PROJECT INFORMATION DOCUMENT (PID)
                                         CONCEPT STAGE
                                                                         Report No.: AB1429
    Project Name                          ST LUCIA WATER SUPPLY INVESTMENT LOAN
    Region                                LATIN AMERICA AND CARIBBEAN
    Sector                                Water Supply (100%)
    Project ID                            P094416
    Borrower(s)                           GOVERNMENT OF ST LUCIA
    Implementing Agency
    Environment Category                  [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined)
    Date PID Prepared                     March 1, 2005
    Estimated Date of                     April 4, 2005
    Appraisal Authorization
    Estimated Date of Board               May 19, 2005

1. Key development issues and rationale for Bank involvement

Saint Lucia is at a development crossroads. With the economy having moved away from traditional
agribusiness and dependence on trade preferences, growth prospects are now closely tied to its
competitive position as a tourism destination.1 Yet the ability of the country to absorb further resort
development and to grow beyond the approximately one million tourists who now visit the island yearly
is being tested by the minimal sector planning and the extraordinary fiscal constraints that restrict public
investment in the island’s infrastructure. While the private sector is recognized as the engine of
sustainable growth for St. Lucia’s economy, the access of developers and hoteliers to basic services is
already affecting their interest in investing.2 In this context, no single sector is more closely linked to the
economic development of St. Lucia than its water and sanitation sector.

Despite a concerted effort in 2000 to turn around the state water utility, Saint Lucia is suffering once
again from a crisis of confidence and performance in the water sector.3 The government-owned utility
which currently controls nearly all water and sanitation services on the island, the Water and Sewerage
Company (WASCO), has ceased to make capital investments and has lost the good will of its domestic
and commercial consumers due to severe shortages, miss-billings and poor quality of service. Hotels
throughout the island are purchasing water trucked to them in tankers while entire neighborhoods are

  While agriculture has dropped from about 15 percent of GDP as recently as 1990 to about 5 percent in 2003, the impact on
employment has been even more severe. At the time of the Poverty Assessment of 1996, banana industry employment was about
13,000 and is now about 3,000. Much of that decline, however, has been picked up by growth in Tourism which now accounts
for about half of GDP along with related businesses (restaurants, construction).
 Recent interviews by the Bank team with developers, hotel owners, the Ministry of Tourism and the National Development
Corporation revealed both a disconnect between permitting and planning generally and a heightened sense of concern among
developers that their Greenfield and expansion plans would not be feasible due to the inability of the country to provide water
connections, reliable service and other basic infrastructure such as access roads. There is currently no Tourism Plan for St. Lucia
nor a regular mechanism for coordinating development permits with infrastructure access.
  Some of the early actions taken by the government to improve its performance included: the corporatization of a state authority,
WASA (into WASCO); the appointment of a private sector managing director and board director; the downsizing of staff by
about one-quarter; and a tariff increase in 2000 after many years of a stagnant tariff. In addition, the Government signed a loan
with the World Bank that led to the drafting of a water law, the establishment of a regulatory body and the enactment of a PSD
relying on rainwater, private purchases and storage tanks to compensate for days-on-end without water
from the utility. Exacerbating the situation, a severe dry season over the last year has compounded
existing water shortage problems affecting the quality of life of the country’s 161,000 people. During
2003, WASCO was forced to implement strict water allocation schedules, island wide. These problems
have a tremendous impact on the economy of the country and the residents’ quality of life and have the
potential to become severe if they are left to fester.4

In summary, the main financial and operational issues faced by the water sector are the following:

              Insufficient cash flow to cover all operating and maintenance costs (let alone depreciation or
               debt service);
              Decrepit state of the utility’s assets which are in dire need of a capital infusion;
              Insufficient supply of treated water to meet current demand leading to water shortages—
               particularly in the population and resort centers of the north;
              Prospects for further increase in demand for water as a result of the booming tourist industry
               and upturn in over-all economic growth;
              Loss of good will on the part of consumers due to the further decline in service after the 2000
               tariff increase.

Strategic Direction for the Water Utility

The Government and the World Bank agree that this situation has grown out of the legacy of
underinvestment in assets, insufficient average tariffs over the past decades and severe human resource
constraints. While WASCO has attempted to turn around its performance over the last few years, the
utility has been unable to confront that legacy and, instead, has seen its services and assets deteriorate

During this period, the World Bank has been working with the Government of St. Lucia through a
Technical Assistance Loan for Sector Reform to pursue a strategy that would leverage private sector
financing and know-how to reach a sustainable solution for the sector. As a result of that project’s PSD
Strategy and direct discussions with the World Bank, the Government of St. Lucia has decided to pursue a
public-private partnership for the utility. The Bank and the Government have agreed upon a structure for
the company that will include a minority share for the Government, a likely minority share set-aside for a
St. Lucian institutional investor and an auction for the majority shares to consortia willing to recapitalize
the utility with a minimum pay-to-play bid.

In order to confront these challenges head on and increase the likelihood of a successful transaction for
WASCO, the Prime Minister, cabinet representatives, WASCO’s senior management and the World Bank
team agreed:

         An urgent works program is required that can increase water flows to the north. The Government
          cannot afford to wait for the transaction to be completed in order to initiate that program, and it
          will absorb the cost of that investment even as the transaction process moves forward.

         Private capital will be required for other short to medium term investments. This capital can
          await the successful completion of the PPP transaction.

  Without identifying a one-to-one causal relationship, the Poverty Assessment noted a worrying rise in levels of diphtheria on
the island and cited water-borne disease as a likely primary cause.
        Tariffs should reflect the rate base of the investment after the transaction is complete. As a
         starting point, financial analysis conducted by Technical Advisors to the PSD Strategy and
         reviewed by the Bank suggest that the current average tariff (approximately US$1.15 per cubic
         meter) is sufficient to turnaround the utility given other modest assumptions about improved
         collections, and operations, government willingness to assume debt and the capital injection
         expected from private investors.

Determining the Best Alternative Solution to Water Supply in the North

Currently, St. Lucia’s entire supply of water is dependant on surface water sources. There is one small
non-operating groundwater well in St. Lucia that produces water with such a high iron content as to make
its use uneconomical.5 In addition to the non-operational groundwater well, one hotel has purchased a
small desalinization plant although it generally purchases its water from WASCO probably as a result of
the high maintenance and operating costs of the plant. In preparation for this proposed project, the Bank
team has conducted an economic and environmental assessment of a larger desalination plant that would
provide equivalent amounts of water into the system and have found that the Net Present Value as well as
operating costs of the desalination alternative are significantly higher than those associated with the use of
surface water as a supply source.

For the short term investment the two alternatives that were considered were thus: (i) increase in the
capacity of the Roseau system from 6 to 10 MGD by upgrading existing infrastructure that follows the
dam; and (ii) installation of a Reverse Osmosis desalination plant in Rodney Bay with a capacity of 4.4
MGD. For this second alternative, the concept that had been proposed to the Government of St. Lucia by
desal developers and other interested parties was evaluated for its economic costs as well as its likely
environmental impact as part of the environmental assessment. The desal alternative presupposes the
disconnection of the water supply network north to Rodney Bay from that south to it. The southern part
would be supplied from the Roseau Dam System which will not be upgraded. Based on a comparative
economic analysis, the first alternative was selected (as a clear choice based both on the Net Present
Value of the investment and the difference in the costs of water. The first alternative will not only
improve the level of service, but will also improve the integrity of the system for the long-term at a lower
cost than the alternative. This is not to say that desal could not play an important role in future sourcing
decisions but that the currently available technology cannot compete with the rehabilitation and minor
expansion works proposed for this project.

The Roseau system, which is the primary source of water supply for the north of St. Lucia, has an
estimated capacity of 10 million gallons per day (MGD). Current demand levels to the north of the
island, where 80 percent of St. Lucians live and where most of the country’s resorts are located, is
estimated at about 7.5 MGD. Because of constraints in the infrastructure (transmission, treatment,
pumping) that support the dam, it is only able to supply between 5 and 6 MGD effectively, turning every
year into a drought year for the north. The backlog in investment in pumping stations, the primary
transmission pipeline to the north of the island and water treatment capacity are the main reasons for the
current shortage. The purpose of the proposed project is to address those constraints in an urgent fashion.
The rapid expansion of the north with respect to residential, commercial and industrial development has
increased water demand to a point that if the necessary investments are not undertaken it could be

  This is consistent with the volcanic formation of the island and although other groundwater sources have not been
identified, the World Bank is separately helping the St. Lucians to mobilize resources to evaluate the potential for
groundwater throughout the country through geological analysis.
detrimental for the development of the region and the health of the citizens. The works that would
comprise the project are described in greater detail below.

The Proposed Investment Loan in the Context of the Future Water Utility

The proposed loan is being designed as a complement to the existing Water Sector Reform Technical
Assistance Project (Ln 70960-SLU). The specific objective of that project is to help the transition of
WASCO from a publicly-managed utility to a privately-operated company under a well-functioning
regulatory framework. To date, the project has seen the completion of a financial and technical analysis
of the sector (including an investment needs analysis), a PSD strategy (including investors’ survey), and
has funded the drafting of a new Water Law which defines the market structure and regulatory
responsibilities of the Water and Sanitation Commission. The reforms initiated during this project,
require additional investment in infrastructure to make possible the transition of a publicly-managed
utility to a privately-operated company.

In order to halt the deterioration of key assets, avert a worsening water supply crisis in the north, reduce
the possibility of abandonment of the system by resorts and hotels, and help entice the equity contribution
of private investors in the water utility, the Prime Minister of St. Lucia has asked The World Bank to
finance the utility’s most urgent rehabilitation works. The components of this project have been
identified by technical advisors, WASCO staff and the World Bank and are described in detail in the
Annex to this Project Concept Note. While the investments planned for financing from the Bank will
help to rehabilitate the utility and increase revenue, it was agreed that the modest room for improved
collection rates and the speed with which leakage reduction programs result in higher revenues mean that
a quick turnaround is highly unlikely. In the end, investors will be required to recapitalize the utility with
an additional US$15 to US$20 million of equity. This will be done through their share “purchases”
which will be utilized as equity contribution.

Structure of the Transaction

The primary approach to be pursued for the transaction will be a public-private partnership in which local,
regional and international investors are invited to purchase shares in WASCO.

        The governance structure of this public-private partnership will be such that private investors can
         exercise board and managerial control of the utility although the Government will be expected to
         maintain a position on the Board with 20 percent of the shares. The World Bank team has also
         identified a St. Lucia-based institutional investor6 which is highly interested in an approximately
         20 percent share in the utility under proposed arrangements. That portion will likely “anchor” the
         investment and will be held apart from the competing purchases.

        In addition, the team has held several discussions and two investor conferences with the major
         tourism and manufacturing associations to test local interest in equity participation. The Hotel
         and Tourism Association in particular has expressed interest in participating as a consortium
         member in the bidding process while other private sector representatives expressed a general
  The National Insurance Corporation currently holds approximately 17 percent of the power utility, Lucelec. The
investment levels suggested for WASCO would be about 20 percent of the size of their investment in Lucelec in
absolute dollars, which in turn is a relatively small part of its portfolio and so would not add significant risk to the
NIC portfolio.
        level of support for the proposed approach. Finally, regional developers from neighboring islands
        and international water utilities have contacted the Bank to discuss the details of the proposed
        initiative and to express their interest in participating in an auction. It is expected that consortia
        of these private participants will be invited to compete for 60 percent of the shares of the
        company providing management and board control for the winning bidder.

       The financial statements of the utility will be prepared and presented for sale without the debt
        which now shows on the books of WASCO. That is, the Government will assume all debt of the
        water company. To offset the liabilities of the Roseau Dam, the Government will likely retain
        those assets in its own accounts and include in the operating license the full rights to use of the

       In place of dividends, a canon is being considered for payment to the Government to compensate,
        to the degree feasible, for the servicing of old debt. Such a canon might not be held subordinate
        to other dividend obligations although it will be priced and timed so as not to inhibit the ability of
        the private investors to receive a fair return on their investment. That is, any canons or dividend
        payments to Government would likely begin at zero following the transaction and await an
        improvement in the financial performance of the utility to be ramped up or “capitalized” over

The Bank team has also initiated discussions with the IFC to test their interest in supporting the PSP
initiative. Preliminary indications are that the IFC is highly interested recognizing that the opportunity to
participate in the purchase of a water utility is increasingly rare,; the teaming possibilities with regional
investors and international operators is attractive; the average tariff and financial proposal over-all appear
lucrative; and that this admittedly small investment opportunity could be seen as a pilot for similar
transactions around the region.

Rationale for Bank Involvement

The World Bank is currently the only institution that is in a position to prepare for and finance the
proposed urgent investments in a coordinated fashion with the design and implementation of the planned
transaction for the water utility. The financial engineering of the transaction is being built around a
shifting set of variables related to investment cost estimates, government debt absorption ability and
willingness and potential for other sources of funding to offset long-term investments. The Bank is
closely involved in discussions on all of these issues each of which could affect the approach to the
transaction. For this reason, the Prime Minister, who also serves as the Finance Minister, has asked that
the Bank finance and assist with the planning of an urgent investment program in such a way as to
strengthen the transaction rather than complicate it. This has resulted in the plan to create a single
Program Implementation Unit for both the transaction and the investment project and house it under the
Ministry of Finance.

2. Proposed objective(s)

The Saint Lucia Water Supply Infrastructure Improvement Project will support a short term investment
program to carry out critical works which are required to achieve the following objectives:
        (i)      alleviate the water shortage in the north of the country. (The infrastructure works
                 proposed will allow the utility to supply the entire north of the island with a more
                 efficient, continuous and reliable service.)
        (ii)     implement urgent investments which will result in additional revenues, reduce the
                 likelihood of commercial users (important sources of cross-subsidy for poor consumers)
                 abandoning the system and improve the potential of a successful partnership between the
                 Government and the private sector.

3. Preliminary description

The project will improve the reliability of the Roseau Dam Water supply system by increasing the flow of
water to the north of St. Lucia as required to meet the current shortfall in water capacity in that area. The
system components that would require upgrading include: the Roseau Dam system pumping station, the
Roseau Dam system raw water transmission, the Theobalds Treatment plant and the Morne Bocage
distribution pipeline that will connect the Hill 20 system, which suffers a severe water shortage, to the
Roseau system. The increase in the extraction capacity from the Roseau reservoir technically reduces the
drought return period for which the reservoir was designed. However, since what currently happens is
that the restrictive extraction capacity practically turns every year to a drought year, it is considered that it
would be better to increase the extraction capacity from the reservoir and satisfy all the demand in years
that are not drought years. The issue of drought years will be taken care of in the medium term
investment program by the future owner/operators under which an expansion of the water source for the
north may be considered, or alternatively, an aggressive water losses reduction in the distribution network
will be pursued.

The components of the proposed project are thus the following:

Component A: Infrastructure Improvement Works: This component includes the following
infrastructure improvement works, which are detailed in Annex 1:
     Roseau Dam Pumping Station Upgrade: This entails the upgrade of pumping capacity to match
         future demand.
       Vanard-Sarot Pipe Replacement: This requires a new 24” ductile iron pipe to be installed from
        Varnard to Sarot (1.3 km) parallel to the existing 18”, which will upgrade the raw water
        transmission pipeline capacity up to 10 MGD.
       Theobalds Treatment Plant Upgrade: Consisting of doubling the capacity of the treatment plant
        by adding treatment units.
       Morne Bocage Distribution Pipeline: This new pipeline functions as a dedicated transmission
        pipeline directly to existing storage tanks at the Morne and Morne Du Don, for enhancing water
        supply to the Hill 20 area..

Due to the urgent nature of the works and the close inter-relationship among the components of the
project it is considered that a turnkey contract will be the most efficient and safe way to implement this
type of project and achieve project objectives as demonstrated in other Bank projects such as the Espiritu
Santo project in Brazil.

Component B: Technical Assistance and Project Management. This component includes:
    consulting services for:
      preparation of preliminary designs and tender invitation documents for all civil, mechanical
        and electrical works;
      preparation of pre-qualification reports where necessary;
      assistance in the evaluation of tenders, preparation of tender the evaluation reports, selection
        of the winning bidder and negotiation of contracts;
      supervision of the quality of works
      other activities, as required, to provide support to the project management unit.

    Additional support to the PMU and the Government in TA and training, as necessary.

4. Safeguard policies that might apply

The project is considered category B due principally to the large scale of excavation planned
during the installation of pipe works. Routes chosen include agricultural areas and roadways
which will result in some short term disruption of activities. Impacts associated with the project
are short term and associated with the actual construction activities. No natural lands are to be
disturbed, no endangered species or critical wildlife habitats are to be disturbed and no
reallocation of inhabitants will be required.

An environmental assessment is being prepared to asses safeguard issues and plan to mitigate

[Guideline: Refer to section 5 of the PCN. Which safeguard policies might apply to the project
and in what ways? What actions might be needed during project preparation to assess
safeguard issues and prepare to mitigate them?]

5. Tentative financing
Source:                                                                              ($m.)
BORROWER/RECIPIENT                                                                     .24
INTERNATIONAL BANK FOR RECONSTRUCTION AND                                             3.85
INTERNATIONAL DEVELOPMENT ASSOCIATION                                                 3.85
                                                                         Total        7.94

6. Contact point
Contact: Jordan Z. Schwartz
Title: Senior Infrastructure Specialist
Tel: (202) 458-0493

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