World Bank
Borrowers, May 2004. The Borrower shall publish in W D B online and in dgMarket the:
name o f the consultant to which the contract was awarded;
the price;
duration; and
scope o f the contract.

This publication may be done quarterly and in the format o f a summarized table covering the
previous period.

95
 Details o f Procurement that are Subiect to Bank Prior Review

a) Goods

Description*

1) Urban Water Supply and Sanitation (UWSS)Component

a) Blantyre Water Board

Supply o f essential equipment spare parts for electro-mechanical

L
Lumpsum Proc. Estimated Prioror Bid Date
Pkg Mobilizatio Date of
Description* orBillof Meth Amountin Post Invitation Contract
No. Completion
Quantities od US% Revlew Date Award

I 1) Town and Market Center Water Supply I

Construction ofpriority rehabilitation, NRWBN/Ol Lump sum ICB 4,000,000 Prior 20 March 08 15 Aug 08 01 Oct 08 30 Sept 09
upgrading and extension works for Mzuzu
Construction o f rehabilitation and extension Lump sum ICB 2,000,000 Prior 15 Nov 08 15 April 01 Jun 09 30 Nov 10
works for water supply facilities and NRWBNIO2 09
catchments protection and rehabilitation
works for Mzimba
b) Central Region Water Board
Construction of priority works for Kasungu CRWBNIOl Lump sum ICB 2,064,000 Prior 09 Jun 08 03 Oct 08 04 Nov 08 30 Jan 09
Water Supply Scheme
Construction of priority works for Mponela CRWBNIOZ Lump sum ICB 806, 000 Prior 09 Jun 08 03 Oct 08 04 Nov 08 30 Jan 09
Water Supply Scheme
I I I I I I I I I I
c) Soutbern Region Water Board
Construction of priority works for Zomba SRWBNiOl I I Lump I ICB I 3,700,000 I Prior I 21 April08 I 25 Ju108 I 11 AugO8 I Feb 2010
sum
Construction ofpriority works for SRWBNi02 Lump ICB 2,305,000 Prior 05 May 08 25 JulO8 11 Aug 08 Feb 2010
Mangochi Sum

96
 Thresholds for Procurement Methods and Prior Review Works and Goods

I I >=50,00 < 250,000 I NCB I None

Lm All Contracts
<50,000
Shopping None
All value
Direct Contracting/Single All Contracts
Source
1. Works >=500,000 ICB All Contracts
>=50,000 - <500,000 NCB None

<50,000 Shopping None

All values Direct Contracting All contracts

ICB International Competitive Bidding QCBS DC Direct Contracting

NCB National Competitive Bidding S Shopping

c) Consultant Services

spfs;;
Cost
Prior/ Expected
Estimate Selection Post
Ref No. Descriptionof the Assignment Compietlon
in US Method
Date
Dollars n date

B W B 01 Feasibility Studies for new water source 2,000,000 QCBS Prior 21/04/08 01/09/09

B W B 11 Strategic Sanitation Planning 300,000 QCBS Prior 12/05/08 06/01/09

LWBll
I Preliminary Design, EIA, safeguard plans for raw water source and I 1,600,000 I QcBs Prior 29110107 04/09/008

Hydrographic Survey for the existing dams

LWB/Z Prior 2611 1/07 02/10/008
Preliminary Design, EIA, safeguard plans for aqueduct 250,000 QcBs
LWBI3
Strategic Sanitation Planning I 300,000 I QcBs Prior 14/04/08 05/03/009

2) Town and Market Center Water Supply

a)Northern Region Water Board
NRWB/C/OI I Preliminary and detailed design o f priority rehabilitation, upmading I 345,000 I QCBS I Prior I 04/12/07 1 00/03/08

97
 Cost Expected Expected
Ref No. Prior/
Prop~d
Description of the Asslgnment Estimate Seleceon S"b&lrion?? : : C
Post
Inus Method ~~i~~
date
Dollan

CRWBICIO5 Pre-feasibility studies for all Market Centres and Detailed 00/09//08 00103/09
feasibility studies and preparationo f business plans for viable
300,000 QCBS Pnor
Market Centres

CRWBICI07 Feasibility studies for groundwater source development for Ntcheu,

Dedza, Mponela, Madisi and Ntcheu 11/12/07 00112/08
350,000 QCBS Pnor
CRWBICIOI Sanitation planning study in all CRWB town centres 00101108 00107108

Detailed design and construction supervisionof rehabilitation and Prior

SRWB1C102 extension works for Zomba water supply 370,000 QCBS 00/03/08 00/12/09

Detailed design and constructionsupervision o f Augmentation for

sRWB1cIo3 230,500 QCBS Prior 00103108 001/12/09
Mangochi water supply
SRWB/C/O6 Feasibilty studies for groundwater source development for
Namwera, Balaka, Muloza, Chikwawa, Nchalo, Ngabu and Nsanje. Prior 00103108 0010808
350,000 QCBS
SRWBICIO7 Sanitation planning study in all SRWB town centres
Prior 01/03/08 00109108
150,000 QCBS

I Various consultancies in MWERA I amended'

WRS O4 I Public awareness about MWERA
150,000 CQS Prior 14112107 03/04/09

PMU -5(i) I Assistant Accountant 24 months I 50,400 I IC

98
 ImulementinpAgencv Cauacitv Building Activities with Time Schedule

I No. I Expected outcome /

Activity Description
Estimated Cost Estimated Duration Start Date
Comments

NRWB/T/Ol Capacity building in various fields including 350,000 April 07 to June 07

I
management and operation.
Central Redon Water Board
CRWB/T/Ol . .
I Cauacitv building in various fields includine I 330.000 I A~rilO7to I June 07 I
I 1
procurement, Financialmanagement,projec; I ' 1 Dkc 12 / 08 I I I
SRWB/T/Ol Capacity building in various fields including 350,000 April 07 to June 07
procurement, Financialmanagement, project Dec 12 / 08
management and operation.

Capacity Building and Training for the ImplementingAgencies

I
No. Expected outcome I Estimated Cost Estimated Duration Start Date Comments
Activity Description
NorthernRegion Water Board
NRWB/T/Ol Capacity building in various fields including 350,000 April 07 to June 07
procurement, Financial management,project Dec 12 / 08
management and operation.
Central Region Water Board
CRWB/T/Ol Capacity building in various fields including 330,000 April 07 to June 07
procurement, Financialmanagement,project Dec 12 / 08
management and operation.

SRWBITI01 Capacity building in various fields including 350,000 April 07 to June 07

procurement, Financialmanagement,project Dec 12 / 08

.,

Thresholds for Consultants Selection Methods and Prior Review

<100,000 CQS, LCS, QBS, FBS First contract

<All values sss All contracts
Individual >=50,000 IC All contracts

SSS Single Source Selection

QCBS Qualifications & Cost Based Selection IC Individual Consultant
CQS Selection Based on Consultants Qualifications UN Procurement b y a UN Agency
LCS Least Cost Selection SFB Selection under Fixed Budget

Total value o f contracts subject to prior review:

Goods: US$4,249,000;
Works: US$14,831,000;
Consulting Assignments: US$15,259,900
Total all contracts for Prior Review: US%34,339,900
Overall Procurement Risk Assessment: {Average}

99
 Annex 9: Economic and FinancialAnalysis
MALAWI: Second National Water Development Project

Economic Analysis

1. Introduction: Malawi, a primarily agrarian economy with 13 million people, i s located in the
southern cone o f the African continent. More than half o f i t s population remains below poverty line and
poverty has remained almost unchanged in the last decade (Country Economic Memorandum, 2005)14.
Poor also have a disproportionately lower access to basic infrastructure services. In water supply, Urban
and rural households primarily access drinking water from communal standpipe and communal
handpumps respectively. Only 2% o f Malawians have access to piped water inside dwelling, 70% o f these
households are located in the urban areas. A significant proportion o f population, particularly in the rural
areas, i s dependent on unimproved sources o f drinking water, with adverse effects on health,
environment, and productivity.

1 Main Source of Drinking Water Urban Rural Total I

I
1 Piped into dwelling 11.83 0.75 2.16 I
I Piped outside dwelling 18.3 1.16 3.34 I
j Communal standpipe 45.37 12.03 16.28 I
1 Personal handpump 1.25 0.22 0.35 I
1 Communal handtmmn 9.46 49.92 44.77 1
I Protected spring 0.28 0.7 0.65 1
1 Personal open, unprotected well 2.71 2.48 2.51 1
1 Communal open, unprotected well 9.39 23.98 22.12 i
1 River. sming 0.35 8.29 7.27 i

-......-...;;.;-...L.

Source: Malawi M S , 2004

2. Only about 6% o f the households have piped water, either inside or outside the dwelling, and
93% o f those with piped water inside dwelling are in the top two quintiles. In both the richest and poorest
quintiles, well/boreholes/handpumps are the most prevalent sources o f drinking water.

l4World Bank, 2004. Malawi Country Economic Memorandum: Policies for accelerating growth, Report Number
25393 MA1

100
 Figure 1: Sources o f Drinking water, by Quintile
Sources o f Drlnklnp W a t e r , B y Q u i n t i l e

Source

--e Quintile 1 ---t Quintile 5

Source: Malawi M S 2003

3. In the recent Malawi Poverty Reduction Strategy, G O M articulated i t s strategy to increase access
to potable water by: a) construction and rehabilitation o f water facilities; b) water resources management;
c) raising capacity to meet industrial and domestic demand; and 4) reducing water-borne diseases (World
Bank, 2005)15. NWDP I1 i s part o f an integrated effort by the Government o f Malawi (GOM) to pool
resources o f the donors to meet i t s goals o f increasing sustainable access, ensuring efficient service
delivery, and contributing to robust institutional structure.

4. The IDA funds o f $50 million would be allocated to all sub-components o f the GOM program
that include: (i) urban water supply; (ii) town, market and rural water supply; (iii)water resources
management; and (iv) program management and urban water supply reform. For purposes of economic
analysis, the components: A) urban water supply and B) town and market center water supply will be
analyzed in detail. The project resources allocated to these two components form three-fourths o f the
project, so economic benefits will only be higher if the other components are included. For component A,
IDA investments o f $11.3 million are complemented with $40 million o f EIB/EU investments for the
cities o f Lilongwe and Blantyre. I t i s important to note that for component A, economic analysis i s
conducted for the physical investments o f the project as a whole and not for IDA contribution only. This
i s because the economic outcomes in the form o f new connections, expenditure and time savings need to
be valued for the urban water supply program as a whole and not as disaggregated parts. The economic
benefits are derived from new connections in unserved areas as well as from performance improving
measures such as reduction o f NRW and rehabilitation and replacement o f treatment plants. There are
other non-easily quantifiable benefits from this project which i s typical o f a rehabilitation project, such as
higher hours o f service, increased reliability, improved customer service, and improved billing and
collection systems. These have not been included in the analysis.

5. Methodology: A cost-benefit analysis using a “with and without project” methodology has been
used to calculate the ERR and NPV o f the project to which the project directly contributes with physical
investments. The economic analysis supplements the financial analysis that calculates the incremental
financial flows to the water boards from the project. The goal o f the economic analysis i s to estimate the
present value o f the benefit streams to major stakeholders o f the project - the households, over a 20 year
period. The net economic benefits to arrive at the ERR and NPV are based on a 10% (the hurdle rate
IDA uses in WSS projects) discount rate.

6. Component A: The two towns where new urban water supply connections are installed and
existing networks rehabilitated are Lilongwe and Blantyre. Currently, about 28% o f L W B ’ s (190,000

15
World Bank, 2005. Malawi Joint IDA-IMF Advisory Note on the Poverty Reduction Strategy Second Annual
Progress Report, Report Number 32645-MW

101
people) and 30% o f BWB’s service area (246,000 people) are unserved by the water boards in the service
area. This number rises dramatically i f the unplanned settlements are considered. Recent evidence
suggests that only 17% o f Lilongwe’s population i s covered by water from LWB (Chinva and Junge,
2007). The water scarcity situation i s severely aggravated in Blantyre where the population i s growing at
6% per year and cost o f water provision i s costly due to i t s higher geographical location and distance from
the main source o f water - the Shire River. This component aims to bring the unserved population into
the service area o f Lilongwe and Blantyre water boards and provide the new consumers with improved
water supply. A total o f 5 1.3 million IDA and EIBEU resources will be invested in new connections for
peri-urban and formal urban areas.

7. The measurable economic benefits o f this component are: (i)Higher expenditure from increased
consumption in the previously unserved peri-urban and formal urban and (ii) lower distance traveled and
filling times at the new connections, leading to time savings. These new consumers are currently
dependent on hosks. There are nine different kiosk management models ranging from Water Boards, City
Assembly, Water User Associations, Committees, and Private businessmen. Among these, WB and
Community/WUA kiosks are most prevalent. As evident from the recent Poverty and Social Impact
Analysis (Chiwra and Junge, 200716), the prices at the kiosks vary between 1.5 - 3.5 MK in Blantyre and
between 2-4MK for a 20L bucket respectively. Therefore, for the purpose o f this analysis, price at the
kiosk i s $0.87/m3 in Blantyre and $ l.O5/m3 in Lilongwe.

Table 2: Prices and Price Trends in Public Kiosks (MW20 litre bucket)

Source: Chinva and Junge, 2007

8. The rehabilitation o f existing networks undertaken during project implementation will

result in incremental water o f 10,500 m3/day in Lilongwe and 11,500 m3/day in Blantyre. In
addition, the NRW is expected to reduce from 29% to 26% in Lilongwe and from 48% to 34% in
Blantyre during the course o f the project. These investments will result in incremental water
flows o f 12,974 m3/day in Lilongwe and 21,456 m3/day in Blantyre. One o f the goals o f these
kinds o f interventions i s to help Malawi reach the millennium development goals and focus on
per-urban and informal settlements where access i s lagging behind and population i s growing. I t
i s assumed, therefore, in the economic analysis that 75% o f this incremental water generated in
Lilongwe and Blantyre will be channeled to the peri-urban areas and the rest to formal urban
areas. The new connections will be in the form o f yard-taps and private standpipes and it i s
assumed that 24 - 28 persons (4 households) can share the benefit from each o f these
connections.

16
Chirwa, E. and N. Junge. 2007. Poverty and Social Impact Analysis: Private Sector Participation in the
Distribution and Management o f Water Services in the L o w Income Areas in the cities o f Lilongwe and Blantyre

102
Table 3: Number of New Connections

9. The expenditure on water for the new consumers i s valued based on the average tariff for
individual connections/yard taps which i s $0.43/m3 in Lilongwe and $0.53/m3 in Blantyre. Incremental
expenditure benefits from new connections are minimal since households are paying twice the formal
domestic connection tariff at the kiosk to consume a minimal 2 0 L bucket per capita.

10. Accessing water from yard-taps and private standpipes also means that households will incur time
savings that can be quantified by valuing the time in the form o f wages lost due to the water collection
activity. The economic benefits from the new connections primarily derive from these time savings, since
an average household spends approximately 4 hours a day collecting water. At the hosk, the waiting,
filling and carrying time for a 2 0 L bucket is approximately 50 minutes. In comparison, the water
collection time i s 10 minutes at the yard tap for a 20L bucket. Provision o f improved water source also
has significant gender implications, as noted by Chinva and Junge (2007), since women and children
primarily bear the burden o f carrying water. If these women and children spend significantly less time
fetching water, they can devote the time in other productive activities. This also means that girl children
can have a higher possibility o f staying in school.

11. The economic analysis suggests that the Component A o f the project has a positive economic
NPV o f $97 million and an EIRR o f 48%. This implies that the project will be beneficial to the citizens o f
Lilongwe and Blantyre in alleviating their water supply concerns.

Table 4: Economic Rate of Return - Urban Water Supply

i
I Component A: Urban Water Supply
NPV $97,109,448 I

12. Component B: Seven market towns from service areas o f Northern Regional Water Board
(NRWB), Central Regional Water Board (CRWB), and Southern Regional Water Board (SRWB) are
selected for new capital and rehabilitation investments to improve i t s water supply systems. The
economic analysis i s conducted for the type o f system - gravity and boreholes, installed in these seven

103
representative towns and benefits are valued per user. I t i s assumed that the tariffs charged to the users o f
these new gravity and borehole facilities will be $0.36/m3. The capital cost varies by type o f system, the
typical capital cost o f building a gravity system i s $40/capita and a borehole i s $50/capita. Given the fact
that bulk o f the resources invested in this component i s grant, investments will occur in the following way
- after the initial capital investment o f $40/capita (for gravity systems), 1.25% o f expansion cost for
distribution will be spent in the next 4 years and 10% o f expansion cost for transmission, generation will
be spent in the 5" year and this pattern will continue over the l i f e o f the project. In addition, An 0 & M
cost o f $0.25/capita i s spent each year. Similar will be the investment schedule for borehole systems.

13. As a result o f this project, the beneficiaries o f these new systems will be consuming more water -
from 15 litres/capita/day to 50 litres/capita/day. The benefits are valued for the additional water consumed
by households at a higher price and time savings as a result o f lower time spent in collecting water.

Table 5: Cost by Type of Water Facility

Source: NRWB, SRWB, CRWB

14. The economic analysis suggests that the Component B o f the project has a positive economic
NPV o f $27.83/capita and an EIRR o f 20% for gravity systems and a NPV o f $16.66/capita and ERR o f
15% for borehole users.

Table 6: EIRR for Gravity and Borehole Systems

15. In summary, a quantitative valuation o f economic gains as a result o f NWDP I1for the project
beneficiaries suggests that this project will have a positive impact o n improving the productivity and
overall welfare in addition to non-quantifiable health and environmental benefits.

Financial Analysis
16. One o f the key aspects that determine the sustainability o f the water supply provision, which
forms the central part o f GOM's policy objective, i s financial sustainability o f the sector and the financial
viability o f the main service providers. Attaining this long term goal has been challenging, partly because
o f the difficulty for the service providers to recover the full cost o f service, and partly because
Government and external fhding are often inadequate and unreliable. Through technical assistance, the
project envisages supporting GOM in approaching i t s financial goal through forming and implementing a
strategy for MIWD to improve i t s sector financial performance, and for the main service providers such
as the three regional water boards and the two city water boards to become more financially autonomous
and commercially oriented to reduce dependence o n government subsidies.

104
17. Sector Financial Performance: As elaborated in the previous sections, the project would be
part o f a larger sector wide program managed by GOM. The size o f the five year program i s expected to
be about $258 million. I t i s expected that the Government subsidies to the sector, especially for the urban
and larger towns could be reduced over time if the user charges and tariffs increase along with the costs
and contribute to the utilities’ operating cash flows. If the water boards can achieve financial autonomy
and start tapping the capital markets o n their own, public funds could be freed up to serve the poorer
people in the rural areas. During project implementation, capacity strengthening activities will be carried
out to enable the key financial staff o f GOM to create a strategy and make realistic projections for the
medium to long term sector expenditure plans for achieving i t s sector objectives.

18. Utility Financial Analysis: The financial analysis o f the urban and town water supply sectors
have been carried out using the audited financial statements o f the two city water boards and the three
regional water boards. The analysis focuses on the water boards’ ability to recover i t s operating costs,
depreciation, and financial charges through i t s revenues. It also assesses the water boards’ future cash
f l o w situations based on the investments carried out under the program.

19. Blantyre Water Board (BWB): BWB has produced net losses in each year since FY02, largely
as a result o f poor operating efficiency, e.g. with increased non revenue water from 34% in FY02 to 49%
in FY05. BWB’s production efficiency has also deteriorated to the extent that in FY05 it sold less water
(by volume) than i t did in FY02, while also producing more water than it did in that year. The high level
o f NRW i s particularly costly since BWB has to pump all the water which it produces approximately 800
meters up from the Shire River. In FY06 the electricity costs were equivalent to 50% o f the company’s
revenues from water sales. BWB also suffers from non-payment o f water bills from a large number of
government institutions, totaling $10 million. BWB’s poor operating efficiency i s combined with tariffs
that are below i t s actual costs or what i s considered as reasonable or efficient costs and that have not kept
pace with inflation. Inefficiencies from operation have affected BWB’s cash f l o w to be very l o w or
negative in each year between FY02 and 06. BWB has been unable to service i t s debt, and unpaid debt
has rapidly accrued on i t s balance sheet. The current portion o f BWB’s long-term borrowings has more
than tripled in size between FY02 and 06. BWB’s inability to generate sufficient cash from operations
and to service i t s existing debt has resulted in a lack o f financing available for investments in fixed assets.
Since FY03, BWB’s annual capital expenditures have been well below i t s annual depreciation charges.
As a result, BWB’s balance sheet indicates that i t s fixed assets are heavily depreciated.

In summary, BWB currently:

Does not generate sufficient operating revenues to cover i t s operating costs;
I s not able to meet i t s current debt service requirements; and
Does not have cash or the access to financing required to make investments to improve
operating efficiency, extend service, and better the quality o f service it provides.

An improvement in BWB’s financial situation will require:

Increasing operating efficiency;
Establishing tariffs that recover i t s operating and capital costs; and
Obtaining financing for investments in i t s fixed assets.

20. Lilongwe Water Board (LWB): LWB has produced net losses in each year since FY03. While
LWB’s operating income was positive in each year from FY02 to FY06, high interest expenses and
exchange rate losses resulted in a net loss on the income statement.

In summary, LWB currently:

Produces net losses once interest expenses and exchange rate losses are accounted for;
I s not able to meet its current debt service requirements; and

105
 0 I s only able to finance i t s required capital investments by relying on government capital
contributions.

The key areas for LWB to improve i t s operational performance are:

0 NRW-LWB’s level o f NRW increased from about 27% in FY02 t o 38% in FY04 and then
fell to around 35% in FY06. LWB’s proposed capital expenditure program aims to
substantially reduce the company’s NRW levels.
0 Collections-according to information provided by LWB, the company’s collection rate in
FY06 was just below 95%.
0 Staff productivity and staff costs-staff productivity, measured as the number o f employee per
1000 water connections, improved from 19.4% in FY02 to about 16.8 in FY05. Despite this
improvement, the level i s s t i l l well above the level for efficient utilities in developing
countries. W h i l e LWB has demonstrated improvement in terms o f staff productivity, average
annual staff compensation rose by nearly 90% between FY02 and FY06. In FY06, staff costs
represented over 40% o f total operating costs.

21. A financial model has been developed to assess the financial viability o f the urban water sector
and simulate the different scenarios with regard to investment plan, operational efficiencies, service levels
especially in the l o w income and peri-urban communities, and tariff level and structure. The analysis
concludes that LWB would achieve full cost recovery by the end o f the five year program, if they make
the proposed capital investment and achieve the operating efficiency gains expected under the program.
The situation for Blantyre i s more challenging, however, there i s a possibility o f BWB achieving full cost
recovery if the following assumptions can be met: (i) a real annual tariff increase o f at least 5 percent will
be implemented; (ii) a robust n o n revenue water reduction program i s implemented; (iii) timely
production volume increase and connection to new customers are carried out; and (iv) subsidies
(including write-offs o f loans on-lent to them by the GOM) are received from GOM.

22. Three Regional Water Boards (NRWB, CRWB, and SRWB): Annual reports and audited
financial statements have been analyzed to assess the historical performance o f the RWBs. Since each
water board covers several districts and towns, town level financial analysis has been carried out to
evaluate the business plans and the related financial proposals prepared for each town. NRWB covers 6
districts and 9 towns varying in size between 145,000 in Mmzuto small market centers o f 10,000 to
50,000 in population. C R W B covers 9 districts and 19 towns ranging from population size o f 30,000 to
300 (rural hospital). SRWB covers 12 districts, 13 towns, and 10 centers/institutions, ranging from
250,000 in Zomba, to centers as small as 10,000 to 40,000. The fastest growing towns, including Zomba,
Mangochi, Kasungu, Likuni, Mponela, Mzum, and Mzimba will receive the initial investments.

23. The historical financial performance indicates that the fastest growing towns are all able to cover
their O&M costs through their revenues, contributing to the consolidated financial statements o f the
RWBs. However, the high depreciation and debt service obligations make it difficult to sustain
themselves. As an example, in the case o f NRWB their total debt service obligation amounts to $3.7
million, corresponding to 170% (almost twice the size) o f the total revenues in 2006. This i s due to the
high on-lending terms from MOF to the RWBs.

106
Net Income (395,147) (543,607) (217,916) (264,745) (784,040) (673,406)
% Full Cost Recovery 38% 35% 55% 55% 30% 40%
Long term Debt to Eqity Ratio 561% 725% 320% 360% 700% 809%
Finance costs as % of Revenue -155% -170% -82% -83% -218% -151%
Cash Balance 1,512 (2,906) 12,149 1,944 7,843 (8,761)

24. Financial models have been developed for the three RWBs to assess the financial
viability o f their operations incorporating the proposed investments to be carried out under
NWDP. The base case scenario assumes: (i) 5% (less than inflation) annual tariff increase; (ii)
70% o f the planned connections are realized; (iii) increase in O&M costs along with inflation;
(iv) average debtor days o f 150 from the past continue; and (v) 100% o f the IDA credit will be
onlent to the RWBs by MOF with the terms o f inflation plus 5%. The base case shows that
none o f the three RWBs would be able to achieve full cost recovery in the foreseeable future
(next 5-10 years) even if i t assumes that the existing debt from GOM are written o f f from their
books in 2007.

25. Sensitivity analysis has been carried out to assess the time i t takes for the RWBs to
achieve full cost recovery in the foreseeable future. The improved scenario assumes the
following: (i) annual tariff increase o f 10%; (ii)100% o f the planned connections are realized;
(iii)some efficiency gains realized in O&M over time; (iv) average debtor days o f 150 from the
past i s reduced to 60 days; and (v) 50% o f the IDA credit will be grant, and 50% will be a credit
with the terms o f inflation plus 5%. The improved case shows that all three RWBs would have
much better prospects o f reaching full cost recovery in the next 5-10 years with the revised
assumptions, as shown in the graph below.

YOCost Recovery Projections f o r RWBs

! >
6
150%
Y
g 100%
"
2
- 50%

\o 0%

+NRWB Base +CRWB Base SRWB Base

x X SRWB Improved
I NRWB Improved -0- CRWB Improved

107
Future financial sustainability of the five Water Boards

26. The situation beyond the project implementation period, for the years beyond 2012 would be
particularly challenging for all five Water Boards as the grace period for the IDA credit expires. W h i l e the
Water Boards are likely to be able to continue covering their O&M expenses through their revenues, the
debt service obligations for the IDA credit that k i c k in will give a significant impact o n their overall
financial health.

27. There are some performance improvement measures that the Water Boards can take on their own,
such as increase in revenue base through connecting to new customers, bill collection efficiency
improvements, non-revenue water reduction, and other cost reduction measures. However, it would be
highly crucial that they also receive support from GOM.

28. The key actions that GOM has agreed to take to create an enabling environment for the Water
Boards to perform better are spelled out as covenants in the Financing Agreement o f the Project:

(i) Outstanding water bills by the public institutions will be paid in full and thereafter
the timely payment will be ensured for the future water bills: As it i s normally estimated that
about 30%-70% o f the billed amount are attributed to the public institutions, full and timely
payment would significantly improve the bill collection rates o f the Water Boards. This would
result in timely payment o f their obligations or generation o f cash for reinvestments in new
networks and connections that lead to increased revenue base.

(ii) A time-bound action plan for carrying out debt to equity conversion of the debt
from the Government in the water boards’ balance sheets will be prepared: Debt to equity
conversion o f the existing loans from GOM would reduce the debt service obligations o f the
Water Boards significantly. For example, the existing long-term debt will be reduced from $7.4
million to $320,000 for BWB and from $16 million to $2.4 million for LWB.

(iii) O&M Cost Recovery by 2008/09 and Full Cost Recovery by 2011/12 for All Five
Water Boards: The five water boards will meet i t s O&M costs through their revenues by
fiscal year 2008/09, and continue to improve thereafter to meet their depreciation and
debt service obligations fully by fiscal year 201 1/12.

(iv) Regulatory framework for the delivery of its urban and town water and sanitation
services completed within 18 months of the effectiveness date: This would include
adoption o f a tariff setting mechanism that reflects the need for the Water Boards to
improve their cost recovery levels. Tariff indexation formula i s proposed to enable
automatic increase o f the tariffs along with inflation.

(v) Grant versus Credit Elements and Conditions for Project Component A and B: The
elements that qualify for grants, as well as the on-lending terms and conditions o f the
loans to be passed on to the Water Boards will be specified to ensure the financial
viability o f the Water Boards.

108
 Annex 10: Safeguard Policy Issues
MALAWI: Second NationalWater Development Project

1. OP 4.01 EnvironmentalAssessment: This policy has been triggered due to potential adverse
environmental and social impacts related to the construction and rehabilitation o f investments under
components A and B. Since the precise locations and potential localized adverse impacts could not be
identified prior to appraisal, the borrower has prepared an Environmental and Social Management
Framework (ESMF) which will guide project implementers in identifying, assessing, mitigating and
monitoring future potential adverse environmental and social impacts.

2. The E S M F identifies potential adverse environmental and social impacts o f the future
investments at the various stages o f project implementation. Thus, impacts are expected to result, for
example, from: (i) civil works requiring additional land for storage/distribution tanks, booster stations,
pipelines and for the construction o f temporary structures; (ii)rehabilitation works requiring the
demolition o f existing water supply infrastructure thereby generating wastes that would have to be
disposed o f properly; (iii)additional water abstraction resulting in changes in ground and surface water
regimes, both inside and outside the project areas; (iv) additional water resources leading to an increase in
waste water generation; and (v) the provision o f additional water supplies that may contribute to water
stagnation and sanitation problems.

3. To ensure that the potential impacts on, for example, flora, fauna, soils, water resources, rural
livelihoods or public health are addresses properly, the project implementers will apply the steps o f the
environmental and social screening process outlined in the ESMF. These steps involve: (i) the screening
o f each sub-project as part o f the desk appraisal and subsequently in the field; (ii)
the assignment o f the
appropriate environmental category to each sub-project; (iii) carrying out the appropriate environmental
work (either the application o f mitigation measures with guidance from the environmental checklist); (iv)
review and approval o f the screening results and EA reports; and (v) implementation o f the environmental
management and monitoring plan; this plan i s to be adapted to the sub-projects as necessary. In addition,
the ESMF includes Environmental Guidelines for Contractors to be attached to the bidding documents o f
future sub-projects as well as a summary o f the Bank’s safeguard policies to ensure that h t u r e sub-
projects are implemented in an environmentally and socially sustainable manner.

4. The E S M F proposes that environmental monitoring be carried out at the community level during
the construction and rehabilitation o f the water supply and sanitation facilities, as well as during their
operation and maintenance. Thus, during the rehabilitation o f the existing water supply structures,
members o f the Village Development Committees and District Executive Committees will be responsible
for the monitoring of: (i) construction techniques and inclusion o f environmental design features as
required in the architectural plans; (ii)provisions for traffic safety, reduction in noise and dust levels; (iii)
construction o f on-site waste management, proper storage o f construction materials, sanitation, solid
waste disposal, and waste water disposal; and (iv) implementation o f plans for the restoration o f the
construction sites, once the constructionhehabilitation works have been completed. Area Executive
Committees will support the village level committees at all stages o f the work, including monitoring. T o
ensure proper operation and maintenance o f the water supply and sanitation facilities in an
environmentally friendly manner, the Area Executive Committee within the proposed sites will appoint a
monitoring committee.

5. The E S M F was prepared during field visits in consultation with officials from the Water Boards,
Town and District Assemblies, members o f fishermen associations, villagers, lands officers, and
potentially affected persons. Their concerns and suggestions have been incorporated into the above
generic Environmental Management and Monitoring Plan. The stakeholders largely viewed the project as
very beneficial to their living standards. They suggested that the project carry out public awareness

109
campaigns to sensitize the beneficiaries o n general environmental and social management practices; put
in place effective environmental and social management plans, and use existing local community
structures in the management and administration o f the E S M F in order to promote ownership and
sustainability o f the environmental management plans.

6. The borrower’s capacity to implement safeguard policy recommendations needs to be

strengthened. Thus, to ensure effective implementation o f the E S M F and RPF, the project will fund a
Training Program for the Training o f Trainers. This program will train a total o f 30 personnel from
District Assemblies/Town Assemblies, City Assemblies, Regional Water Boards, Urban Water Boards,
Ministry o f Irrigation and Water Development, and project personnel. Once these representatives have
been trained, it i s recommended that they train (under the supervision o f a qualified facilitator) the other
groups (members o f District Development Committees, Area Executive Committees, Village
Development Committees and Local Leaders or their representatives) that will be directly involved in the
project implementation. Training topics include, for example, the screening process, the use o f checklists,
preparation o f terms o f reference, Malawi’s environmental policies and laws as well as the World Bank’s
safeguard policies.

7. OP 4.12 Involuntary Resettlement: T h i s policy has been triggered due to the planned
rehabilitatiodconstction activities described under components 1-3, T o the extent that these activities
require land, i t i s possible that some people will experience a loss o f livelihoods, impact on assets, loss o f
land, or loss o f access to economic assets. T o address potential adverse social impacts due to land
acquisition, the Borrower has prepared a Resettlement Policy Framework (RPF). The RPF outlines the
policies and procedures to be followed in the event that future project activities involve land acquisition,
impact on assets, and/or the loss o f livelihoods which would require appropriate compensation.

8. OP 7.50 Projects on InternationalWaterways: Consistent with this policy, the Bank, on

behalf o f the Government o f Malawi, has notified the riparian states (Angola, Botswana, Mozambique,
Namibia, Tanzania, Zambia, and Zimbabwe) in December 2006. N o unfavorable responses were received
from any o f the riparians based on international waterways issues.

9. The Bank staff have considered those aspects o f the Project that might have an effect on the
downstream riparians and are satisfied that the Project will not cause appreciable harm to the other
riparians and will not be appreciably harmed by the other riparians’ possible water use.

110
 Annex 11: Project Preparationand Supervision
MALAWI: Second National Water Development Project
~~ ~~

Planned Acutal
PCN review June 27,2005 June 27,2005
Initial PID to PIC October 18,2005 October 18,2005
Initial ISDS to PIC November 17,2006 November 17,2006
Appraisal March 19, 2007 March 23,2007
Negotiations March 26, 2007 March 27, 2007
Board/RVP approval May 24,2007
Planned date o f effectiveness October 3 1,2007
Planned date o f mid-termreview April 31,2010
Planned closing date October 3 1,20 12

1. Key institutions responsible for preparation o f the project:

Ministry o f Irrigation and Water Development
Privatization Commission
Ministry o f Finance
e Ministry o f Economic Planning and Development
Two City Water Boards and Three Regional Water Boards

2. Bank staff and consultants who worked on the project included:

Name Title Unit
Robert Roche Lead Water and Sanitation Specialist AFTU 1
Midori Makino Senior Financial Analyst AFTU 1
Leonard John Abrams Senior Water Resources Management Specialist AFTU 1
Jan Janssens Lead Technical Specialist WBIEN
Edeltraut Gilgan-Hunt Environmental Specialist AFTS2
Kristine Schwebach Social Safeguards Specialist AFTS 1
Gert van den Linde Senior Financial Management Specialist AFTFM
Wedex Ilunga Procurement Specialist AFTPC
Muthoni Kaniaru Senior Counsel LEGAF
Modupe Adebowale Senior Finance Officer LOAG2
Barbara M w i l a Water and Sanitation Specialist ETWAF
Kazimbaya-Senkwe
Yitbarek Tessema Senior Water and Sanitation Specialist AFTU1
Sudeshna Banerjee Economist AFTP 1
Esther Lozo Program Assistant AFMMW
Belinda Asaam Program Assistant AFTU1

Bank funds expended to date on project preparation:

1. Bank resources: US$355,921.38
2. Trust funds:
3. Total: US$355,921.38

Estimated Approval and Supervision costs:

1. Remaining costs to approval: US$75,000
2. Estimated annual supervision cost: us$100,000

111
 Annex 12: Documents in the Project F i l e
MALAWI: Second National W a t e r Development Project

1. Government o f M a l a w i Policy Documents

National water policy

Draft national sanitation policy

2. Preparation Study Reports

Sector reform consultancy reports

Institutional/financial/technical study for low income and peri-urban component

Feasibility studies for physical investments

3. Bank Staff Assessments

Project concept note, quality enhancement review, and decision meeting minutes

Mission aide memoires

4. Project Implementation Documents

Program implementation manual

Implementation manual for urban water and sanitation component

Implementation manuals for town, market center, and rural piped water and sanitation component

Implementation manual for rural water supply and sanitation component

Environmental and social management framework

Resettlement Policy Framework

112
 Annex 13: Statement of Loans and Credits
MALAWI: Second National Water Development Project

Difference between
expected and actual
Original Amount in US$ Millions disbursements
Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d
PO84148 2006 MW-Irrig, Rural Lvlihds & Agr S I L 0.00 0.00 0.00 0.00 0.00 38.26 5.48 0.00
(FY06)
PO57761 2006 MW-Infrastr Srvcs S I M 0.00 0.00 0.00 0.00 0.00 40.49 0.00 0.00
PO83401 2005 MW-Health Sec Supt S I M (FY05) 0.00 0.00 0.00 0.00 0.00 10.27 1.60 0.00
PO70823 2005 MW-Edu Sec Supt SIL 1 (FY05) 0.00 0.00 0.00 0.00 0.00 27.22 -3.96 0.00
PO75247 2004 MW-Com Based Rural Land Dev (FY04) 0.00 0.00 0.00 0.00 0.00 17.11 2.85 0.00
PO73821 2004 MW-Multi-sectoral AIDS - MAP (FY04) 0.00 0.00 0.00 0.00 0.00 13.59 -10.70 0.00
PO78408 2003 MW-Fin Mgmt, Transpar & Account 0.00 23.70 0.00 0.00 0.00 15.47 9.50 0.00
(FY03)
PO75911 2003 MW-MASAF APL 3 (FY03) 0.00 32.80 0.00 0.00 0.00 2.96 -1.88 0.00
PO70235 2001 Regional Trade Fac. Proj. - Malawi 0.00 15.00 0.00 0.00 0.00 12.60 11.08 0.00
PO63095 2000 MW-Priv & Utility Reform (FYOO) 0.00 28.90 0.00 0.00 0.00 9.07 6.44 2.62
Total: 0.00 100.40 0.00 0.00 0.00 187.04 20.41 2.62

MALAWI
STATEMENT OF IFC’s
Held and Disbursed Portfolio
In Millions o f US Dollars

Committed Disbursed
IFC IFC
FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.
2000 NICO 0.00 0.52 0.00 0.00 0.00 0.52 0.00 0.00
Total portfolio: 0.00 0.52 0.00 0.00 0.00 0.52 0.00 0.00

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

Total pending commitment: 0.00 0.00 0.00 0.00

113
 Annex 14: Country at a Glance
MALAWI: Second National Water Development Project

Sub-
POVERTY a n d SOCIAL Saharan LOW-
> e v e I o p m e n t dlamond.
Maiawl Afrlca Income
2005
Population, mid-year (millions) P.9 741 2,353
Life expectancy
GNi percapita (Atlasmethod, US$) 60 745 580
GNi (Atlas method, US$ billions) 2.1 552 1364 -
Average annual growth, 1999-05
Population (%) 2.3 2.3 19
Laborforce (%) Gross
2.0 2.3 23
capita
"1 l+enroimeni primar)
M os1 recent ertlmate ( l a t e s t year available, W99-05)
Poverty (% o f population belo wnatbnal po verty line)
Urban population (%oftotalpopulationj
Life expectancyat birth ( e a r s )
n
40
35
46
30
59
infant rnortaiity (per lOOOllve birfhs) m 00 80
Childmalnutrition(%ofchiidrenunder5) 22 29 39 Access to improvedwatersource
Access to an improvedwater source (%ofpopulation) 73 58 75
Literacy (%ofpopulation age a+) 64 62
Gross primaryenroilment (%ofschool%gepopulation) P5 93 04 -Malaw
M ale P3 99 10 Lowrncome omuD
Female 126 87 99

KEY ECONOMIC RATIOS a n d LONG-TERM T R E N D S

1985 1995 2004 2005 Economlc ratlos'
GDP (US%biiiions) 11 14 19 21
Gross capital formation1GDP 6.5 7.4 '6.3 145
Trade
Exports of goods and SewicesIGDP 24.2 30.4 26.8 26 8
Gross domestic savingsiGDP P,9 -0.3 -9.1 -n6
Gross national savingslGDP .. -4.0 -5.3 -7 4
Current account balance1GDP -8.5 -P2 -8.1 -8 2
Domestic Capital
interest papentslGDP 2.7 2.8 12
savings formation
Total debt1GDP 90.2 602 79.6
Total debt serviceleuports 39.0 26.5 9,3
Present value of debtlGDP 57.1
Present value of debtlexports 69.8
indebtedness
1985-95 m 9 5 - 0 5 zoo4 2005 2005-09
(average annualgroMh)
GDP 2.4 2.7 7.1 2.6 6.8 -Malaw
GDP percapita -0.9 0.1 4.8 0.4 6.2 Lowrncome group
Exports of goods and sewices 1.7 19 -3.0 202 3.0

STRUCTURE o f the ECONOMY

1985 7995 2004 2005 Growth o f capltal and GDP (%I
(%ofGDPj
40 T
Agriculture 429 304 38.9 347
industry 219 86 17.2 84
Manufacturing 145 '68 114 P5
Services 352 500 44.0 45 9
Householdfinal consumption expenditure 694 794 92.2 948
Genera gov't flnaiconsumptlon expenditure T77 210 8.9 67
Imports of goodsandservices 299 461 512 53 0

1985.95 1995.05 2004 2005 Growth of exports and i m p o r t s (%)

I
(average annualgrovclh)
Agriculture 19 40 2.7 -9 1 40 T

Industry 34 11 u.2 154 20

Manufacturing 31 -07 6.9 11s
Services
Household final consumption elpenditure
Generalgov't final consumption emnditure
24
48
16
13
32
37
5.3
2.1
P.1
52
27
15
11:
Gross capital formation -14 -12 332 03
Imparts of goodsandservices 28 23 -0.7 110

Note 2005 data are preliminawestimates

This tabiewas producedfrom the Development Economics LDB database
*Thediamonds showfourkeyindicatom in thecountry(in bo1d)comparedmthits income-groupaverage If dataare missing. the diamondhill
be incomDiete

114
PRICES andGOVERNMENT FINANCE
1985 1995 2004 2005
D o m e s t l c prlces
(%change)
Consumer prices 0.5 83.3 114 6.4
Implicit GDP deflator 8.9 77.2 P5 15.5
Government flnance
(%of GDP, includes current grants)
Current revenue 22.7 8.7 23 2 25.6 00 01 02 03 M 05
Current budget balance -0.8 -8.2 -8 1 -02
Overall surplus/deficit -9.7 -a.o -20 7 -20 9

TRADE
1985 1996 2004 2005
Export and Import levels (US$ mlll.)
(US$ millions)

I
Total exports (fob) 300 404 470 514
Tobacco la 256 230 282
Tea 54 27 47 51
Manufactures 50 49 ,a5 It?
Total imports (cif) 287 474 866 984
Food 2 01 85 20
Fuel and energy 34 45 83 94

I
Capital goods 77 157 287 326
99 00 01 02 03
E q o r t price index (20OO=fJO) im 08 01
Import price index (2000=00) 96 98 97 Exports Inports
Terms of trade (2000-fJ0) P2 10 04

BALANCE of PAYMENTS
1985 1995 2004 2006
Current account balance to G D P (‘4
(US$ millions)
Exports of goods and Services 276 429 511 578 0
Imports of goods and services 331 548 947 1066
5
Resource balance -54 -118 -436 -488

Net income -53 -47 -45 -41 .10

Net current transfers -4 1% a1
.15
Current account balance -97 -77 1 -363 -398
-20
Financing items (net) 54 258 379 445
Changes in net reserves 42 -87 -8 -47
Memo:
Reserves including gold (US$ millionsl 49 115 t34 85
Conversion rate (DEC,local/US$) 17 6.3 $38.9 18.4

E X T E R N A L D E B T and R E S O U R C E FLOWS
1985 1995 2004 2005
:omposition o f 2004 debt (US$ mill.;
(US$ millions)
Total debt outstanding and disbursed 1021 2,239 3,418
iB RD 69 55 0 0 F:8 a28
IDA 322 1251 2,075 1940
Total debt service 10 18 60
iB RD 7 8 1 0
IDA 3 8 25 50
Composition of net resource flows
Official grants 38 262 348
Official creditors 52 773 62
Private creditors -29 -23 -2
Foreign direct investment (net inflows) 1 6 8
Portfolio equity(net inflows) 0 0 0
World Bank program
Commitments a5 00 54 IBRD E-Ellateril
.
b.
Disbursements 34 73 62 45 E IDA D. Other mltilEitrd F - Private
Principal repayments 2 18 a 35 G-Start-ten
Net flows 32 55 50 0
Interest payments 8 8 14 ‘8
Net transfers 24 39 37 -5

Note: This table was produced from the Development Economics LDB database. 8/t3/08

115
 IBRD 35457
32°E 34°E 36°E

To

To
Song
we
Mbeya TANZA
TA NZA NI
NIAA
Tunduma
Chitipa
MALAWI
Karonga
10°S Chisenga 10°S
KAR ON
KA RO N GA
To CHI
C HI T I PA
Muyombe
Nykia Chilumba
(2,606 m)
Chelinda Mkondowe
To
Muyombe Livingstonia
Katumbe
R UM PHI
Rumphi

Ruarwe
M ZI M
MBBA

s.
Kafukule
Mzuzu

Mtn
Euthini
Nkhata
NORT HERN
NORTHERN Bay
ZAMBIA a
N KHATA
KH ATA
Viphy

B AY
Mzimba Chinteche (MALAWI)

Lake Mala
12°S 12°S
Luwawa

To
Lundazi
Nkhunga
wi

Kaluluma

KASUNGU Nkhotakota
Kasungu
NKHOTAKOTA
MOZAMBIQUE
N T CHI SI
CH IS
Ntchisi
0 20 40 60 80 100 Kilometers MCHINJ I
MCHINJI
C EN T R A L
DOWA Dowa SSAL
AL IM
IMA Makanjila
Bua

To Mchinji
Chipata Salima
0 20 40 60 Miles
LILONGWE
14°S 14°S
Namitete Monkey
Bay
LI LO
LILL ON
N GW E D ZA
DE DZA To
To Cuamba
Furancungo MANGOCHI
Dedza
Mangochi
To
Ulongwe
NTCHEU SOUTHERN
To
32°E
MOZAMBIQUE Ntcheu BalakaM ACH
ACHIIN
NGGA
A Cuamba

Liwonde
Machinga
ire

M ALAWI
Sh

Lake
ZOM BA
ZO MB
SECO N D NATI ONAL WATER M WA
WANN ZA Zomba
Chilwa

DE V E L O P M ENTP R OJEC T To
Tete
Mwanza
Lirangwe
BLANTYRE
Chiradzulu
PHALOMBE
PARTICIPATING CITIES Blantyre CHIRADZULU Phalombe
PARTICIPATING TOWNS M UL AN JE
MULANJE
16°S Chikwawa Mulanje Sapitwa 16°S
THYOLO (3,002 m)
LAKE LEVEL CONTROL STRUCTURE
Thyolo
SELECTED CITIES AND TOWNS CH IKWAWA
CHI K WAWA To
Liciro
DISTRICT CAPITALS
N’gabu
REGION CAPITALS To
Morire
NATIONAL CAPITAL
NSANJE
RIVERS
MAIN ROADS Nsanje

RAILROADS This map was produced by the Map Design Unit of The World Bank.
The boundaries, colors, denominations and any other information
DISTRICT BOUNDARIES To shown on this map do not imply, on the part of The World Bank
Vila de Sena Group, any judgment on the legal status of any territory, or any
REGION BOUNDARIES endorsement or acceptance of such boundaries.
INTERNATIONAL BOUNDARIES 36°E

APRIL 2007