manual de operaÇÃo volume...

Companhia de Saneamento Básico do Estado de São Paulo - SABESP

Banco Internacional para Reconstrução e Desenvolvimento - BIRD

UNIDADE DE GERENCIAMENTO DO PROGRAMA

UGP

MANUAL DE OPERAÇÃO

Volume 2A

PROGRAMA DE SANEAMENTO SUSTENTÁVEL E

INCLUSIVO

Junho/2019

Apresentação

O presente Volume 2 do Manual de Operação do Programa Saneamento Sustentável e Inclusivo

é constituído basicamente por uma compilação de documentos (contratuais e similares,

licitatórios) e por modelos disponíveis de relatórios.

Assim, nesse Volume 2, encontram-se os documentos contratuais:

- Acordo de Empréstimo.

- Acordo de Garantia.

- Carta de Desembolso e Informações Financeiras.

- Project Appraisal Document (PAD).

- Deliberação de Diretoria da Sabesp 0289/2018, criando a Unidade de Gerenciamento do

Programa (UGP).

- Lei Autorizativa Estadual n. 16.851, que autoriza o Governo do Estado de São Paulo a prestar

contra-garantias à União em operações de crédito junto ao Banco Interamericano de

Desenvolvimento (BID) e ao Banco Internacional para Reconstrução e Desenvolvimento (BIRD).

- Plano de Aquisição (primeiro Plano de Aquisição elaborado durante a preparação técnica do

Programa).

-Links para acesso aos Editais padrão utilizados pelo Banco e que devem ser adotados nas

licitações do Programa que recorram a recursos do Acordo de Empréstimo.

- Modelos de Relatórios.

Há várias modalidades de Relatórios previstos para o desenvolvimento e a implantação do

Programa Sustentabilidade e Inclusão Social. Os Relatórios estão descritos, com avançado grau

de detalhe, no Volume 1 do Manual de Operação (Capítulo 8).

No momento da edição desse Volume 2 do Manual, estão disponíveis três modelos de

Relatórios:

- IFR - Interim Unaudited Financial Report (Relatório Financeiro Internediário – RFI).

- Plano de Aquisição (modelo Banco Mundial).

- Plano de Aquisição (Modelo Sabesp).

Conforme outros relatórios venham a ser elaborados, seus modelos poderão ou deverão ser

incorporados a esse Volume do Manual de Operação.

FOR OFFICIAL USE ONLY

Report No: PAD2906

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$250 MILLION

TO THE

SÃO PAULO STATE WATER UTILITY

(COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP)

WITH A GUARANTEE FROM THE FEDERATIVE REPUBLIC OF BRAZIL

FOR THE

SABESP - IMPROVING WATER SERVICE ACCESS AND SECURITY IN THE METROPOLITAN REGION OF SÃO PAULO PROJECT

November 27, 2018

Water Global Practice Latin America and the Caribbean Region

This Document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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The World Bank

CURRENCY EQUIVALENTS

(Exchange Rate Effective September 24, 2018)

Currency Unit = Brazilian Reais (BRL)

US$1.0 = BRL 4.06

US$0.25 = BRL 1.00

FISCAL YEAR

January 1 - December 31

Regional Vice President: Jorge Familiar Calderon

Country Director: Martin Raiser

Senior Global Practice Director: Jennifer Sara

Practice Manager: Rita E. Cestti

Task Team Leaders: Juliana Menezes Garrido Marcos T. Abicalil

The World Bank

ABBREVIATIONS AND ACRONYMS

AAR Alkali-Aggregate-Reaction ANA National Water Agency - Agência Nacional de Água APA Action Plan of Activities APL Adaptable Program Lending ARSESP São Paulo State Regulatory Agency - Agência Reguladora de Saneamento e Energia do

Estado de São Paulo BNDES National Economic and Social Development Bank - Banco Nacional de Desenvolvimento

Econômico e Social BRL Brazilian Real CAPEX Capital Expenditures CEO Chief Executive Officer CEF National Savings Bank - Caixa Econômica Federal CERC Contingent Emergency Response Component CLP Programmable Logic Controller - Controlador Lógico Programável CPF Country Partnership Framework CS SABESP’s Corporation Management Department - Superintendência de Suprimentos e

Contratações Estratégicas CVM Brazilian Securities Commission - Comissão de Valores Mobiliários DAEE Water and Energy Resources Department - Departamento de Águas e Energia Elétrica DALY Disability-Adjusted Life Years DBFOM Design-Build-Finance-Operate-Maintain EAP Emergency Action Plan EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization EMAE Metropolitan Water and Energy Company - Empresa Metropolitana de Águas e Energia EPP Emergency Preparedness Plan ERR Economic Rate of Return ESMF Environmental and Social Management Framework ESMP Environmental and Social Management Plan FFT Financial Analysis and Contracts Division - Departamento de Análise Financeira e Contratos

da SABESP FIN SABESP’s Financing Department - Departamento de Captação de Recursos da SABESP FINEP Studies and Projects Funding Agency - Financiadora de Estudos e Projetos FM Financial Management FMA Financial Management Assessment GDP Gross Domestic Product GHG Greenhouse Gases GoSP State Government of São Paulo GRM Grievance Redress Mechanism IADB Inter-American Development Bank IBGE Brazilian Institute of Geography and Statistics - Instituto Brasileiro de Geografia e

Estatística IFC International Finance Corporation IFR Interim Unaudited Financial Report

The World Bank

IPF Investment Project Financing IPVS São Paulo Social Vulnerability Index - Índice Paulista de Vulnerabilidade Social JICA Japan International Cooperation Agency MAR SABESP’s Water Resources for the Metropolitan Region Division - Departamento de

Recursos Hídricos Metropolitanos da SABESP MC SABESP’s Business Unit – Downtown - Unidade de Negócio - Centro da SABESP MD SABESP’s Metropolitan Department - Diretoria Metropolitana da SABESP MDC SABESP’s Comptroller Division - Departamento de Controladoria da SABESP ME SABESP’s Entrepreneurship Management Division - Departamento de Gestão de

Empreendimentos da SABESP MIS SABESP’s Integrated Administrative Service Department - Departamento de Serviços

Administrativos Integrados da SABESP ML SABESP’s Business Unit – East - Unidade de Negócios - Leste da SABESP MM SABESP’s Strategic Maintenance Unit - Superintendência de Manutenção Estratégica da

SABESP MN SABESP’s Business Unit – North - Unidade de Negócios - Norte da SABESP MO SABESP’s Business Unit – West - Unidade de Negócios - Oeste da SABESP MP SABESP’s Planning and Development Unit of the Metropolitan Department -

Superintendência de Planejamento e Desenvolvimento da Diretoria Metropolitana da SABESP

MRSP Metropolitan Region of São Paulo MS SABESP’s Business Unit – South - Unidade de Negócios - Sul da SABESP NPV Net Present Value NRW Nonrevenue Water O&M Operation and Maintenance PDO Project Development Objective PIU Project Implementation Unit POM Project Operation Manual PPSD Project Procurement Strategy for Development PR SABESP’s Chief Executive Officer Office - Superintendência de Assuntos Regulatórios da

SABESP RPF Resettlement Policy Framework SABESP São Paulo State Water Utility - Companhia de Saneamento Básico do Estado de São Paulo SAP Information Management System - Sistema de Gerenciamento de Informação SDG Sustainable Development Goal SEC Securities and Exchange Commission SIA Social Impact Assessment SSRH São Paulo State Secretary of Water and Sanitation - Secretaria de Saneamento e Recursos

Hídricos do Estado de São Paulo STEP Systematic Tracking of Exchanges in Procurement ToRs Terms of Reference WSS Water Supply and Sanitation WWTP Wastewater Treatment Plant

The World Bank SABESP Improving Water Service Access and Security Project in the Metropolitan Region of São Paulo (P165695)

TABLE OF CONTENTS

DATASHEET ................................................................................. Error! Bookmark not defined.

I. STRATEGIC CONTEXT .......................................................................................................... 7

A. Country Context ............................................................................................................................... 7

B. Sectoral and Institutional Context .................................................................................................. 8

C. Relevance to Higher Level Objectives ........................................................................................... 11

II. PROJECT DESCRIPTION ..................................................................................................... 12

A. Project Development Objective .................................................................................................... 12

B. Project Components ...................................................................................................................... 13

C. Project Beneficiaries ...................................................................................................................... 15

D. Results Chain .................................................................................................................................. 17

E. Rationale for Bank Involvement and Role of Partners ................................................................. 18

F. Lessons Learned and Reflected in the Project Design ................................................................... 19

III. IMPLEMENTATION ARRANGEMENTS .............................................................................. 21

A. Institutional and Implementation Arrangements ........................................................................ 21

B. Results Monitoring and Evaluation Arrangements ...................................................................... 22

C. Sustainability .................................................................................................................................. 23

IV. PROJECT APPRAISAL SUMMARY ..................................................................................... 23

A. Technical, Economic and Financial Analysis ................................................................................. 23

B. Fiduciary ......................................................................................................................................... 27

C. Safeguards ...................................................................................................................................... 28

V. KEY RISKS ........................................................................................................................ 33

VI. RESULTS FRAMEWORK AND MONITORING ..................................................................... 36

ANNEX 1: IMPLEMENTATION ARRANGEMENTS AND SUPPORT PLAN ................................... 50

ANNEX 2: SPECIFIC PROJECT DESIGN ANALYSIS .................................................................... 56

ANNEX 2A: BACKGROUND OF SABESP .................................................................................. 71

ANNEX 3: ECONOMIC AND FINANCIAL ANALYSIS ................................................................. 79

ANNEX 4: FIDUCIARY ........................................................................................................... 93

ANNEX 5: MAP .................................................................................................................. 102

The World Bank SABESP Improving Water Service Access and Security Project in the Metropolitan Region of São Paulo (P165695)

Page 1 of 102

DATASHEET

BASIC INFORMATION BASIC_INFO_TABLE

Country(ies) Project Name

Brazil SABESP - IMPROVING WATER SERVICE ACCESS AND SECURITY IN THE METROPOLITAN REGION OF SÃO PAULO PROJECT

Project ID Financing Instrument Environmental Assessment Category

P165695 Investment Project Financing

B-Partial Assessment

Financing & Implementation Modalities

[ ] Multiphase Programmatic Approach (MPA) [✓] Contingent Emergency Response Component (CERC)

[ ] Series of Projects (SOP) [ ] Fragile State(s)

[ ] Disbursement-linked Indicators (DLIs) [ ] Small State(s)

[ ] Financial Intermediaries (FI) [ ] Fragile within a non-fragile Country

[ ] Project-Based Guarantee [ ] Conflict

[ ] Deferred Drawdown [ ] Responding to Natural or Man-made Disaster

[ ] Alternate Procurement Arrangements (APA)

Expected Approval Date Expected Closing Date

18-Dec-2018 16-Jun-2025

Bank/IFC Collaboration Joint Level

Yes Historical Project/Activity implemented in sequence with an IFC activity(Loan/Credit/Guarantee/AAA)

Proposed Development Objective(s)

The Project Development Objectives are to increase access of vulnerable people to water services and to contribute to the reduction of water losses and pollution loads in the Metropolitan Region of São Paulo.

The World Bank SABESP Improving Water Service Access and Security in the Metropolitan Region of São Paulo Project (P165695)

Page 2 of 102

Components

Component Name Cost (US$, millions)

Expand access to water services, reduce water losses, and increase system resilience in the MRSP

255.20

Reduce pollution loads to scarce water resources in the Guarapiranga Water Basin 59.90

Technical assistance and Project management and supervision 34.30

Contingent Emergency Response Component – CERC 0.00

Organizations

Borrower: SABESP

Implementing Agency: SABESP

PROJECT FINANCING DATA (US$, Millions)

SUMMARY-NewFin1

Total Project Cost 350.00

Total Financing 350.00

of which IBRD/IDA 250.00

Financing Gap 0.00

DETAILS-NewFinEnh1

World Bank Group Financing

International Bank for Reconstruction and Development (IBRD) 250.00

Non-World Bank Group Financing

Counterpart Funding 100.00

Borrower 100.00

Expected Disbursements (in US$, Millions)

WB Fiscal Year 2019 2020 2021 2022 2023 2024 2025 2026


Page 3 of 102

Annual 2.16 9.97 15.84 30.09 48.82 61.52 56.36 25.23

Cumulative 2.16 12.13 27.97 58.07 106.89 168.41 224.77 250.00

INSTITUTIONAL DATA Practice Area (Lead) Contributing Practice Areas

Water

Climate Change and Disaster Screening

This operation has been screened for short and long-term climate change and disaster risks

Gender Tag

Does the project plan to undertake any of the following?

a. Analysis to identify Project-relevant gaps between males and females, especially in light of country gaps identified through SCD and CPF

Yes

b. Specific action(s) to address the gender gaps identified in (a) and/or to improve women or men's empowerment

Yes

c. Include Indicators in results framework to monitor outcomes from actions identified in (b) Yes

SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT)

Risk Category Rating

1. Political and Governance ⚫ Substantial

2. Macroeconomic ⚫ Substantial

3. Sector Strategies and Policies ⚫ Substantial

4. Technical Design of Project or Program ⚫ Substantial

5. Institutional Capacity for Implementation and Sustainability ⚫ Moderate

6. Fiduciary ⚫ Moderate

7. Environment and Social ⚫ Moderate

8. Stakeholders ⚫ Moderate


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9. Other

10. Overall ⚫ Moderate

COMPLIANCE

Policy Does the project depart from the CPF in content or in other significant respects?

[ ] Yes [✓] No

Does the project require any waivers of Bank policies?

[ ] Yes [✓] No

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 ✔

Performance Standards for Private Sector Activities OP/BP 4.03 ✔

Natural Habitats OP/BP 4.04 ✔

Forests OP/BP 4.36 ✔

Pest Management OP 4.09 ✔

Physical Cultural Resources OP/BP 4.11 ✔

Indigenous Peoples OP/BP 4.10 ✔

Involuntary Resettlement OP/BP 4.12 ✔

Safety of Dams OP/BP 4.37 ✔

Projects on International Waterways OP/BP 7.50 ✔

Projects in Disputed Areas OP/BP 7.60 ✔

Legal Covenants

Sections and Description The Borrower shall maintain a Project Implementation Unit (the “PIU”) at all times during the implementation of the Project, with sufficient resources, decision making capacity, competent staff in adequate numbers and responsibilities, all acceptable to the Bank and as set forth in the Operational Manual. The Borrower shall, no later than eight months after the Effective Date, hire a Managing Company to support the Borrower in the implementation of the Project, with terms of reference, competence, capacity and staff acceptable


Page 5 of 102

to the Bank, as further detailed in the Project Operational Manual. (Schedule 2, Section I.A of the Loan Agreement)

Sections and Description The Borrower shall: (i) adopt and carry out the Project in accordance with the Operational Manual acceptable to the Bank, which shall include the rules, methods, guidelines, standard documents and procedures for the carrying out of the Project, including the following: (a) the detailed description of Project implementation activities and the detailed institutional arrangements of the Project; (b) the Project administrative, accounting, auditing, reporting, financial (including cash flow aspects in relation thereto), procurement and disbursement procedures; (c) the monitoring indicators for the Project; (d) the contractual arrangements and missions of the Managing Company; and (e) the ESMF and the RPF; and (ii) not amend, suspend, abrogate, repeal or waive any provision of said Operational Manual without the prior written approval of the Bank. (Schedule 2, Section I.B of the Loan Agreement)

Sections and Description In order to ensure the proper implementation of Part 4 of the Project after the occurrence of an Eligible Crisis or Emergency, and prior to the carrying out of any activities under said Part of the Project, the Borrower shall take the following measures, all under terms and in a manner satisfactory to the Bank: (a) determine or provide evidence that a competent entity has determined that an Eligible Crisis or Emergency has occurred, and the Bank has agreed with said determination; (b) prepare and furnish to the Bank an official request to finance the Eligible Expenditures under Category (2) in order to respond to said Eligible Crisis or Emergency; (c) prepare, consult and disclose all safeguards instruments required for said activities, in accordance with the provisions of Section I.D of this Agreement; and (d) prepare and furnish to the Bank a manual (the CERC Manual), for the implementation of Part 4 of the Project, including: (i) a list of proposed emergency response and reconstruction activities to be carried out; (ii) financial management arrangements; (iii) procurement methods and procedures; (iv) documentation required for withdrawals of Eligible Expenditures under Category (2); (v) safeguard instruments for environmental and social management consistent with the Bank’s Safeguard Policies then in force on the matter; and (vi) any other arrangements necessary to ensure proper coordination and implementation of Part 4 of the Project. (Schedule 2, Section I.C of the Loan Agreement)

Sections and Description The Borrower shall: (a) implement the Project in accordance with the provisions of the ESMF and the RPF; (b) ensure that all measures for carrying out the recommendations of the ESMF, and the RPF are taken in a timely manner and that all necessary plans prepared in accordance with said ESMF and RPF have received the Bank’s written no-objection prior to the start of any works or services; and (c) ensure that the terms of reference of any consultancy in respect to the Project shall be satisfactory to the Bank following its review thereof and, to that end, such terms of reference shall duly incorporate the requirements of the Bank’s Safeguard Policies then in force, as applied to the advice conveyed through such consulting services. (Schedule 2, Section I.D of the Loan Agreement)


Page 6 of 102

Sections and Description By June 15, 2022, or such other date as the Bank shall agree upon, the Borrower shall: (i) carry out, jointly with the Bank, a mid-term review of the implementation of the Project, which shall cover the progress achieved in the implementation of the Project; and (ii) following such mid-term review, act promptly and diligently to take any corrective action as shall be agreed by the Bank. (Schedule 2, Section IV of the Loan Agreement)

Conditions

Type Description

Effectiveness Operational Manual adopted by the Borrower in a manner and with contents acceptable to

the Bank.

(Article IV of the Loan Agreement) Type Description

Disbursement 1. Notwithstanding the provisions of Section III A above, no withdrawal shall be made:

(a) under Category (1), for payments made prior to the Signature Date, except that

withdrawals up to an aggregate amount not to exceed $50,000,000 may be made for

payments made prior to this date but on or after August 1, 2018 or the date falling twelve

months prior to the Signature Date, for Eligible Expenditures; or

(b) under Category (2) until the Borrower has: (i) determined or provided evidence that a

competent entity has determined that an Eligible Crisis or Emergency has occurred; (ii)

prepared, consulted and disclosed all safeguards instruments required; and (iii) prepared and

furnished the CERC Manual; all in a manner satisfactory to the Bank.

2. The Closing Date is June 16, 2025. The Bank may grant an extension of the Closing Date

only after the Guarantor’s Ministry of Finance has informed the Bank that it agrees with such

extension.

(Schedule 2, Section III B of the Loan Agreement)


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I. STRATEGIC CONTEXT

A. Country Context

1. After a decade of rapid growth and social progress up to 2013, Brazil’s economy first stumbled and then fell into deep recession. A decade of sound macro policies and a favorable external environment contributed to fast economic and social progress between 2001 and 2010. However, the deterioration in both factors led to a steady decline in growth declining from an average of 4.5 percent per year in 2006–10 to 2.4 percent in 2011–14, followed by contractions of 3.5 percent per year in 2015 and 2016. While external factors triggered the slowdown, an expansionary policy response led to rapidly rising fiscal disequilibria and, with rising domestic political uncertainty, a loss of confidence and sharp drop in investment. Economic recovery remains weak with 1 percent growth in 2017 and 1.2 percent growth projected for 2018.

2. The crisis threatens a decade of development progress. Brazil experienced an unprecedented reduction in poverty and inequality between 2006 and 2015 when 24.8 million Brazilians escaped poverty and the Gini coefficient of household incomes fell to 0.51 in 2015 from 0.59 in 1999. Most of this reduction was explained by the creation of formal sector jobs, resulting in a sharp decline in the unemployment rate to a low of 6.8 percent in 2014. However, the economic crisis precipitated a rapid rise in unemployment with job losses of 0.6 million in 2015 and 2.0 million in 2016. As a result, poverty increased in 2015 and 2016. With on-going tepid economic growth, poverty is estimated to have leveled off at 20.6 percent in 2017.

3. Restoring fiscal sustainability is the most urgent economic challenge for Brazil. To address unsustainable debt dynamics, in December 2016 the Government adopted a constitutional amendment to limit public expenditure growth, which entails an accumulated adjustment of 5 percentage points of Gross Domestic Product (GDP) for 2019–26 and would stabilize debt at around 89 percent of GDP by 2026, declining thereafter. Implementing this fiscal adjustment requires alleviating the rigidities affecting public spending and revenue earmarking mechanisms, which make over 90 percent of the federal government’s primary spending mandatory. It will also require a comprehensive reform of social security to halt the projected increase in the deficit and possible adoption of controls on the wage bill and rationalizing programs to support private sector development. This large fiscal disequilibrium also affects subnational governments with limited capacity to cope with growing wage bill and pension payments unless reforms are adopted. While spending restraint will continue to dominate the fiscal agenda, there is large scope for efficiency improvements in public services. Thus, fiscal adjustment need will not come at the expense of worsening access or service quality. However, realizing efficiency gains requires structural changes to budget rules and incentives and is resisted by some public-sector interest groups.

4. Brazil will also need to accelerate productivity growth and infrastructure development. The income of an average Brazilian has only risen by 0.7 percent per year since the mid-1990s—one-tenth the rate in China and only half the average in the Organization for Economic Co-operation and Development countries. This is mainly explained by the lack of total factor productivity growth between 1996 and 2015. The productivity problem in Brazil stems from the lack of a conducive business environment, distortions created by market fragmentation, multiple business support programs, and a market that is relatively closed to external trade and competition. Brazil also posts one of the lowest rates of infrastructure investment (2.1 percent of GDP over 2000–13) compared to its peers and the quality of this investment is low. Accelerating productivity growth remains a key priority for the country and there is limited space for public sector led growth. Reforms could focus on boosting market competition, greater access to external markets and cheaper inputs and technologies and simplifications to the tax system. Higher levels of investment in infrastructure will also be needed to ensure adequate maintenance and expansion of the existing infrastructure stock necessary to meet the needs of the population and to increase Brazil’s prospects for further economic growth and competitiveness. This calls for


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improved planning capacity at the Government level, improving the regulatory environment and leveraging private resources to finance investments.

5. Generating 33 percent of Brazil’s GDP, São Paulo is the most populous state, a major industrial complex, and home to roughly 11 percent of the country’s poor. Located in the southeast region of the country, the State of São Paulo is home to roughly 46 million people (24 percent of Brazil’s total population). An estimated 96 percent of its population is concentrated in urban areas, the largest of which is in the Metropolitan Region of São Paulo (MRSP). With almost 22 million habitants, the MRSP is the largest metropolitan region in Brazil and the 10th largest in the world, generating close to 60 percent of the state’s GDP. Despite its lead standing in terms of size and economy, approximately 0.7 million people live below the poverty line of US$5.50 income per day1 while almost 20 percent of the population of the MRSP falls under the high and very high social vulnerability category (which comprises 62 percent of the state’s vulnerable population).2 In São Paulo, as elsewhere in Brazil, households headed by single women with children are overrepresented among families living below the poverty line,3 many of whom live in vulnerable and high-risk areas with poor water and sanitation services.

B. Sectoral and Institutional Context

6. The MRSP faces crucial water shortages, which are rapidly increasing due to urban growth and pollution. While Brazil is home to 19 percent of total world freshwater resources, its waters are unevenly distributed. Water availability is rapidly becoming a major constraint to growth and the poor are more directly and disproportionally affected by the lack of water. In the State of São Paulo, half of its 22 water basins face crucial water shortages4—due to the increase in population and high urban concentration which affect water quality—the worst being the Upper Tiete Basin that is responsible for 88 percent5 of the average water supplied to the MRSP. The per capita water availability of 140 cubic meter (m³) per inhabitant per year for the MRSP is comparable to the driest areas in the northeast. While 95.6 percent of the state’s households are connected to the water supply network, only 79 percent are connected to the sewerage network, of which, only 62 percent is treated. Hence, a considerable amount of wastewater is discharged directly in water bodies, further affecting the quality and availability of water in the region. Water services will also become increasingly vulnerable to climate change. The 2014 World Bank Report Turn Down the Heat6 predicts that climate change will significantly impact Latin America going forward, increasing the likelihood of droughts, floods, and other extreme weather events with adverse effects on the poor and the overall economy. The 2014–15 drought and water crisis that affected São Paulo and its MRSP is likely to become more frequent and severe. Droughts not only decrease water availability but also worsen water quality by reducing the capacity of rivers to dilute pollution loads.

1 Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística, IBGE), Síntese de Indicadores Sociais 2017, available at https://biblioteca.ibge.gov.br/visualizacao/livros/liv101459.pdf. 2 In 2010, the Seade Foundation developed the São Paulo Social Vulnerability Index (Índice Paulista de Vulnerabilidade Social, IPVS), based on information derived from the census. The index considers not only income data but also various determining factors of social vulnerability such as, among others, schooling, health, family structure, labor market, and access to public services. https://www.seade.gov.br/wp-content/uploads/2014/06/Primeira_Analise_n8_novembro_2013.pdf. 3 The mono-parental families headed by women with children are among the most vulnerable social group. Extreme poverty—counted as people living with a monthly household per capita income below the US$5.50 threshold—affects 55.6 percent of these families in the country and 64.0 percent of the families headed by afro-descendants women (IBGE, Síntese de Indicadores Sociais 2017). Mono-parental families headed by women with children also count for most of the families registered in the national flagship cash transfer program (Bolsa Família). They comprise 36 percent of the total beneficiary families of the program and 65 percent of them are extremely poor. (Ministry of Social Development, Perfil das Pessoas e Famílias no Cadastro Único do Governo Federal - 2013). 4 São Paulo Water Resources Report, 2016 (Sao Paulo Integrated Water Resources Management System, Sistema Integardo de Gerenciamento de Recursos Hidricos do Estado de São Paulo - SigRH website – www.sigrh.sp.gov.br). 5 Data informed by São Paulo State Water Utility (Companhia de Saneamento Básico do Estado de São Paulo, SABESP) based on 2017 average water production by water system. 6 World Bank Group. 2014. Turn Down the Heat: Confronting the New Climate Normal. Washington, DC: World Bank.

https://www.seade.gov.br/wp-content/uploads/2014/06/Primeira_Analise_n8_novembro_2013.pdf


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7. The 2014–15 water crisis exposed the vulnerability of the MRSP to water shortage and required drastic measures to reduce consumption. In 2014 and 2015, the State of São Paulo faced one of the most serious droughts in recorded history. In February 2015, the total water volume in the MRSP reservoirs was at 22 percent of its capacity. Total water production fell from 71.4 m3 per second, in February 2014 when the drought intensified, to 54.8 m3 per second, in December 2015. SABESP adopted a number of emergency measures to reduce the impacts of the drought. Water demand management was promoted with the provision of financial incentives to reduce consumption. Between 2014 and 2016, about 80 percent of water consumers received a bonus for reduced consumption, which resulted in an average reduction from 155 to 118 liter per person per day.7 SABESP also expanded pressure reducing valves to 51 percent of the network, significantly reducing water losses and increasing water supply control, which accounted for an estimated 50 percent of water savings throughout 2015.8 New water storage facilities and pumps to access the remaining water in reservoirs were built. Ultrafiltration membranes were installed to increase water treatment capacity of the Guarapiranga water treatment plant. These measures, partially financed by the World Bank’s Mananciais Project9, combined with investments10 to increase water transfers within the existing seven water production systems, resulted in an increase of 10 m3 per second to the integrated system.

8. The measures in response to the water crisis and the current macroeconomic situation in Brazil remain key challenges for the sector and SABESP. The water crisis, combined with Brazil’s persisting macroeconomic situation since 2014, continues to bring uncertainties and restrictions to SABESP. Although the volume of water in reservoirs serving the MRSP increased to 49 percent11 of their capacity in 2017 and the critical impacts on water supply availability have gradually subsided, SABESP faces new paradigms as the consumption rate has declined by 23 percent12 and large customers have migrated to other water supply sources. There are also uncertainties concerning tariff increases in the short term, particularly regarding remuneration over asset base. Despite the 6.9 percent extraordinary tariff increase in 2015 to compensate higher water supply costs and reduced consumption, it did not compensate for the losses in revenues resulting from the bonus program. The Regulatory Agency of São Paulo (Agência Reguladora de Saneamento e Energia do Estado de São Paulo, ARSESP) considered the bonus as a demand-driven management decision taken by SABESP and not part of the formal tariff structure. However, SABESP is currently requesting the inclusion of the bonus in the tariff structure to manage future crises. As a result, SABESP has not been able to financially recover from the crisis and reestablish Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA) at pre-drought levels. In addition, the financing of emergency investments had a negative impact on SABESP’s borrowing and indebtedness capacity.13

9. SABESP provides water supply and sanitation (WSS) services to two-thirds of the state’s population, but there are major challenges ahead to increase efficiencies and provide services to all. SABESP has

7 SABESP. CHESS. 2015 - http://site.sabesp.com.br/site/uploads/file/crisehidrica/chess_crise_hidrica.pdf. 8 SABESP - Relatório da Administração, 2015. 9 Mananciais Project - Integrated Water Management in Metropolitan São Paulo Horizontal Adaptable Program Lending (APL) - Loan Agreements BR-7661, 7662, and 8149, approved in 2009 and closed in 2017 10 Drawing on recommendations in particular from the ‘Plano Diretor de Aproveitamento de Recursos Hídricos para a Macrometrópole Paulista’, COBRAPE, 2013. 11 1.8 billion m3. Without the emergency works, it is estimated it would be 6.5 percent lower. SABESP, Relatório da Administração, 2017. 12 In 2017 water consumption per capita was 130 L per day, same as in 2016, and 23 percent lower than the 169 L per day registered in 2013. SABESP - Relatório de Sustentabilidade, 2017. Current consumption per capita informed by SABESP averages 149 L per day. 13 The drought prompted a reduction in the volume of water billed, impacting revenue collection, especially in 2014 and 2015. The water volume billed decreased 3.1% (2014) and 8.0% (2015); and increased 4% (2016) and 4.3% (2017); and the gross operational revenue fell by 6.7% (2014), and increased by 0.5% (2015), 24.3% (2016) and 9.9% (2017) compared to the previous years. Reduction in volume of water billed directly impacted gross operational revenue, thus reducing the utility’s ability to invest either through capital investments or borrowing. Source: SABESP 2017 Annual Report, Form 20-F/A submitted to Securities and Exchange Commision. Link: http://www.sabesp.com.br/sabesp/filesmng.nsf/5BE006E9B6DCC3E48325829D00790CCB/$File/form_20f_mai18.pdf.

http://www.sabesp.com.br/sabesp/filesmng.nsf/5BE006E9B6DCC3E48325829D00790CCB/$File/form_20f_mai18.pdf


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concessions contracts14 with 36815 municipalities in the state, directly providing WSS to approximately 28 million people.16 In these municipalities, 98 percent of the households are connected to the water supply system while 89 percent are connected to sewerage, of which 74 percent is treated. To supply water to the MRSP, SABESP operates an integrated water production system composed of seven production systems, with 19 dams or reservoirs (see details on SABESP in Annex 2A). An estimated 300,000 low-income households in the MRSP are not formally connected to the water supply network but rely on illegal connections, often provided by illegal operators at much higher costs than the formal tariffs.17 In addition, the people are exposed to dangerous coliforms and pathogens. The illegal connections, along with aging infrastructure—especially the distribution network—contribute significantly to non-revenue water losses and inefficiencies in the water supply system.

10. Uncontrolled urban growth, irregular settlements, and untreated wastewater discharge continue to worsen water reservoirs and the security of water supply in the MRSP. Significant progress has been made since the 1990s in cleaning up the MRSP’s main reservoir, Guarapiranga, that supplies water to a quarter of the MRSP’s population. Among others, the World Bank-financed Guarapiranga and Mananciais Projects18 helped improve the situation and SABESP now collects and treats roughly 70 percent of the wastewater produced within the Guarapiranga Basin. SABESP also manages a proactive program to reduce overflows, breakages, and leakages of the sewage system, along with cleanup programs of rivers within the basin. However, there is much to be done to complete the universalization of sanitation services and cleanup of the water basin. Many informal settlements remain unserved and continue to contaminate the reservoir. The persistent financial constraints that SABESP and municipalities face have greatly reduced investments in expansion and rehabilitation of sewage systems, but an ambitious plan has been prepared by SABESP to systematically address critical problems.

11. SABESP has adopted a comprehensive investment plan aimed at ensuring universal water supply, reducing water security risks and promoting economic and financial sustainability. The 2018/24 Investment Plan includes three main areas for investments: (a) expansion of access to water and sanitation services; (b) rehabilitation and renewal of existing networks; and (c) improvements in energy efficiency, operational and institutional performance. The investments total BRL 24.7 billion (approximately US$7 billion), of which 44 percent is allocated to the MRSP. To achieve its ambitious goals, the plan combines a variety of sources of finance that will complement SABESP’s own capital. About 66 percent will be financed with own budget resources and 34 percent with loans, of which 56 percent are already effective19 and the remainder are being prepared.20 This Project is an integral part of the Investment Plan and will support SABESP in achieving the goals of reducing water losses by 34 percent via the needed replacement of 2,600 km of aging pipelines and of connecting 79 percent of the 240,000 households of the Água Legal Program by reducing illegal connections and non-revenue water losses. The Investment Plan also includes interventions under the sanitation program for the MRSP, with an estimated cost of BRL 1.3 billion, to protect critical water resources and reduce

14 Concessions contracts (usually 30-year long contracts) include gradual targets to expand and improve WSS services, based on the Municipal Sanitation Plans and other state planning instruments. The services include intake, transport, and treatment of raw water; transport, reservation, and distribution of treated water; and, collection, transport, treatment, and final disposal of wastewater. 15 281 concessions contracts are regulated and supervised by the ARSESP. 16 27.9 million people are direct users and 3 million people access water through bulk water supply to four municipalities. 17 SABESP’s information indicates that the population pays around BRL 50 per month to illegal operators. 18 Guarapiranga Project - São Paulo, Paraná, and Federal Government Water Quality and Pollution Control Project SAR No. BR-28962 (1992), Loan Agreement BR-3504 (1992), closed in 2000; Mananciais Project - Integrated Water Management in Metropolitan São Paulo Horizontal Adaptable Program Lending (APL) - Loan Agreements BR-7661, 7662, and 8149, approved in 2009 and closed in 2017. 19 Loans already effective: National Economic and Social Development Bank (Banco Nacional de Desenvolvimento Econômico e Social, BNDES), BRL 1.32 billion; National Savings Bank (Caixa Econômica Federal, CEF), BRL 1.36 billion; IDB, BRL 313 million; JICA, BRL 248 million; and Studies and Projects Funding Agency (Financiadora de Estudos e Projetos, FINEP), BRL 34 million. Source: SABESP, Estruturação do Financiamento do Programa de Investimentos, September 2017. 20 Loans under negotiations: IDB, BRL 840 million; CEF, BRL 700 million; Debentures, BRL 600 million; IBRD, BRL 520 million. Source: SABESP, Estruturação do Financiamento do Programa de Investimentos, September 2017.


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waterborne diseases in the periphery. The Project will fund approximately 20 percent of the sanitation program and target investments in the Guarapiranga Basin in the MRSP.

12. Given current fiscal and natural resource constraints and the highly complex urban environment, innovative approaches are necessary to achieve WSS for all in a sustainable way. The Project will introduce and solidify some innovative approaches and draw lessons from other experiences to be replicated by other utilities in and outside Brazil. Technical innovations and customized solutions combined with output and performance-based contracts will be scaled up. The successful experience of SABESP with these contractual models to manage water losses will be tailored to other types of interventions to: (a) ensure high-quality and well-performing outputs; (b) transfer the performance risk to the contractor, and (c) allow for a more favorable disbursement schedule. Expanding this contractual model to other capital-intensive investments and social activities will require challenging adjustments that will be supported by the Project. In addition, the Project will pilot innovative technologies for river cleanup, increasing the energy efficiency of pumping stations and improving the operational efficiency of treatment plants. The experiences and results will be closely monitored and recorded to draw lessons to be shared with other utilities around the world. C. Relevance to Higher Level Objectives 13. The Project aligns well with the FY18–23 Country Partnership Framework (CPF) for Brazil.21 The CPF proposes a reorientation of new lending, advisory services and analytics toward supporting the Government in addressing the main development constraints identified in the Systematic Country Diagnostic, water security being one of them, with emphasis on the third focus area of the framework: equitable and sustainable development. As stated in the CPF, a challenge for improved livelihoods and economic opportunities is the smarter management of Brazil’s natural resources and the better mitigation of environmental pollution. Three principal issues in natural resource management stand out and affect the bottom forty percent of the low-income households (B40) directly and indirectly: access to land and secure property rights, water management, and more broadly, environmental management. As also mentioned in the CPF, the World Bank will continue to invest in water and sanitation to foster resilience against the increased variability of water supply. The Project will address these issues by increasing access to WSS, reducing pollution loads and increasing water security in the MRSP. 14. The Project will also support attainment of the Sustainable Development Goals (SDGs) and contribute to the World Bank’s twin goals. This Project will contribute to the SDGs by investing in increasing sustainable coverage of WSS, therefore improving the population’s quality of life—health and living conditions. Proposed activities aimed at increasing sustainable access to WSS would likewise contribute to enhanced water availability and reducing pollution loads reaching the Guarapiranga Reservoir. These are expected to have positive impacts on public health, especially of poor families living in the MRSP by reducing waterborne diseases and the associated loss of income due to the loss of days worked and any out-of-pocket health care costs. Besides improving the living conditions, the Programa Água Legal is expected to improve the sense of citizenship of the community by promoting social awareness and mobilization. The reduction of pollution loads in the Guarapiranga Water Basin may create incentives for multiple uses of the reservoir for leisure purposes.

15. The Project combines efforts to simultaneously provide affordable services to the poor, expand and improve services and increase efficiency and resilience in a strategy that is in line with the World Bank’s Maximizing Finance for Development (MFD) approach by blending finance and leveraging private sector funding to optimize the use of scarce resources. The private sector is playing an increasing role in water and sanitation development together with SABESP—both as an investor and as a source of innovation and expertise. SABESP uses a broad range of solutions to meet its services and efficiency goals to ensure inclusive and

21 World Bank. 2017. Brazil: Country Partnership Framework for the period FY18–FY23. Report no. 113259-BR.


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sustainable services. Private equity and commercial lending are geared to investments that require higher returns and/or shorter terms, while concessional financing is geared toward projects providing lower financial returns and high economic and social returns. The private sector also plays an important role by participating in Design-Build-Finance-Operate-Maintain (DBFOM) contracts promoted by SABESP. To maximize finance for development in SABESP, the World Bank support would assist SABESP in financing services to the poor, increased resilience and protection of water resources through the Project (including DBFOM contracts), while the International Finance Corporation (IFC) would provide technical assistance and advisory services to improve corporate governance and raise private capital through both equity and lending (see more details in Annex 2A). In addition, the 2030 Water Resources Group22 contributes to improving urban water security and resilience in São Paulo by promoting dialogue and knowledge exchanges and giving technical assistance for boosting industrial and urban reuse of effluents from domestic sewage treatment plants.

16. Repairing, renewing, upgrading and replacing SABESP’s water and wastewater infrastructure is key to maximizing the value of its capital as well as its operations and maintenance efforts. SABESP has undertaken a multicriteria assessment of the status of the main assets in the MRSP, which identifies critical infrastructure that needs to be replaced or modernized—such as aging and leaking water pipes and wastewater pumping stations. However, asset management goes beyond these and includes detailed asset inventories, operation and maintenance tasks, and long-range financial planning. Improving SABESP’s asset management will provide critical information for decision makers on capital assets and the optimal timing of investments. The Project will support SABESP to improve its asset management practices, with a view to prolonging asset life and improving decisions about asset rehabilitation, repair, and replacement, ensuring that budgeting is focused on critical activities for sustained performance, meeting service expectations and regulatory requirements, and improving responses to emergencies. The security and safety of assets and reduction in overall costs for both operations and capital expenditures are also expected long-term outcomes from the technical assistance supported by the Project. II. PROJECT DESCRIPTION A. Project Development Objective PDO Statement 17. The two-part Project Development Objectives (PDO) are to increase access of vulnerable people to water services23 and to contribute to the reduction of water losses and pollution loads in the Metropolitan Region of São Paulo. PDO-Level Indicators 18. Achieving the PDO would contribute to the long-term objective of securing the access of communities to safe and sustainable water services and contributing to ensuring that water resources are secured for the future in the context of climate change associated risks. The following outcome indicators will be tracked to measure the achievement of the PDO:

(a) People24 provided with access to improved water sources (number) - core indicator

22 2030 Water Resources Group is a unique public-private-civil society collaboration. It was launched in 2008 at the World Economic Forum and has been hosted by the World Bank Group since 2012. Its mission is to help countries achieve water security by 2030 by facilitating collective action on water between governments, the private sector, and civil society. 23 Where ‘vulnerable people’ is defined by the IPVS and ‘access to water services’ refers to coverage through formal household connections. 24 People refers to the population that will benefit from Subcomponent 1.1 interventions that are in the lower end of the IPVS range.


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(b) Volume of non-revenue water reduction (millions of cubic meters per year) (c) Volume of wastewater removed from the Guarapiranga Basin sent to treatment25 (millions of cubic

meters per year)

B. Project Components Component 1: Expand access to water services, reduce water losses, and increase system resilience in the MRSP (US$255.2 million; Bank US$181.4 million) 19. Subcomponent 1.1: Increase access of the vulnerable population to WSS services (US$73.9 million; Bank US$52.7 million). The scope of this subcomponent is to increase access to WSS service for vulnerable people in peri-urban areas of the MRSP by scaling up the ‘Água Legal’ Program. The Project will benefit families who face high and very high social vulnerability (as per IPVS) living in low-income areas in the peri-urban areas of the MRSP by connecting them legally to the existing SABESP WSS network including, inter alia, removal of illegal connections, implementation of formal water and sanitation connections, through a combination of social support and outreach activities, planning and monitoring; and infrastructure investments (including pipelines and connections). 20. Subcomponent 1.2: Rehabilitation and renewal of critical water networks (US$128.1 million; Bank US$118.2 million). The scope of this subcomponent is to rehabilitate and renew critical water networks to reduce leakages by scaling up the SABESP’s replacement program of critical aging water networks,26 including, among others, the replacement of reticulation mains, pipelines and water connections in the MRSP. This subcomponent aims to increase resilience and water availability in the system, reduce non-revenue water, reduce potential impacts on the quality of the supplied water, reduce the natural rate of loss growth, reduce operational costs and improve asset management in the overall MRSP network and enable SABESP to expand water services in peri-urban areas. 21. Subcomponent 1.3: Reducing water losses in specific water sectors in low-income areas (US$41.0 million; Bank US$0 million). This subcomponent’s scope is to reduce water losses in specific water sectors in low-income areas located in the Guarapiranga and Billings Basins with a comprehensive water losses reduction plan, including, among others, district metered areas, infrastructure replacement, pressure control and active leakage repair. The existent water distribution control measures in both areas are inadequate and the rate of water loss is very high. These interventions are consistent with the priorities of the approved MRSP Water Master Plan (2016) and with the aim to increase resilience in the system to respond to climate change-related risks. 22. Subcomponent 1.4: Repairing and improving operation and maintenance of assets, lifespan extension of dams supplying water to the MRSP (US$12.2 million; Bank US$10.5 million). This subcomponent will support repairs and improve the operation and maintenance of assets, including lifespan extension of dams supplying water to the MRSP, involving, inter alia, the correction of anomalies and repair of dams and their associated structures; control of eroded material or leaks; and the supervision of such activities. It aims to increase the resilience of the main water sources of the MRSP water production system to sustain long-term water services access by improving the safety of the dams and their associated structures. 23. Subcomponents 1.1, 1.2 and 1.3 would combine output and performance-based contracts (tailored to each subcomponent) to carry out the proposed activities. Additional details can be found in Annex 2.

25 Wastewater will be sent to the existing Barueri treatment plant, which has a total treatment capacity of 16,000 L per second but is currently treating around 13,000 L per second. 26 Networks were selected using a robust multicriteria analysis. Details are presented in Annex 2.


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Component 2: Reduce pollution loads to scarce water resources in the Guarapiranga Water Basin (US$59.9 million; Bank US$58.8 million) 24. Subcomponent 2.1: Expanding sanitation services provision to vulnerable people (US$31.3 million; Bank US$30.2 million). This subcomponent will expand the provision of sanitation services for vulnerable people by reducing the direct discharge of sewage into water bodies upstream of the Guarapiranga reservoir through investments including sewerage networks, collectors, pumping stations, and connections to the existing Barueri Wastewater Treatment Plant (WWTP), as well as the preparation and implementation of social development plans and activities. 25. Subcomponent 2.2: Reducing pollution loads in rivers (US$16.0 million; Bank US$16.0 million). To further reduce the pollution loads reaching the Guarapiranga Reservoir, the subcomponent will promote investment in innovative approaches to remove nutrients from the Embu Mirim River, which contains about 41 percent of the nutrient load currently released into the reservoir. A performance-based contract is being designed to engage the private sector in providing the most cost-effective solution for removing nutrients. The contract would entail the development of the concept and design, execution of the works and operation of the system for a defined number of months. The contractual modality would allow the proponent to recommend the technology, the technical solutions for the execution of the works and the operational procedures. This activity would also assist in accomplishing the maximum target of pollution load reaching the Guarapiranga Reservoir, as defined in the water quality law for the reservoir.

26. Subcomponent 2.3: Increase sewerage system reliability (US$12.6 million; Bank US$12.6 million). Under this subcomponent, the Project would aim to increase sewerage system reliability through: (i) the rehabilitation and modernization of existent sewerage pumping stations in the Guarapiranga Basin; (ii) the replacement of the Guavirutuba sewerage main trunk pipeline; and (iii) the replacement of the Talamanca discharge pipeline. The rehabilitation and modernization of existent sewerage pumping stations are an integral part of the existing sewerage systems that transport untreated wastewater to treatment plants located in a different river basin. The proposed rehabilitation and modernization aims at addressing the frequent failures that these facilities face by increasing their resilience to operate in adverse urban conditions. For example, the Talamanca discharge pipeline was built some 30 years ago and is facing severe operational failures and material deterioration. The activities proposed under this subcomponent would primarily benefit low-income people living in the MRSP periphery, especially their health and quality of life, and would also support SABESP’s efforts to improve asset management. Component 3: Technical assistance and Project management and supervision (US$34.3 million; Bank US$9.2

million) 27. Subcomponent 3.1: Exploring innovative approaches, strategic studies, and alternative-pilot solutions (US$3.2 million; Bank US$2.7 million). This subcomponent will explore innovative approaches, strategic studies and alternative-pilot solutions to allow SABESP to respond to key sector and institutional challenges by, inter alia, bringing in innovative approaches, implementing alternative-pilot solutions27, preparing key strategic studies, documenting case studies and best practices, providing training material, promoting knowledge-sharing events, developing impact assessments, and improving the SABESP’s technical capacity to deal with regulatory requirements and asset management. Potential studies and activities that have been identified include: (a) an energy micro generation study; (b) an automation system pilot, and (c) an Integrated Plan for SABESP’s Metropolitan Department’s Operational System. At the corporate level, this subcomponent will support SABESP in improving technical capacity to deal with regulatory requirements and asset management.

27 Examples would include: the already identified automation system for the Barueri wastewater treatment plant and, potentially, a study of technical solutions for city-wide inclusive sanitation, especially in the Guarapiranga basin.


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28. Subcomponent 3.2: Project management and supervision (US$24.6 million; Bank US$0 million). This subcomponent aims to support SABESP with Project management and works supervision requirements including, inter alia, technical assistance to respond to technical, fiduciary and safeguards-related demands, reporting needs, and monitoring and evaluation. The contracting of firms and/or individual consultants to assist with the supervision of all works and to support SABESP’s Project Implementation Unit (PIU) in monitoring Project activities would be fully paid with counterpart funds.

29. Subcomponent 3.3: Institutional support, development of studies, plans, designs, and investigations to support the renewing and life span extension of the dams supplying water to the MRSP (US$6.5 million; Bank US$6.5 million). This subcomponent will support SABESP to develop studies, plans, designs and investigations to renew and extend the lifespan of the dams supplying water to the MRSP, including, inter alia, the increase of SABESP’s institutional capacity and the development of key dam safety-related tools to enhance SABESP’s capacity to respond to the dam safety requirements and benchmarks and the acquisition and installation of monitoring and control systems; as well as electrical and mechanical equipment.

Component 4: Contingent Emergency Response Component (CERC) (zero budget)

30. The objective of this component is to support SABESP, following an eligible crisis or emergency, to respond to the emergency situations and reconstruction. It will provide immediate support to SABESP in responding to an eligible crisis or emergency by quickly reallocating Project funds. This component is a zero-fund disaster recovery contingency component that could be used in the event of a crisis or an emergency. A crisis or emergency eligible for financing is an event that has caused, or is likely to imminently cause, a major adverse economic and/or social impact, associated with a natural or artificial crisis or disaster. Once the Contingent Emergency Response Component (CERC) is activated, the funds can be mobilized quickly from uncommitted funds toward response activities, with minimal procedural steps. SABESP would be the implementing agency of the CERC. As the first-year activity of project implementation (and as conditions for disbursement of the CERC component), SABESP will prepare, with the World Bank’s support, a CERC annex to the Project Operations Manual (POM). This CERC annex will lay out in detail the provisions for activating and implementing the CERC and the operational, fiduciary, and technical details of the CERC. The criteria for activation would include submission of a formal request from the Government to the World Bank for support for an eligible emergency through the CERC (as indicated by formal documents issued by either/or National Water Agency (Agência Nacional de Água, ANA) and Water and Energy Resources Department (Departamento de Águas e Energia Elétrica, DAEE), related to the main MRSP reservoirs28), the preparation by SABESP of an acceptable Action Plan of Activities (APA) for the use of CERC funds and the World Bank’s approval of such a plan. The CERC may finance works, goods, non-consulting and consulting services, training and operating costs.

C. Project Beneficiaries

31. The Project would contribute to increasing safe and formal access to water supply services for up to 532,000 very poor people (152,000 families) and to sanitation services for up to 133,000 very poor people (38,000 families) living in areas in the MRSP with high social vulnerability as measured by IPVS.29 In addition, it will increase access to sanitation for about 24,150 people (6,900 families) living in the municipalities of Embu das Artes and Itapecerica da Serra, which face high and very high social vulnerability. Furthermore, the replacement of aging water supply networks in the MRSP would result in improved and more reliable water

28 Formal documents by ANA and/or DAEE may include ‘Portarias’ publicly available at the respective websites informing restrictions to SABESP for the total volume of water intake possible due to an emergency (usually caused by droughts in main water systems). 29 IPVS indicator - levels 5 and 6 (2010). Indicators of high social vulnerability areas include household income per capita, average income of the head of the family by gender, percentage of heads that are literate, average years of study, and percentage of children 0 to 5 years old, among others.


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supply services that would directly benefit an additional 400,000 people and indirectly benefit 850,000 people living in low-income neighborhoods of Jardim Angela and Grajau. The interventions to upgrade the sewerage main trunk pipeline and discharge lines will directly benefit around 17,500 people and indirectly benefit 80,000 and 306,000 people, respectively, also living in the poorest neighborhoods within the MRSP. The beneficiary families of these Project activities are characterized by poor socioeconomic and living conditions and are overrepresented in the higher levels of social vulnerability according to IPVS. In total, the interventions supported by the Project will benefit more than 2 million people. Indirectly, the Project will benefit a much large number of people living in the MRSP by reducing the water security risks.


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D. Results Chain

Theory of Chain for the SABESP Project.

Problem Statement: Unreliable access or lack of access to water supply and sanitation service reduce the resilience of the vulnerable population and of the water production system to face extreme climate change-related events; and adversely affect the quality of life.


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E. Rationale for Bank Involvement and Role of Partners

32. An engagement with SABESP provides an opportunity for a two-way exchange of cutting-edge expertise, best practice and innovation experiences that can be brought from and shared with other World Bank clients. Countrywide and internationally, SABESP is acknowledged as a very good example of a utility, considering the status of its indicators compared to other worldwide benchmarks on service provision and the size and complexity of the challenges it faces. There is strong interest among sector entities in various aspects of SABESP, including its governance structure and capacity, the challenges it has already overcome and the innovative approaches SABESP has used30. The Project would support SABESP in tackling challenges such as (a) climate change, which is resulting in severe challenges for access to water for one of the largest cosmopolitan areas in the world; and (b) in spite of Brazil’s middle income status, it has areas of deep poverty and it is precisely the very poor who are most vulnerable to the challenges related to access to safe water and sanitation services, and who would be the primary beneficiaries of this Project. The World Bank has extensive experience with providing project financing to SABESP and the Government of Brazil. The World Bank is also well placed to support water and sanitation infrastructure investments and strategic studies for the MRSP due to its strong local and national presence and its global experience and knowledge related to the management of complex issues of water stress and scarcity for large and ever-expanding urban areas. Innovative solutions for performance improvement of the utility as well as citywide-inclusive sanitation will be explored in the Project, while the initiative led by the WSS Global Solutions Group could bring alternative options to SABESP for its consideration. Among other activities, the Project would especially support the scaling up of very interesting programs (such as the Programa Água Legal) and the use of contracts with a combination of output and performance-based payments to a range of investments, and it would pilot alternative solutions to face complex sector challenges. The innovative approaches proposed would constitute a great contribution to the delivery of new public goods.

33. World Bank Group joint support in the sector to enable an MFD approach31. Through this operation, IBRD will also bring value added to IFC support to SABESP, further enabling both blended finance and private sector participation. IBRD finance will be blended with market-based finance to generate an overall capital investment cost compatible with both affordability for the low-income population and capital remuneration that is acceptable to the regulator and required by investors and financiers. IFC support focuses on bringing capital market investors to invest in SABESP32 through the creation and capitalization of a holding company to hold the state’s shares of SABESP. Through this process, SABESP would also be capitalized and corporate governance mechanisms will be further strengthened. In São Paulo and in Brazil in general, reaching universal access, resilience, and efficiency targets will not be achieved without a significant increase in private sector participation. The current World Bank and IFC joint engagement with SABESP and the state enables MFD by

30 A number of delegations from other states in Brazil and from Latin America and African countries have visited SABESP to learn about various topics such as the reduction of water loss program implemented using performance-based contracts; the Rational Water Use Program (Programa de Uso Racional de Água, PURA); the River Cleaning Program (Córrego Limpo); Connecting the Unconnected Program (Se Liga Na Rede); and above all, the successful measures SABESP took in responding to the 2014/15 water crisis. 31 SABESP capital investment strategy is a clear model of blended MFD financing. SABESP capital expenditures are financed by three main sources: cash generation from tariffs, issuances of debt securities in the domestic and international capital markets and borrowings in Brazilian Reais and foreign currencies from development banks, including IBRD. Development banks financing uses much favorable conditions in both maturity length and borrowing costs, represent around 34 percent of SABESP’s annual capital expenditure. Cash generation and market issuances represent 66 percent of SABESP capital expenditure. As result, expenditure presents a ratio of 2:1

between equity/capital markets and borrowing from development banks. 32 IFC support is put on hold until state elections are concluded, and a new administration takes over. In addition, it needs resolution of discussions by SABESP and ARSESP on asset considerations in the tariff structure.


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improving SABESP’s corporate governance and its operational and financial efficiency; extending coverage, particularly to the vulnerable population; and increasing revenues and lowering operational costs by reducing water loss and increasing water security.

F. Lessons Learned and Reflected in the Project Design

34. The Project design draws valuable lessons from recently closed WSS operations33 in São Paulo and from the World Bank’s key water sector analytical work in Brazil and worldwide.34

35. Clearly defined activities aligned with corporate priorities. Based on recently closed projects, it is critical to clearly define activities and the implementation strategy during preparation instead of applying a framework approach that postpones the definition to the implementation stage. The proposed activities of this Project have been clearly identified with SABESP based on solid technical criteria and on SABESP’s corporate strategy and priorities. The clear alignment between the proposed activities and SABESP’s Investment Plan will reduce risks of losing management commitment over time to the Project. In addition, activities have been selected that clearly fall under the responsibility of SABESP and involve a minimum number of other government agencies, unlike in previous World Bank projects. In addition, many of these activities apply an innovative approach (for example, a combination of output and performance-based contracts) that, if successful, will lead to significant efficiency gains in the sector. The potential risks associated with this approach are discussed in the Key Risks section.

36. Measuring project results. Earlier projects often had difficulties measuring results as activities were scattered over large areas. Although the Project supports activities that cover different areas in the MRSP, they have been clustered around specific interventions or within well-defined areas. The concentration of sanitation activities around the Guarapiranga Water Basin will consolidate results and ease impact monitoring.

37. Project management staff and support. Previous engagement with SABESP has shown that its investment portfolio is large and demands strong commitment and coordination among various departments and staff. Moreover, global experience indicates that, in such an environment, new project and corporate demands can compete for staff time allocated to the Project. This Project will therefore identify specific staff to compose the Project management team with clear roles and responsibilities, including coordination, planning, and monitoring of Project activities. In addition, an experienced consultancy firm will support the Project Management Unit in SABESP, while other firms will support the supervision of works. Such support has proven to be valuable in similar contexts. While SABESP has excellent technical experts, it will need support to respond on time to the financial, procurement, safeguards, supervision, monitoring, and reporting requirements of a World Bank project.

38. Counterpart financing. In other projects, inadequate budgeting of resources has proven to be a constraint in implementing WSS operations. The counterpart financing that SABESP has budgeted for this Project shows SABESP’s high commitment (especially for supporting Project management and supervision) to the Project and enables an early start of Project implementation with the required support. The amount

33 The ICR for the Integrated Water Management in Metropolitan São Paulo Adaptable Program Lending, 2017 (Report No: ICR 3284) – P006553, and the ICR for the Brazil - São Paulo Water Recovery Project - REAGUA, 2017 (Report No: ICR3902) - P106703. 34 World Framework for Utility Turnaround, 2017 (Report No: AUS18030); A Thirst for Change - An IEG Evaluation of the World Bank Group’s Support for Water Supply and Sanitation with Focus on the Poor, FY2007–16 (Report No: 123270); Incentives for Improving Water Supply and Sanitation Service Delivery - A South American Perspective (Knowledge Brief) - FY18 (Report No. 126196).


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allocated to management and supervision activities is consistent with an average cost that SABESP has for similar activities in other financed projects (around 7 percent of the total Project cost).

39. Lessons learned from SABESP’s ongoing performance-based contracts. Based on the Água Legal Program, this Project will include additional social engagement activities and sanitation interventions to ensure better and more sustainable outcomes of project interventions. In addition, the payment periods have been reduced to expedite disbursements. The selection of vulnerable and higher-risk project areas within the MRSP and stronger social engagement also ensure that the performance-based contracts better target the poor. The lessons learned from the Water Loss Reduction Program performance-based contracts will also serve as the basis for proposing the contracts for implementing Subcomponent 1.2, especially considering the definition of performance indicators and percentages to be paid for the output and performance phases, therefore trying to reduce risks of limited market response to this new approach.

40. Need to provide sustainable and affordable WSS services for all. While the Project will finance the expansion of water services to poor neighborhoods, the experience with the Água Legal Program has indicated that the families have the capacity to pay for social tariffs35. Project activities will also aim to improve asset management, reduce water losses and increase efficiencies to keep tariffs at an affordable level. Moreover, the reduction in water losses and pollution will help increase the resilience of the overall system.

41. International experience on building resilience in water scarce cities. Many cities face unprecedented challenges with rapid urbanization and growth that puts pressure on dwindling resources which are exacerbated by climate change. Recent reports36 and international experiences highlight successful responses to water scarcity, including managing conventional water resources more effectively, tapping new and nonconventional resources such as wastewater, controlling demand, and reducing water losses. A number of these supply and demand-driven approaches will be implemented by the Project and enhance the knowledge on how to manage water more effectively in highly complex urban environments like MRSP. These lessons will be documented and disseminated as part of the Project.

42. Based on the Bank’s global experience in expanding water services to the poor, the benefits of expanding service delivery to lower-income areas not only promotes equity but makes good business sense. The expansion of water services to low-income areas is not only pivotal to promoting the wellbeing of the B40 but can improve the financial status of utilities. Utility benefits accrue from increased revenues - even when charging social tariffs – resulting from: (i) a reduction in losses stemming from illegal connections; (ii) decreased consumption rates due to metering; (iii) lower water pollution treatment costs; and (iv) enhanced operational efficiency, all of which contribute to fostering financial sustainability. The Project fully takes into account this global lesson.

43. Global experience also points to the importance of community engagement and participation for the success and sustainability of these programs. Both community engagement and participation are pivotal to secure the buy-in of the poor to connect and pay for water services. They likewise promote water conservation and waste disposal behaviors that are particularly relevant in water scarce areas. The Project’s design incorporates a robust strategy of engagement, consultations and social development activities aimed at

35 The average number of households that actually pay social tariffs in the MRSP is 73 percent. In the areas that have already received the Água Legal Program Interventions, this number reaches 81 percent. 36 World Bank. 2018. Water Scarce Cities: Thriving in a Finite World. Washington, DC: World Bank. https://openknowledge.worldbank.org/handle/10986/29623 License: CC BY 3.0 IGO.


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promoting awareness of the respective benefits of WSS services, water resources conservation and environmental protection, as well as hygiene practices. The Project will, likewise, actively promote civil participation and beneficiary feedback of the poor to elicit their understanding of and commitment to the program. III. IMPLEMENTATION ARRANGEMENTS

A. Institutional and Implementation Arrangements

44. Project implementation arrangement. SABESP will be the borrower of the loan. The Planning and Control Unit (Superintendência de Planejamento e Desenvolvimento da Diretoria Metropolitana da SABESP, MP), under the Metropolitan Department (Diretoria Metropolitana da SABESP, MD), will coordinate Project implementation. In this regard, the SABESP’s Board of Directors had created the PIU with roles, decision-making capacity and responsibilities satisfactory to the World Bank before negotiations. A chart nominating and identifying the specific responsibilities of the staff participating in the PIU has been discussed with the World Bank. The final list of staff taking part in the PIU was presented to the World Bank before negotiations. The main profiles and team composition for the PIU will be included in the POM.

45. Several units, all under the MD, will be in charge of the implementation of the activities that fall under their regular responsibility. Other departments beyond the MD will also participate in project implementation as follows: (a) units responsible for fundraising and monitoring disbursement aspects from the Financing Department (Departamento de Captação de Recursos – FIN and Departamento de Análise Financeira e Contratos, FFT); (b) unit responsible for procurement and contracts from the Corporation Management Department (Superintendência de Suprimentos e Contratações Estratégicas, CS); and (c) unit responsible for corporate level regulatory aspects in SABESP’s Chief Executive Officer (CEO) Office (Superintendência de Assuntos Regulatórios, PR). Within the MD, the following units will participate in Project implementation: Business Units (downtown, north, south, east, and west). The Water Resources for the Metropolitan Region Division (Departamento de Recursos Hídricos Metropolitanos, MAR), the Entrepreneurship Management Division (Departamento de Gestão de Empreendimentos da SABESP, ME), the Comptroller Division (Departamento de Controladoria da SABESP, MDC), the Strategic Maintenance Unit (Superintendência de Manutenção Estratégica da SABESP, MM) and the Integrated Administrative Service Department (Departamento de Serviços Administrativos Integrados, MIS) will also participate in Project implementation. Annex 1 presents the arrangements proposed for project implementation.

46. Project management support. Based on lessons learned from previous Projects, support to the MP in managing the Project will be provided by a consulting firm with acknowledged expertise in implementation of multilateral-financed operations. The support to be provided by the firm (under Subcomponent 3.2) would include, among others, monitoring and planning Project implementation, safeguard and fiduciary-related demands, validation of contract performance and ad-hoc demands.

47. Overall supervision of works. In addition to the Project management firm, consultancies to supervise specific Project activities are envisaged, including for: (a) supervision of the execution of the activities for subcomponents 1.1 (a specific contract) and 1.2 and 1.3 (in another contract) under the management of the MP; and (b) supervision of activities in Component 2 under the management of the ME. For subcomponent 1.4, a firm will be hired to support the MM in the supervision of the works.


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48. Capacity in managing financed operations. SABESP has strong experience in managing operations financed by various banks, including large loans financed by multilateral agencies. The Project is properly rooted in its organizational structure, especially in the Metropolitan Planning Unit, and is strongly linked to SABESP’s Business Plan priorities. Having support from consultancy firms to manage a project is a common practice in SABESP, e.g., in projects financed by the Inter-American Development Bank (IADB) and the Japan International Cooperation Agency (JICA), with a view to having more dedicated qualified team members to support carrying out heavy Project-related activities.

49. Institutional capacity for social and environmental risk management. SABESP has considerable, successful experience working with the World Bank and applying its safeguard policies. The overall environmental and social safeguard policies were addressed adequately during the implementation of the Mananciais Program37, which triggered the same safeguard policies as the Project. An Environmental Impact Analysis, a Social Assessment, an Environmental Assessment Report, and a Resettlement Policy Framework (RPF) were prepared by the São Paulo State Secretary of Water Resources and Sanitation (Secretaria de Saneamento e Recursos Hídricos do Estado de São Paulo, SSRH) and SABESP, which has also satisfactorily implemented some Resettlement Action Plans and managed environmental and social risks.38 In addition, as required by the Brazilian environmental licensing procedures, specific environmental studies were conducted.

50. SABESP corporate governance and auditing procedures. SABESP’s corporate governance structure includes a Board of Directors assisted by an Audit Committee, Fiscal Council, and an Internal Audit Department that reports to the CEO, whose activities are overseen by the Audit Committee. KPMG (independent auditors) issued an unqualified opinion over the latest available (FY2016) consolidated financial statements. The consolidated financial statements are under the responsibility of its Board of Directors and have been prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board. The federal and state government auditing institutions also audit SABESP.

B. Results Monitoring and Evaluation Arrangements

51. SABESP’s systematic measurement of the proposed indicators constitutes the primary source for the monitoring and evaluation of the Project. This systematic measurement falls under the responsibility of the five SABESP’s business units, ME and MAR that will oversee the execution of the contracts financed by the Project. The information gathered by the business units will be consolidated by the MP/PIU, which is also responsible for the overall Project coordination and monitoring and compliance with the Project safeguards. The private consulting firm that will support the MP in undertaking the Project management activities will also assist in carrying out the monitoring and evaluation requirements. This support will be extended to the business units, ME and MAR as needed, to ensure that these units are properly prepared to perform the systematic indicators measurement and reporting. This support also comprises assisting in consolidating the periodic biannual monitoring and evaluation reports, as well as supporting the preparation of the reports for the midterm implementation review and the completion report. Reports will also present consolidated data on the status of contracts, performance targets reached, compliance with safeguard-related aspects (including, among others, security and labor influx aspects) and disbursements, among others (detailed in the POM) to effectively monitor

37 Mananciais Project - Integrated Water Management in Metropolitan São Paulo Horizontal Adaptable Program Lending (APL) - Loan Agreements BR-7661, 7662, and 8149, approved in 2009 and closed in 2017 38 Monitoring the implementation of the Mananciais Program’s Safety of Dam Panel’s recommendations for the Taiaçupeba Dam is being carried out as part of Project preparation and will continue during implementation.


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progress under the Project.

C. Sustainability

52. The Project is an integral part of SABESP’s 2018-24 Investment Plan, which is aligned with the corporation’s projected tariffs revenues and sustainable borrowing commitments. The implementation of this plan is ongoing and SABESP is firmly pursuing efficient technical and financing arrangements to complement its capacity to achieve the its goals. Besides investments that are part of the plan, the Project will also provide technical support to address implementation and sector challenges expected to strengthen SABESP’s capacity and improve its operational efficiency. Most interventions proposed will promote the reduction of current operations and maintenance (O&M) costs by reducing, for instance, pumping needs and lowering energy consumption and water treatment needs (for example, chemicals). Furthermore, to ensure sustainability from the customer/user perspective, the Project will implement social outreach activities as part of the ‘Legal Water Program’, including an educational and awareness campaign to ensure beneficiaries’ rational use of WSS systems.

IV. PROJECT APPRAISAL SUMMARY

A. Technical, Economic and Financial Analysis

(i) Technical Analysis

53. The Project’s activities are tightly aligned with the overall SABESP goal to ensure quality services in a sustainable financial environment and were agreed upon and selected based on their relevance to the PDO and higher-level objectives. They especially focus on reaching vulnerable people with water services and undertaking strategic water loss and pollution control interventions that provide significant contributions to water security in the MRSP. Innovative approaches and technologies—targeting relevant issues that SABESP and most of the WSS sector face in Brazil—were also highly considered during preparation and are expected to be further explored and enhanced during project implementation. SABESP has improved its prioritization strategies to select specific interventions to be supported under the Project. These tools were evaluated and found to have robust technical analysis and were considered for identifying key areas for interventions.

54. Costs for the works interventions were assessed based on the ongoing/previous SABESP experiences with similar contracts and/or of similar complexity of the areas for interventions. International benchmarks were also considered, as well as Brazilian local market references. Based on these assessments, cost estimates were found to be satisfactory. For the consultant activities, further assessments will be carried out based on the terms of reference (ToRs) being prepared.

55. Readiness of Project implementation was comprehensively discussed with the client so as to have a number of the activities ready to be procured during preparation for implementation right after effectiveness, or indeed even earlier as they could be eligible for retroactive financing or could be paid using counterpart funds (for example, subcomponents 1.1 and 1.3, and Component 3, especially project management and supervision). In addition, the Procurement Plan, ToRs, bidding documents, and procurement strategies have been thoroughly discussed to try to have standard documents agreed before project signing. SABESP has successfully implemented performance-based contracts for about two decades, producing robust contractual documents, which will provide solid ground for expanding the modality to other investments types and expediting the preparation of documents. Guaranteeing the support that SABESP needs to implement the


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Project was discussed and it was agreed that SABESP would pay, exclusively from counterpart funds, for supervision and management firms contracts to start the selection processes right after negotiations.

56. The project time frame was assessed for each project component. Although six years can be a good amount of time for a Project to be implemented, some performance contracts (in particular for intensive capital investments mostly paid upfront by the provider) require an extended period to pay for the performance results and reach contract conclusion. Nevertheless, once the proposed activities had been thoroughly reviewed, agreement was reached on reducing the payment time for performance-based contracts so as to give more confidence to the provider regarding the repayment scheme and minimize risks to the time frame. In addition, activities that need longer periods to receive authorizations from other entities (for example, environmental, traffic, and energy agencies) were identified and an action plan was agreed upon to reduce processing time, with the support of the management and supervision firms.

(ii) Economic and Financial Analysis

Financial Analysis

57. The overall utility analysis is a broader task undertaken jointly with IFC, where a capitalization strategy involves assessing the overall financial impact on the utility resulting from a long-term investment plan and considering new demand and additional debt within the Investment Plan. The financial utility model of SABESP highlights certainties and risks from its operations. The financial certainties come from its transparent process of tariff revisions that are gradually enabling the recovery of revenues from water and sanitation services billed, as well as from normal hydrological conditions in the last year. Also, low business risks rise from a near-monopolistic position as provider of essential services within a large-scale concession area. The financial risks of SABESP involve high capital expenditure (CAPEX) plans and currency risks arising from its foreign exchange debt exposure. Other risks also threaten the financial performance of the company, such as changes in strategy and management related to local political cycles, as SABESP is a state-owned company. The financial rate of return of the project was estimated at 11 percent.

58. The financial analysis of the Project’s financing focused on the financial impact on cash flows, operating margins, and some financial positions relevant to justify future tariff adjustments related to the Project’s components. The Project’s investments will improve water storage and availability, and the distributional efficiency of targeted systems in the MRSP, by upgrading critical infrastructure that will, in turn, increase revenue flows and strengthen operating margins. These investments will reduce operating ratios (measured as operating costs to revenues) by 5 percent annually for 10 years and contribute to meeting SABESP’s Investment Plan objectives, targets, and to mitigating increasing operation and maintenance costs. The World Bank loan will contribute to expanding the customer base and to improving cash flows by 17 percent from new and upgraded connections in the areas targeted by the Project. Improving operating margins and cash flows, reducing costs, and mitigating the cost of capital increases will help SABESP enhance its long-term financial positions and investment capacity.

Economic Analysis

59. Methodology. The economic analysis was undertaken at the subproject level according to World Bank guidelines. The benefits of the Project include: (a) the economic value of expanding water access water and the


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value of avoided losses from the Água Legal Program;39 (b) benefits from efficiency gains (reduction in operating costs) and the value of additional treated water treated; (c) the benefits from the expansion of sanitation services40 to vulnerable people, including the value of discharge collection and sludge from WWTP (SABESP), and indirect health benefits (to customers); (d) pollution removal (valued at shadow prices of phosphorus (US$0.42 per kg) and avoided contamination effluents (sludge US$0.10 per kg), considering operational cost savings from energy and chemicals; and (e) sewerage systems improvements, including benefits to direct and indirect beneficiaries of the total value of treated flows from trunk lines, based on household discharges; however, there are other benefits not estimated based on the resilience provided by these investments.

60. The Project will provide water and wastewater services of higher quality as measured in higher water quality, better pressure, and less leakage. The Project will generate significant health and environmental externalities, assuming that all targeted connections have 100 percent uptake. Part of the externalities include the estimates of the avoided cost in terms of Disability-Adjusted Life Years (DALY) of illness as a result of the reduced incidence of water and sanitation-related diseases.

61. The cost of the Project will comprise the investment in infrastructure for increasing water access to vulnerable populations (US$73.9 million); rehabilitation and renewal of critical water networks (US$128.7 million); reduction of water losses in low-income neighborhoods (US$41 million); repairing and improvement of operation and maintenance of assets, lifespan extension of the MRSP Dams System dams (US$12.2 million); expansion of sanitation services provision to vulnerable people (US$31.3 million); reduction of pollution loads in targeted rivers (US$16 million); increase in sewerage systems’ reliability (US$12.6 million); and investments in strategic studies, alternative pilot solutions, and design studies and plans for future systems upgrades (US$9.7 million). To these costs will be added incremental O&M costs, totaling US$46.8 million during the lifetime of the Project—though these may in certain cases be overestimated as the upgrades may result in significant maintenance savings—and other ancillary costs (of which connection charges and fixed fees as the most important).

62. The valuation of the total CO2 avoided uses a shadow price of carbon per kW produced and emissions avoided, measured in millions of tCO2-eq, with the shadow price reflecting the minimum and maximum values per ton CO2 as per the 2017 World Bank guidelines of the Shadow Price of Carbon for Economic Analysis, and an average projected growth rate of the shadow price of carbon of 2.3 percent per year until 204941. The greenhouse gases (GHG) valuations increase the Net Present Value (NPV) of the Project by only 9.8 percent, resulting in an Economic Rate of Return (ERR) with GHG valuations, using a low shadow price of carbon, of 24.1 percent, and 27.2 percent with a high shadow price of carbon.

39 When water and sanitation services are improved, time savings can be assumed to be reallocated for productive activities by increasing households’ time available through convenient on-site connections. Sewerage connections also improve environmental health compared to non-on-site sanitation sources that usually do not treat human waste effectively. Time savings were not added but rather health benefits. New connections lead to users shifting from usage of unimproved facilities to on-site connections. The only indirect benefits estimated were, indeed, from avoided cost of illness through disability-adjusted life years (DALY) for water and sanitation disease incidence reductions. 40 Including reduction in water losses in low-income neighborhoods (Subcomponent 1.3). The improvement of water availability is measured through the unit cost of a cubic meter and the total volume of water (m3/year) increased from the water loss reduction activities. 41 The minimum values for the shadow price of carbon are on average per year (until 2049) US$55.4/tCO2-eq and the maximum values are US$110.7/tCO2-eq. Both minimum and maximum shadow prices change on a per year basis and each price per year is utilized to monetize the values of the NPVs with the scenario of GHG reductions per subcomponent.


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63. The economic analysis followed a conventional approach where the incremental financial cash flows have been translated into economic cash flows by adding externalities where appropriate. It compares ‘with’ and ‘without-project’ situation, where the ‘with-project’ situation was defined as the Project with its associated targets and the ‘without-project’ considers a status quo situation defined by current levels of efficiency and operations of the infrastructures, reservoir capacity, and services. The activities were appraised measuring the flows of costs and benefits for the lifetime of the subprojects, (estimated at 30 years). Costs and benefits were expressed in constant prices of 2017. The team did not estimate quantitatively all the capacity-building activities as these activities are qualitative in nature and hard to monetize.

64. The discount rate used in the analysis (12 percent) is similar to that used by SABESP that considers the weighted cost of capital used by ARSESP and the State Government of Sao Paulo. The exchange rate used for the entire estimation of the economic and financial analyzes was set at BRL 3.7 per U.S. dollar. The team also analyzed the results with a discount rate of 6 percent in line with World Bank guidelines. The analysis did not use standard conversion factors due to a lack of availability of data. For more details on the economic analysis, see Annex 3.

65. Results. At appraisal, 7 subprojects were analyzed. The overall economic rate of return of the Project is 21.3 percent at present values. The net economic gains from the Project at present values (benefits-investment costs) reach on average US$169 million for the entire lifetime of the Project. The benefit cost ratio is 1.3 for the entire lifetime of the Project.

Table 1. Results of the Economic Analysis

Subcomponent

NPV Benefits-

Investment Costs (US$, millions)

Economic Rate of Return (%)

Benefit-Cost Ratio

Increase access of the vulnerable population to WSS services

28.5 28.3 1.28

Rehabilitation and renewal of critical water networks 38.8 25.1 1.25

Reducing water losses in specific water sectors in low-income areas

12.6 11.8 1.12

Repairing and improving operation and maintenance assets, lifespan extension of dams supplying water to the MRSPa

12.5 9.1 1.09

Expanding sanitation services provision to vulnerable people

43.5 28.4 1.28

Reducing pollution loads in rivers 6.8 16.4 1.16

Increase sewerage system reliability 36.9 30.0 1.30

Exploring innovative approaches, strategic studies and alternative-pilot solutions and design studies and plans

(9.7) — 0

Total 169.9 21.3% 1.3

Note: a. Based on a recent study by Cardoso-Silva et al. (2016) Temporal and spatial efficiency and accumulation of heavy metals in the sediments at Paiva Castro Reservoir Dam - São Paulo, Brazil and Environmental Earth Sciences. It is estimated that improvements in dams can deliver 4.4 m3/s of additional flow which, when valued at a bulk cost of US$0.11 per m3, yields US$19.5 million over 30 years.

66. Sensitivity and risk analysis. The sensitivity and risk analysis measures the impact of the results when some of the key critical variables change. The most critical risks identified are implementation delays and the


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resulting increase in investment costs and increases in operation and maintenance costs. Overall, with rather significant changes, it was found that the Project remains robust after reducing overall benefits by 30 percent (with an ERR of 15.5 percent) and with a cost overrun rate of 30 percent (with an ERR of 16.3 percent).

B. Fiduciary

(i) Financial Management

67. A Financial Management Assessment (FMA) of SABESP was performed in accordance with OP/BP 10.00 and the Financial Management Manual for World Bank-Financed Investment Operations (effective March 1, 2010, and revised February 10, 2017). The scope of the FMA included: (a) an evaluation of the existing financial management (FM) systems in place to be used for project monitoring, accounting, and reporting; (b) a review of staffing requirements; (c) a review of the flow of funds arrangements and disbursement methodology; (d) a review of the internal control mechanisms in place, including internal audit; (e) a discussion with regard to reporting requirements, including the format and content of Interim Unaudited Financial Reports (IFRs); and (f) a review of the external audit arrangements. Overall, the evaluation found that: (a) at the country level, the Federal FM laws and regulations applicable to the state-owned enterprises provide a strong FM framework; and (b) at the entity level, the fiscal transparency, accounting, reporting, internal controls, and external audit are considered adequate but require improvement in specific areas.

68. The conclusion of the FMA is that the FM arrangements for the Project are: (i) considered adequate; (ii) the funds flow, disbursements, monitoring, auditing and supervision arrangements have been designed in a way to respond to the Project’s implementation arrangements; and (iii) the residual FM risk associated with the Project is rated as Moderate. There are no FM-related conditions for negotiations, Board presentation and/or effectiveness.

69. The FMA identified the following risks to the achievement of the Project Development Objectives: (i) SABESP’s corporate system SAP BI (“Business Intelligence”) was considered adequate but currently faces some challenges in generating the required IFRs. Remedial measures were agreed with SABESP, including the need to update the SAP system with the final project amounts per disbursement category and component to generate IFRs.

(ii) Procurement

70. Procurement of loan-financed activities will be conducted according to the World Bank’s ‘Procurement Regulations for IPF Borrowers’, issued in July 2016, for the supply of goods, works, and non-consulting and consulting services under the Project. SABESP is responsible for the technical aspects of their respective actions and for managing the contracts.

71. The arrangements for procurement are based on bidding committees (comitê de licitação) in SABESP-specific sector and/or special bidding committees for specific project activities. The operational control is made by state auditing and controlling institutions.

72. SABESP’s technical areas will provide the necessary technical inputs (for example, ToRs and technical specifications) to allow the PIU and SABESP’s Procurement Department (CSS) to carry out the procurement process with due diligence. The PIU will be responsible for coordinating and consolidating all procurement actions pertaining to the Project, with the ability to have information and reports that reflect the status of each


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bid conducted separately. The Procurement Department is responsible for carrying out all the procurement processes during the Project.

73. A procurement assessment of the capacity of SABESP to implement procurement actions was carried out to review the organizational structure for implementing the Project and the interaction between the PIU and SABESP’s areas. SABESP has a well-functioning procurement team, with experience in procuring goods and services and with international rules and regulations. Two procurement team members attended a World Bank procurement training delivered in June 2018 to receive updates on the procurement framework. Civil works are handled by a well-qualified procurement staff and technical assistants. The procurement risk is assessed as Moderate, rather than Low, mainly due the complexity of the SABESP’s internal processes for clearances and uncertainties that may result from the application of the new legislation for the state-owned enterprise - Federal Law # 13.303/2016 to SABESP, especially SABESP’s new internal regulation.

74. SABESP’s team has developed a draft Project Procurement Strategy for Development (Estratégia de Licitação de Projeto para o Desenvolvimento, PPSD), and based on the PPSD, a Procurement Plan for the Project has been prepared and discussed. Both the PPSD and the Procurement Plan were considered acceptable to the World Bank before negotiations.

75. Procurement of activities fully paid with counterpart funds will be conducted using SABESP’s regulations. Technical and safeguard-related aspects will be reviewed and approved by the Bank before the launch of the bidding processes.

C. Safeguards

(i) Environmental Safeguards

76. Environment benefits. By regulating access to water supply, providing access to sanitation and reducing pollution loads, the proposed activities would contribute to ensure the quality of the water offered and available to the population. Then it is expected to have positive impacts on public health and the environment, in addition to contributing to enhanced water security.

77. Environment impacts and safeguard policies. The Project includes activities that aim to regularize the supply of water to low-income areas of the MRSP by making available the needed infrastructure for supplying water, measuring consumption and collecting sewage, and including construction of civil works—small physical interventions related to the complementation of sanitary sewerage systems (networks, trunk collectors, interceptors, and pump stations) and replacement of existing networks. The Project will involve construction of civil works, but no significant labor influx is expected. As the potential adverse environmental and social impacts are expected to be site specific, reversible, and readily mitigatable, the Project is rated as Category B. The Project will not result in environmental Category A type impacts. In case new activities would result in environmental Category A type impacts, then the activities would need to be evaluated through an Environmental Impact Assessment or regional or sectoral Environmental Impact Assessment. No activity with environmental Category A type impacts would be financed by the Project without the World Bank clearance. In addition to triggering OP 4.01 on Environmental Assessment, the Project also triggers the following environmental safeguards: OP 4.04 on Natural Habitats, OP 4.11 on Physical Cultural Resources, and OP 4.37 on Safety of Dams.

78. OP/BP 4.37 is being triggered considering that the MRSP is supplied by an integrated water production system composed of seven production systems with 19 dams/reservoirs: Cantareira, Alto Tietê, Rio Claro, Rio


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Grande, Guarapiranga, Cotia, and São Lourenço. As part of project preparation, a specific appraisal of the current status of the safety of all 19 dams was carried out in close coordination with SABESP. The assessment included the evaluation of the capacity and procedures in place by the institutions involved in operating, maintaining, and/or regulating the dam system, in light of the Brazilian National Dam Safety Policy - BNDSP Law, as well as of São Paulo state regulation on the matter, and OP 4.37. Findings and recommendations from the assessment were shared with SABESP. Appropriate measures regarding the dams’ safety were taken into consideration as part of two dedicated subcomponents—subcomponent 1.4 (infrastructure related) and subcomponent 3.3 (institutional capacity and tools)—to strengthen SABESP’s capacity to improve the safety of its dams. Agreed procedures were included in the Environmental and Social Management Framework (ESMF).

79. The legal safeguard OP 7.50 on International Waterways is applicable to the Project since the WSS systems to be improved and rehabilitated by the Project rely in part on water sources that are interconnected with the upstream of the Tiete River that is a tributary of the Parana River (shared between Brazil, Paraguay, and Argentina), which is itself an ‘international waterway’ and connected to the La Plata River Basin (shared between Brazil, Argentina, Paraguay, Uruguay, and Bolivia). La Plata River is also considered ‘international waterways’ for purposes of the policy.

80. The Project is not expected to have a negative impact on the quality and quantity of the Tiete River that reaches the Parana River, because the net extraction from the Tiete River Basin to support the WSS is already minor and the Project activities are expected to improve water use efficiency and discharges of the WSS of the MRSP into the Tiete River Basin. Therefore, Project activities fall within the exception of paragraph 7 (a) of the policy; because the WSS systems for the MRSP are an ‘ongoing scheme’, proposed interventions will not adversely change the quality or quantity of water available to the other riparians of the Paraná or the La Plata River Basins, and no impacts are expected by the other riparian states’ possible water use. Therefore, it was determined that the Project meets the criteria defined in paragraph 7 (a) of OP 7.50 and is eligible for an exception to notification requirements. A Memorandum for Exception to Notification Requirements under OP 7.50 (Project on International Waterways) was prepared and approved by the Regional Vice-President on September 24th, 2018.

81. Because specific Project activity sites and detailed interventions are not fully known, and in view of the type of works to be carried out, an ESMF was prepared. It includes social and environmental procedures to be followed to assess and carry out safeguard activities. Specific screening data sheet and criteria were defined in the ESMF to ensure that any potential habitat impacts are identified, prevented, and mitigated during Project implementation. The potential negative impacts can be avoided and mitigated by adopting related environmental construction measures and procedures, as established in the Environmental Construction Manual (ECM), which is an annex to the ESMF.

82. The ESMF also includes procedures for screening any known physical cultural resources in the proposed Project areas and ‘chance-find’ procedures if culturally significant resources are discovered during Project implementation, according to the procedures of OP 4.11 and the Brazilian legislation. It also provides for special care in the case of replacement of cement-asbestos networks.

83. The ESMF (and the ECM) sets the guidelines and principles of a proper ‘Code of Conduct’ to rule the daily relationships between laborers and local people.

84. Specific Environmental and Social Management Plans (ESMPs)—based on the ESMF—will be prepared for the civil works to be carried out during implementation. The ESMPs’ preparation will include location-specific


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consultations with stakeholders.

85. The ESMF was disclosed and consultations with key stakeholders, beneficiaries, affected people and other interested parties were carried out by SABESP during preparation. These consultations addressed the findings of the social and environmental assessment and evaluated the identification of impacts and benefits derived from Project activities as well as the proposed measures to avoid, minimize and/or mitigate adverse impacts.

86. Safeguard management performance. SABESP is the major actor for water supply and wastewater collection and treatment in São Paulo. SABESP has significant and successful experience working with the World Bank and complying with its safeguard policies. SABESP, together with the SSRH of the State of São Paulo, implemented the Brazil APL Integrated Water Management in Metropolitan São Paulo Project (P006553) that closed in March 2017. A strategy of institutional capacity strengthening for the management of social and environmental risks and impacts was included in the ESMF. Human and financial resources to improve SABESP’s system for managing environmental and social risks were considered. Therefore, the Project will contribute to SABESP’s vision by assessing/strengthening its system of social risk management.

(ii) Screening for climate change co-benefits and GHG missions

87. The Project has been developed specifically to increase local water sector resilience to climate-induced shocks, especially drought. Potential climate-related benefits from Project’s components involve: (a) a reduction in vulnerability through increased water savings and pollution controls; (b) increased water productivity by investing in infrastructure that would allow better integration of systems to cope with water scarcity and treatment of water outflows; (c) stronger mitigation of human and environmental risks by providing access to safe water and sanitation services; (d) energy efficiency gains by improving policies and testing pilots that could generate energy and/or reduce energy usage; and (e) reduction in sources of obsolescence in the system by upgrading key aspects of wastewater and sanitation infrastructure. Please refer to Table 3.5 in Annex 3 for a detailed breakdown of each subcomponent’s contribution to increased local climate resilience in the water sector and mitigation activities.

88. GHG reduction. A quantitative analysis was also conducted to estimate the Project’s impact on GHG emissions and to value the externality using the shadow price of carbon. The MRSP water supply relies on water transferred and pumped from various systems, two important ones being the Guarapiranga and Billings Reservoirs (responsible for around 43 percent of the water production, especially during the drought crisis) with energy provided by Metropolitan Water and Energy Company (Empresa Metropolitana de Águas e Energia S.A., EMAE). EMAE is a company that is also controlled by the State of São Paulo with a concession to produce hydroelectric energy by using water from these reservoirs. The energy savings expected from Project results will increase resilience (avoided cost) against negative impacts of water insecurity and scarcity/pollution of CO2 for energy. The valuation of the total CO2 avoided used two shadow price of carbon corridors based on the updated 2017 World Bank shadow price of carbon methodology. Details of the analysis are presented in Annex 3.

(iii) Social Safeguards

89. Policies triggered and instruments prepared. OP 4.12 (Involuntary Resettlement) is triggered because Project activities may require a small number of site-specific land acquisitions and/or have temporarily adverse impacts on economic activities. As many locations and Project designs have not been defined yet, potential adverse impacts related with land acquisition and involuntary resettlement were addressed through the


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preparation of an RPF. SABESP has robust procedures and an experienced team for land acquisition as well as strong previous experience applying OP 4.12.

90. Social Impact Assessment. A gender-sensitive Social Impact Assessment (SIA) of project activities was carried out in the scope of the Project’s ESMF. Special attention was given to vulnerable social groups and to the subcomponents that target them: subcomponent 1.1 - Increasing WSS access to vulnerable population, and subcomponent 2.1 - Expanding sanitation services. This gender-sensitive SIA shows that SABESP lacks information on: (a) the composition of families that have access to its water and sanitation services; (b) how perceptions of service accessibility and quality vary among men and women; and (c) how levels of satisfaction with water and sanitation services also vary according to gender. Therefore, SABESP needs to better understand the societal dynamics of low income families among the vulnerable groups that are the main beneficiaries of subcomponents 1.1 and 2.1 and the different impact these subcomponents may have according to the gender of household heads to reach its goals of social inclusion and sustainability. The SIA concludes that the Project is socially inclusive and can make positive contributions to gender equity, as described below. Overall, it is expected to bring large social benefits to more than 150,000 low-income families living in peri-urban communities within the MRSP. Project benefits related to access to reliable and affordable WSS include: improving living conditions, reducing waterborne diseases, and ensuring access to reliable sources of drinkable water. These services are expected to be affordable because, once the formal connection is operational, these low-income households will pay the ‘social tariff’ (BRL 0.82 per m3 for up to 10 m3 - 33 percent of the regular tariff amount).

91. Social inclusion and gender integration. The Project is socially inclusive as it aims to provide access to reliable and affordable WSS to poor and extremely poor communities as well as to foster connections by providing subsidies to these families. The SIA shows that female-headed households with children are overrepresented in the low-income peri-urban communities that comprise the area of intervention of these subcomponents. These female-headed households have recently grown in the MRSP and now comprise more than 40 percent of the families. In Brazil, the share of poor people living in female-headed households (55.6 percent) is more than twice the average share of poor people living in all households (25.4 percent). A similar trend is found among the 12.2 percent of people living under poverty in the state of São Paulo.42 Female headed households in São Paulo have also generally experienced more problems paying bills than is the case for male-headed households.43 The SIA concludes that the provision of access to reliable and affordable WSS can contribute to addressing gender inequalities because: (a) female-headed households are overrepresented among the most vulnerable and under-serviced people; (b) due to prevailing cultural norms, women bear most of the burden of fetching water for households, thereby increasing their household workloads and reducing their job and income opportunities, and hampering their life projects; (c) women are more aware than men of water supply-related problems, since they are unequally affected by their effects in the daily domestic and caregiving tasks that are traditionally assigned to them; and (d) access to SABESP’s social tariff will reduce the burden on family households associated with expensive fees paid to illegal water providers. Thus, reliable WSS may reduce the time spent on the domestic workload or, at least, render it more predictable and may represent a major income boost that will benefit the poorest female-headed households the most.44 The Project will help

42 IBGE, 2016 Summary of Social Indicators - Síntese dos Indicadores Sociais 2016 43 Default Protection Service - Serviço de Proteção ao Crédito – SPC. Inadimplentes no Brasil 2017. Perfil e comportamento frente às dívidas – August 2017. Link: https://webcache.googleusercontent.com/search?q=cache:daw8D9YHnKoJ:https://www.spcbrasil.org.br/wpimprensa/wp-content/uploads/2017/08/Analise_perfil_inadimplente_2017.pdf+&cd=1&hl=pt-BR&ct=clnk&gl=br 44 Time spent on domestic workloads is an indicator of gender inequalities widely used in Brazil. The latest official census data available

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SABESP to monitor the Project performance in terms of addressing the gender equity by collecting data on the number of male- and female-headed households in low-income groups with access to WSS. The data could also inform SABESP on special needs and concerns of these groups about services provided. The Project will support SABESP in developing a strategy on targeting vulnerable households, including female headed households with special approaches to ensure their affordable and reliable connection to the water.

92. In addition, under subcomponents 1.1. and 2.1, the Project’s approach includes the development and carrying out of gender-sensitive social development plans based on a strategy developed for targeting poor households, with special attention to poor female headed households.45 These plans aim to ensure: (i) the satisfaction of poor families (including female headed households) benefitted with the WSS services provided; (ii) their rational use of water, and consequently; (iii) the reduction of water losses. The implementation of these plans requires that SABESP overcome the knowledge gaps about Project’s beneficiaries mentioned above and designs communication, guidance, and awareness-raising campaigns according to their characteristics, needs, and concerns. The standard features of these plans include: (i) carrying out a baseline demographic and socioeconomic profile of SABESP’s beneficiaries and measuring levels of satisfaction with the WSS provided; (ii) preparing and disseminating gender-sensitive sanitary communications and awareness raising materials46 through household visits, community meetings, and water users groups; and (iii) adaptive planning of activities based on lessons learned and evidence from a continuous process of beneficiary feedback, performance monitoring and end-line evaluation of levels of satisfaction with WSS provided. The performance and results of this strategy will be tracked by gender via indicators included in the results framework for the Project, related to changes in levels of beneficiary satisfaction with the WSS provided and the gender-sensitive engagement strategy implemented, as well as via indicators on access to water and sanitation services. In addition, a gender gap analysis would be monitored by comparing results of the gender-sensitive indicators and would be reported in the bi-annual progress reports. The indicator on water access will also monitor the defaults for water bills by gender in the Project area. The target would be to reduce the defaults for men and women in the Project area closer to the average in peri-urban areas in the MRSP for the year.47 Beneficiary surveys would measure the changes in perception among men and women through project interventions. Baseline data will be established during the diagnosis phase at the start of each contract. Nevertheless, the evidence available through public opinion polls customarily carried out by SABESP as well as the corporative Grievance Redress Mechanism (GRM) shows that women are more aware than men of water supply-related problems, since they are unequally affected by their effects on the daily domestic and care-giving tasks that are traditionally assigned to them, and they are more likely than men to express more critical views about the quality of services provided.

93. Citizen engagement, information disclosure, and consultation. Dissemination events and public consultation processes with key stakeholders, beneficiaries, and affected people were carried out by the SABESP

show that, on average, the time spent by working women with household tasks equals 18.1 hours per week, whereas working men spent on average 10.5 hours per week (https://www.ibge.gov.br/estatisticasnovoportal/multidominio/genero/20163). 45 The strategy would include carrying out social development plans that include the development of capacity building for sanitary, environmental and family budgetary education according to schedules that better fit the time availability of women and particularly of female household heads, considering the main channels through which men and women obtain information, and tailoring these messages to the specific interests and concerns of men and women. 46 Data informed by SABESP based on 2017 average water production by water system. 47 Defaults are a good proxy for the impact of water tariffs on the family budget. Family budgets for female headed households tend to be more constrained than those of male headed households. Thus, if the default rates among female and male headed households are closer to the average, then the logical conclusion would be that access to regularized water service provision and the activities supported through the social development plans would have had a positive impact on the family’s budget (especially for female headed households), and on their capacity and willingness to pay for such services.

https://www.ibge.gov.br/estatisticasnovoportal/multidominio/genero/20163#_blank


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during preparation (further information provided below). Throughout implementation, SABESP will rely on its robust strategy of engagement with interested parties for the works of its Programa Água Legal. Beneficiary communities will be consulted before the start of civil works and social development plans will be developed in each one of them. These social development plans comprise: (a) a mapping exercise of community leaderships; (b) demographic and socioeconomic profile of beneficiary families; (c) educational and awareness-raising community meetings and household visits; (d) dissemination of gender-sensitive communication materials; (e) periodic meetings with community leaderships/water users to evaluate the provision of WSS by SABESP; and (f) satisfaction researches at the beginning and end of the works. The Project would rely on both the social development plans carried out at the local level and the network of community leaderships (and their periodical meetings) to increase awareness about the efficient use of water resources and the protection of water sources, promote environmental and sanitary education, improve civil participation, and obtain feedback from the beneficiaries of subcomponents 1.1 and 2.1.

(iv) Other Safeguards

94. No other safeguard policies are triggered by the Project.

(v) Grievance Redress Mechanisms

95. SABESP already has in place several channels for receiving and redressing complaints. In addition to service agencies in all municipalities covered by SABESP, these channels include a website, online chat, and free telephone lines with special services for hearing- and speech-impaired persons. Also, SABESP has an Ombudsman Office (with a dedicated toll-free phone line, website, and e-mail address). The Project’s GRM will rely as much as possible on the structures, processes, and procedures that are already in place in the implementing agency, but additionally a dedicated free of charges telephone line will be made available to receive and process complaints related to Project implementation. The Project’s GRM will be periodically reported to the World Bank and monitored according to agreed performance indicators.

96. Communities and individuals who believe that they are adversely affected by a World Bank supported Project may also submit complaints the World Bank’s Grievance Redress Service. The Service ensures that complaints received are promptly reviewed to address project-related concerns. Project affected communities and individuals may submit their complaint to the World Bank’s independent Inspection Panel, which determines whether harm occurred, or could occur, as a result of World Bank non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service, please visit http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress-service. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org.

V. KEY RISKS

97. Overall Risk. The overall risk rating is considered Moderate.

98. Political and governance risk is rated Substantial. The state government faced elections in October 2018, with a change in government from January 2019. SABESP has a strong board comprising five long-standing directors, except for the CEO who is usually appointed by the State Governor. With the new state-owned

http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress-service

http://www.inspectionpanel.org/


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enterprise law—and potentially the approval of the holding company process—it is expected that the regulatory framework would minimize the risk of political interference, and a more transparent and robust decision-making process is also expected to be in place. However, political interferences remain a possibility during Project implementation and may jeopardize approval and implementation processing at both the federal and state levels. At the state level, high-level discussions and meetings with SABESP directors have been carried out throughout Project preparation and will continue during implementation to guarantee SABESP’s commitment and interest in the Project. Also, the Project is well aligned with SABESP’s Investment Plan and priorities, and the PIU has been established with decision-making capacity. At the federal level, close engagement with line Ministries has helped to expedite the process. These actions are expected to mitigate this risk.

99. Macroeconomic risk is rated Substantial. Federal- and state-level government elections were held in October 2018. The new governments will take office in January 2019, which could affect the financial, economic, and fiscal situation of the state and country. The SABESP tariffs usually cover both CAPEX and operational expenditures, but with an uncertain macroeconomic scenario, SABESP’s revenues (in Brazilian reais) might suffer if the economic and fiscal problems remain, due to a potential increase in unpaid bills, difficulties to approve any tariff restructuring and increase, problems obtaining concessional finance to invest in poor and peripheral areas, as well as a potential increase in exposure to foreign exchange risks. All these could result in reducing SABESP’s capacity to keep up with its planned counterpart financing and investments. Overall, though, SABESP has covenants that limit its exposure to debt dominated in foreign exchange. 48 It is currently in compliance with such covenants. Moreover, most of the company's foreign currency debt is made up of long-term debt, with a repayment schedule that takes into consideration diluted depreciation in the long term, whereby the impact of a devaluation of the Brazilian real on cash flow occurs only on the current portion of SABESP’s debt. This feature allows the mitigation of the risk of exchange rate variations, while capturing the benefits of the low cost of this debt. In addition, the Project would assist SABESP with asset management that would also provide a basis to support tariff discussions.

100. Sector strategies and policies risk is rated Substantial. SABESP’s Investment Plan and strategy are defined but it is still recovering from the impacts of the 2014/15 drought crisis. The definition of investment priorities in the annual budget exercise is based on demands from each subsector within SABESP and is impacted by drought/flood crises. The Mananciais Program49, for instance, was subject to multiple changes in the selection of investments and delays in implementation due to the changes in priorities resulting from the 2014/15 crisis. During Project preparation, it was assured that all activities are part of SABESP’s Investment Plan and priorities, and the Project will be flexible to respond to any emergency needs using the CERC.

101. Technical design risk is rated Substantial. The design incorporates relatively new performance-based contractual modalities (a combination of output and performance-based contracts). SABESP has been successful in implementing performance-based contracts over the last two decades, in particular to implement interventions for water loss reduction and for connecting the poor to the formal water services. SABESP seeks to scale up and expand this contractual model, including to other types of water interventions such as the rehabilitation and renewal of aging networks with an improved asset management practice. The market response to these demands will largely depend on the support the Project will provide to properly calibrate the incentives embedded in that contractual modality. In addition, these types of contracts take longer to disburse.

48 SABESP is subject to financial covenants under the several financing agreements evidencing or governing outstanding indebtedness in both foreign exchange rate and in local currency denominated indebtedness. 49 Mananciais Project - Integrated Water Management in Metropolitan São Paulo Horizontal Adaptable Program Lending (APL) - Loan Agreements BR-7661, 7662, and 8149, approved in 2009 and closed in 2017


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Project preparation therefore addressed the readiness of procurement packages and ensured agreement on reducing the payment time frame for the performance phase of the contracts.

102. Other risks were considered either Low or Moderate.


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VI. RESULTS FRAMEWORK AND MONITORING

Results Framework

COUNTRY: Brazil SABESP - IMPROVING WATER SERVICE ACCESS AND SECURITY IN THE METROPOLITAN REGION OF SÃO PAULO PROJECT

Project Development Objectives(s)

The Project Development Objectives are to increase access of vulnerable people to water services and to contribute to the reduction of water losses and pollution loads in the Metropolitan Region of São Paulo.

Project Development Objective Indicators

RESULT_FRAME_T BL_ PD O

Indicator Name DLI Baseline End Target

Increase access of vulnerable people to water services

People provided with access to improved water sources (CRI, Number)

0.00 532,000.00

Contribute to the reduction of water losses

Volume of non-revenue water reduction (millions of cubic meters per year) (Cubic meters/year)

0.00 33.30

Contribute to the reduction of pollution loads

Volume of wastewater removed from the Guarapiranga basin sent to treatment (millions of cubic meters/year) (Cubic meters/year)

0.00 1.90

PDO Table SPACE

Intermediate Results Indicators by Components


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RESULT_FRAME_T BL_ IO


1 - Expand access to water services, reduce water losses, and increase system resilience in the MRSP

Volume of micro metered water from new service connections to the formal water supply system (millions of cubic meters per year) (Cubic meters/year)

0.00 18.50

People provided with access to improved sanitation services (CRI, Number) 0.00 157,150.00

Number of bursts on the water distribution mains per 100km per year in the Project targeted area (reported and unreported) (Number)

115.00 19.00

Number of bursts on serviced connections per 1,000 connections per year in the Project targeted area (reported and unreported) (Number)

31.00 5.00

Km of water distribution mains rehabilitated in the Project targeted area (Kilometers) 0.00 850.00

Number of serviced connections rehabilitated in the Project targeted area (Number) 0.00 113,000.00

2 - Reduce pollution loads to scarce water resources in the Guarapiranga Water Basin

Period of time that the wastewater pumping stations rehabilitated by the Project are operational (percentage of time per year) (Percentage)

93.09 98.00

Km of sewerage main trunk line and discharge pipeline rehabilitated under the Project (Kilometers) 0.00 3.10

3 - Technical assistance and Project management and supervision

Automation system pilot implemented and operational (Text) No Yes

Energy micro generation study developed and implemented (Text)

No Yes

Citizen Engagement and Gender – Beneficiary feedback

Beneficiaries that feel that water and sanitation services reflect their needs in the Água Legal areas of interventions supported by

0.00 80.00


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RESULT_FRAME_T BL_ IO


the Project (beneficiary survey informed disaggregated per gender) (Percentage)

Beneficiaries satisfied with social activities carried out by the Água Legal areas of interventions (beneficiary survey informed disaggregated per gender) (Percentage)

0.00 70.00

IO Table SPACE

UL Table SPACE

Monitoring & Evaluation Plan: PDO Indicators

Indicator Name Definition/Description Frequency Datasource Methodology for Data Collection

Responsibility for Data Collection

People provided with access to improved water sources

This indicator measures the cumulative number of people who benefited from improved water supply services that have been constructed through operations supported by the World Bank.

Per semester

SABESP commercial information system

Number of households connected to the formal water supply system by the Agua Legal Program financed under the Project - all of which are vulnerable people. Target: 532,000 people, or 152,000 families (3.5 people per family[1]). [1] Average per capita for the MRSP. Each Business Unit involved will: (i) check in SABESP information

The Business Units involved (MS, MC, MN, ML, MO) are responsible for the data collection. The PIU is responsible for consolidating the data.


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system the number of connections achieved implementing the Agua Legal Program financed under the Project disaggregated by gender; and, (ii) inform to MP the number of active connections achieved. PIU will consolidate the data. In addition, each Business Unit would collect and report the information about lack of payment of water bills by gender for the Agua Legal Program area of intervention supported by the Project. The PIU would consolidate the data and compare it with the average in peri-urban areas of the MRSP. The Project target would be to have women and men headed families closer to the year average for the peri-urban areas


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Volume of non-revenue water reduction (millions of cubic meters per year)

Volume (millions of cubic meters per year) of water saved due to water losses reduction interventions carried out through subcomponents 1.1, 1.2, and 1.3. The following expected contributions per subcomponent for last year of Project implementation are: 1.1 = 18.5 million m3/year; 1.2 = 8.4 million m3/year; and 1.3 = 6.4 million m3/year.

Per semester

Supervision of contracts of implemented activities under subcomponents 1.1, 1.2 and 1.3

Each Business Unit involved will (i) verify the volume of water saved according with the methodology per subcomponent described below, and (ii) inform MP. The PIU is responsible for consolidating the data. The methodology to calculate the volume of water saved is: - Subcomponent 1.1: Each Business Unit involved will compare the before and after (by the end of the performance based payment phase per contract) volume of water consumed in the water sectorization corresponding to the neighborhoods benefiting from the Agua Legal Program financed under the Project. - Subcomponent 1.2:

Business Units: MS, MC, MN, ML, MO send data to MP for consolidation. The PIU is responsible for consolidating the data.


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The International Water Association methodology will be used for calculating the flow rate, multiplied by decreased the number of leakages. From the baseline defined in the contracts, the flow rate lost is verified from the flow measurement equipment at the supply sector. - Subcomponent 1.3: The business units managing the execution of the contracts implementing the interventions will provide the data, for the volume saved with the performance reached in each contract on the reduction of water losses.

Volume of wastewater removed from the Guarapiranga basin sent to treatment (millions of cubic meters/year)

Consolidation of the data from the Project interventions in Embu and Itapecerica sanitation

Per semester

Average of additional volume of pumped/coll

Each Business Unit involved will (i) verify the volume of wastewater removed

Business units from MS, ME, MA send data to the PIU for


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systems; Pumping Stations (Talamanca, Iporã and Embu 4); and Collectors. The total volume (millions of cubic meters per year) of wastewater collected by the Embu and Itapecerica sanitation systems, plus the volume of wastewater transported through Guavirituba main trunk line, and the volume of wastewater transported by the pumping stations (only Talamanca, Iporã and Embu 4, to avoid double counting).

ected/transported wastewater in the period compared to the baseline of 2017[1] [1] Baseline data is on Project files.

from the basin and send to treatment according with the methodology per subcomponent described below, and (ii) inform MP. The PIU is responsible for consolidating the data. The methodology to calculate the volume of wastewater removed is: - Subcomponent 2.1 – Average volume of wastewater collected from the new households connected to the system, considering an average of 10m3 per family; - Subcomponent 2.3 - Pumping stations: average volume of wastewater pumped compared to the average volume in the baseline of 2017. Guavirituba collector: Average volume of wastewater collected from the new

consolidation.


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households connected to the system, considering an average of 10m3 per family.

ME PDO Table SPACE

Monitoring & Evaluation Plan: Intermediate Results Indicators

Indicator Name Definition/Description Frequency Datasource Methodology for Data Collection

Responsibility for Data Collection

Volume of micro metered water from new service connections to the formal water supply system (millions of cubic meters per year)

Volume (millions of cubic meters per year) of consumed water measured through the micrometers installed in the neighborhoods benefiting from the Agua Legal Program financed under the Project. The expected volume for the last year of Project implementation is 18.50 million of cubic meter per year.

Per semester

SABESP commercial information system.

Each Business Unit involved will: (i) check in the SABESP information system the number of water connection achieved through the Agua Legal Program financed under the Project; and, (ii) inform the PIU the number of active connections achieved. The PIU will consolidate the data.

The Business Units involved (MS, MC, MN, ML, MO) are responsible for the data collection. The PIU is responsible for consolidating the data.

People provided with access to improved sanitation services

The indicator measures the cumulative number of people who benefited from improved sanitation

Per semester

SABESP commercial information system

Number of people connected to the sanitation services that benefited from the

The services contractor provides information on the new user to the respective Business Unit


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facilities that have been constructed through operations supported by the World Bank.

Água Legal interventions (38,000 families) and the sanitation systems built in Embu (3,500 families) and Itapecerica da Serra (3,400 families) multiplied by 3.5 people per family[1]. [1] Average per capita for the MRSP. Each Business Unit involved will: (i) check SABESP information system the number of sanitation connection achieved through the contracts implementing the Agua Legal Program and the Sanitation systems financed under the Project; and, (ii) inform to MP the number of active connections achieved. PIU will consolidate the data. This indicator would be informed disaggregated by gender.

overseeing the contract implementation, which enters the information in SABESP’s SIGAO system. MP/PIU consolidates the information.


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Number of bursts on the water distribution mains per 100km per year in the Project targeted area (reported and unreported)

Decrease in number of reported and unreported bursts per 100 km per year in the Project targeted area.

Per semester

SABESP’s SIGNOS and SIGAO systems.

The number of water distribution mains replaced by the contracts will be accounted, and verified the number of leakages on the connections during the implementation and the performance verification phases.

PIU will collect and consolidate the data.

Number of bursts on serviced connections per 1,000 connections per year in the Project targeted area (reported and unreported)

Decrease in number of reported and unreported bursts per 1,000 serviced connections per year in the Project targeted area.

Per semester

SABESP’s SIGNOS and SIGAO systems

The number of serviced connections replaced by the contracts will be accounted, and verified the number of leakages on the connections during the implementation and the performance verification phases.

PIU will collect and consolidate the data.

Km of water distribution mains rehabilitated in the Project targeted area

Number of kilometers of water distribution mains replaced under the Project.

Per semester

MP’s SIGNOS system

The data on the km of water distribution main replaced under the Project will be entered in the SIGNOS system, which will provide

MP/PIU will update the SIGNOS and provide consolidated information as needed.


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updated information as needed.

Number of serviced connections rehabilitated in the Project targeted area

Number of serviced connections replaced under the Project.

Per semester

MP’s SIGNOS system

The data on the connections replaced under the Project will be entered in the SIGNOS system, which will provide updated information as needed

MP/PIU will update the SIGNOS and provide consolidated information as needed

Period of time that the wastewater pumping stations rehabilitated by the Project are operational (percentage of time per year)

Electromechanical availability index: compares the total number of hours per year that the pumping station (panel, motor, and pumps) supported by the Project was operation versus the total number of hours per year that the pumping station was expected to stay operational (arithmetic average of the six pumping stations) calculated per year. This indicator precludes events that are not related to the operation of the pumping stations such as due to problems upwards and downwards of the stations.

Per semester

Information system managed by the Electromechanics Maintenance Business Unit (MS).

SABESP’s MSEG team is responsible for the pumping stations daily inspection. When a failure is founded, a repair order is entered in the SAP system. The non-operational timeframe is counted from the time the repair order is entered in SAP to the time the back on operation registered is entered in SAP. Both units in charge or daily inspection and carrying out the repair are under the same Business Unit (Business

MS collects the data. PIU consolidates the information.


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Unit South).

Km of sewerage main trunk line and discharge pipeline rehabilitated under the Project

Number of kilometers of sewerage main trunk line and discharge pipeline replaced under the Project.

Per semester

MP’s SIGNOS system.

The data on the km of wastewater lines replaced under the Project will be entered in the SIGNOS system, which will provide updated information as needed.

ME collects the data. The PIU consolidates the information.

Automation system pilot implemented and operational

Automation system pilot implemented and operational

Per semester

SABESP’s SAP systems.

The deliver and installation of goods by the firm refers to 40 percent of the Contract and will be registered in SAP. This will represent the implementation of the pilot. After 12 months, operation will be measured by performance-based payments actually paid and registered in SAP.

ME collects the data. PIU consolidates the information.

Energy micro generation study developed and implemented

Energy micro generation study developed and two pilots implemented during Project implementation

Per semester

Study progress reports and Pilots’ results assessment.

Development of the study will be measured based on the delivery and acceptance of it by MA. Once the two pilots are implemented

MA collects the data. PIU consolidates the information.


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by hired firms and assessed by MA the targets will be fully reached.

Beneficiaries that feel that water and sanitation services reflect their needs in the Água Legal areas of interventions supported by the Project (beneficiary survey informed disaggregated per gender)

Percentage of Água Legal beneficiaries supported by the Project that have positively assessed the Project. The reduction on the gender gap will also be monitored by comparing the satisfaction per gender before and after the contracts are carried out. This indicator would be measuring and monitoring the changes in perceptions among men and women.

1. Per year

Beneficiary survey per community supported by the Project

Percentage of all families interviewed that have satisfaction with Project-related interventions. The information will be reported disaggregated by gender.

The PIU will consolidate the information with support from the supervision firm.

Beneficiaries satisfied with social activities carried out by the Água Legal areas of interventions (beneficiary survey informed disaggregated per gender)

Percentage of Agua Legal beneficiaries supported by the Project that have positively assessed the social activities carried out by Project. The reduction on the gender

Per year

Beneficiary survey per community supported by the Project

Percentage of all families interviewed that have satisfaction with Project-related social activities. The information will be reported disaggregated by

PIU will consolidate the information with support from the supervision firm.


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gap will also be monitored by compering the satisfaction per gender before and after the contracts are carried out.

gender.

ME IO Table SPACE


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ANNEX 1: IMPLEMENTATION ARRANGEMENTS AND SUPPORT PLAN

COUNTRY: Brazil SABESP - Improving Water Service Access and Security in the MRSP

Implementation Arrangements

1. Project implementation arrangement. SABESP will be the borrower of the loan and its executing agency. The Planning and Control Unit for SABESP (MP), under the MD, will coordinate project implementation.50 In this regard, SABESP’s Board of Directors established the PIU with roles, decision-making capacity, and responsibilities satisfactory to the World Bank before negotiations. A chart nominating and identifying specific responsibilities to the staff participating in the PIU has already been discussed with the World Bank. The final list of staff taking part at the PIU was presented to the World Bank before negotiations. The main profiles and team composition for the PIU will be included in the POM.

2. Technical inputs and support. Several units, all in the same MD, will be in charge of the implementation of the activities that fall under their regular responsibility. Other corporate departments beyond MD will also participate in Project implementation as follows: (a) units responsible for fundraising and monitoring disbursement aspects from the Financing Department (FIN and FFT); (b) unit responsible for procurement and contracts from the Corporation Management Department (CS); and (c) unit responsible for corporate-level regulatory aspects in SABESP’s CEO Office (PR). Within MD, the following units will participate in Project implementation: business units (downtown, north, south, east, and west). The Water Resources for the Metropolitan Region Division (MAR), the Entrepreneurship Management Division (ME), the Comptroller Division (MDC), the Strategic Maintenance Unit (MM) and the Integrated administrative service Department (MIS) will also participate in Project implementation.

3. Division of roles and responsibilities. The arrangement proposed for the Project is described in the following paragraphs and will be reflected in the POM:

(a) Planning and Control Unit (MP)

(i) General project coordination, including planning and monitoring; maintaining relationship with the World Bank and the technical missions; receiving, preparing, and sending agreed reports (including, among others, progress reports, procurement plans, and FM reports); ensuring environmental and social safeguards compliance; ensuring other commitments agreed in the POM; and preparing the documents required for the midterm review as well as for Project completion

(ii) Direct planning, coordination, and supervision of the implementation of the activities under Component 1

50 A Resolution from the SABESP Board of Directors creating the PIU with responsibilities and capacity satisfactory to the World Bank was part of the conditions for negotiations.


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(iii) Active participation in the planning and monitoring of activities proposed in Components 2 and 3

(iv) Monitoring the implementation of all aspects related to environmental and social safeguards of the Project, with support from the Nucleus of Environment and Social support

(b) Entrepreneurship Management Division (ME)

(i) Preparing bidding documents, managing the implementation, and preparing and forwarding to the MP the reports concerning the execution of the activities under Component 2

(ii) Carrying out the supervision of all Component 2 contracts with support from a dedicated firm

(iii) Developing inputs needed to prepare key studies/pilots for subcomponent 3.1

(iv) Providing legal guidance related to procurement rules as required by the Loan Agreement signed with the World Bank

(c) SABESP’s Business Unit - South (Unidade de Negócios - Sul da SABESP, MS)

(i) Developing the required diagnostics, carrying out the implementation of the feasibility studies, and putting together the procurement documents for subcomponent 1.1

(ii) Managing the contracts for implementing subcomponents 1.1,1.2 and 1.3

(iii) Preparing the procurement documents for subcomponent 2.1 and 2.3

(iv) Preparing and forwarding to the MP the reports related to the implementation of subcomponents 1.1, 1.2, 1.3, 2.1 and 2.3

(d) SABESP’s Business Units - Downtown (Unidade de Negócio - Centro da SABESP, MC); North (Unidade de Negócios - Norte da SABESP, MN); East (Unidade de Negócios - Leste da SABESP, ML), and West (Unidade de Negócios - Oeste da SABESP, MO)

(i) Developing the required diagnostics, carrying out the implementation of the feasibility studies, and putting together the procurement documents for subcomponent 1.1

(ii) Managing the contracts for implementing subcomponents 1.1 and 1.2

(iii) Preparing and forwarding to the MP the reports related to the implementation of subcomponents 1.1 and 1.2

(e) Water Resources for the Metropolitan Region Division (MAR)

(i) Collecting and updating the water quality monitoring indicators for activities under Component 2


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(ii) Managing the implementation of the contract for subcomponent 2.2 and the operation of the installed facility

(iii) Supporting the preparation and managing of the contract for the energy micro generation study and innovation aspects under subcomponent 3.1

(iv) Coordinating overall activities related to subcomponent 1.4

(v) Preparing ToRs/specifications, bidding documents, managing and supervising contracts of activities related to safety of dams (subcomponent 3.3)

(f) Strategic Maintenance Unit (MM) – Responsible for coordinating the works and supply and installation activities related to subcomponent 1.4

(g) PR - Regulatory Aspects Division (directed linked to the SABESP’s CEO’s office) - Developing ToRs; proposing activities, events, and knowledge exchange exercises; and monitoring activities implementation related to regulatory aspects supported in subcomponent 3.1

(h) Comptroller Division (MDC) - Monitoring project budget execution in the context of the SABESP’s overall budget implementation

(i) Procurement Division (Superintendência de Suprimentos e Contratações Estratégicas, CS) - Carrying out the procurement processes and contracts awards

(j) Integrated Administrative Service Department (Departamento de Serviços Administrativos

Integrados, MIS) - Carrying out the procurement of goods processes and contracts awards for fully counterpart funded activities;

(k) Fundraising Department (for investment projects) (Departamento de Captação de Recursos - FIN) - Monitoring economic/financial aspects under the Legal Agreement with the World Bank and the Sovereign Guarantee Agreement with the Federal Government

(l) Financial Analysis and Contracts Division (Departamento de Análise Financeira e Contratos, FFT) - Preparing and controlling the disbursement requests

4. Support to Project management. Based on lessons learned from previous Projects, support to MP in managing the Project will be provided by a consulting firm with acknowledged expertise in implementation of multilateral-financed operations. Subcomponent 3.2 will support this contract. The consultant firm’s role would include, among others, monitoring and planning Project implementation, safeguard and fiduciary-related demands, validation of the performance of contracts, and ad hoc expertise based on demands.

5. Overall supervision of works. Contracting of consultancy firms to supervise specific project activities is envisaged in subcomponent 3.2, including for: (a) supervision of the execution of the activities for subcomponents 1.1 (a specific contract), and 1.2 and 1.3 (in another contract) under the management of MP, and (b) supervision of activities in Component 2 under the management of ME. The ME has a current ongoing supervision contract that will be used to support Component 2 interventions. It is expected to last until the end


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of 2019. For 2020, a new contract is expected to be carried out. For subcomponent 1.4, a firm will be hired to support MM in the supervision of the works.

6. Financing of Project management and supervision. SABESP will, under subcomponent 3.2, finance the management and supervision support needed to carry out the Project. SABESP’s commitment to the Project is very high. Since early stages of Project preparation, SABESP has committed to carry out some project activities before Project signing. Therefore, SABESP’s financing of these firms will give it the opportunity to both manage and supervise these potential activities before loan signing. The ToRs for the contracting of these firms were conditions to negotiations of the Project and the hiring of them as conditions to start specific-related works51.

7. Capacity in managing financed operations. SABESP has strong experience in managing externally financed operations, including large loans financed by multilateral agencies. The Project is unquestionably linked with SABESP’s business plan priorities and fully rooted in its organizational structure, especially at the Metropolitan Planning Unit. Having support from consultancy firms to manage a project is a common practice in SABESP (examples include IADB- and JICA financed-projects), with a view to having dedicated and highly qualified team members support carrying out heavy project-related activities.

8. Institutional capacity for social and environmental risk management. SABESP has considerable and successful experience working with the World Bank and complying with its safeguard policies. The overall environmental and social safeguard policies were addressed adequately during the implementation of the Mananciais Program52, which triggered the same safeguard policies as those that apply in this Project. An Environmental Impact Analysis, a Social Assessment, an Environmental Assessment Report, and a Resettlement Policy Framework were prepared by São Paulo SSRH and SABESP—the latter has also satisfactorily implemented some Resettlement Action Plans and managed environmental and social risks.53 In addition, as required by the Brazilian environmental licensing procedures, specific environmental studies were conducted.

9. SABESP’s corporate governance and auditing procedures. SABESP’s corporate governance structure includes a Board of Directors assisted by an Audit Committee, Fiscal Council, and an Internal Audit Department that reports to the CEO, whose activities are overseen by the Audit Committee. KPMG (independent auditors) issued an unqualified opinion over the latest available (FY2016) consolidated financial statements. The consolidated financial statements are under the responsibility of its Board of Directors and have been prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board. The federal and state government auditing institutions also audit SABESP.

Strategy and Approach for Implementation Support

10. The implementation of the SABESP Project will be supported by the World Bank’s task team. The type and level of support will be guided by the scope of the Project, the activities in each component, relative risks involved, and the institutional capacity in place. Implementation support by the World Bank will consist of semiannual full supervision missions, short technical missions, meetings, and audio conferences between the

51 For works that will start after Project signing. 52 Mananciais Project - Integrated Water Management in Metropolitan São Paulo Horizontal Adaptable Program Lending (APL) - Loan Agreements BR-7661, 7662, and 8149, approved in 2009 and closed in 2017 53 Monitoring the implementation of the Mananciais Program’s Safety of Dam Panel’s recommendations for the Taiaçupeba Dam is being carried out as part of Project preparation and will continue during implementation.


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World Bank and the SABESP representatives, including senior management and the PIU team, as appropriate. Field visits to key construction and rehabilitation sites will be conducted during supervision missions. Additional support will also be provided by the World Bank’s procurement, FM, and safeguards specialists based in the Brasilia office, on project contracts and overall compliance with safeguard and fiduciary requirements. National and international technical experts from the World Bank team will also provide advice to SABESP and to the PIU, as required, regarding draft ToRs, design and feasibility studies, technical assistance needs, knowledge exchange activities and, especially, promote/share innovative approaches. This Implementation Support Plan is indicative and may be revised during the Project implementation based on emerging Project challenges.

Implementation Support Plan

11. Semiannual supervision missions and short follow-up technical missions will focus on the following areas:

(a) Strategic support. Supervision missions will meet with the SABESP representatives to: (i) review progress on the Project’s activities; (ii) discuss strategic alignment of the Project’s different activities, especially at the planning level between the relevant stakeholders; and (iii) evaluate progress on cross-cutting issues such as M&E, training, communication, knowledge exchange, innovation, dissemination of the Project results and experiences, and coordination between relevant stakeholders.

(b) Technical support. Supervision will concentrate on ensuring the technical quality of bidding documents (especially the performance-based ones), ToRs, evaluation reports, construction plans, products delivered by consultants and validation of the performance-based activities/targets. During construction and commissioning, technical supervision will be provided to ensure that technical contractual obligations are met. Regular site visits will be carried out during Project implementation and involve technical specialists as needed. Moreover, technical assistance including capacity building and institutional strengthening will be provided to enhance performance of the Project-supported activities.

(c) Fiduciary support. Periodic supervision of procurement and FM support will be carried out by the World Bank semiannually or annually to: (i) perform desk reviews of the Project IFRs and audit reports, following up on any issues raised by auditors, as appropriate; (ii) assess the performance of control systems and arrangements; (iii) update the FM rating in the FM Implementation Support and Status Report as needed; (iv) provide training and guidance on carrying out procurement processes in compliance with the Procurement and Anti-Corruption Guidelines and the POM; (v) review procurement documents and provide timely feedback to the PIU; (vi) carry out the post review of procurement actions; and (vii) help monitor the Project’s progress against the Procurement Plan.

(d) Safeguards support. The coordination that began during preparation would continue throughout Project implementation, especially to ensure that relevant safeguards concerns are included in the works financed under Components 1 and 2 and in specific studies/plans under Component 3 through due diligence from applications of the site-specific ESIAs, ESMPs, and Resettlement Action Plans and effective mitigation measures. Supervision from the World Bank safeguard specialists will take place at least twice a year.


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Implementation Support Resource Estimates

Time Focus Skills Needed Resource Estimates

(Staff Weeks)

First 12 months

Project rollout, management, and implementation support coordination

Task team leads 6 per task team lead per year

Refine subcomponent activities and ensure quality of detailed designs

Task team leads/technical specialists

2 per task team lead per year

Social and environmental safeguards, including risk mitigation measures, and safety of dams

Social, environmental, and dam safety specialists

4 per year

Technical and procurement review of ToRs and bidding document

Task team leads, technical specialists, procurement

6 per year

Fiduciary arrangements and FM systems Financial management 3 per year

Promoting innovation in the project Task team leads/technical specialists

3 per year

Operational support Operations Officer 6 per year

12 to 72 months

Procurement review and feedback of bidding documents and consultant contracts

Procurement specialist 6 per year

Technical review of ToRs, technical reports, and bidding documents

Task team leads, technical specialists

6 per year

Non-lending technical assistance, capacity, and institutional strengthening efforts


4 per year

FM supervision FM specialist 3 per year

Social safeguards—supervision Social specialist 4 per year

Environmental safeguards—supervision Environmental specialist 4 per year

Dam safety - supervision Dam safety specialist 4 per year

Project management, M&E, and project supervision coordination


8 per year

Operational support, M&E, lessons learned, progress and final reporting

Technical specialists and operations officer

6 per year

Skill Mix Requirements

Skill Needs for Supervision Comment

Task team leaders Country based

Water supply and sanitation specialists Headquarters and country based

Water losses control experts Headquarters and country based

Sanitation engineers Headquarters and country based

FM specialist Country based

Procurement specialist Country based

Social specialist Country based

Environmental specialist Country based

Dam safety specialists International and country based

M&E specialists Headquarters based

Operations analyst Country based

Lawyers Country based

Disbursement officers Country based


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ANNEX 2: SPECIFIC PROJECT DESIGN ANALYSIS

COUNTRY: Brazil SABESP - Improving Water Service Acess and Security in the MRSP

Component 1: Expand access to water services, reduce water losses, and increase system resilience in the MRSP (US$255.20 million; Bank US$181.4 million)

1. This component focuses on supporting the vulnerable population to access legal and quality water services; addressing high nonrevenue water (Água Não-faturada, NRW) losses in the MRSP; and improving the safety of dams, thereby contributing to increased water security. Activities of subcomponents 1.1, 1.2, and 1.3 will be implemented using a combination of output- and performance-based contracts.

2. SABESP’s customized combination of output- and performance-based contracts has been presenting good results and has generated good lessons to be replicated. This contractual model, being implemented for more than a decade by SABESP for water loss control interventions, has so far successfully achieved its goals. SABESP sees the benefit of expanding this methodology to other type of interventions, seeking to ensure the high quality of outputs delivered by the contractor, reducing performance risk for the employer, and allowing for a more favorable financial commitment and disbursement schedule. Innovating by designing, implementing, and measuring the results of performance-based contracts54 applied to water and sanitation works of a different nature will constitute a challenge and a major goal for SABESP in this Project. Moreover, these types of contracts are to be applied in most investments under SABESP’s plan. This will constitute a major innovative contribution to the water and sanitation sector, which could potentially significantly change the sector’s financing schemes and the market involving consultants and contractors.

3. Challenges of using performance-based contracts. Past operations supporting performance-based approach considerably suffered from legal challenges. But the country’s laws have evolved since,55 and SABESP56 has solid experience in implementing this approach. Thus, the implementation of performance-based approaches under the Project will occur within a much more favorable legal and solid technical context.

4. The ‘Corporation Water Losses Program’ (see detailed information in Annex 2A). Water losses control has been on SABESP’s priority list since the mid-1990s. The water losses per connection have varied over the last two decades. They reached 612 L per connection per day in 2000, when the Municipality of Osasco was incorporated in the MRSP water supply system operated by SABESP. They decreased to 258 L per connection per day in 2015, reflecting the reduction of water pressure in the pipeline implemented by SABESP as a key measure to face the water crisis. In 2017, they reached 302 L per connection per day, reflecting the gradual increase in the availability of water supply.57 The program focuses on reducing real and apparent losses, as well as implementing actions to avoid the expected natural increase of total losses through aging infrastructure and/or growth in connection irregularities and fraud. Over the last decade, SABESP has implemented water loss interventions through performance-based contracts. This contractual modality, which is also used by a few other

54 SABESP intends to use contracts that are fully performance-based paid contracts, as well as a combination of output-based and performance-based paid contracts. 55 Seen as an improved procurement model, the Regime Diferenciado de Licitação (Law 12,462) was regulated in October 2011. 56 SABESP’s new regulation also facilitates and creates incentives for the use of performance-based contracts (or mixed contracts). 57 See Annex 2A - SABESP - Matrix of Indicators (service, operational, financial).


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Brazilian utilities,58 has been very successful in yielding the desired results. However, scaling up the water loss control program requires increasing the interventions that require higher capital investments and, in consequence, modeling the performance contract so that both the employer and the contractor will (at least temporarily) share the higher capital investment required. The World Bank support would allow SABESP to increase its water losses control interventions that require higher capital investments for the most critical and aging network and water sectors.

Subcomponent 1.1: Increase access of vulnerable population to WSS services (US$73.9 million; Bank US$52.7 million)

5. The scope of this subcomponent is to increase access to WSS service for vulnerable people in peri-urban areas of the MRSP by scaling up the ‘Água Legal’ Program (Programa Água Legal).

6. Background on the Legal Water Program. SABESP initiated the program in 2016. Accordingly, with surveys it has been identified that59 there are close to 1,050,000 vulnerable people (approximately 300,000 households) informally connected to the formal water supply systems in the Municipality of São Paulo. The precariousness of the informal connections does not ensure that the water being consumed is still potable. Also, they are a relevant cause of water losses for SABESP and can potentially reduce the quality of the water serviced. SABESP’s goal is to regularize the connections of approximately 80 percent of those (240,000 low-income households) by 2027. The gap refers to low-income houses built on the outskirts of the city in locations facing formal restrictions, where, at first, construction of public infrastructure, including access to water services, would not be allowed. Expanding the formal connections to the targeted 240,000 low-income households would be feasible since the existent water supply system coverage already reaches 98 percent of the total of 22 million people living in the MRSP, while the connection rate is at 95 percent.60 In addition, the program has been conceived to implement water loss control activities in an integrated manner with the implementation of formal connections, through a combination of social support and outreach activities and infrastructure investments. Once the formal connection is operational, the households pays the social tariff (BRL 0.82 per m3 for up to 10 m3, which is 33 percent of the regular tariff) for at least two years. Moreover, the existence of sewerage systems in the area also allows for the connection of some households. Typically, 20 percent of households can obtain access to the sewerage system. Since 2016, 78,000 water connections were formalized under the program, benefiting some 280,000 people, and an estimate of 14,000,000 m3 of potable water was saved (there are 10 contracts under execution and two have already concluded). SABESP aims at scaling up the implementation of the Água Legal Program with World Bank support, so as to reach a larger number of people by 2025.

7. Project beneficiaries. This subcomponent would intervene to increase legal access to the formal water supply system for some 532,000 vulnerable people (152,000 households) and sanitation to some 133,000 people (38,000 households) while also reducing NRW in the community. These families live in peri-urban slum areas within the MRSP. These families face high and very high social vulnerability—higher than the state average levels for households with per capita incomes below the poverty line (US$5.50 per day). They also have poor access to public services and the labor market, a large number of children and high dependency rates. They are generally headed by people with low school attainment and they account for about 14 percent of the socially vulnerable

58 Mainly based on SABESP’s reach experience with this type of contract for water loss reduction. 59 Prepared jointly by SABESP and the Municipal Government of São Paulo, supported by existent geo-referenced systems carried by both entities. 60 Illegal connections are not considered.


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people living in the MRSP and 64 percent of the 300,000 families living in slums in the MRSP. Among these vulnerable families, the parcels of households headed by women with children are overrepresented (about 44 percent of the total). The families have demonstrated capacity to pay the social tariff. Experience from the Água Legal Program areas already implemented indicates that 81 percent of the population pay the bills, while 73 percent of other social tariff payers of SABESP in the MRSP are actually paying.

8. Lessons learned. The overall program methodology has been successfully implemented, providing lessons that have been incorporated in the Project design and interventions, such as the importance of also intervening with sanitation. The main lessons learned were the following: (a) add activities to carry out a stronger evaluation of the first cycle of water bill payment and provide further assistance to the households whose consumption exceeded the average previously estimated; (b) carry out systematic bill payment monitoring for each community, requiring the presence of the contractor’s employees in the community during some weekends to provide clarifications about the water tariffs, rational water use procedures, water leaks search, and so on; and (c) include in the contractor’s contract the execution of works in-house to install the sewerage pipes to effectively connect them to the public sewerage collection system. For the Project-supported combined output and performance-based contracts, SABESP has considered reducing the number of months for paying the contractor for the performance-based part of the contract in order to reduce the time needed for the private firms to recover their investments (potentially reducing costs as well as the timeframe for disbursing the loan); and balancing the financing funds readily available with SABESP budgetary planning and limits.

9. Subcomponent approach. SABESP’s own multisectoral team initiates the activities to carry out the Água Legal Program methodology. This includes undertaking: (a) a social and services diagnostic; (b) an economic feasibility analysis, obtaining information from the municipal government on the land ownership and an authorization allowing the extension of water services infrastructure (SABESP is legally allowed to provide formal connections for houses located in a neighborhood built on public land for which land use has been, or is in the process of being, regularized); and (c) elaborating the ToRs specifying the activities to be tendered, according to each community’s characteristics. SABESP would then outsource the main activities to be financed, including: (a) visiting households for detailed information on the activities to be implemented, time frame, and infrastructure works to be executed, explaining the upcoming new water consumption features including receiving the water bill, double-checking consistency with the micrometer, and payment procedures; (b) implementing infrastructure works to install pipelines and connections, including micro meters; (c) monitoring the first micrometer reading jointly with the household; (d) carrying out adjustments as needed; (e) for three consecutive months, ensuring the presence of employees in the community after formal connections have been carried out (during the first month, at a fixed address; during the second month, visiting the houses facing inconsistent consumption levels or bill payment arrears to provide orientation and carry out adjustments as needed); and (f) monitoring consumption and payment in the whole community. The acquisition of goods (mainly pipes) is carried out by SABESP and provided to the firm for installation.

10. Performance-based contract and payment. The activity is implemented through a performance-based contract including three phases: the first phase (12 months) comprises items (a) and (b) listed in the previous paragraph; the second phase (18 months) includes item (c), (d), (e), and (f). The third phase (12 months)61 only includes payments from SABESP to the services contractor based on the performance reached. The total payment to the services contractor might range from 75 percent to 120 percent of the targeted contractual amount,

61 For interventions to be supported with loan funds, the performance-based payment period has been reduced to six months.


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measured in terms of the volume of water micro-metered by SABESP in the areas. The payments initiated during the second phase and the monthly payment amounts vary according to the performance reached each month. During the third phase, the contractor receives the final payments in fixed amounts corresponding to the performance reached in the second phase. The contractor’s performance is measured according to the number of new formal water connections added and the associated water volume that is micro-metered.

11. Readiness. Around 16 percent (some US$12 million) of the total amount of this subcomponent is expected to be procured by the end of calendar year 2018 using counterpart funds. Technical documents have been discussed with the World Bank for around US$4.3 million worth of contracts, and their respect bidding processes have been launched.

Subcomponent 1.2: Rehabilitation and renewal of critical water networks (US$128.1 million; Bank US$118.2 million)

12. The scope of this subcomponent is to rehabilitate and renew critical water networks to reduce leakages by scaling up SABESP’s replacement program for critical aging water networks,62 including among others, the replacement of reticulation mains, pipelines and water connections in the MRSP. This subcomponent aims to increase resilience and water availability in the system, reduce NRW, reduce potential impacts on the quality of the supplied water, reduce the natural growth rate of water losses, reduce operational costs and improve asset management in the overall MRSP network, and enable SABESP to expand water services in peri-urban areas.

13. This subcomponent will intervene in up to 850 km of reticulation mains, including the replacement of approximately 113,000 serviced connections in various areas of the overall MRSP. This is part of the 2,600 km of very critical pipelines prioritized according to a multicriteria decision analysis.63 In the MRSP, 16 percent of SABESP’s 36,000 km water network was more than 50 years old in 2016, and this rate has increased exponentially. Ten years earlier, it was at 9 percent according to SABESP’s technical records. The Project would finance replacing 33 percent of critical pipelines. Investing in rehabilitating these water distribution mains and connections provides high benefits because it significantly decreases the rates of losses and reduces the natural growth rate of water losses in the system in the succeeding years. Besides operational gains, the interventions are also expected to save water, support water security, and decrease risks of water quality issues in the serviced water. It is estimated that the interventions will directly benefit about 400,000 inhabitants and would result in an estimate of up to 111 million m3 in water savings accumulated during the Project’s life time.

14. Construction and type of contractual modality. The Project proposes a non-destructive construction method, following SABESP’s long experience in applying it in MRSP’s difficult transportation and urban density conditions. Also, the selected intervention sites are located within the different territories managed by SABESP’s five business units responsible for water and sanitation operation in the MRSP and distributed within the business units’ regional management units to allow for stronger and more agile contract management procedures. SABESP would like to use a combination of output- and performance-based contracts for implementing this subcomponent, as an innovative approach. Bidding documents and ToRs are being discussed. The current proposal would entail that the contractor develops the detailed designs and executes the works, while 20 percent

62 Networks were selected using a robust multicriteria analysis. Details are presented in Annex 2. 63 Analytic Hierarchy Process considers the following variables: leakage frequency; material age; water outages; low pressure; turbidity; color; health and safety buildings; revenues; and housing density.


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of the total payment is tied to achieving yet-to-be-agreed performance criteria64 over 12 months after conclusion of the works. The required material (mainly pipes) would be provided by SABESP using counterpart funds.

15. Readiness. The ToRs and proposal for the combination of output- and performance-based contracts have been received by the World Bank and are expected to be agreed upon by the end of calendar year 2018. Preparation of bidding documents is expected in early 2019.

16. Complementary ongoing investments. This includes 80 km under bidding processes and financed by SABESP’s own funds; 700 km financed by JICA, for which works are under execution; and 260 km to be financed by the Caixa Econômica Federal (CEF), which is under preparation.

Subcomponent 1.3: Reducing water losses in specific water sectors in low-income areas (US$41.0 million)

17. The scope of this subcomponent is to reduce water losses in specific water sectors in low-income areas located in the Guarapiranga and Billings Basins with a comprehensive water loss reduction plan, including, among others, district metered areas, infrastructure replacement, pressure control, and active leakage repair. In two prioritized low-income neighborhoods (Jardim Angela and Grajau) located in the Guarapiranga and Billings Basins, the existent water distribution control measures in both areas are inadequate and the rate of water loss is very high (307 L per connection per day). These interventions are consistent with the priorities of the approved MRSP Water Master Plan (2016) and with the aim to increase resilience in the system to respond to climate change-related risks. Implementation of the activities for the two abovementioned neighborhoods would result in an estimated 32 million m3 reduction in water losses during the Project’s life time. It would indirectly benefit around 850,000 inhabitants (242,000 connections).

18. Type of contract. This combination of output- and performance-based contracts has a total contract period of 60 months. It includes 18 months for the execution of designs and works, 12 months for measuring the performance levels reached, and 30 months65 in which the constructor will receive fixed payments based on the performance levels reached during the previous 12 months. SABESP provides the required material. SABESP has solid experience in implementing such interventions following the proposed contractual modality. The performance criteria require reducing the losses by approximately 18 percent.66 The implementation of the planned activities for the two abovementioned neighborhoods will result in an estimated reduction of up to 32 million m3 in water losses accumulated during the Project’s life time. It would indirectly benefit some 850,000 inhabitants.

19. Readiness. The total amount of this subcomponent is expected to be procured using counterpart funds. Technical documents have been discussed with the World Bank and their respect bidding processes are expected to be launched in December 2018.

64 Initial ideas included indicators such as connection quality index (based on the number of failures during the test period); and pipelines and connection index, measured over one year of the new infrastructure regular operation. 65 The time frame for payments will still be discussed, with a view to being reduced. 66 Volume made available less volume micro metered.


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Subcomponent 1.4: Repairing and improving operational and maintenance assets, life span extension of dams supplying water to the MRSP (US$12.2 million; Bank US$0 million)

20. This subcomponent will repair and improve the operation and maintenance of assets, and support lifespan extension of dams supplying water to the MRSP, including, inter alia, correction of anomalies and the repair of dams and their associated structures; control of eroded material or leaks; and supervision of such activities.

21. This subcomponent would finance, among others: (a) the correction of anomalies in dams and their associated structures, particularly the Paiva Castro and Atibainha Dams; (b) the control of eroded material in the drainage system at the downstream toe, where applicable; (c) the control of leaks in open joints at the bottom outlets galleries (Grouting), where applicable; (d) repair of the structures affected by the Alkali-Aggregate-Reaction (AAR) (expansive reaction), including for the Paiva Castro Dam; and (e) the supervision of all such activities.

Component 2: Reduce pollution loads to scarce water resources in the Guarapiranga Water Basin (US$59.9 million; Bank US$58.8 million)

22. The importance of the Guarapiranga Reservoir to the MRSP. The Guarapiranga Reservoir has the capacity to produce up to 16 m3 per s of water to the MRSP. During the 2014/15 droughts, it became the largest water supply reservoir to the MRSP because it benefits from a more abundant rainfall pattern given its proximity to the coast. At that time, its contribution to the MRSP water production system increased from 20 percent to 30 percent, by increasing the water treatment capacity and integrating the overall system. Currently, it is the region’s third largest water production system. The need to protect the Guarapiranga Water Basin67 is a recurrent theme, given its relevance as a water production system and its unfavorable urban occupation with a large presence of vulnerable population (poor included) and its informal neighborhoods deprived of appropriate infrastructure (especially sewerage collection), in which pollution loads are carried out to the water reservoir, threatening the water quality. Raising the operational standard of the existent sewerage systems in the Guarapiranga Water Basin is the second most relevant action to protect the reservoir,68 after continuing the provision of multisectoral infrastructure to slums. Approximately 100 percent of the regular urban settlements are connected to the sewerage system.69 Once it is collected, the untreated wastewater is pumped up to be treated in the existent Barueri WWTP located in Upper Tiete West Basin. Due to the environmental restrictions, the wastewater produced in the Guarapiranga Water Basin cannot be treated locally. SABESP has requested the World Bank’s continued support to carry out a set of interventions—including expanding sewerage collection in vulnerable neighborhoods, implementing appropriate technology solutions to remove pollution loads from natural drainage systems, and increasing the operational efficiency of the existent sewerage system—that strongly contribute to remove pollution loads drained into the Guarapiranga Reservoir. However, although the Project will directly contribute to reduce the volume of pollution loads in the reservoir, other significant sources

67 The Guarapiranga Water Basin’s total population is approximately 800,000 people (IBGE 2008, www.ibge.gov.br ). 68 Plano de Proteção Ambiental do Guarapiranga, 2008. 69 This represents approximately 70 percent of the population living in the Guarapiranga Basin. The remaining 30 percent are largely in dense informal settlements known as slums. Provision of infrastructure to these areas falls under the municipal government’s responsibility and requires complex, multisectoral, and costly infrastructure works. In the 1990s and early 2000s, the number of slum upgrading works was substantial. Then they fell from the municipal government priorities.

http://www.ibge.gov.br/


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of pollution (notably slums deprived of urban services) still need to be addressed to ensure permanent improvements in the quality of the reservoir.

Subcomponent 2.1: Expanding sanitation services provision to vulnerable people (US$31.3 million; Bank US$30.2 million)

23. This subcomponent will expand sanitation services provision to vulnerable people by reducing the direct discharge of sewage into water bodies upstream of the Guarapiranga reservoir through, among others, investments including sewerage networks, collectors, pumping stations, and connections to the existing Barueri WWTP, including preparation and implementation of social development plans and activities.

24. Itapecerica da Serra and Embu municipalities. The Project would finance the expansion of sewerage system to vulnerable neighborhoods in the territory of the Municipality of Itapecerica da Serra and the Municipality of Embu, located in the peri-urban area of the MRSP and also in the center-south area of the Guarapiranga Water Basin. These two municipalities host a generally low-density urban occupation mixing mid- to low-income settlements. The low-income neighborhoods that would benefit from Project financing are located in the Embu-Mirim River Basin, which is the second largest tributary to the Guarapiranga Reservoir. Also, this river is responsible for the second largest pollution load to the reservoir largely because it receives the untreated wastewater from low-income neighborhoods deprived of sewerage infrastructure. The housing density in these neighborhoods has gradually increased over the last two decades, although it is still below the typical high-density standards found in the consolidated urban areas in the northern section of the Guarapiranga Water Basin (which already have services provision).

25. Scope. The detailed design for building the sewerage system in Itapecerica da Serra has been prepared, and it has been reviewed and approved by SABESP and appraised by the World Bank. The sewerage infrastructure to be built comprises 39 km of collection pipeline, 1.6 km of interceptors, 5 pumping stations, and 4.3 km of discharge pipeline. The collection system will connect with the sewerage transfer pipeline that pumps the wastewater produced within the Guarapiranga Water Basin to an existent treatment plant located in another basin, as required by the environmental legislation. The beneficiaries are approximately 12,250 people (3,500 families). The concept design proposed for the sewerage system in Embu is estimated to benefit another 11,900 people (3,400 families) and is expected to comprise around 18.5 km of collection pipeline, 3,400 connections, 5 km of interceptors, 4 pumping stations, and 2 km of discharge pipeline. The expansion of this sewerage system in Embu also requires the construction of 4.7 km of main trunk pipelines to transfer the volume of the wastewater to a treatment plant, located outside the Guarapiranga Water Basin. The detailed designs for the Embu sewerage collection and main truck pipeline will be carried out as part of the Project and are expected to start during project preparation using counterpart funds.

26. Project beneficiaries. This subcomponent would intervene to increase access to sanitation to some 24,000 people (6,900 households). These families face high and very high social vulnerability—higher than state average levels of households with per capita income below the poverty line (US$5.50 per day), poor access to public services and the labor market, large number of children and high dependency rates, and they are headed by people with low school achievements.

27. Community participation. Following the approach of the Água Legal Program, the water and sanitation works will foster the participation of beneficiaries and community representatives through: (a) community consultations to be held before civil works; (b) participation in community meetings and in the periodical


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meetings of SABESP’s Social Responsibility Forum; and (c) engagement in community development works carried through community events and household visits.

Subcomponent 2.2: Reducing pollution loads in rivers (US$16.0 million; Bank US$16.0 million)

28. This subcomponent will support the reduction of pollution loads in rivers by, inter alia, investing in innovative approaches to remove nutrients from the Embu Mirim River. This subcomponent would finance a nutrient removal plant in the Embu-Mirim River aiming at reducing the pollution loads, mainly phosphorus, reaching the Guarapiranga Reservoir. The plant would be located in the final downstream section of the river, before its flow is discharged into the reservoir. Also, it would complement the efforts to abate the pollution load in the river, given the difficulties to control the discharge of untreated wastewater and contaminated urban runoff. A floatation plant of a smaller size was already implemented by SABESP some 20 years ago with good results in the Guavirutuba River. Based on the lessons learned from the previous experience, a performance-based contract is being designed to engage the private sector in providing the most cost-effective solution.

29. Scope, performance-based payment. The financing would comprise the development of the concept and the design, as well as the execution of the works and the operation for a defined number of months. The contractual modality would allow the proponent to recommend the technology, the technical solutions for the execution of the works, and the operational procedures. The contractual modality would also include performance-based payments tied to the agreed targets on pollution loads removal, energy efficiency achieved, and volume of water treated. Draft technical parameters being considered include the following: the plant treatment capacity should reach approximately 4.5 m3 per s and the efficiency should reach around 90 percent of phosphorus removal, among others. It is also expected that the plant will treat the totality of the river flow during the dry period and the plant will operate at full capacity during the wet period. It is projected that the sludge amount of approximately 400 m3 per day would be transported through the existent sewerage main truck system (connected at the existent pumping station located nearby) to the Barueri WWTP. The existent capacity of both the sewerage main trucks system as well as the Barueri WWTP is appropriate to receive the additional load. SABESP has implemented70 another nutrient removal plant to protect the Guarapiranga Reservoir, which has been in operation for 16 years. It is located at the Guavirutuba stream and its capacity reaches 200 L per s, removing up to 90 percent of the phosphorus during the dry season. Lessons learned from this experience are being reflected in the current project proposal. The subcomponent investment still requires discussions with the environmental entity to ascertain that all provisions to comply with the environmental legislation would be carried out.

30. Readiness. The ToRs and the framework for the performance parameters have been shared with the World Bank. It is expected that the ToRs would be agreed upon before project signing.

Subcomponent 2.3: Increase sewerage system reliability (US$12.6 million; Bank US$12.6 million)

31. Under this subcomponent, the Project would aim to increase sewerage system reliability through: (a) the rehabilitation and modernization of existent sewerage pumping stations in the Guarapiranga Basin; (b) the

70 Supported by the World Bank-financed Guarapiranga Project - São Paulo, Paraná, and Federal Government Water Quality and Pollution Control Project SAR No. BR-28962 (1992), Loan Agreement BR-3504 (1992), closed in 2000; and the Mananciais Project - Integrated Water Management in Metropolitan São Paulo Horizontal Adaptable Program Lending (APL) - Loan Agreements BR-7661, 7662, and 8149, approved in 2009 and closed in 2017).


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replacement of the Guavirutuba sewerage main trunk pipeline; and (c) the replacement of the Talamanca discharge pipeline.

32. Pumping stations rehabilitation and modernization. Under this subcomponent, the Project would finance the rehabilitation and modernization of existent sewerage pumping stations in the Guarapiranga Water Basin. They are an integral part of the existent sewerage systems that transport untreated wastewater to treatment plants located in a different river basin. The proposed rehabilitation and modernization aim at addressing the frequent failures of this equipment by increasing its resilience to operating in adverse conditions, therefore supporting improved asset management. The existent pumping stations have a conventional design that does not prevent the impact of the excessive amount of sand and debris in the wastewater flow, given the large number of irregular drainage connections in the sewerage system. The precarious urban standards that prevail in most of the Guarapiranga Basin—including a large number of very dense slums and informal settlements without, or with poor, infrastructure, where inappropriate practices regarding drainage and sewerage connection, as well as for solid waste collection and dumping, are frequent—do not allow for a normal operation of conventional pumping stations. The operational failures, including equipment breakdowns, are too frequent, leading to high maintenance costs as well as to overflows of untreated wastewater to a nearby short watercourse that quickly reaches the reservoir.

33. Scope. To address the problem, SABESP has proposed to improve the robustness of the existent sewerage pumping stations, including adding redundant pumping and energy sources. This comprises access blockage systems (drawers’ valves), screening of floating matter, solid grinders, a solid removal system, a barrel of discharge, external stopping contingency, rolling bridges, pumping support, and so on. If needed, equipment to reduce odor will be added. Six critical pumping stations would be targeted. These are strategically located in the sewerage systems running along the left and right banks of the Guarapiranga Reservoir and transporting the wastewater generated by some 700,000 people to treatment. Table 2.1 shows the six pumping stations, average flow, and the estimate overflow.

Table 2.1. Average Flow per Wastewater Pumping Station

Pumping Station Average Flow (m3/h) Estimate Overflow in 2017a (m3/year)

Embu Guaçu 4 738 12,562

Caulim 432 2,703

Iporã 396 608,060

Jardim Solange 900 29,865

Riviera mãe 648 52,725

Talamanca 677 469,124

Total 1,175,039

Note: a. Caused by breakdown.

34. Costs and contractual modality. The estimated costs are being refined based on preliminary studies and equipment costs. The preliminary designs are being developed by SABESP. The proposed improvements are expected to reduce the total number of breakdown from 42 accumulated in 2017, to 1 per pumping station per year. A conventional works contractual modality is anticipated.

35. Guavirutuba - sewerage main trunk line. Under the subcomponent, the Project would also finance the replacement of the Guavirutuba sewerage main trunk pipeline. The existing one was built about 30 years ago, its operational lifetime is considered expired, and additional families (estimated around 5,000) require sewerage


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collection. Its operational capacity is insufficient, and it is facing severe material deterioration. A slum settlement has occupied the land over a large extension of the upstream section of the main truck, hindering its maintenance. Also, it has broken down and repairing it is not feasible given the unplanned urban standards in the area. In consequence, the untreated wastewater generated by some 20,000 people runs into the Guavirutuba Stream, a short watercourse feeding the Guarapiranga Reservoir, which is only 3 km from SABESP’s water intake. The new 2.3 km sewerage main trunk pipeline would largely follow the existent main trunk routing while also bypassing urban settlements and including extensions to reach areas not previously covered. The preparation of the detailed design is ongoing. A conventional works contractual modality is anticipated.

36. Talamanca - sewerage discharge line. The subcomponent also includes financing the replacement of the Talamanca discharge pipeline. Like the Guavirutuba sewerage main trunk pipeline, this was built some 30 years ago and is facing severe operational failures and material deterioration. Also, it faces the same urban threats described earlier, hampering the maintenance procedures and the quality of its material. This system transports the untreated wastewater generated by some 300,000 people—about 330 L per s to the existent treatment plant located in another basin. A 1.9 km wider pipeline would replace the current one. The preliminary design is available, and the detailed design is under preparation. A conventional works contractual modality is anticipated.

Component 3: Technical assistance and Project management and supervision (US$34.3 million; Bank US$9.2

million)

Subcomponent 3.1: Exploring innovative approaches, strategic studies, and alternative-pilot solutions (US$3.29 million; Bank US$2.7 million)

37. This subcomponent will explore innovative approaches, strategic studies, and alternative-pilot solutions to allow SABESP to respond to key sector and institutional challenges by, inter alia, bringing in innovative approaches, implementing alternative-pilot solutions, preparing key strategic studies, documenting case studies and best practices, providing training material, promoting knowledge-sharing events, developing impact assessments, and improving the SABESP’s technical capacity to deal with regulatory requirements and asset management.

38. This subcomponent will support bringing in innovative approaches and technologies, implementing alternative-pilot solutions, preparing key strategic studies, documenting case studies and best practices (including those related to performance-based contracts), assessing the impact of the “Água Legal” Program, providing training material, and promoting knowledge-sharing events, among other activities, to support SABESP in responding to key sector and institutional challenges. Knowledge exchange events and studies have also been discussed related to city-wide inclusive sanitation and reduction of water losses, among others. Identified studies and activities may include an: (a) energy micro generation study; (b) automation system pilot; and (c) Integrated Plan for SABESP’s Metropolitan Department’s Operational System. Alternative-pilot solutions would include the already identified automation system pilot for the Barueri wastewater treatment plant; and, potentially a study of technical solutions for city-wide inclusive sanitation, especially in the Guarapiranga basin. At the corporate level, this subcomponent will support SABESP in improving technical capacity to deal with regulatory requirements and asset management.

(i) Energy micro generation study. The proposed study would focus on carrying out a detailed diagnostic of the potential to generate energy by micro turbines in 22 water pumping systems that belong to the MRSP integrated water production system. It would also include the subsequent


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implementation of a pilot for micro energy generation in one of systems assessed, totaling an estimate investment of BRL 2 million and 18 months for carrying out the diagnostics and implementing the pilot. Since 2012, the national energy regulator (Agência Nacional de Energia) has allowed the distributed micro generation of energy, meaning that the consumer can generate energy and send it to the grid, earning credits. This triggered the expansion of micro generation countywide, which the water and sanitation companies have not taken advantage of yet. Additional opportunities lie in using the micro turbines or water pumps working as turbines, which offer potentially high economic returns while contributing to increased safety and to sustainable energy production, adding to the reduction in energy costs from the micro generators.

(ii) Automation system pilot. The proposed study would develop a field automation system and the consolidation of the Operational Control Center (Centro de Controle Operacional) of the Barueri system, which includes the WWTP Barueri, pumping stations, and isolated WWTP. The study’s objective is to process control (field), to acquire data, supervision, information storage, and management, focusing on resources optimization and integrating the operational divisions constituting the Business Unit—Metropolitan Wastewater Treatment Department. The study scope includes the following: integrate the existent systems and equipment; plan and prepare the acquisition of equipment needed for the automatic functioning of all facilities to reach at least 95 percent of the control loops in automatic and 100 percent of the interlocks control loops; design all communications between instruments and Programmable Logic Controller (Controlador Lógico Programável, CLP), among CLPs and between CLPs and a supervision and control system; supply, install, and commission panels and field equipment to carry out measurements and controls needed for specified points from the facility, following the Project criteria previously mentioned; implement a centralized acquisition Process Information Management System (Sistema de gerenciamento de informações de processo); and make the field information available in SABESP’s intranet. Services and equipment acquisition is expected to constitute a single procurement process.

(iii) SABESP Metropolitan Department Operational System Integration Plan. This plan would be developed through an agreement with the University of São Paulo, specifically with the Energy Engineering Department for Electric Automation of the Polytechnic School, also involving the support of the University of São Paulo Foundation (Fundação da Universidade Estadual de São Paulo). The activity consists of defining guidelines for the development of automation designs for all the water and sewerage facilities under the responsibility of SABESP’s Metropolitan Department. The automation process would integrate the facilities and follow international norms. The objective is to improve the process management involving water and sanitation operational facilities and equipment, going from process level 0 (involving equipment: motors, valves, sensors, and actuators) to level 4 (corporate level). This would allow for rapid technical responses to find solutions to problems, shortening the decision-making process and resulting in greater overall system automation. The plan would entail classification/documentation; functional modeling by site (control and monitoring operational levels—process, controllers); supervisorory systems; production management and definition of key performance indicators; project concept for key sites; and quantifying the operational and financial benefits. The estimate cost is BRL 2 million, and the implementation period is 12 months. This activity would be fully paid using counterpart funds.


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Subcomponent 3.2: Project management and supervision (US$24.6 million; Bank US$0 million)

39. This subcomponent aims to support SABESP with Project management and works supervision requirements including, inter alia, technical assistance to respond to technical, fiduciary and safeguards-related demands, reporting needs, and monitoring and evaluation. The contracting of firms and/or individual consultants to assist with the Project supervision of all works and to support SABESP’s PIU in monitoring project activities (fiduciary and safeguard-related aspects included) would be fully paid with counterpart funds.

40. Management firm. The firm would support the PIU in managing the Project. A consulting firm with acknowledged expertise in implementation of multilateral-financed operations would be contracted. The consultant firm’s role would include, among others, supporting the monitoring of project implementation, safeguard and fiduciary-related demands, validation of contract performance, and ad hoc expertise based on demands.

41. Contracting of consultancy firms to supervise specific project activities. This would include: (a) supervision of the execution of the activities for Subcomponents 1.1, 1.2, and 1.3, under the management of MP; and (b) supervision of activities in Component 2 under the management of ME (except for 2.3, which MS will supervise directly with its own staff). The ME has a current ongoing supervision contract that will be used to support Component 2 interventions, which is expected to last until the end of 2019. For 2020, a new contract is expected to be carried out.

42. Readiness. The ToRs for the contracting of these firms were conditions for negotiations of the Project.

Subcomponent 3.3: Institutional support, development of studies, plans, designs, and investigations to support the renewing and life span extension of the dams supplying water to the MRSP (US$6.5 million; Bank US$6.5 million)

43. This subcomponent will support SABESP to develop studies, plans, designs and investigations to renew and extend the lifespan of the dams in the MRSP, including, inter alia, the increase of SABESP’s institutional capacity and the development of key dam safety-related tools to enhance SABESP’s capacity to respond to the dam safety requirements and benchmarks, and the acquisition and installation of monitoring and control systems; as well as electrical and mechanical equipment.

44. This subcomponent will finance, inter alia: (a) the preparation and implementation of an Emergency Action Plan (EAP) or an Emergency Preparedness Plans (EPPs) at SABESP’s operated dams (in agreement between SABESP and the World Bank); (b) the hiring of a Dam Safety Panel of Experts to assess aspects of vulnerability, including a revision of the dam break analysis and instrumentation systems, during the implementation of the periodical dam safety reviews; (c) a study of the status of the structures affected by the AAR (expansive reaction), where applicable, including for the Paiva Castro Dam; (d) the design and provision of suitable downstream warning/alarm systems or actions for downstream communities in line with the EAP or EPP; (e) a study and the design of the new supervision control, data acquisition system, and integrated database in the offices of SABESP, connecting with the existing decision support system, including the definition of hardware and software; (f) the acquisition and installation of monitoring equipment—instrumentation package or the acquisition of data from monitoring equipment, including the revision and updating of the existing supervision control and data acquisition system, installation of new hardware, and acquisition of software to implement an integrated database in the offices of SABESP, including the existing decision support system; (g) the installation of a system


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to control deformations with micro geodesic equipment at dams, where applicable; (h) a study and design for upgrading the instrumentation systems and monitoring equipment—instrumentation packages at dams in general; (i) the acquisition and installation of electrical and mechanical equipment for the renewal of the dams in general; (j) refining of the operation and maintenance plans and manuals after design of new equipment and instruments, where applicable; (k) technical assistance as needed to comply with the policies; and (l) capacity building and on-the-job training, including two weeks hand-on training workshops covering risk analysis on the basis of the “Possible Failure Modes” methodology.

Component 4: Contingency Emergency Response Component (CERC) (US$0.0 million; Bank US$0.0 million)

45. The objective of this component is to support SABESP, following an eligible crisis or emergency, to respond to emergency situations and finance rapid reconstruction. It will provide immediate support to SABESP in responding to an eligible crisis or emergency by quickly reallocating Project funds. This component is a zero-fund disaster recovery contingency component that could be used in the event of a crisis or an emergency. A crisis or emergency eligible for financing is an event that has caused, or is likely to imminently cause, a major adverse economic, environmental and/or social impact, associated with a natural or artificial crisis or disaster. Once the CERC is activated, the funds can be mobilized quickly from uncommitted funds toward response activities, with minimal procedural steps. SABESP would be the implementing agency of the CERC. As part of the first-year activities of Project implementation (and as a condition for disbursement of the CERC component), SABESP will prepare, with the World Bank’s support, a CERC annex to the POM. This CERC annex will lay out in detail the provisions for activating and implementing the CERC and the operational, fiduciary, and technical details of the CERC. The criteria for activation would include submission of a formal request to the World Bank for support for an eligible emergency through the CERC (as indicated by formal documents issued by a competent entity, e.g. either/or ANA and DAEE, related to the main MRSP reservoirs71), the preparation by SABESP of an acceptable action plan for the use of CERC funds, compliance with the safeguard instruments, and the World Bank’s approval of such a plan. The CERC may finance works, goods, non-consulting and consulting services, training, and operating costs.

Project Cost and Financing

46. The Project is estimated to cost US$350 million–US$250 million from IBRD financing and US$100 million from SABESP counterpart funds. The counterpart funds will be provided via contracts that are 100 percent paid by SABESP to cover: (a) an early start of Subcomponents 1.1 and 1.3 before loan signing; (b) the acquisition of goods needed for the water works (mainly pipes); (c) specific technical assistance and design studies; and (d) project management and supervision.

47. The lending instrument is an Investment Project Financing (IPF) that will support a six-year project. Selection of the IPF instrument was based on the IPF’s flexibility and suitability to incorporate financing for a broad range of activities, including several specific investments, TA, and capacity enhancement measures. The borrower will be SABESP. While the option of the Program-for-Results (PforR) Financing modality was explored, it was clarified that this modality is not available for subnational entities.

71 E.g. Formal documents by ANA and/or DAEE may include ‘Portarias’ publicly available at the respective websites with information about restrictions for SABESP on the total volume of water intake possible due to an emergency (usually caused by droughts in main water systems).


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Table 2.2. Summary Cost and Financing

Components Total (US$,

million)

Source (US$, millions)

Loan Counterpart

Component 1: Expand access to water services, reduce water losses, and increase system resilience in the MRSP

255.2 181.4 73.8

1.1. Increase access of the vulnerable population to legal WSS services 73.9 52.7 21.2

1.2. Rehabilitation and renewal of critical water networks 128.1 118.2 9.9

1.3. Reducing water losses in specific water sectors in two low-income neighborhoods

41.0 — 41.0

1.4. Repairing and improving operation and maintenance of assets, life span extension of the MRSP Dams System

12.2 10.5 1.7

Component 2: Reduce pollution loads to scarce water resources in the Guarapiranga Water Basin

59.9 58.8 1.1

2.1. Expanding sanitation services provision to vulnerable people 31.3 30.2 1.1

2.2. Reducing pollution loads in rivers 16.0 16.0 —

2.3. Increase sewerage system reliability 12.6 12.6 —

Component 3: Technical assistance and project management and supervision

34.3 9.2 25.1

3.1. Exploring innovative approaches, strategic studies, and alternative-pilot solutions

3.2 2.7 0.5

3.2. Project management and supervision 24.6 — 24.6

3.3 Institutional support, development of studies, plans, designs, and investigations to support the renewing and life span extension of the dams in the MRSP

6.5 6.5 —

Component 4. Contingency Emergency Response Component (CERC) — — —

Front-end Fee 0.6 0.6 -

Project total 350.0 250.0 100.0

Note: Exchange rate used for planning purpose was BRL 1 = US$3.70 based on the average projection for 2019 carried out by the Central Bank of Brazil.

48. Project beneficiaries. The Project would contribute to increasing safe and formal access to water supply services for up to 532,000 very poor people (152,000 families) and to sanitation services for up to 133,000 very poor people (38,000 families) living in outskirt areas in the MRSP with high social vulnerability as measured by IPVS.72 In addition, it will increase access to sanitation to about 24,150 people (6,900 families) living in the municipalities of Embu das Artes and Itapecerica da Serra, who face high and very high social vulnerability. Furthermore, an additional 400,000 people are expected to directly benefit from the replacement of aging water supply networks in the MRSP and 850,000 people living in the low-income neighborhoods of Jardim Angela and Grajau, with improved and more reliable water supply services. Also, the interventions to sewerage main trunk

72 IPVS indicator - levels 5 and 6 (2010). Indicators of high social vulnerability areas include household income per capita, average income of the head of the family by gender, percentage of heads that are literate, average years of study, and percentage of children 0 to 5 years old, among others.


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pipeline and discharge lines will benefit 80,000 and 306,000 vulnerable people, respectively, also living in the poorest neighborhoods within the MRSP. The beneficiary families of these Project activities are overrepresented in the higher levels of social vulnerability, according to IPVS, and are characterized by poor socioeconomic and living conditions as well as by a large share of households headed by youth, women, and the elderly. In total, the interventions supported by the Project will provide direct and indirect benefits to more than 2 million people, mostly in vulnerable areas. Indirectly, the Project will benefit a much large number of people living in the MRSP by reducing the water security risks.

Figure 2.1. Social Vulnerability Index (2010)

Source: SEADE Foundation/Assembleia Legislativa do Estado de São Paulo - http://indices-ilp.al.sp.gov.br/view/index.php?selLoc=0&selTpLoc=2&prodCod=2.

6.1%

13.3%

0.0% 0.0%

40.1% 39.5%

9.9%11.3%

18.0% 17.2%

32.1%

21.3%19.2%

13.6%

23.4%27.5%

11.1%8.9%

23.5%

39.0%

4.4%7.5%

11.1%

0.8%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

São Paulo State São Paulo Embu das Artes Itapecerica da Serra

Negligible Very Low Low Average High Very High


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ANNEX 2A: BACKGROUND OF SABESP


1. SABESP context. Created in 1973, SABESP holds concessions contracts73 with 36874 municipalities in the state of São Paulo, providing WSS to approximately 28 million people75—66 percent of the total population of São Paulo. The government of the state of São Paulo holds 50.3 percent of SABESP’s shares, while 29.7 percent and 20.0 percent are traded in the São Paulo and New York stock exchange markets, respectively. SABESP users include residences, commercial activities, industries, and public buildings. The utility also supplies bulk water to four municipalities and large consumers (above 500 m3 per month) and participates in WSS services in four other Brazilian states as a minority partner of private providers.76 In addition, SABESP holds a partnership in industrial water reuse,77 in the non-domestic sewerage sector78 and in energy production.79 By the end of 2017, SABESP operated 74,400 km of water distribution networks, 51,000 km of sewerage collection and main pipelines, 240 water treatment plants, and 557 WWTPs, including nine submarine outfalls.80 Water supply coverage reached 98 percent, while the connection rate was close to 95 percent.81 Sewerage connection coverage was 89 percent, while the connection rate was 82 percent. The connection rate to wastewater treatment was 74 percent. SABESP’s organizational structure is aligned with river basin borders. The complete list of SABESP’s indicators (services, operational and financing) is presented in Table 2.3.

2. SABESP’s financing sources. SABESP’s financing strategy involves a mix of schemes: (a) commercial financing, with higher costs and shorter maturity; (b) private equity (existing and proposed to be expanded, through IFC assistance); and (c) financing from national (CAIXA, BNDES) and international (World Bank/IDB, JICA) development banks, with lower costs and longer maturities. The latter sources of finance are crucial to reach the poor and finance other lower-return investments, as SABESP does not have access to grants from the national or state governments’ budgets. Investment levels are supported by the tariffs.

Table 2.3. Matrix of SABESP Indicators

Indicators Unit 2017 2016 2015 2014 2013 2012 2011

SERVICE

Water service ratio % Tends toward universalizationa

Water coverage ratio % Tends toward universalizationa

Sewage collection service ratiob

% 83 82 83 82 —

Sewage collection coverage % 90 89 90 89 — 83 82

73 Concessions contracts (usually 30-year long) include gradual targets to expand and improve WSS services, based on the Municipal Sanitation Plans and other state planning instruments. The services include intake, transport, and treatment of raw water; transport, reservation, and distribution of treated water; and collecting, transport, treatment, and final disposal of wastewater. 74 281 concessions contracts are regulated and supervised by the ARSESP. 75 27.9 million people are direct users and 3 million have access through bulk water supply to four municipalities. 76 The private providers are Águas de Castilho S.A, Águas de Andradina S.A, Saneaqua Mairinque S.A, Serviços de Saneamento de Mogi Mirin S.A.. 77 Partnership with Aquapolo Ambiental. 78 Partnership with Attend Ambiental. 79 Partnership with Paulista Geradora de Energia S.A. 80 SABESP – Relatório da Administração, 2017. 81 Illegal connections are not considered.


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Indicators Unit 2017 2016 2015 2014 2013 2012 2011

ratiob

Percentage of households connected to sewage treatmentc

% 75 74 72 71 — 77 76

Resident population provided with water supplyd

Thousand inhabitants

24,905 24,669 24,429 24,226 — 24,249 23,911

Resident population provided with sewage collectiond

Thousand inhabitants

21,577 21,277 20,932 20,672 — 20,992 20,498

Positive perception of customer satisfactione

% 85 82 75 80 89 89 92

OPERATIONAL

Water connections Thousands 8,863 8,654 8,420 8,210 7,888 7,679 7,481

Sewage connections Thousands 7,302 7,091 6,861 6,660 6,340 6,128 5,921

Water network extensionf km 74,396 73,015 71,705 70,800 69,619 67,647 66,389

Sewage network extensionf km 50,991 50,097 48,774 47,992 47,103 45,778 45,073

WTP ‐ Water Treatment Stations

Units 240 237 235 235 232 214 212

Wells Units 1,110 1,093 1,085 1,055 1,083 1,079 1,102

STS ‐ Sewage Treatment Stations

Units 557 548 539 524 509 502 490

Water billed ‐ loss indexg % 20.1 20.8 16.4 21.3 24.4 25.7 25.6

Water metered – loss indexh

% 30.7 31.8 28.5 29.8 31.2 32.1 32.0

Water loss ‐ per connectioni Liters per connection per day

302 308 258 319 372 392 395

Water meter ratioj % 99.97 99.97 99.97 99.97 99.97 99.97 99.97

Volume of water produced millions of m3 2,783 2,696 2,466 2,840 3,053 3,059 2,992

Volume of water metered on retail market

millions of m3 1,524 1,465 1,399 1,573 1,629 1,601 1,557

Volume of water billed on the wholesale market

millions of m3 245 227 216 247 299 298 297

Volume of water billed on the retail market

millions of m3 1,818 1,763 1,698 1,812 1,835 1,796 1,747

Volume of sewage billed millions of m3 1,606 1,552 1,481 1,562 1,579 1,535 1,486

Headcountk Units 13,672 14,137 14,223 14,753 15,015 15,019 14,896

Operating productivity Connections per employee

1,182 1,114 1,074 1,008 948 919 900

FINANCIAL

Gross revenues BRL millions 15,374.6 14,855.1 12,283.5 11,823.4 11,984.8 11,391.2 10,529.7

Net revenues BRL millions 14,608.2 14,098.2 11,711.6 11,213.2 11,315.6 10,737.6 9,927.4

Adjusted EBITDAl BRL millions 5,269.3 4,571.5 3,974.3 2,918.7 4,006.6 3,605.0 3,371.0

Adjusted EBITDA Margin % of net income 36.1 32.4 33.9 26.0 35.4 33.6 34.0

Adjusted EBITDA Margin before construction revenues and costs

% of net income 45.4 43.3 46.6 34.4 44.6 43.0 43.2


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Indicators Unit 2017 2016 2015 2014 2013 2012 2011

Operating resultm BRL millions 3,961.7 3,429.6 3,044.0 1,910.7 3,138.8 2,843.3 2,512.0

Operating marginm % of net income 27.1 24.3 26.0 17.0 27.7 26.5 25.3

Result (net income/loss) BRL millions 2,519.3 2,947.1 536.3 903.0 1,923.6 1,911.9 1,380.9

Net margin % of net income 17.2 20.9 4.6 8.1 17.0 17.8 13.9

Net debt by Adjusted EBITDAn

multiple 1.9 2.2 2.9 3.1 1.9 1.9 1.9

Net debt to equityn % 56.1 65.4 83.7 68.1 59.3 61.8 59.6

Investmento BRL millions 3,387.9 3,877.7 3,481.8 3,210.6 2,716.0 2,535.6 2,440.2

Source: SABESP - Relatório da Administração, 2015 and 2017.

Note: a. Coverage equal to 98 percent or more. Service equal to 95 percent or more. b. For methodological reasons, it includes a variation margin of 2 percentage points. c. Household is the term used for the building or subdivision of a building, with occupations that are demonstrably independent of each other, collectively using a single water supply and/or sewage connection. d. The demographic data considers the ‘Projections for the Population and the Households for the Municipalities of the State of São Paulo: 2010–2050’, drawn up by the State Data Analysis System Foundation. The data for 2013 have not been recalculated. e. Survey carried out in 2017 by Consulting do Brasil ‐ Consulting & Intelligence in Government Business (6,312 interviews across the entire operating base with a margin of error of 1.23 percent and a reliability interval of 95 percent). f. Includes water mains, branch collectors, interceptors, and outfalls. g. Includes real (or physical) loss and apparent (or non‐physical) loss. The percentage of water loss represents the resulting ratio between: (i) billed volume lost and (ii) volume of water produced. The billed volume lost corresponds to the volume of water produced MINUS billed volume MINUS volume of uses. The volume of uses corresponds to water used in regular maintenance of water mains and reservoirs, water used in municipalities such as for firefighting, and water supplied to irregular settlements. h. Includes real (or physical) loss and apparent (or non‐physical) loss. The percentage of water loss represents the resulting ratio between: (i) measured volume lost and (ii) volume of water produced. The measured volume lost corresponds to the volume of water produced MINUS measured volume MINUS volume of uses. The volume of uses corresponds to water used in regular maintenance of water mains and reservoirs; water used in municipalities, such as for firefighting; and water supplied to irregular settlements. i. Calculated by dividing the measured volume lost in the year by the average amount of active water connections in the year, divided by the number of days in the year. j. Connections with water meter/total connections. k. Internal headcount. Does not include those assigned to other entities. Employees with permanent disability ceased to be taken into account from 2016 onward. l. Adjusted EBITDA corresponds to net earnings before: (i) depreciation and amortization expenses, (ii) income tax and social contribution, (iii) financial income, and (iv) other net operating expenses. m. Does not include financial income and expenses, income tax, and social contribution. n. Net debt consists of debt, minus cash, and cash equivalents. o. Does not include financial commitments assumed in program agreements (BRL 65 million, BRL 116 million, BRL 177 million, BRL 6 million, and BRL 121 million in 2013, 2014, 2015, 2016, and 2017, respectively).

Water Crisis: Context and Lessons Learned 3. Water crisis in São Paulo and the role of SABESP. The water crisis that happened in 2014 and 2015 was the worst in the region’s historical records. In February 2015, the total water volume in the MRSP reservoirs was at 22 percent (409 billion L) of its capacity. The total water production fell from 71.4 m3 per s in February 2014, when the drought intensified, to 54.8 m3 per s in December 2015. The MRSP’s largest water production system


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(Cantareira, the largest of the seven existent systems) reduced its contribution from 31.77 m3 per s to 14.93 m3 per s, from February 2014 to December 2015. The population supplied by the Cantareira system fell from 8.8 million to 5 million. Other water production systems provided for an increased number of users, especially Guarapiranga. SABESP addressed the crisis through a set of emergency measures. The first addressed water demand management, by providing a financial bonus for lowering consumption. The bonus applied from 2014 to 2016 and was adopted by 80 percent of the users. Water pressure adjustments were key. SABESP expanded the share of the network covered by pressure reducing valves to 51 percent, significantly reducing water losses and increasing water supply control capacity within the water sectors. This was responsible for about 50 percent of the water saved in 2015.82 In addition, new water tanks targeting sectors within the region were installed, increasing water distribution security and flexibility. Pumping solutions to access the remaining water in two of the Cantareira reservoirs were built, which became a lesson of considerable interest for other national and international water utilities. Ultrafiltration membranes to increase water treatment capacity were installed in the Guarapiranga Water Treatment Plant. Combined with the investments83 in increasing water transfer within the seven existent water production systems, this set of measures resulted in an increase of 10m3 per s to the integrated system. The World Bank-financed project84 active at that moment funded half of that increase.

4. Managing climate impacts in São Paulo. The hydrographic region hosting the MRSP (the Alto Tietê River Basin) is highly sensitive to increasing drought risks, compared to the 21 other regions in the State of São Paulo. As was to be expected, the MRSP was the area most affected by the 2014/15 droughts. The institutional setting responsible for managing the water resources is complex and involves multiple public and civil society entities. Within this context, SABESP played a very critical and sensitive role because it had to respond to the demand of water services from its 24 million users. This water crisis has been deeply analyzed from different angles, including academic studies and operational learning disseminated among a large number of water utilities. In particular, the measures taken by SABESP to ensure the water supply have led to relevant lessons being drawn for the sector. Overall, a clear lesson is that better monitoring would contribute to improving water resources management in São Paulo. Nevertheless, it is also acknowledged that São Paulo has produced and kept up to date the required information and plans required for water resources management. Building on these, SABESP has undertaken and concluded major investments increasing water resources availability to the MRSP. Complementing this effort, SABESP’s top priority now is to reduce water losses in the MRSP, which is currently the major cause underlying the ongoing depletion of the scarce water resources available to the region. In addition, efforts are also being made to continue to address pollution loads discharged in the water bodies. However, it is also known that it is critical to strengthen the water resources management capacity in the state given the significant dimension of its social and economic impacts.

5. Additional responses to the water crisis - supply side. SABESP has increased investments to have additional water supply sources reaching the MRSP water production systems. In 2014, the construction of a new production system85 was initiated and supported through a public-private partnership. It includes 82 km of main pipelines and will provide an additional 6.4 m3 per second of treated water, supplying 2 million people. The system is already almost fully operational. Also, additional works will increase bulk water provision to the MRSP

82 SABESP - Relatório da Administração, 2015. 83 Drawing on recommendations in particular from the Plano Diretor de Aproveitamento de Recursos Hídricos para a Macrometrópole Paulista, COBRAPE, 2013. 84 Mananciais Project - Integrated Water Management in Metropolitan São Paulo Horizontal Adaptable Program Lending (APL) - Loan Agreements BR-7661, 7662, and 8149, approved in 2009 and closed in 2017. 85 Sistema Produtor São Lourenço.


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by up to 8.5 m3 per second, by transferring water from the Paraiba do Sul River Basin shared with a neighboring state, Rio de Janeiro. The system is almost fully operational, and it also allows for reverting the water if needed. A third large transfer project to revert water (up to 2.5 m3 per second) from the coastal area has not yet begun implementation. Once these systems are operational, SABESP trusts that it will be better prepared to respond to droughts such as the 2014/15 events.

6. Water crisis savings results. By December 2015, the MRSP water production system was delivering 54.7 m3 per second, and the 24/7 water supply services to the whole region had been reestablished. This was 23 percent less than when the crisis started almost 24 months earlier. The estimated water savings came from: (i) water pressure management: 8.6 m3 per second (51 percent of the total savings); (ii) the bonus on the tariffs: 5.6 m3 per second (31 percent); and (iii) adjustments to the bulk water supply volume provided to municipalities: 2.5 m3 per second (14.9 percent). As a result, SABESP’s water losses control program was back as the top priority intervention.

7. The water crisis legacy. The water crisis combined with the unfavorable macroeconomic circumstances in Brazil (especially after 2014) resulted in significant uncertainties and restrictions for SABESP. In 2017, the volume of water in reservoirs reached 49 percent86 of their capacity. The impact on water supply availability has been gradually subsiding. However, SABESP faces new paradigms: (a) a 23 percent lower water consumption rate per user;87 (b) the migration of large consumption clients to other water supply sources; and (c) uncertainties regarding achievements concerning tariffs in the near future. The impact of the crisis on SABESP’s revenues continues to be highly significant. Also, the time frame to reestablish EBITDA88 back to pre-drought levels is still uncertain. The financing commitments made to support the emergency investments had a negative impact over SABESP’s indebtedness indicators.89 Moreover, the unfavorable macroeconomic circumstances persist. Building upon this new reality, SABESP has developed and approved a 2018-24 Investment Plan guided by the following principles: (a) ensure water supply; (b) seek economic and financial sustainability with clear focus on SABESP indebtedness capacity; and (c) ensure the company’s financial covenants stay in line with existing financial agreements.90 Aligned with that budget plan, the underlying factors guiding SABESP’s approved 2018-24 Investment Plan are: (a) the postcrisis revenue restrictions; and (b) a cautious resumption of investments.

8. SABESP’s 2018-24 Investment Plan. The main objective of this plan is to reduce the water security risks the MRSP faces while also ensuring SABESP’s financial sustainability. It includes three main areas for investments: (a) expansion of access to WSS; (b) rehabilitation and renewal of existing networks; and (c) improvements in energy efficiency and operational and institutional performance. ‘No water supply shortage’ is the 2018/24 Investment Plan’s main assumption. The 2018-24 Investment Plan amounts to BRL 24.7 billion, of which 44 percent is allocated to the MRSP. The second largest amount (25 percent) is allocated to technology, operational aspects, entrepreneurship, and environmental protection, while 17 percent is allocated to the water loss program and 14 percent is allocated to the WSS provision beyond the MRSP. However, this plan does not address all the commitments agreed with under the concessions signed with municipalities given the current revenue restrictions. The plan seeks to achieve the maximum of the agreed targets, keeping consistency with the

86 1.8 billion m3. Without the emergency works, it is estimated it would be 6.5 percent lower. SABESP, Relatório da Administração, 2017. 87 In 2017, water consumption per capita was 130 L per day, same as in 2016, and 23 percent lower than the 169 L per day registered in 2013. SABESP Relatório de Sustentabilidade, 2017. 88 Earnings before interest, taxes, depreciation, and amortization. 89 SABESP, Orçamento Empresarial 2018 e Plurianual até 2024 - Diretrizes Operacionais, 2017. 90 SABESP is subject to financial covenants under several financing agreements evidencing or governing outstanding indebtedness denominated in foreign currencies as well as indebtedness denominated in local currency.


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established priorities and in line with investment levels supported by the tariffs. The financing arrangement in place includes 66 percent from own revenues and 34 percent in loans, of which 56 percent are already effective91 and the remaining loans are at different stages of preparation.92 In terms of loan currencies, 51 percent are in local currency, 34 percent in U.S. dollars, and 15 percent in Japanese yen.93

9. The Investment Plan’s main programs. Without including the ongoing public-private partnerships and assets leasing arrangements, the investments concentrate in three programs, all targeting the MRSP: the Tietê Program, the Water Loss Control Program, and the Metropolitan Water Program. The Tietê Program aims at expanding the sewerage coverage within the Tietê River Basin (which encompasses most of the MRSP). The Water Loss Control Program includes continuing actions to reduce losses by upgrading the network, metering, connections replacement, and by implementing sectorization, installing pressure reduction valves, and implementing control and measurement districts. The Metropolitan Water Program aims at expanding water production capacity as well as the flexibility of the production systems, which directly minimizes risks of water shortages. This program also encompasses the public-private partnership ‘São Lourenço’, which is not included in the plan rationale given that this partnership responds to a different regulation.

10. The Investment Plan’s main goals. The plan’s goals are aligned with the demands established by the regulator. For the overall SABESP area, the goals by 2025 include 98 percent and 95 percent water coverage and connection, respectively, and 95 percent sewerage connection and treatment (of the total collected); for municipalities where the collection rate is below 70 percent, the goal is to reach 70 percent of collection and treatment by 2022 and closer to 95 percent by 2030. The water losses goals for the MRSP require reducing losses from 357 L per connection per day in 2017, to 310 L per connection per day94 in 2020. For SABESP overall, the goal is 273 L per connection per day by 2020.

11. The Investment Plan’s main assumptions. The main assumption underlining the proposed investments and goals is the projection to 2021 in the number of water and sanitation connections, as well as water consumption rates, which takes into account the declines observed mainly after the 2014/15 water crisis. This also reflects the continuing decrease in the number of people per household, of 1 percent per year. As a result, the Project’s total water consumption is projected to be 1.4 billion m3 in 2021 for SABESP within the overall area covered. Wastewater collection will reach 1.2 billion m3 during the same time frame. The corresponding billed amounts are projected as follows: water supply BRL 1.6 billion and sanitation connection BRL 1.5 billion. Additional revenues would come from bulk water provision to municipalities and WSS services provided to industries.

12. IFC engagement with SABESP. IFC has been engaged by SABESP as the lead adviser to carry out a transaction that would enable: (a) SABESP to raise resources in the form of equity; and (b) allow the state government of São Paulo (Governo do Estado de São Paulo, GoSP) to raise financial resources from one or more long-term investors with suitable local knowledge and proven experience in the water sector (‘Potential

91 Loans already effective: BNDES, BRL 1.32 billion; CAIXA, BRL 1.36 billion; IDB, BRL 313 million; JICA, BRL 248 million; and FINEP, BRL 34 million. Source: SABESP, Estruturação do Financiamento do Programa de Investimentos, September 2017. 92 Loans under negotiations: IDB, BRL 840 million; CAIXA, BRL 700 million; Debentures, BRL 600 million; IBRD, BRL 520 million. Source: SABESP, Estruturação do Financiamento do Programa de Investimentos, September 2017. 93 SABESP debt includes financial covenants that impose indebtedness limits on the company. Failure to comply with these covenants could seriously impair SABESP’s ability to finance the capital expenditure program. Foreign currency denominated indebtedness, including borrowings from IBRD, are also subject to financial covenants, including limitations on ability to incur debt. 94 Includes distribution and adduction.


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Investors’). The GoSP would execute this transaction by selling indirectly part of its shares of SABESP, where it currently holds 50.3 percent. The GoSP shares of SABESP may be packaged in a Special Purpose Vehicle. Together, the GoSP and the Potential Investor will create a Holding Company for the GoSP’s shares in SABESP, where the GoSP would remain the controlling shareholder (hereafter referred to as the ‘Transaction’). Among other activities, IFC’s advisory services for this Transaction involve several governance improvements, in which IFC will advise the GoSP and SABESP on defining the governance structure between the GoSP and the newly formed Special Purpose Vehicle to hold SABESP. The transaction with investors is on hold at the moment, due to the electoral period in Brazil and uncertainties in the financial market.

SABESP’s Water Losses Control Overall Program

13. SABESP has been implementing water losses control measures in the MRSP since the 1990s. Over the last 20 years, though, these measures intensified. Figure 2.2 illustrates the fluctuation in water losses since 1998 and indicates how much SABESP has reached and the continued effort and trend to keep the reduction rates low. It also shows the impact of the new municipal systems added to the MRSP system and the impacts of the water crisis triggering steep overall water loss increase.95

Figure 2.2. SABESP - MRSP Integrated Water System - Water Losses 1998–2017 (L per connection per day)

14. In response, SABESP reduced the water pressure below the normal practiced and adopted measures inducing consumption decreases which did not return to the previous levels. In 2016, as the water production increased, the losses also increased without returning to the previous levels. During the drought crisis, another measure implemented was the increase from 42 percent to 51 percent the coverage of valves to reduce pressure in the water system in the MRSP96. The goal was to reach 75 percent of coverage until 2027. Another successful action has been replacement of network branches that have presented leaks events above the normal rate instead of just fixing the leakages.

15. In the MRSP, on one hand, the alternatives for easily reducing water pressure and implementing leakages control measures (which offer the highest cost-benefit ratio) are gradually running out. On the other hand, the

95 In 1999, SABESP and the Municipality of Osasco signed a concession contract. In 2002, SABESP signed a contract with the Municipality of São Bernardo do Campo. 96 NETPERDAS – SABESP internal water loss monitoring system.


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need to rehabilitate (long-term economic return) the network that is in critical or in extremely critical conditions, has become more pressing.

16. SABESP’s Investment Plan (2018-24) goal for the MRSP is to achieve a total water loss in the network of 292 L per connection per day by 2020. The regulatory agency for water, sanitation, and energy of São Paulo (ARSESP) has established a target at 242 L per connection per day for SABESP in total to be achieved in 2020—which has significant consequences for the calculation of tariffs increases. SABESP’s own established target for the same year is 272 L per connection per day excluding the MRSP and 310 L per connection per day for the MRSP. However, constraints on the resources available to invest in reaching this target and the limited construction works firms available to cope with the required time frame indicate that the likelihood of reaching the target set by ARSESP seems low.

17. The main investments currently proposed in SABESP’s Business Plan include the installation of 554 new pressure valves (55 per year); preventive and corrective replacement of 2.5 million connections; replacement of 3,900 km of pipelines; carrying out of leaks surveys on 390,000 km of distribution network and on 1,450 km of adduction pipeline; replacement of 4.9 million micrometers; installation of 693 new district metered areas; and inspection of 16.9 million inactive connections and 2.6 million suspected fraudulent connections. The total estimated cost is BRL 3.5 billion.


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ANNEX 3: ECONOMIC AND FINANCIAL ANALYSIS


Economic, Financial, and Environmental Rationale97

1. Rationale for Public Sector Investment. The São Paulo Metropolitan Region is home to around 4 million people who are classified as highly vulnerable. Recent information also shows that there has been a dramatic increase in poverty in urban São Paulo. At the same time, the region’s demand for water far outstrips its natural availability, and pollution is a major concern. This large supply-demand gap became prominent during the water crisis of 2014-2015 when a prolonged drought hit the region. Hence, the company has to diversify and innovate its water program to meet demand, especially from its poorest clients, while also increasing efficiency, reducing pollution loads and increasing resilience to cope with more extreme weather events. Due to its binding legal and financial frameworks, financing these innovative programs with private funding is severely constrained. Hence, public financing is still needed to ensure that such investments can be made, and the knowledge on these new innovations can be tapped into by other water companies in the country as the benefits of improved water supply, wastewater and solid waste management do not only accrue to SABESP, but also to society because of the large externalities they will generate.

2. Rationale for Bank Involvement. The Bank has been involved with SABESP since 2010 in investing in key infrastructures that aim to improve the management of WSS in both the State of São Paulo and the MRSP. The Bank has invested in two projects (Mananciais and Reagua Programs98) with an emphasis on increasing the resilience, quality and reliability of WSS. These projects have improved and helped to innovate technologies, improve contractual arrangements, expand the customer base and enhance infrastructure resilience in the MRSP. Investments in sanitation improvement were also needed to diminish the pollution load and to protect water resources.

3. For utilities to improve their operating efficiency, investments are needed to improve the way of doing business. The Bank, with its global experience, will be able to combine a focus on funding the most cost-effective investments that will assist the utility in improving their efficiency in service delivery and expanding services to the poorest citizens. It will also work closely with IFC, part of the World Bank Group, to reduce the financial strains by increasing investments in the poorest neighborhoods in São Paulo, while increasing the efficiency of its overall water supply network. The Bank value added is most notably in: (i) the use of technologies and approaches that are not yet introduced in SABESP, especially with regard to leakage control in the center of one of the largest metropolitan areas in the world; and (ii) ensuring that the service remains affordable to the poor. The financial and economic analysis will put particular emphasis on the viability of subprojects to be supported

by this Project.

97 The full economic and financial analyses reports are available in the project files. 98 ICR for the Integrated Water Management in Metropolitan São Paulo Adaptable Program Lending, 2017 (Report No: ICR 3284) – P006553, and the ICR for the Brazil - São Paulo Water Recovery Project - REAGUA, 2017 (Report No: ICR3902) – P106703.


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Economic Analysis

4. Methodology. In the cost-benefit analysis, costs and benefits were first assessed at financial prices. The financial cash flows were then translated into economic cash flows by using standard conversion factors to translate financial prices into economic prices. In addition, the economic analysis also values the reduction in greenhouse gas emissions that the projects will achieve.

5. The net benefit is the difference between the incremental benefits and the incremental costs of two scenarios: “with” and “without” the Project. The “with project” scenario considers the Project and its associated targets. The “without project” scenario considers that utility consumers will access services with current services and infrastructure efficiency. Currently the water network is out of date and produces 115 leaks per 100 km of network, with costs related to excess flows and the wastage of potential wastewater flows for treatment. Investing in infrastructure in a “with project” situation will upgrade these systems and hence produce economic benefits to the entire network by enabling a 35 percent efficiency gain, which represents 25m3/month per household available at a cost of US$0.3 per m3. Also, the Project will have a unit cost of US$410 per household to shift them to legal connections. In addition, this Project will avoid costs from current illegal connections which are incurred by SABESP. The volumetric loss from illegal connections amount to 18.5 million m3 (involving 55,000 families), with a unit cost of US$0.69 per 10 cubic meters.

6. The activities were appraised measuring their flow of costs and benefits over the lifetime of the Project, which is estimated at 30 years. Costs and benefits were expressed in constant prices as of 2017. The discount rate was set at 12 percent, which reflects the floor of 6 percent per WB guidelines for these types of investments as well as an extra 6 percentage points that correspond to the opportunity cost of capital and local economic risks, as used in other projects in SABESP. In addition, the 12 percent discount rate used is also compatible with the discount rate used by ARSESP (SABESP’s regulator). Conversion factors were not used due both missing data and to SABESP’s efficiency in production and labor allocation. Because of the large economy of the MRSP there are no substantial labor market and other economic distortions that can produce large differences between economic and financial prices, including other input commodities, transfers (taxes, subsidies), and other distortions. Simple monetized values were used according to economic opportunity using the poverty line of the region. Benefits to households and individuals were monetized according to local poverty line in the MRSP (for vulnerable populations) of US$5.5 per capita per day (US$121 per month), and the mean wage per person per month in the region (US$311). The design of each project’s components will take 1-2 years to distribute funding, assuming a total of 5 years of implementation completion, with a project lifetime of 30 years.

7. Benefits. The combination of benefits depends on the investments selected. The benefits of the Project include: (i) the economic value of expanding water access water and value of avoided losses from the Água Legal Program; (ii) benefits from efficiency gains (reduction in operating costs) and the value of additional water treated; (iii) the benefits from the expansion of sanitation services to vulnerable people, including the value of discharge collection and sludge from WWTP (SABESP), and indirect health benefits (for customers); (iv) pollution removal (valued at shadow prices of phosphorus (US$0.42 per kg) and avoided contamination effluents (i.e. sludge, at US$0.10 per kg), considering operational cost savings from energy and chemicals; and (v) sewerage systems improvements, including benefits to direct and indirect beneficiaries of the total value of treated flows from trunk lines, based on household discharges. However, there are other benefits that are not estimated, derived from the resilience provided by these investments. In addition, by making these investments, the water


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and wastewater provided will be of higher quality, while access to water and wastewater services will increase among the most vulnerable households in the region.

8. The Project will also produce significant health and environmental benefits. The health benefits include a reduction or avoidance of individual health costs derived from a reduction in the incidence of water and sanitation-related diseases. Based on the cost avoidance of illness from the Global Burden of Disease for Brazil monetized through DALY’s for water- and sanitation-borne diseases (WHO, 2017 and IHME-UWS, 2016)99 at the current poverty rates of BRL 170 (poor) and BRL 85 (extreme poor). DALY is an indicator reported by the Institute of Health Metrics and the World Health Organization. The indicator is an estimate of the country-based global burden of disease (GBD) that aggregates the days in life lost due to disability, mortality and morbidity from major diseases, injuries and risk factors to health at global, national and regional levels. These diseases are diarrheal diseases, childhood-cluster diseases (diphtheria, tetanus, enteric childhood disease), parasitic and vector diseases (malaria, chagas, Schistosomiasis, Leishmaniasis, cysticercosis, echinococcosis, dengue, trachoma), and other intestinal nematode infections. The burden of disease and local incidence rates were used to estimate the total cost avoided from reducing these diseases with the sewerage infrastructure and connections in place.

9. The environmental benefits will be reflected in the reduction of environmental pollution loads, and reduction in greenhouse gas emissions. The total costs of increasing water quality add up to US$2.8 million a year, including O&M costs and other costs like energy, chemicals and management of pollution loads (US$0.75 million a year). All environmental benefits included direct and indirect beneficiaries. Because of the small scale of the pollution removal of the Project (compared to the entire load of pollutants in the entire Guarapiranga Basin) indirect beneficiaries were added to account for the full externalities of the Project’s pollution removal. Water resources availability per capita in São Paulo is 140 m3/year, which is lower than the average for Brazil’s semi-arid region. Water security for the 22 million people living in the MRSP requires adding 40 m3/s of water transferred to the MRSP. Total water volume in the MRSP reservoirs reached only 22 percent (409 billion liters) of its capacity during the drought, valued at cost of US$0.069 per m3. Other environmental benefits were estimated based on the economic value of other pollutants removed (nitrogen) reported by SABESP, against the costs of increasing water quality. The value of nitrogen pollutants removed is US$1.72 million on average per year (nitrogen loads in Guarapiranga of 3,154.4 kg per day valued at to US$1.50 per kg.

10. Subcomponent 1.1: Increase access of vulnerable population to WSS services: The efficiency of this program can be maximized and at the end of the Project it can reach a total of 532,000 individuals benefitting from new water connections and 133,000 from sanitation connections. Uptake of these services is an estimate that can change due to the significant legal restrictions that households face to obtain permits to modify public infrastructure for private water connections. Still, the costs of water connections to households at full scale target can be reduced to approximately BRL 1,400 (US$397) per household. The main parameters used are a unit cost of US$410 per household to shift them to legal connections and avoided costs from current illegal connections which are incurred by SABESP. The volumetric losses from illegal connections reach 18.5 million m3 per year, with approximately 28.5 m3/month per household.

99 See for instance, the updated version fo the World Health Organization (WHO) Methods and data sources for global burden of disease estimates 2000-2015. Available at: https://www.who.int/healthinfo/global_burden_disease/GlobalDALYmethods_2000_2015.pdf . Also see: Institute of Health Metrics Evaluation-University of Washington (2016). Global Burden of Disease Tool Per Country. Available at: http://ghdx.healthdata.org/gbd-results-tool

https://www.who.int/healthinfo/global_burden_disease/GlobalDALYmethods_2000_2015.pdf

http://ghdx.healthdata.org/gbd-results-tool


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11. Subcomponent 1.2 - Rehabilitation and renewal of critical water networks: The current state of the network hinders efficiency and induces high costs of excess flows, and it limits the potential wastewater flows for treatment. Investing in such infrastructure upgrades will produce economic benefits to 400,000 individuals for the entire system by enabling a 35 percent efficiency gain, which represents 25 m3/month per household at a cost of US$0.3 per m3, and avoided losses from wasting water for treatment (173,000 m3 a day with a unit cost of US$0.77 of additional treated water per m3) and with an average value of BRL 1,100 for water available per connection (US$352). In addition, this component will entail additional costs of monitoring leakages once infrastructure works are completed.

12. Subcomponent 1.3 - Reducing water losses in specific water sectors in low-income areas: This subcomponent will finance new and rehabilitated water connections for dense low-income neighborhoods (Jardim Angela and Grajau) located in the headwater basins of Guarapiranga and Billings. In total, it involves 242,000 water connections (around 850,000 beneficiaries) currently facing water loss of 307 L/connection/day (32 million m3 in cumulative water savings during the Project’s lifetime). Targeting investment in this zone will reduce inequities in water availability and improve efficiency that will also bring benefits to the entire distribution network servicing the MRSP100.

13. Subcomponent 1.4 - Repairing and improving operation and maintenance of assets, life span extension of dams supplying water to the MRSP: This subcomponent assumes only primary benefits from improving 4.4 m3/s of additional flow in the MRSP Reservoir Dams, valued at bulk cost of US$0.11/m3 with a monetized value of US$19.5 million over 30 years.

14. Subcomponent 2.1 - Expanding sanitation services provision to vulnerable people: This subcomponent will invest in the Itapecerica da Serra sewerage system and will support upgraded sewerage infrastructure with 39 km of collection pipeline built, a 1.6 km interceptor, 5 pumping stations, and 4.3 km of discharge pipelines. The second in Embu das Artes consisting of expanding sewerage networks to transfer the wastewater to a treatment plant located outside the Guarapiranga Basin. The rest of the works will involve expanding 4.7 km of main trunk pipelines in Embu to allow all regional water distribution and sewerage connections being integrated, benefiting directly 3,500 families, with additional indirect benefits accruing to 38,000 families, with a unit cost of connection of US$47.7 per household. Finally, providing these services will entail costs for the water treatment plant, with an additional flow of 14.25m³/s at a bulk water cost of US$0.28 /m3 for additional water treatment.

15. Subcomponent 2.2 - Reducing pollution loads in rivers: The Guavirutuba Stream and its capacity will increase 200 L/s by removing phosphorus and nitrogen during dry seasons. One important benefit is the value of removing loads in the basin, which will be on average 216.3 kg/day of phosphorus removed valued at US$0.42 per kg. Another important benefit from this component is that with these investments SABESP will save on chemicals for water quality treatment. In addition, the investments in the treatment plant will add approximately 4.5 m3/s of treatment flow and managing an amount of 400m3/day of sludge valued at US$0.10/kg. Currently, SABESP spends BRL 17,877.9/per month (US$5,078) on operations and maintenance including energy costs and chemical costs.

16. Subcomponent 2.3 - Increase sewerage system reliability: stations rehabilitation and modernization in the Guarapiranga Basin, followed by a sewerage main trunk line in Guavirutuba, and completing the works with

100 This component will result in 600,000 m3/month in water savings, with a value estimated based on the spread between the full technical tariff (US$2.48/m3) and retail water tariff (US$0.82/m3), which is close to US $1.66/m3.


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a sewerage discharge line in Talamanca. Six pumping stations will be targeted with a total overflow avoided of 1.8 million m3/year valued at US$0.28 per m3 (US$0.50 million a year). The direct benefits of enhanced transportation of wastewater generated to treatment with a total flow of 631 m3 per household per year valued at US$0.03 per m3 (US$3.5 million a year). For the Guavirutuba trunk line, the expected discharging increase is 310 L/s with an average of 0.72 tons per household per year, valued at US$0.30 per m3 for a total benefit of US$1.3 million a year. In the case of the Talamanca sewerage discharge line, a change of 330 L/s is foreseen with an average of 0.76 tons per household per year, reaching a total benefit of US$3.6 million a year.

17. Costs. The investment costs for each subproject were estimated based on feasibility level designs. The only costs not included in the analysis are technical assistance costs that are not directly related to the implementation of the works. These activities are focused on capacity building and project management. Financial investment costs include: (i) the costs of the investment program linked to the participating cities, including physical contingencies and supervision; (ii) replacement costs of equipment such as electromechanical parts, and (iii) incremental operation and maintenance costs. In addition, other costs such as house connection charges, permit costs to modify public infrastructure for private connections, etc.

Table 3.1. Distribution of Total Costs and Beneficiaries per Subcomponent

Subcomponent Total Costs US$

million Total beneficiaries

(individuals)

Increase access of the vulnerable population to legal WSS services $73.9

532,000 water 133,000 sanitation

Rehabilitation and renewal of critical water networks $128.1 400,000

Reducing water losses in specific water sectors in two low-income neighborhoods

$41.0 850,000

Repairing and improving operation and maintenance of assets, lifespan extension of the MRSP Dams System

$12.2 n.a.

Expanding sanitation services provision to vulnerable people $31.3

12,250 upgraded 11,900 new sewerage

service

Reducing pollution loads in rivers $16.0 n.a.

Increase sewerage system reliability $12.6 700,000

18. The incremental operations and maintenance costs include incremental costs of staff, chemicals, electricity and maintenance. Labor costs were calculated as the number of incremental employees and the average financial cost per employee. It is assumed that both the “with” and “without” Project scenarios would over time benefit from significant efficiency improvements. Energy cost savings were calculated as the savings in the volume of energy used multiplied by the electricity rate paid by the utility. In cases, where changes are made to drinking water and/or wastewater treatment processes, the Project may also generate chemical cost savings. Finally, improvements in the systems will often reduce the maintenance cost for utilities, even though the new investment will require that the new investments be properly maintained.

19. Results. Table 3.2 shows that the cost benefit analysis for all subcomponents analyzed generates healthy rates of returns – with the exception of subcomponents 1.3 and 1.4 where the ERRs are below the discount rate of 12 percent. The base case scenario does not assume any real tariff increases. In case the benefits of a reduction in greenhouse emissions are included the EIRRs increase for the subprojects, then all projects will generate viable economic rates of return, with an average of 21.3 percent of ERR for the entire Project and a BCR of 1.3. NPV


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(benefits-investment costs) reach 169 million for the entire Project, with a total NPV of 176.1 million with the lower shadow price estimate and 182.4 million with the higher shadow price estimate for the GHG benefits.

Table 3.2. Results of the Cost Benefit Analysis without any Real Tariff Increases

20. Sensitivity and Risk Analysis. The results obtained so far assume that all variables are certain. The sensitivity and risk analyses measure the impact on the results when some of the assumed values for critical variables change. The sensitivity analysis measures the outcome if one of the variables changes while all others remain fixed. The risk analysis measures the outcome when all selected variables change at the same time, each one based on a probability distribution.

21. The sensitivity and risk analysis measure the impact of the results when some of the key critical variables change. The most critical risks we identified are implementation delays and the resulting increase in investment costs and increases in operation and maintenance costs. Overall, we find that with rather significant changes, the Project remains robust after reducing overall benefits by 30 percent (with an ERR of 15.5 percent) and with a cost overrun rate of 30 percent (with an ERR of 16.3 percent).

22. Other risks involve having low take up of services and high prevalence of illegal connections, combined with unmet efficiency gains. SABESP will mitigate these risks by ensuring proper communication to potential users about the connection costs and means to manage connections properly. Also, efficiency gains, improved access and distribution of services, environmental benefits and legal connections’ metering will rely on strong monitoring activities to guarantee that benefits can be materialized. In addition, there are latent currency and interest rate risks that could translate in higher financing costs to SABEP, that can also reduce economic benefits and increase costs of the project. Finally, the cost structure of the Project may be financially harmed in the event of another prolonged drought, like the one that affected the region in 2014-2015. These risks are worth


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highlighting to make the case of the mitigation measures that the Project has (e.g. CERC component) to make the best use of the Project’s financing to cope with these climate-change-induced shocks.

Financial Analysis

23. Although the Project will support targeted investments that are expected to increase revenue collection and improve efficiencies, the additional revenues generated are not likely to be ring-fenced. Consequently, the financial analysis will evaluate the impact of the proposed loan on SABESP’s overall financial structure and results as well as its long-term capital investment strategy.

24. SABESP’s active participation in domestic and international capital markets needed a holistic assessment of SABESP’s current financial position, short- and long- financial strategy and future capital requirements. An ancillary project objective is that World Bank financing is in line with the overall financial strategy of SABESP and bolsters its financial flexibility. As of mid-2018101, SABESP was rated as BB- (AA- local currency) by Standard & Poor’s, BB (AA local currency) by Fitch and Ba2 (Aa2 local currency) by Moody’s. SABESP is majority owned (50.3 percent) by the State of Sao Paulo State Government with 31.4 percent traded on the domestic stock market, B3 (formerly BM&FBOVESPA) and 18.3 percent traded on the New York Stock Exchange (NYSE).

25. Recent drought conditions had a significant negative impact on SABESP’s financial position. During the drought years, SABESP recorded a net income of BRL 903 million (US$244 million) in 2014 with a drastic decline to BRL 365.3 million (US$98.7 million) for 2015 due to the drought, with an impressive bounce back of BRL 2,519.3 million (US$680.9 million) for 2017. As a result, SABESP experienced decreases in its cash position in 2014 and 2015. In this manner, the drought temporarily reduced SABESP’s available financial resources from 2014-15 to fund long-term investment needs to meet future demand as well as manage and replace critical assets. SABESP’s net profit increased to BRL 2,947 million in 2016 and BRL 2,519.3 million in 2017. SABESP’s improved financial condition in recent years has been due to the following: (i) a 4.3 percent increase in billed revenues due to the increased water supply; (ii) tariff increases of 8.4 percent in May 2017 (followed by an additional increase of 7.9 percent in November 2017); and (iii) the receipt of BRL187.4 million in bonds in 2016 in support of the Water Reduction Incentive Program.

26. SABESP’s outstanding debt levels remain manageable but had spiked during the drought. SABESP’s leverage ratio (debt to total capital) increased from 37 percent in 2013 to 46 percent by the end of 2015. Improved revenue generation and earnings retention led to a reduction of the leverage ratio to 40 percent in 2016 and 36 percent in 2017. Additionally, SABESP is required by various legal covenants with other lenders to maintain a debt service coverage ratio (DSCR) of at least 2.35. As of December 31, 2017, SABESP maintained a DSCR of 7.79, indicating its ability to repay outstanding debt obligations.

27. The proposed reorganization of SABESP’s financial structure, which was supported by the IFC, was intended to increase its financial flexibility and bring in additional capital to finance its investment program. In recognition of recent challenges, a corporate reorganization was approved in May 2017 and later codified into a law approved on September 15, 2017 (Law #16,525). The main provisions of the reorganization allowed: (i) private shareholders to increase ownership in SABESP’s parent company; (ii) São Paulo State to sell its shares in SABESP’s parent company; (iii) the allocation of at least 30 percent of the proceeds from any sale amount to

101 For 2018, the second quarter financial report shows that SABESP’s net operating revenue, which considers construction revenue, totaled BRL 3,672.2 million (US$980 million), a growth of 5.1% over the same period of the previous year.


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investments in basic sanitation; (iv) the acquisition of other state-owned or private companies that create operational synergies with SABESP; and (v) revised performance targets for the reduction of water losses and the expansion of sanitation services.

28. Although only 15 percent of outstanding debt obligations are short-term (within 1 year), a majority of SABESP’s debt is due within the next five years, constraining somewhat its financial flexibility. Approximately BRL 8.2 billion (63 percent) of SABESP’s outstanding debt liabilities of BRL 13.2 billion at the end of 2017 are due between 2018-2022. This amount includes an additional BRL 750 million in bonds issued in early 2018. The bonds were issued in three separate tranches with BRL 100 million maturing in 3 years, BRL 400 million maturing in 5 years and the remaining BRL 250 million tranche maturing in 7 years. Approximately two-thirds of SABESP’s outstanding debt are variable rate instruments. SABESP has noted that it has not entered into any derivative contracts to hedge against potential losses due to fluctuations in interest rates. SABESP has an additional liability stemming from the São Lourenço Public Private Partnership (PPP), which was inaugurated in April 2018.

29. At the same time, SABESP is planning an ambitious capital investment and asset replacement plan totaling BRL 17.3 billion during this five-year period (US$4.7 billion). These investments are in addition to the BRL 10.4 billion (around US$2.8 billion) (including major works in the municipalities of São Paulo, Franca and Itanhaém) recorded as works in progress as of December 2017.

Table 3.3. Distribution of Capital Investment and Asset Replacement Plan (BRL)

Component 2018 2019 2020 2021 2022 Total

Water supply 1,446 1,520 1,445 1,368 1,341 7,120

Sewage collection 1,200 1,460 1,398 1,799 1,875 7,732

Sewage treatment 254 394 657 596 540 2,441

Total 2,900 3,374 3,500 3,763 3,756 17,293 Source: SABESP. Relatório de Sustentabilidade 2017 and SABESP Financial Unit.

Table 3.4. Distribution of main financial indicators of SABESP and projections (2015-2025) US$ million

Financial indicators Financial Statements Projections

2015 2016 2017 2018 2019 2020 2025

Revenue (water and sanitation) 2,542 3,160 3,473 3,552 3,632 3,827 4,454

Construction and service costs 1,385 1,470 1,311 1,341 1,371 1,445 1,682

Gross added value 2,011 2,458 2,759 2,822 2,886 3,040 3,539

Transfers 313 128 326 417 426 449 522

Taxes and contributions 293 621 680 695 711 749 872

Staff costs 377 413 444 454 464 489 569 Sources: Income statements, balance sheets, audited financial reports 2010-2017. SABESP. US$ millions, base 2010. ITR – Quarterly Information Forms, SABESP 2014-2017. Projections based on increments of 2.3 percent annually.

30. Long-term financial planning is critical for hedging against the risk of future water scarcity and supporting a declining share of costs and expenses with respect to revenue. In 2017, the operating margin, e.g. the share of total expenses and costs to revenues, of the company was 72.9 percent and the ratio of adjusted earnings to adjusted net operating revenues was 45.5 percent, exceeding the 38 percent loan covenant


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requirement of BNDES.102 The capital restructuring along with the additional financing has helped the company efficiently inject capital for its investment plan and hence meet future demand for water and sanitation services. As the financial planning incorporates operational efficiency measures, the capital investments will lead to a further decline in costs in combination with higher projected revenues that can improve the financial position of the company over the long-term.

31. In this manner, World Bank financing complements its current financing strategy while helping SABESP maintain its financial flexibility and better manage future risks. Although economic growth is forecast to be relatively strong, there is a great deal of uncertainty impacting Brazil’s capital markets due to the present currency volatility impacting upper middle-income economies and interest rate increases in advanced economies. Additional debt financing from capital market sources would involve shorter maturities at higher interest rates, which would increase SABESP’s pressure from short-term maturities and interest rate pressures. In this manner, concessional financing would extend debt repayment over a longer period at lower interest rates, freeing up additional financial resources that can be used for SABESP’s investment program. In all, the World Bank loan would add approximately 7 percent to its outstanding debt liabilities, the majority of which will be repaid over the next five years. Additionally, repayment of the World Bank loan would begin four months after the 2025 closing date, which is after most of its outstanding debt obligations will have been repaid.

32. SABESP’s financial position is also impacted by the recent regulatory review of its tariff rates, which is intended to rebalance tariffs in line with its current and future operating and capital costs. The regulatory review conducted by ARSESP in January 2018 analyzed the degree to which operating revenues can cover ongoing and future capital investments. ARSESP regulatory review assumed a regulatory remuneration base of BRL 38.4 billion and Weighted Average Cost of Capital (WACC) of 8.11 percent. Based on this review, ARSESP recommended a Tariff Repositioning Index (IRT) of 4.7744 percent that should be applied on a straight-line basis to current tariffs. Public consultation and hearings were held in late March to mid-April. The tariff review was concluded in May 2018.

33. As per Resolution #672, the additional funding streams generated by the Project were used by ARSESP to forecast changes in the regulated asset values at baseline and changes in variables affecting SABESP’s tariff reviews. Thus, the Project financing will support SABESP’s investment plans and will be considered for modifying asset values. For assets linked to special obligations (like foreign debt), it will be incumbent upon ARSESP to determine the amount that will be considered to determine the Regulatory Remuneration Base for SABESP103. The Metodologia para atualização da Base Regulatória de Ativos (BRR) evaluates the basic parameters used for determining SABESP’s tariff revisions, such as capital growth and depreciation.104 The analysis of financial leverage includes scenarios for improving operating ratios (measured as operating costs to revenues), taking into

102 See for instance the entire local and international covenant requirements set by financial agencies to SABESP in the Securities and Exchange Comission Form of 2018: http://www.sabesp.com.br/sabesp/filesmng.nsf/5BE006E9B6DCC3E48325829D00790CCB/$File/form_20f_mai18.pdf 103 According to these resolutions of the State of Sao Paulo, new asset valuation and management changes among changes in working capital, are factors that can determine a tariff revision with the methodology and general criteria to determine the regulatory remuneration rate to SABESP and negotiate an Ordinary Tariff Revision. A replacement cost methodology will then be used considering the new value of the asset as the base to determine its market value in use. This incentivizes SABESP to improve asset management and valuation of its systems to have an efficient Remuneration Rate that is transferred to ARSESP. 104 The basic formula for tariff revisions [BRRT1 = BRRT0 + Σ (CAPEX + ΔCG − DEP)] will be fed with data related to capital growth (CG) and depreciation (DEP) and CAPEX (Capital Expenditures) projections conducted with data from audited balance sheets and financial statements between 2014 and 2017.

http://www.sabesp.com.br/sabesp/filesmng.nsf/5BE006E9B6DCC3E48325829D00790CCB/$File/form_20f_mai18.pdf


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consideration SABESP’s investment plan, associated targets, corresponding operation and maintenance costs, and water losses.105

34. Other important factors like opportunity costs between using commercial finance versus World Bank funding are important to fully assess SABESP’s capitalization capabilities. IBRD financing will result in an increase of SABESP’s capital and create additional flexibility to take on new debt to finance its investment plan. IBRD loan conditions and the conditions from major commercial financing have historically funded SABESP and other utilities in Brazil with different incentives, costs and repayment timelines. Because the IBRD loan will expand WSS in low-income areas/informal settlements and will seek to improve asset management and reduce water losses, there would also be additional financial benefits from capacity building activities under the IBRD funding.

35. To meet the challenge of mobilizing resources for its multi-year investment plan, SABESP has combined its own resources, resulting from the tariffs charged for the services rendered, together with third-party resources obtained by means of debt and the capital restructuring. However, at the present time the possibilities of obtaining resources to efficiently finance the investments necessary for the universalization of services are limited. One of the constraints is internal—the current level of the Company’s indebtedness, which although prudent, does not permit any significant increase. The other constraint is external, as the country’s fiscal situation has reduced the availability of funds in terms of long-term domestic financing from public sector agencies, such as the BNDES and the Caixa Econômica Federal.

36. Financial Resilience for SABESP against future climatic shocks. Additional expenses rose during the prolonged drought and water scarcity, which are still resulting in a financial and economic toll for SABESP. To respond to these challenges, investments in new and upgraded production systems are intended to mitigate water insecurity in the region. These investments will be leveraged in part with the Bank’s funding for specific pro-poor and underinvested areas.

37. Results. Increased investments in revenue-generating infrastructure, combined with the continued repayment of outstanding debt obligations, is expected to reduce further debt leverage below 30 percent by 2023. The financial return estimated for the Project is 11 percent which exceeds SABESP’s WACC of 8.11 percent estimated by ARSESP. Cash flows from increased customer base and improved efficiencies supported by the Project are forecasted to nearly double in the Project’s area of influence between 2020 and 2049. The Project will contribute toward sustaining SABESP’s financial recovery after the 2016 drought. Additionally, the Project, combined with recent tariff increases, will help SABESP further increase its long-term revenue growth from 8 to 12 percent and increase cash flow margins from 13 percent in 2017 to 17 percent by 2030.

Climate Co-Benefits

38. The Project has been designed to increase local water sector resilience to climate-induced shocks, especially drought. Potential climate-related benefits from the Project’s components involve: i) a reduction in vulnerability through increased water savings and pollution controls; ii) increased water productivity by investing in infrastructures that would allow better integration of systems to cope with water scarcity, and treatment of water outflows; iii) stronger mitigation of human and environmental risks by providing access to safe WSS; iv)

105 SABESP is receiving advise from IFC to find efficient mechanisms to capitalize the company and fulfill investment planning objectives. This activity aims to improve SABESP’s financial position, creating room for additional debt to finance its long-term capital investment plan. When the capitalization process is completed, a subsequent tariff review process will be needed to take into account SABESP’s revised asset base.


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energy efficiency gains by improving policies and testing pilots that could generate energy and/or reduce its use; and v) reduction in sources of system’s obsolescence by upgrading key aspects of wastewater and sanitation infrastructures. Please refer to the Table 3.5. for a detailed breakdown of each sub-components’ contribution to increased local climate resilience in the water sector and mitigation activities.


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Table 3.5. Climate-informed Activities to be Financed

Component Adaptation Mitigation

Subcomponent 1.1

The 152,000 families, located in several areas in the urban environment in the MRSP, are currently supplied with water produced by SABESP through clandestine and illegal connections that do not have the minimum conditions to guarantee water quality due to leaks and inadequate connections. The estimated volume of consumption in these areas is excessive compared to households with a similar social vulnerability framework. It is currently estimated that water losses plus consumption in these areas are around 28.5m3/month/household, based on measurements carried out in similar areas. The regularization of these serviced connections should significantly reduce the current losses, as the expected consumption would most likely go down to consumption of 10m3/ month/household. A total recovery would then be around 1.67 m3/s for 152,000 households, with around 0.68 m3/s of water being consumed and about 1.01 m3/s in reduced physical losses. The recovery of 1.01 m3/s represents about 2% of the water currently produced by the MRSP System.

With the recovery of about 2% of the water produced, the forecast is of a consequent reduction of pumped volumes and reduction of energy demand by the producer system. The energy efficiency improvements are expected to result in net emissions of -161,675 tCO2-eq. Wastewater activities through the Água Legal Program will have estimated net emissions of -32,043 tCO2-eq.

Subcomponents 1.2 and 1.3

The pipelines and household connections to be replaced were selected among the highest physical water leakage rates and aging network in the MRSP. The average of the visible leakages in the selected pipelines is about 115/100 km/year and in the related household connections is about 31/1000 connections/year. The investment aim to reduce the leakage to 19/100 km/year in the pipelines and 5/1000 connections/year in the household connections. The expected results are data is based in ongoing interventions of the same nature and SABESP’s monitoring systems. Project interventions will represent a reduction of raw water taken by the overall system of about 408 L/s. There will be more benefits that are not easy to quantify now, as the overall MRSP network will work at lower pressure and eventually other areas not included in the Project will also reduce the leakage because of the reduction of pressure. Also,

With the reduction of losses currently verified and the adequacy of the pressures in the network, there is also a forecast of lower energy demand. The NRW investments are expected to yield energy efficiency gains, resulting in net emissions of -29,194 tCO2-eq under Subcomponent 1.2 and -23,443 tCO2-eq under Subcomponent 1.3.


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there will be traditional investments of NRW reduction by installing meters and pressure zones in specific areas that will contribute to reducing the use of the already stressed water resources.

Subcomponents 2.1 and 2.2

These two subcomponents aim to increase the resilience of the Guarapiranga reservoir, which accounts for about 25% of the contribution to the water supply system of the MRSP (in the 2014/15 water crisis, it increased its participation to around 30%) by reducing the release of nutrients to the Guarapiranga reservoir, minimizing the risks of an intense eutrophication process. The capture of SABESP in the reservoir is close to the affluence of the Embu Mirim river and the reduction of the phosphorus contribution should minimize the possibility of occurrence of “algae bloom” in the area.

The wastewater activities for Embu and Itapecerica da Serra are expected to have net emissions of -2,289 tCO2-eq.

Subcomponent 2.3 — Rehabilitation and upgrading of wastewater pumping stations are expected to lower energy demand, yielding net emissions of -160 tCO2-eq for the pumping investments to prevent wastewater overflow. Replacing the Guavirutuba sewerage main trunk pipeline is expected to yield net emissions of -1,523 tCO2-eq.

Subcomponent 3.1 — The Energy Micro Generation study and pilot case will influence local policy and potentially generate clean energy and reduce energy consumption. The automation system pilot for the Barueri WWTP is also expected to lower energy demand by optimizing the use of available resources. Finally, the Operational System Integration Plan is also expected to influence local policy to potentially reduce energy consumption as the plan aims, among other tasks, to identify opportunities for the efficient use of the WSS facilities through automatization.


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GHG reduction

39. The São Paulo metropolitan region water supply relies on water transferred and pumped from various systems, two important ones being the Guarapiranga and Billings reservoirs (responsible for around 43 of the water production, especially during the drought crisis) with energy provided by EMAE. EMAE is a company that is also controlled by the State of São Paulo with a concession to produce hydroelectric energy by using water from these reservoirs. The energy savings will increase resilience (avoided cost) against negative impacts of water insecurity and scarcity/pollution of CO2 for energy. The valuation of the total CO2 avoided used two shadow price of carbon corridors based on the updated 2017 World Bank Shadow Price of Carbon methodology.

40. For Components 1 and 2 of the Project, the GHG emissions were estimated in tCO2eq using the World Bank’s Water GP’s GHG accounting tool. Gross emissions are the emissions Project activities cause over the Project’s economic lifetime through the “with Project” scenario. These are compared to a baseline scenario. The difference between the gross emissions and the baseline emissions are the Project’s net emissions.

41. The net emissions of the Project are estimated at -250,327 tCO2-eq over the life of the Project, while the gross emissions are estimated to be 387,160 tCO2-eq. On average, the Project generates estimated net emissions of -8,343 tCO2-eq annually. The water supply expansion activities to promote efficient legal connections under subcomponent 1.1 are estimated to experience net emissions of -161,675 tCO2-eq due to energy efficiency gains. The NRW reduction activities under subcomponent 1.2 will see total net emissions of -29,194 tCO2-eq, while the NRW reduction activities under subcomponent 1.3 result in estimated net emissions of -23,443 tCO2-eq, both of which represent a net decrease in emissions due to energy efficiency gains. The wastewater treatment activities under subcomponents 2.1 and 2.2 will see estimated net emissions of -2,289 tCO2-eq due to a reduced load of pollutants entering the reservoir. Since the analysis for subcomponents 2.1 and 2.2 only focused on wastewater generated in Embu and Itapecerica da Serra, this likely underestimates the emissions savings. While Embu and Itapecerica da Serra are major sources of wastewater that enter the Guarapiranga reservoir and nearby rivers, these towns are not the only source of untreated wastewater currently polluting these waterways, though population data for other towns was not available for this analysis. Pumping improvement investments to prevent overflow for subcomponent 2.3 have estimated net emissions of -160 tCO2-eq. Replacing the Guavirutuba sewerage main trunk pipeline under subcomponent 2.3 is expected to yield net emissions of -1,523 tCO2-eq. Meanwhile, replacing the Talamanca discharge pipeline will result in net emissions of 0 tCO2-eq. The wastewater collection and treatment activities through the Água Legal Program will have expected net emissions of -32,043 tCO2-eq.


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ANNEX 4: FIDUCIARY


Financial Management Assessment of SABESP:

1. Implementing Entity and Staffing: A Project Implementation Unit (PIU) under the Planning and Control Unit (Superintendência de Planejamento e Desenvolvimento da Diretoria Metropolitana da SABESP, MP), under the Metropolitan Department (Diretoria Metropolitana da SABESP, MD), in SABESP will be responsible for the overall coordination and will be involved in the implementation of the Project’s activities. 2. This PIU will oversee the management, coordination, monitoring and evaluation of all Project activities, and will undertake the primary fiduciary responsibilities for the Project. These responsibilities include: (i) preparing and obtaining approval of Project FM arrangements; (ii) coordinating and supervising Project implementation; (iii) preparing and submitting Project interim unaudited financial reports (IFRs) for monitoring to the World Bank; (iv) preparing and providing all financial documentation and Project reports requested by external auditors and World Bank staff; and (v) preparing, updating and ensuring that the Project Operational Manual (POM) is observed. 3. All submission of disbursement requests and documentation of expenditures to the World Bank will be under the responsibility of the Department of Financial Analysis and Financed Contracts (FFT), that has prior experience working with World Bank financed projects. SABESP has sufficient capacity to fulfill its FM responsibilities; is adequately exposed to the World Bank’s FM procedures, having adequately implemented World Bank funded operations (P006553 - BR APL Integrated Water Management in Metropolitan São Paulo, Loan 76620). However, based on previous experiences, to mitigate implementation delays, at least one dedicated qualified FM staff needs to be identified as part of the PIU, no later than Project signing. 4. Planning and Budgeting: The Project will follow SABESP’s budget cycle. The budget cycle includes the planning and implementation of all entity’s activities, which are reflected in its corporate governance norms, including its annual investment budget. The state-owned enterprise law, Federal Law #13.303/2016), sets high standards of budget planning and transparency, as established under article 165 of the Federal Constitution. 5. Accounting: SABESP is a public company, governed by the Federal Law 6.404/76 and a specific state law and rules, that owns, manages and explores assets aiming primarily at the universalization and efficiency of WSS provision in the State of São Paulo. Since 2002, as a publicly traded company listed on the Brazil Stock Exchange and Over-the-Counter (B3), SABESP is subject to the rules of the Brazilian Securities Commission (CVM) and the norms of the Securities and Exchange Commission (Comissão de Valores Mobiliários dos Estados Unidos, SEC) and the New York Stock Exchange (NYSE) in the United States, where it is also listed. Together with other rules, policies, and procedures issued by the Federal Accounting Council, SABESP’s accounting policies and procedures are aligned with international standards. 6. SABESP will maintain the accounting records of the transactions under the Project encompassing the related components and subcomponents activities under its corporate information management system (SAP). An equivalent to a ledger account and a fund number will be created to account and record all loan transactions under the SAP Project planning structure cost classification that will reflect the structure of the Project by


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category and component/activity. All contracts that will be supported by the World Bank (and those that will be accounted as counterpart funds) will be associated to the fund, which can be used to keep track of all sources and uses of funds and which will be reconciled with budget report figures monthly. Transactions under the Project will be accounted for on a cash basis, for disbursements, reporting and auditing purposes.

7. Internal Control: SABESP’s Corporate Governance structure includes a Board of Directors assisted by an Audit committee, a Fiscal Council and an Internal Audit oversight department that reports to the CEO and its activities are overseen by the Audit Committee. The consolidated financial statements are approved by the Board of Directors and have been prepared in accordance with International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB). SABESP is also audited by the State Government Supreme Auditing Institution - Tribunal de Contas do Estado de São Paulo. The Project will be included under the internal audit annual strategic plan.

8. All Project budgeting and accounting transactions will run through the SAP Corporate management information system that enforces strict segregation of duties, controls the preparation and approval of transactions to ensure that these transactions are properly executed and recorded (i.e. different units or persons authorize the transaction and record the transaction), and guarantees the confidentiality, integrity and availability of data. All accounting and support documents are retained on a permanent basis, using a system that allows for easy retrieval for the authorized user. All payments will follow acquisition, verification of invoices (provisão), and payment (pagamento) routine and any other specific procedure stated by the regulators. All transaction processing (recording annual budgets, budget commitments, and payables; authorizing payments; and internal control reviews) will be carried out by SABESP, which will execute payments and control the segregated Project Designated Account (DA). These functions will be carried out by the Accounting and Finance Departments. Other internal control mechanisms will include: review and reconciliation of payments, proper access to systems, segregation of functions, and observation of internal administrative codes and procedures. Internal controls procedures will be detailed in the POM, following current SABESP established routines.

9. In accordance with the World Bank’s Anti-Corruption guidelines for IPF operations, the Borrower needs to ensure that “any person or entity debarred or suspended by the World Bank is not awarded a contract under or otherwise allowed to participate in the project during the period of such debarment or suspension”. Reporting of fraud and corruptions practices has increased in recent years and is mainly done through phone calls and e-mails sent directly to the institution’s ombudsman. In order to raise awareness about existing Project mechanisms to handle any allegations of fraud and corruption, SABESP will immediately report to the World Bank, through exchange of letter, any allegation of fraud and corruption, and every quarter (jointly with the IFRs), SABESP will provide a report containing all alleged cases with an updated status of respective actions taken.

10. Financial Reporting and Monitoring: The World Bank evaluated the robustness of SAP and concluded that it can provide financial information for the purposes of supporting the World Bank-financed Project. However, the BI module needs to be customized to run agreed reports so as to provide details for the operations and timely information for monitoring and disbursement reasons. This step needs to take place prior to loan signing.

11. SABESP, through the PIU, will ensure the timely production of IFRs for Project expenditures, prepared in Brazilian Reais (BRL) on a cash flow basis, for monitoring reasons. These reports will be generated by data from its corporate management system (SAP) and submitted to the World Bank within 45 days after the end of each quarter. Accordingly, the format and content of the IFRs will cover the following items:


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a. IFR 1A - Sources and Uses of Funds by disbursement category (project-to-date, year-to-date, and for the period) showing budgeted amounts versus actual expenditures, including a variance analysis.

b. IFR 1B - Uses of Funds by Project Component and subcomponent (project-to-date, year-to-date, and for the period) showing budgeted amounts versus actual expenditures, including a variance analysis.

c. IFR 1C - DA bank reconciliation (as appropriate).

12. Funds Flow and Disbursement Arrangements: All payments will be made using SAP, once expenditures have been incurred and properly documented, by each financial department responsible for executing the Project in SABESP, upon instructions from each contract administrator under the respective units at the Metropolitan Department. Payments will be made through the issuance of a payment authorization (autorização de pagamento) to service providers and contractors. To make payments, funds will be committed by source, making possible the tracking of loan disbursements/receipts to Project expenditures, due to this earmarking mechanism within the system.

13. Contingent Emergency Response Component (CERC). The overriding aim of a CERC is to improve the response capacity of the Borrower in case of an emergency. CERCs are designed to disburse only after an emergency has occurred or is about to occur. A disbursement condition for CERC will define the circumstances when the funds under the component will become available. The same flow of funds, accounting, financial reporting, disbursement methods and corresponding supporting documentation requirements, will apply to disbursements under the CERC, that will be described in the initial Disbursement and Financial Information Letter, as the CERC will also be implemented by SABESP.

14. The following diagram indicates the flow of funds for the disbursement methods:


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15. Disbursement arrangements: The following disbursement methods will be available: Advance, Reimbursement, and Direct Payment. Disbursements will be made on the basis of interim IFRs, submitted to the World Bank within 10 days from the end of each month (for Reimbursement) or each quarter (for Advances to the DA) in the prescribed agreed format. It will be primarily based on Reimbursements in Brazilian Reais to SABESP account in Banco do Brasil, in São Paulo.

16. If necessary, the World Bank will advance funds into a segregated DA, maintained exclusively for management of loan proceeds, opened in United Stated Dollars (US$) at Banco do Brasil in New York, in the name of SABESP. The ceiling of the DA will be fixed as US$5,000,000.

17. SABESP will report on the use of Advances and Reimbursement requests through IFRs (generated through SAP). Direct Payments will be documented by records (copy of the invoices). There will be no decentralization or transfers of funds to any other agency.


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18. Counterpart funds. The counterpart funds will be managed separately from the DA. Counterpart funds will be properly accounted, monitored, and reported by SABESP in the IFRs.

19. Retroactive financing will be allowed for components 1, 2 and 3 of this Project up to an aggregate amount not to exceed US$50,000,000 to be made for payments up to 12 months before the signing date of the loan agreement for eligible expenditures but no earlier than August 1, 2018.

20. The loan will also have a four-month grace period after the closing date, during which the World Bank will accept withdrawal applications relating to Project transactions incurred before the closing date. The loan will have a Minimum Application Size of US$1,000,000 for Reimbursements and Direct Payments. All disbursement details will be reflected in the Disbursement and Financial Information Letter. The table below specifies the categories of eligible expenditures that may be financed out of the proceeds of the Loan.

Table 4.1 - Disbursement Categories

Category Amount of the Loan Allocated

(expressed in USD)

Percentage of Expenditures to be financed

(inclusive of Taxes)

(1) Goods, works, non-consulting services, consulting services, Training and Operating Costs for Components 1, 2, and 3 of the Project

249,375,000 100%

(2) Goods, works, non-consulting services, consulting services, Training and Operating Costs for Component 4 of the Project

0 100%

(3) Front-end Fee 625,000 100%

(4) Interest Rate Cap or Interest Rate Collar premium

0 -

TOTAL AMOUNT 250,000,000 -

21. External Auditing: SABESP’s prior external auditors (KPMG) issued an unqualified opinion on the latest available (FY2016) Consolidated Financial Statements. For Project purposes, specific annual financial statements will be prepared and audited by independent auditors, satisfactory to the World Bank, in accordance with acceptable auditing standards. The external audit will be conducted according to ToRs acceptable to the World Bank. The auditors will be required to issue an opinion on the Project’s financial statements (IFRs), according to the World Bank’s guidelines. Auditors will also have to prepare a Management Letter, where any internal control weaknesses will be identified, which will contribute to the strengthening of the control environment. The auditor’s report will be submitted to the World Bank no later than six months after the closing of SABESP’s fiscal year. All supporting records will be maintained at the PIU for at least: (a) two years after the Closing Date; or (b) one year after the World Bank has received the Audited Financial Statements covering the period during which the last withdrawal from the Loan Account was made, whichever is later. The World Bank also requires that SABESP disclose the audited financial statements in a manner acceptable to the World Bank and following the World Bank’s formal receipt of these statements from SABESP. The World Bank will also make them available to the public in accordance with the World Bank Policy on Access to Information.


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22. Conditions or Nonstandard/Significant Financial Covenants (i.e. Relevant issues to be included in the Legal Documents). There are no FM-related conditions for Board and/or Effectiveness. 23. Supervision Plan: FM supervision will take place once a year and include: (a) reviewing of quarterly IFRs; (b) reviewing of the auditors’ reports and follow-up of any issues raised by auditors in the Management Letter, as appropriate; (c) participating in Project supervision; and (d) updating the FM rating in the Implementation Status and Results Report. Procurement 24. Procurement of activities to be loan-financed in the Project will be carried out in accordance with the “World Bank Procurement Regulations for IPF Borrowers” dated July 2016 and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general terms below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and timeframe will be agreed between SABESP and the Bank in the Procurement Plan. The World Bank's Standard Procurement Documents will govern procurement using the international approach. For procurement using the national approach, SABESP will use Standard Procurement Documents acceptable to the World Bank that will be included in the POM.

(a) Procurement of works. Works procured under the Project will include, among others, construction and rehabilitation of water supply systems (pipelines, valves, meters, connections, reservoirs, etc.); construction and rehabilitation of sanitation systems (pipelines, connections, pumping stations, collectors, discharge mains, etc.) and the construction of a nutrient removal plant. The methods to be used for selecting firms depend on the nature and complexity of assignments, attractiveness to foreign firms, the need for international expertise, and the estimated budget for the services in accordance with the Procurement Regulations.

(b) Procurement of goods. Goods procured under the Project will include, among others: software packages, communications services, educational materials, vehicles, IT equipment, valves, pipes, pumps, inspection instruments, and other tools required to carry out the water and sanitation-related subcomponent activities and support SABESP in piloting innovations or in knowledge exchange material and events. It may be carried out in accordance with the method known as “Pregão Eletrônico”, provided that: (i) documents are acceptable to the Bank, in accordance with the Procurement Regulations, (ii) documents include anti-corruption clauses, and (iii) the process is carried out under an e-procurement system previously approved by the Bank.

(c) Procurement of non-consulting services. Non-consulting services under the Project will include, among others: capacity building activities; monitoring, reporting and evaluation-related services; events of various natures, including training, workshops and seminars; logistics, such as hotel services, catering and travel services; printing services, videoconferencing materials, brochures, magazines, intranet, and videos; communication and education campaigns and events, etc. It may be carried out in accordance with the method known as “Pregão Eletrônico”, provided that: (i) documents are acceptable to the Bank, in accordance with the Procurement Regulations, (ii) documents include anti-corruption clauses, and (iii) the process is carried out under an e-procurement system previously approved by the Bank.


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(d) Selection of consultants. Consulting services under the Project will include technical assistance and advisory services of various natures and purposes, among which: engineering services; water, sanitation, environmental and/or dam safety-related studies, engineering designs, diagnostics and impact assessments; software and system development-related services, auditing and Project monitoring and supervision, etc. The following methods will be used for selecting consulting firms depending on the nature and complexity of assignments, attractiveness to foreign firms and need for international expertise, estimated budget of the services: Quality and Cost Based Selection (QCBS), Least Cost Selection (LCS), Selection under a Fixed Budget (SFB), Selection Based on Consultant’s Qualification (SBCQ), Single-Source Selection (SSS) both for consulting firms and individual consultants, and Selection of Individual Consultants (IC). Contracts estimated to cost US$300,000 equivalent and more will be advertised internationally.

(e) Operational costs are office supplies, per diem, staff related expenses, sundries, incidentals, and other project implementation related expenses to be financed by the Project. These will be procured using SABESP’s administrative procedures acceptable to the Bank and outlined in the POM, however they should be described in the procurement plan accordingly.

(f) Others. The procurement procedures and standard bidding documents to be used for each procurement method, as well as templates for the contracts for works and goods to be procured, are presented in the POM.

25. Procurement assessment. The Bank team performed a Procurement Assessment to evaluate the capacity of the SABESP’s areas involved in implementing procurement actions for the Project. Procurement activities will be carried out by Special Committee (SC). The PIU’s is the central unit for execution, coordination and monitoring of procurement affairs and for the overall coordination and monitoring of Project execution. The PIU responsibilities will include but are not limited to: coordinating the technical inputs to the bidding processes, procurement planning, implementation and monitoring, ensuring quality of bidding documents, and participating in bid evaluations.

26. The Bank reviewed the organizational structure for Project implementation and the interaction between the Project’s staff responsible for technical aspects and the PIU. The review included an assessment of staff skills, the quality and adequacy of supporting and control systems, as well as suitability of the laws, rules and regulations applicable to the Project. They were all considered acceptable to the Bank.

27. The assessment indicated that the procurement-focal staff designated for the Project should be included as part of the team that will assist project implementation, especially in support of the PIU. In addition, the World Bank recommends that a procurement consultant with experience with the Bank’s procedures should be hired on an ad-hoc basis to assist during critical stages of the procurement processes. This consultant could most likely be included as part of the consulting firm that will be supporting the PIU. Based on the information at this moment the procurement risk is Moderate. The following action plan was proposed to address and/or mitigate risks during Project implementation:


Page 100 of 102

Table 4.1. Procurement Action Plan

Act Description Action Timeframe

1

Low experience in implementing projects using the World Bank’s new procurement framework

Strengthening SABESP’s capacity, through continued Bank support and promotion of specific procurement trainings.

30 days after effectiveness.

2 Interest of companies in the tendering procedures

Using: (i) national media for works, goods and non-consulting services, (ii) international media in the selections of consultancies of higher complexity, and (iii) direct contact with the market.

As defined in the POM.

3 Quality of ToRs and Technical Specifications (TEs)

Obtaining expert advice on the definitions of the ToRs and TEs. Technical no objections to technical documents need to be issued by the World Bank.

Before negotiations (as the main ToRs and TEs are being prepared), and throughout implementation before launching each Project procurement process.

4 Uncertainties with cost estimates

Look for budgeting based on data that reflects the market and not just on official tables issued by SABESP and various spheres of government.

Before negotiations (as the main ToRs and TEs are being prepared), and throughout implementation before launching each Project procurement process.

5 Companies involved in fraud and corruption issues

Maintain a strict control over the companies and individuals that are present in the different control lists in Federal, State, and Municipal scope, and in the lists of international financing institutions.

Before signing the first contract using loan funds, and throughout implementation.

6 Contract management

Maintain members of the team with responsibility for the formal control of the execution of contracts, controlling and monitoring the progress of the contracts, and the milestones for their development, such as deadlines, readjustments (when applicable), etc.

Before signing the first contract using loan funds, and throughout implementation.

28. It was agreed that an approximate amount of US$50,000 will be made available in the Project proceeds to finance some procurement capacity deemed appropriate and previously approved by the Bank as Operating Costs. Those actions are defined in the Procurement Plan.

29. The procurement arrangements for the Project were set up taking into consideration SABESP’s own systems and procedures in place. SABESP’s technical areas are responsible for preparing the ToRs and Technical Specifications. The PIU is responsible for managing the bidding documents and Requests for Proposals (with support from a management firm) and the SC is responsible for conducting the procurement/selection processes. The Project team will count on a focal point from the PIU to be responsible for managing the Project’s


Page 101 of 102

procurement packages. The SC would carry out activities such as: (i) consolidating the procurement packages for consulting services; (ii) issuing requests for expressions of interest, requests for proposals and procurement notices; (iii) conducting opening and negotiations sessions, when applicable; and (iv) consolidating evaluations and inputs from the technical evaluation.

30. All bidding documents and respective contracts, regardless of the procurement method, are required to have the anticorruption (A/C) clause as a condition for eligibility of expenditures, both to be financed or to receive retroactive financing. 31. Procurement Plan. The Borrower has developed a Procurement Plan for the first eighteen months of Project implementation, which provides the basis for the procurement processes. The use of Systematic Tracking of Exchanges in Procurement (Sistema de Acompanhamento em Aquisições, STEP) is required to manage the Procurement Plan. This plan was agreed between SABESP and the Bank Project Team on November 13, 2018. The Procurement Plan will be updated in agreement with the Bank on an annual basis or as required to reflect the actual Project implementation needs and improvements in institutional capacity. 32. Frequency of Procurement Supervision. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended yearly supervision missions to visit the field to carry out post review of procurement actions.

33. Summary of PPSD. Based on the strategy developed and the low amount (considering the Bank’s limits) of individual procurement processes planned so far, it is expected that the activities will be carried out with the following arrangements: (i) Works: would be carried out using SDP/SDO National/International approach and SDC - National approach; (ii) Goods and non-consulting services: the Project plans to finance the procurement of goods to be acquired using SDO, SDC – National/International Approach and e-reverse auction, with bidding documents acceptable to the Bank; (iii) Consulting Services: the Project would finance, inter alia, consulting activities, mainly for planning, engineering designs, auditing, monitoring, supervising and collecting data. QCBS, LCS, QCS are the most appropriate selection methods, but this approach can be reviewed in light of finalized ToRs. Any change in the conditions described in the PPSD must necessarily be reflected in a revised PPSD and in the Procurement Plan, subject to Bank’s approval.


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ANNEX 5: MAP106


106 MAP Nr. 43982

Deliberação de Diretoria Sabesp

(Criação da Unidade de Gerenciamento do Programa – UGP)

Lei Estadual Autorizativa

Plano de Aquisição

PROGRAMA DE SANEAMENTO SUSTENTÁVEL E INCLUSIVO (Cotação Dólar USD = R$ 3,70)

Description

(Value cannot

exceed 250

Characters)

Reference

No.

(Value

cannot

exceed 40

Characters)

Procurement

Category

Procurement

Method

Estimated

Amount

(Must be

greater than

zero, and a

positive

number) USD$

Estimated Amount

(Must be greater

than zero, and a

positive number)

R$

Bank

Financed %

(Can not be

greater than

100%)

Review

Type

Planned Start

Date

(Must be in

YYYY/MM/DD

format)

Regularização

de ligações em

áreas de alta

vulnerabilidade

social - UGRs

Interlagos,

Guarapiranga,

Santo Amaro,

Billings,

Butantã, Cotia,

Osasco e Tietê

Obras SDO $11.074.486,49 R$ 40.975.600,00 100% Revisão

posterior 2019-06-30

Regularização

de ligações em

áreas de alta

vulnerabilidade

social - UGRs

Moóca, Jardins,

Alto Tietê,

Santana e

Freguesia



Regularização

de ligações em

áreas de alta

vulnerabilidade

social - UGRs

Santana,

Freguesia,


prévia

2020-06-30

Extremo Norte e

Pirituba

Regularização

de ligações em

áreas de alta

vulnerabilidade

social - UGRs

Pirituba,

Extremo Norte,

Alto Tietê e

Billings



Tubos -

Regularização

de ligações em

áreas de alta

vulnerabilidade

social - UGRs

Pirituba,

Extremo Norte,

Alto Tietê e

Billings

Bens SDO $3.152.537,11 R$ 11.664.387,30 100% Revisão


Renovação de

Redes

Secundárias

Licitação 3


prévia

2020-06-01

Renovação de

Redes

Secundárias

Licitação 4



Renovação de

Redes

Secundárias

Licitação 5


prévia

2020-11-01

Renovação de

Redes

Secundárias

Licitação 6


prévia

2020-12-01

Renovação de

Redes

Secundárias

Licitação 7


prévia

2021-05-01

Renovação de

Redes

Secundárias

Licitação 8



Tubos para

Renovação de

Redes

Secundárias

(parte 01)


prévia

2019-11-01

Tubos para

Renovação de

Redes

Secundárias

(parte 02)


prévia

2020-04-01

Tubos para

Renovação de

Redes

Secundárias

(parte 03)


prévia

2020-06-01

Obra de

Fortalecimento

da Segurança

Hídrica

SDO $10.463.640,41 R$ 38.715.469,50 100% Revisão

prévia

Itapecerica da

Serra

Obra SDO $13.648.648,65 R$ 50.500.000,00 100% Revisão


Embu das Artes

- SES completo


prévia

2020-04-01

Remoção de

Carga Poluidora

Obra SDP/DBO

(depende

do TdR)

$16.027.027,03 R$ 59.300.000,00 100% Revisão

prévia

2019-03-01

EEE´s Obra SDO $3.405.504,32 R$ 12.600.366,00 100% Revisão

Posterior 2019-04-01

CT Guavirituba e

LT Talamanca


Posterior 2019-10-01

consultoria para

avaliar

potenciais para

Eficiência

Energética - EEA

e EEE

Consultoria SDP $189.189,19 R$ 700.000,00 100% Revisão


Implantação de

pilotos de

Eficiência

Energética -

Acionamento de

motor à gás

encanado

Bens SDO $272.972,97 R$ 1.010.000,00 100% Revisão


Implantação de

pilotos de

Eficiência

Energética - BFT

(Bomba

operando como

turbina)

Bens SDO $272.972,97 R$ 1.010.000,00 100% Revisão


Automação -

projeto piloto

Barueri



Economia

comportamental

Consultoria a

definir

detalhamento

SBQC $270.270,27 R$ 1.000.000,00 100% 2019-02-01

Material

pedagógico e de

comunicação

(água Legal- Se

liga na Rede)e

demais

inovações

Material SDC $52.892,97 R$ 195.704,00 100% 2019-02-01

Estudos e

projetos para

ampliação de

segurança de

barragem

Consultoria SBQC $6.486.486,49 R$ 24.000.000,00 100% Revisão

Prévia

Estudos sobre

assuntos

regulatórios

Consultoria SBQC $270.270,27 R$ 1.000.000,00 100% Revisão

posterior

$249.999.999,95 R$924.999.999,80

$100.000.000,00 R$370.000.000,00 Contrapartida

$349.999.999,95 R$1.294.999.999,80 Total

As datas informadas (Planned Start Date) para os itens Renovação de Redes Secundárias-Licitações 3, 4, 5, 6, 7 e 8 se referem às datas previstas para o

início das obras

As datas informadas (Planned Start Date) para o itens Tubos-Renovação de Redes Secundárias-partes 01, 02 e 03 se referem as datas previstas para

publicação dos editais de contratação de fornecimento dos tubos e conexões

Legendas de Métodos de Licitação:

SDO – Solicitação de oferta

SDP – Solicitação de Proposta

DBO – Desenha, Implementa e Opera

Documentos Licitatórios

Os documentos de licitação adotados pelo Banco Mundial – e que devem ser utilizados em

qualquer processo licitatório do Programa que envolvam aporte de seus recursos – são

acessíveis através dos itens informados a seguir.

(i) Editais em português

http://www.worldbank.org/pt/country/brazil/brief/Brazil-procurement-documents-

procedures

(ii) em inglês:

http://www.worldbank.org/en/projects-operations/products-and-services/brief/procurement-

new-framework

Qualquer eventual dúvida no cotejo entre os documentos em português e inglês, prevalecem os

documentos em inglês.

No caso das licitações que envolvam recursos de contrapartida, serão adotados modelos de

documentos segundo a legislação nacional.

http://www.worldbank.org/pt/country/brazil/brief/Brazil-procurement-documents-procedures

http://www.worldbank.org/pt/country/brazil/brief/Brazil-procurement-documents-procedures

http://www.worldbank.org/en/projects-operations/products-and-services/brief/procurement-new-framework

http://www.worldbank.org/en/projects-operations/products-and-services/brief/procurement-new-framework

Relatórios: Modelos

O Programa Sustentabilidade e Inclusão Social requer a elaboração de vários relatórios. Parte deles atende

a exigências contratuais. O escopo e a periodicidade de cada um desses Relatórios estão definidos no

Capítulo 7 do Manual de Operação Volume 1.

A seguir, estão apresentados os modelos de três Relatórios do Programa.

- Plano de Aquisição (versão BIRD), que deve ser elaborado ou revisado e informado ao Banco através do

Sistema STEP.

- Plano de Aquisição (versão Sabesp), que apresenta, com maior grau de detalhe, os passos preparatórios de

cada ação, desde a elaboração do Termo de Referência e do pacote técnico até a licitação e a assinatura do

contrato.

- International Financial Report (IFR), que organiza e encaminha ao Banco a movimentação financeira do

Programa no que se relaciona aos valores de empréstimo.

Tão logo estejam elaboradas as primeiras edições do Relatório de Progresso e do Relatório de Avaliação

Ambiental e Social Simplificado, também elas serão incorporadas a esse Volume 2 do Manual de Operação.

Plano de Aquisição (Modelo BIRD)

PROGRAMA DE SANEAMENTO SUSTENTÁVEL E INCLUSIVO (Cotação Dólar USD = R$ 3,70)

Description (Value cannot exceed 250 Characters)

Reference No. (Value cannot exceed 40 Characters)

Procurement Category

Procurement Method

Estimated Amount (Must be greater than zero, and a positive number) USD$

Estimated Amount (Must be greater than zero, and a positive number) R$

Bank Financed % (Can not be greater than 100%)

Review Type

Planned Start Date (Must be in YYYY/MM/DD format)

XXXXXXXXXXX

XXXXX

XXXXXX

XXXXXX

XXXXXXX

XXXXXXXX

XXXXXXXX

XXXXX

XXXXXXXX

$249.999.999,95 R$924.999.999,80

$100.000.000,00 R$370.000.000,00 Contrapartida

$349.999.999,95 R$1.294.999.999,80 Total

As datas informadas (Planned Start Date) para os itens Renovação de Redes Secundárias-Licitações 3, 4, 5, 6, 7 e 8 se referem as datas previstas para o início das obras

As datas informadas (Planned Start Date) para o itens Tubos-Renovação de Redes Secundárias-partes 01, 02 e 03 se referem as datas previstas para publicação dos editais de contratação de fornecimento dos tubos e conexões

Legendas de Métodos de Licitação:

SDO – Solicitação de oferta

SDP – Solicitação de Proposta

DBO – Desenha, Implementa e Opera

Plano de Aquisição (Modelo Sabesp)

International Financial Report - IFR

Empréstimo: IBRD XXXX-BR

Mutuário: SABESP

Executor: SABESP

IFR 1A

Valores em Reais (R$)/ (US$)

Trimestre Ano Acumulado Trimestre Ano Acumulado 2/ Trimestre Ano Acumulado

SALDO DE ABERTURA

Conta Designada - - -

Rendimentos - - -

Total Saldo de Abertura - - -

FONTES DE FUNDOS

Fundos Contrapartida - - - - - - - - - -

Fundos do BIRD - Conta Designada 1/ - - - - - - - - - -

Fundos do BIRD - Reembolso - - - - - - - - - -

Fundos do BIRD - Pagamento Direto - - - - - - - - - -

Fundos do BIRD - Comissão Inicial - - - - - - - - - -

Rendimentos do período - - - - - - - - - - -

Total Disponível (A) - - - - - - - - - -

USOS DE FUNDOS - Contrapartida

Categorias DespesasCategoria 1 - - - - - - - - - -

Total das Despesas - Contrapartida - - - - - - - - - -

USOS DE FUNDOS - BIRD

Categorias DespesasCategoria 1 - - - - - - - - - -

Categoria 2 CERC (Componente) - - - - - - - - - -

Comissão Inicial - - - - - - - - - -

Total das Despesas - BIRD - - - - - - - - - -

TOTAL DESPESAS (BIRD + CP) - - - - - - - - - -

SALDO DE ENCERRAMENTO

Conta Designada - - - Rendimentos - - -

Total Saldo de Encerramento - - - 1/ Depósitos feitos na Conta Designada.

________________________________________________

Representante Autorizado

Mutuário ________________________________________________

_______________________________ IFR Preparado por

Data Cargo

2/ Acumulado é a soma do total realizado (acumulado) até 31/12/do ano anterior + o planejado até o trimestre vigente.

Valores do Projeto

Demonstrativo de Fontes e Usos por Categoria de Despesas

Projeto IBRD XXXX: Programa Saneamento Sustentável e Inclusivo

DESCRIÇÃO

Realizado Planejado Variação ( Realizado - Planejado)

Período: XX/XX/XXXX a XX/XX/XXXX

CONTRAPA

RTIDA

BIRD TOTALCONTRAPA

RTIDABIRD TOTAL

CONTRAP

ARTIDABIRD TOTAL

CONTRAP

ARTIDA

BIRD TOTALCONTRAPA

RTIDABIRD TOTAL

CONTRAPART

IDABIRD TOTAL

CONTRAPART

IDABIRD TOTAL

Componente 1: Disponibilidade Hídrica e

Perdas

1.1 - Água Legal (Acesso)

1.2 - Renovação de redes secundarias

1.3 - Setorização por performance

1.4 - Fortalecimento da segurança hidrica

Subtotal Componente 1 - - - - - - - - - - - - - - - - - - - - -

Componente 2: Melhoria da Eficiência e da

Segurança dos Serviços de Água e

Saneamento

2.1 - Expansão Sistema de Esgotamento

Sanitário - - - - - - - - - - - - - - - - - - - - -

2.1.1 - Itapecerica

2.1.2 - Embu das Artes - SES Completo

2.2 - Remoção de Carga Poluidora

2.3 - Aumento de Segurança do SES - - - - - - - - - - - - - - - - - - - - -

2.3.1 - EEEs

2.3.2 - CT Guavirituba e LR Talamanca


Componente 3: Assistência Técnica

3.1 - Estudos e Projetos - - - - - - - - - - - - - - - - - - - - -

3.1.1 - Eficiência Energética - EEA e EEE

3.1.2 - Automação - projeto piloto Barueri

3.1.3 - Elaboração do Plano integrado dos

sistemas operacionais

3.1.4 - Economia comportametnal e Material

pedagógico e de comunicação (água Legal-

Se l iga na Rede)e demais inovações

3.1.5 - Assuntos Regulatórios

3.2 - Supervisão e Administração (

contrapartida ) - - - - - - - - - - - - - - - - - - - - -

3.2.1 - Prestação de Serviço de

Gerenciamento Água Legal

3.2.2 - Gerenciamento de Obras -Troca de

rede

3.2.3 - Gerenciamento de Obras - Segurança

hídrica Guarapiranga

3.2.4 - Prestação de Serviço de

Gerenciamento Programa

3.3 - Estudos e projetos para ampliação de

segurança das barragens


Componente 4: Resposta a Emergências e

Contingências (CERC) - - - - - - - - - - - - - - - - - - - - -

TOTAL DO PROJETO - - - - - - - - - - - - - - - - - - - - -

(2) Variação = Realizado-Planejado

Elaborado por: ________________________________________ Revisado por: ________________________________________ Certificado por: ______________________________________________

(1) Acumulado desde o início do Projeto

Programa Saneamento Sustentável e Inclusivo

COMPONENTE / SUBCOMPONENTE

NO TRIMESTRE NO ANO ACUMULADO (1)

PLANEJADO REALIZADO

RELATÓRIO DE APLICAÇÕES POR COMPONENTE

RELATÓRIO TRIMESTRAL

Expresso em Reais (R$)/(US$)

VARIAÇÃO (2) PLANEJADO EXECUTADO VARIAÇÃO (2) EXECUTADO

PERÍODO: XX/XX/XXXX a XX/XX/XXXX

IFR 1C

(Expresso em Reais)

R$

I. Fundo RecebidoBIRD -

Rendimentos - 0,00

2. Rendimento financeiro até

XX/XX/XXXX

Rendimentos - 0,00

3. Desembolsos do Banco Mundial:

Depósitos na Conta-BIRD 0,00

-

0,00

II. Menos:

0,00

III. Saldo de Conta BIRD

Rendimentos - 0,00

Saldo da Conta 0,00

Saldo da conta pelo extrato bancário e balancete 0,00

Diferença 0,00

Razão para a diferença -

4. Fundos Disponíveis no semestre ( 1 + 2+

3 )

Pagamentos por Bens e Serviços segundo comprovantes-

BIRD

Pagamentos por Bens e Serviços segundo comprovantes-

Contrapartida

1. Saldo em XX/XX/XXXX (Trimestre

anterior)

AGÊNCIA EXECUTORA: SABESP

Programa Saneamento Sustentável e Inclusivo

Conciliação da Conta Designada

CONTA N.º :

BANCO : Banco do Brasil

PERÍODO: XX/XX/XXXX a XX/XX/XXXX

Closing Date: d3/m3/a3d3/m3/a3

Período: 00 / 00/0000 a 00/00/0000

Trimestre

Atual

Trimestre

PosteriorTOTAL

1 0% 0 0

2 0% 0

3 0% 0

4 0% 0

0

Esta Requisição 0

Total

Saldo Trimestre Anterior

Data da Assinatura do Acordo: d1/m1/a1

Data de Efetividade: d2/m2/a2

PROJEÇÃO DE CAIXA PARA DESEMBOLSO

Componentes

%

Financiament

o

R$ NECESSIDADE DE CAIXA R$

Financiado

Semestre

Taxa

Conversão

Elegível

Banco US$

Semestre