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					GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion       September 13, 2007


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         GPOBA PROJECT APPRAISAL - COMMITMENT DOCUMENT

Project Name: Cameroon Water Lease – OBA for Coverage Expansion (P106794)


Project Summary

The objective of the project is to expand access to urban water supply in Cameroon through a
subsidized household connections program, to be implemented by the international private
operator, ONEP of Morocco, competitively selected to run the national water utility under a 10-
year lease contract in August 2007.

The project shall allow for the installation of 55,000 household connections in urban areas
countrywide over 4 years, equivalent to a 25% increase in the total number of water connections
in the country. An estimated population of 330,000 people shall gain access to safe piped water
(current urban coverage is estimated at 35%).

For a typical household connection, the connection cost amounts to US$ 198, plus US$ 53 as an
initial guarantee deposit, giving a total of US$ 251 to be paid upfront by a new customer. This
clearly is not affordable to most urban households, where average monthly income is US$ 31 for
the first income quintile increasing to US$ 68 for the third quintile. As a consequence, the
households currently connected to the piped water network mostly belong to the 4 th and 5th
income quintiles.

When the GPOBA project was initially conceived in August 2006, GPOBA was requested to
provide a grant amounting to US$10 million. However, in September 2007 a Presidential Decree
reduced by half the level of connection fee (which previously was set at connection cost), so that
the fee for a typical household connection is now US$ 99. Camwater, the asset-holding company
will finance the difference between the actual connection cost and the connection fee applicable
after the Presidential Decree.

As a result of the Presidential Decree, the required subsidy from GPOBA was halved to US$ 5
million. It is proposed that the GPOBA grant will finance up to US$ 91 per connection or US$ 15
per person, depending on the length of the connection. Thus for a typical household connection,
the GPOBA grant would be US$ 89, and the household contribution would be US$ 10. GPOBA
would subsidize 90% of the current level of connection fee, and 45% of the total connection cost.
Camwater would finance 50% of the connection cost. The user would pay 10% of the connection
fee (5% of connection cost) plus an initial guarantee deposit of US$ 53, so that the up-front cash
contribution required would be around US$ 63 per beneficiary household. Based on previous
experience with subsidized water connection programs in the region (Senegal, Burkina, Niger), it
is expected that this level of upfront payment would be affordable for most households in the
second and third income quintile. These are poor households with a daily income per capita of


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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion        September 13, 2007


less than US$ 0.40. It is also expected based on this experience that most of the poorer
households from the first income quintile would not be interested in a residential connection, and
an already approved IDA-loan to be implemented in parallel with the proposed GPOBA project
will finance at least 1,200 new community standpipes to ensure that they also get improved
access to piped water in the future.

Although Camwater, as the asset-holding company, will be the nominal recipient of the grant, the
international private operator will be directly responsible for the implementation of the GPOBA
project, which it was fully delegated under the lease contract. Namely, Camwater will establish a
Subsidized Connection Fund (SCF) with a dedicated bank account to be managed directly by the
private operator. Camwater will pre-finance the connections out of this SCF, the private operator
will implement the connections. The connections will be verified, triggering disbursement of the
GPOBA subsidy to the SCF.

The operator is remunerated through a volumetric fee of US$ 0.36 per m3 billed and collected
(which was the parameter of the tender), plus a monthly fixed fee of US$ 3 per customer, which
fully covers marginal O&M costs even for small customers. These will provide incentives for the
operator to expand its customer base through the project, including to modest-income households.

With respect to the cost recovery of service provision, a review of the financial projection of the
winning bidder confirmed that: (i) its remuneration will fully cover its overall O&M and (partial)
investment obligations, (ii) its monthly remuneration for small customers (5-6 m3 per month) will
fully cover its marginal O&M costs of serving them, (iii) the expected total revenue flow from
users’ tariff collection will exceed the total remuneration of the operator, thereby providing the
asset holding company Camwater with increasing cash-flow to service debt and finance system
expansion (it is expected that the urban water sector would become self financed by the end of the
10-year lease, as was successfully achieved in Senegal).

The international private operator has been competitively procured following Bank procedures
and will be remunerated through a cost schedule included in the lease contract. The GPOBA
subsidy will be paid every trimester directly to an account owned by Camwater but entirely
managed by the operator, conditional on the independent verification of the outputs.

This connection subsidy project will be implemented as part of an Urban and Water Development
Support (P084002) IDA loan, whose Component 3 includes an amount of US$ 33 million from
IDA to support the implementation of the public-private partnership between Camwater and the
international private operator. The proposed connection subsidy program was explicitly included
and analyzed as part of Component 3 of the IDA operation, as it is an integral part of the lease
contract. Financial management, procurement and safeguards policies issues were analyzed
during the IDA loan preparation, and mitigation measures carried out under the implementation
of the Bank loan.




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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion                September 13, 2007




Project Fact Sheet


Scope: Expanding access to urban water supply through household connections, through an
international private operator managing the national water utility under a lease contract.

Total project costs: $11,850,000 including Government (Camwater) and users’ contributions

Total GPOBA funding requested: $5,350,000
    Subsidy funding = $5,000,000 (W3)
    Project implementation/consulting = $250,000 (W3)
    Bank/GPOBA supervision = $100,000

                 Table 1: Estimated Project Cost Break-down by Activity (US $)
                                           GPOBA          Co-Financing by      Contribution         Total
                                           Funding         Government*           by users*
             Connections installation     5,000,000         5,750,000           750,000       11,500,000
                                VAT
      Independent Verification Agent       250,000                                             250,000
          Supervision (WB/GPOBA)           100,000                                             100,000
                             TOTAL        5,350,000          5,750,000           750,000      11,850,000
* Government co-financing and Users’ contribution are estimates (actual amount will depend on the
average length of connections installed). The above does not include the Initial Deposit that users are
expected to pay up-front.

GPOBA funding: financed by GPOBA contributions by the Dutch, DFID and possibly SIDA

Additional funding sources: The state-owned asset holding company Camwater will contribute
an estimated US$ 5.75 million. Beneficiary users will also pay at least 5% of the cost of each
connection equivalent to an estimated US$ 0.75 million in total (actual amounts for Camwater
and beneficiaries will depend on connection length, see B.2.1.).

Outputs: 55,000 household connections added to the water distribution network, equivalent to a
population of 330,000 people gaining access to piped water (based on 6 persons per household).

GPOBA subsidy “efficiency”: US$ 15 per person without supervision and verification; US$16
per person with supervision and verification.

Returns: Economic IRR estimated at 46%, financial IRR estimated at 16% with the project, 5%
without.

Targeting: the project will target the unconnected urban population in the first two years. It is
expected that these shall be essentially poor to lower middle income households (i.e. monthly
incomes of less than US$ 68 for an average family of 6). Further targeting for the poor will be
considered starting in year 3.




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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion        September 13, 2007


Grant recipient: National Asset-holding public company Camwater (as concessionaire of the
systems), but the funds will be directly managed by the international private operator, as outlined
in the lease contract.

Disbursement: Over a 4-year period, disbursements will take place every trimester following
certification of outputs by independent verification agent.

Financial Management: Risks are assessed as Moderate. GPOBA subsidies are disbursed to the
private operator through a dedicated commercial bank account, based on independent auditor
financed by the program to verify new connections in the field before allowing disbursements of
OBA funds.

Procurement: all connections to be executed by the international private operator, which was
selected competitively following Bank procurement rules (based on a fully satisfactory technical
offer and the lowest operating fee per m3 of water sold and collected). The private operator will
be paid for each connection according to cost schedule based on size and length. The cost
schedule is attached to the lease contract, was known in advance by each bidder when calculating
their proposal for the operating fee, and is subject to periodic revision based on market
references.

Environmental clearance: The GPOBA project was prepared as part of a larger IDA operation
for urban and water reform which falls under category B. Since environmental and social
safeguards for the proposed GPOBA project have already been complied with as part of the IDA
project, no additional EA will be carried out for the GPOBA project, which is independently rated
as a Category C.

Government endorsement: Yes. State assets holding company Camwater

Exchange rate: 485 CFA = US$1 as of August 2007




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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion                 September 13, 2007



Panel of Experts’ Issues raised at Eligibility Stage (August 2006)

1. Linking of the Project components.
The panel of experts (PoE) inquired as to how the proposed subsidy program would be bundled
into the tender process for a lease program

     The tender was officially launched in January 2007. The potential contribution from
      GPOBA under the present project was included in the tender documents1 (with the
      proposed subsidized connection program covered in the lease contract) and
      corresponding procurement, financial management and safeguards review carried out as
      part of the IDA operation that will support the lease contract with an international
      operator. Two international consortia, led respectively by Veolia and ONEP (state-
      owned, largest water utility in Morocco), submitted technical offers in March 2007 and
      both were deemed fully satisfactory by the Technical Commission in charge of
      Privatization (CTPL) of the Ministry of Finance.
     The financial proposal based on the lowest operator’s fee was submitted on July 3rd 2007
      and opened the same day. ONEP submitted the lowest cost offer with a fee of 176
      CFA/m3 (US$ 0.36 per m3), while Veolia offer was 269 CFA/m3. Following detailed
      review of the bid’s financial projections, the technical commission recommended that the
      contract be awarded to ONEP. A non-objection was issued by the Bank in August 2007.
      An inter-ministerial Committee voted unanimously the award of the lease contract to
      ONEP on September 6th, 2007. The lease contract is now pending closing.

2. Split of responsibilities between operation and investment under the lease contract.
The PoE expressed concerns about the split in responsibility between the investment program, to
be carried out mostly by the assets holding company Camwater, and the operation of the utility
transferred to the private operator under the lease. This split has created interface problems in
earlier lease contracts that are well documented in various case studies and sector reviews. The
PoE also expressed strong preference for the operator to take direct responsibility for execution of
the connection works.

     Under the Cameroon lease, the private operator will be entirely responsible for the
      installation of new connections, subject to terms for cost and technical standards included
      in the lease contract. To mitigate the risk that delays in the investment program due to
      Camwater affect the expansion of the water system and the capacity of the operator to
      increase the number of connections as planned, the lease contract has been tendered
      together with a contract for the execution of $14.9 million in civil works (production
      facilities and distribution network) financed by the Bank (IDA), to be executed directly
      by the private operator in the first two years of the lease. Under the lease contract, the
      operator will also be responsible for funding around US$ 4 million of civil work out of
      users’ tariff collection. This shall leave sufficient flexibility for the operator to be able to
      ensure that priority civil works are carried out without delays during the beginning of the
      lease contract.

1
  Although it was originally expected that the funding commitment from GPOBA would be sought before
the tender award, the task team did not want to ask GPOBA to commit funds before it was sure the
competitive tender was effectively awarded, validating the IDA project. The tender process experienced
difficulties due to the threat that one of the two pre-qualified bidder could retire from the process, which
would have invalidated the project by making a competitive selection of the operator impossible.


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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion               September 13, 2007




3. Involvement of state-owned asset holding company Camwater.
The PoE requested further clarification regarding the precise nature of involvement of
CAMWATER in the proposed GPOBA operation. The PoE expressed strong preference for the
payment of GPOBA to be made directly to the private operator. The panel also stated a
preference for the operator to take some pre-financing risk, but recognized (as explained by the
team) that in the current market environment taking pre-financing risks was unlikely to be
acceptable to international operators. If this was the case, the PoE requested the team to explore
an option for Camwater to capitalize a working capital fund.

     Although Camwater as asset-holding company will own the newly installed connections
      and will be the official recipient of the OBA grant (as well as the provider of a
      contribution of an equivalent amount to the subsidy funding), the proposed operation will
      be implemented entirely by the operator. The lease contract explicitly establishes that the
      private operator shall be responsible for the implementation of the subsidized connection
      program, including the management of funds. Camwater involvement will be limited to
      making deposits to replenish its share of subsidy funding, and carrying out ex-post audits.
     Following discussions with the two consortia during the tender process, the project team
      concluded that it was not advisable to push for the transfer of pre-financing risk to the
      private operator. Given the current market conditions, the likelihood was high that
      introducing this feature could have forced one potential bidder to retire from the process.
      Instead, it was agreed that Camwater would establish a Subsidized Connection Fund
      (SCF) with a dedicated bank account to be managed directly by the private operator, and
      take the pre-financing risk with an initial deposit of 400 million CFA (around US$ 0.8
      million)2.
     The lease contract explicitly establishes that the private operator will be responsible for
      directly managing the SCF and the corresponding dedicated bank account, subject to
      monthly reporting of the flow of funds to Camwater. All GPOBA payments will be made
      directly to the SCF bank account managed by the private operator.

4. Cost estimate.
The PoE requested clarification on the details of the cost estimate submitted by the team, as the
benchmark based on Camwater current connection tariff and cost schedule for new connections
might not reflect competitive market conditions. The PoE requested the team to produce a more
detailed benchmark for the efficient costs of making connections, to be fixed as unit price for the
operator prior to submission of tender offers. This costing should allow for differentiation of
connections subsidies with regard to the distance of connected households from the network, one
major cost driver for unit costs.

     The transaction adviser (financed by the Bank) had a detailed review of Camwater
      connection costs carried out by a technical consultant in October 2006, using regional
      comparisons and consultations with suppliers. As a result, a detailed cost schedule for
      new connections (outlining what the private operator would receive depending on length
      and diameter) was prepared and included in the lease contract. The lease contract
      provides for occasional revisions of this cost schedule based on market references.


2
  Although the project team understood from the PoE that this was not the preferred solution, it was the
only option given the risk of losing one bidder during the tender process. The PoE was specifically
informed of this in the March 5-6 meetings and agreed with the option adopted given the circumstances.


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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion         September 13, 2007


     The contractual cost schedule was included in the lease contract as part of the tender
      documents. It was therefore incorporated in the financial offer submitted by each bidder.
     In order that the beneficiary users share in the increased cost associated with the length of
      connection, the OBA subsidy was designed so that it represents 90% of the current
      connection fee (45% of the total connection cost) for households located up to around 17
      meters away from the tertiary network, with the cost associated with any additional meter
      to be paid entirely by the beneficiary.

5. Targeting.
The PoE requested some clarification on the team’s decision to propose no further targeting of
households receiving the subsidy beyond an element of self-selection (eligibility only for small
diameter connections) and a formal exclusion of middle and high income residential areas
developed by real estate developers. The PoE also requested the team to refine how exclusion of
middle and higher income households from connection subsidies would be managed, in particular
when public investments would lead to network expansion, and suggested including regular
targeting reviews, with adjustments if audits indicate poor targeting accuracy.

     In the absence of reliable information, the project team assessed that designing a credible
      (proxy) means test to carry out targeting was not a viable option in Cameroon at that
      stage. The urban areas already covered by the water network are those areas where high
      income households are concentrated (due to higher property prices). Overall income of
      unconnected urban populations is low (monthly incomes of less than 33,075 CFA or
      US$68). Making the connection subsidy available to all households during the project
      implementation span is unlikely to result in significant bias towards rich households.
     In order to mitigate the risk that a significant number of households in the two highest
      income quintiles could benefit from the subsidy during year 3 and 4, the consultant that
      will carry out the verification of the connections will document the socio-economic
      profile of the beneficiary households. If it was found at mid-term review that a significant
      number of non-poor households were benefiting, then the program would be adjusted to
      ensure better targeting. This tracking of beneficiaries will also be useful to improve the
      targeting in case a second connection subsidy program is implemented after the end of
      this project (year 5).
     Based on the Bank experience with subsidized water connection programs funded by
      IDA in other countries of the region (Senegal, Burkina, Niger), it is expected that most of
      the households from the 2nd and 3rd quintile would be interested and able to afford a
      subsidized connection, given the level of upfront payment they would have to make
      under the proposed GPOBA program of around US$ 63. The experience has also shown
      that the poorest households in the 5th quintile are typically not interested in an individual
      connection, and the IDA-loan (already approved) to be executed in parallel with the
      GPOBA program will finance at least 1,200 new community standpipes to ensure that
      they also gain improved access to piped water in the coming years.

6. Private operator’s incentives and obligations to expand coverage.
The PoE requested clarification regarding the incentives for the private operator to make
connections, as well as its specific obligations under the lease contract.
The PoE also advised the team to retain the current fixed charge assessed as part of the tariff even
for low consumption households. While often costly for lower income households, the amount
seems to reflect the reasonable fixed costs associated with water utility customers.




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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion           September 13, 2007


     As already mentioned, the private operator has been made responsible under the lease
      contract for the implementation of the connection subsidy program. In addition, the
      private operator will have positive commercial incentives for making such connections as
      the installation cost will be fully covered, and it will result in a significant increase in its
      customer base. In commercial terms, the contract would benefit from enhanced sales
      expected from a substantial addition to the customer base, and there are indications that
      the winning bidder is actually planning on large customer expansion to be able to reach
      financial equilibrium.3
     The customer tariff structure in Cameroon is based on progressive consumption brackets,
      as is the case in many water utilities elsewhere, to ensure cross-subsidies between large
      and small customers. This typically results in a disincentive for a utility to serve the poor
      as the low tariff applied to their modest consumption typically result in monthly invoices
      below the marginal O&M costs of servicing them. The advantage to the lease contract is
      that the remuneration of the private operator per m3 of water billed and collected does
      not have to follow the tariff structure and its consumption bracket. In the case of
      Cameroon, the financial structure of the lease contract bases the remuneration of the
      private operator on a combination of (i) a fixed volumetric amount per m3 sold which is
      the same regardless of the customer’s consumption bracket; and (ii) a fixed monthly fee
      of around US$ 3 dollars per customer. It has been verified based on financial projections
      that this remuneration structure ensures that servicing the poor households will be a
      profitable business for the private operator, covering the marginal O&M cost of servicing
      them. In accordance with the lease contract, Camwater will cover any difference between
      the revenues collected by the private operator and its contractual remuneration.


Panel of Experts’ Issues raised during the March 2007 discussion
The team explained recent developments, and that much progress had been made in negotiating
with the GoC the incorporation of the requests of the PoE in the tender documents, in particular
that the operator will get the subsidy money directly and would be making the connections. But
the operator will not be pre-financing the connections – the asset company would, given the
current market situation and the reluctance of international water operator to take financial risks
in Cameroon.

This issue of risk sharing between Camwater and the operator was explicitly discussed at the
same time the Mozambique project was presented for commitment at the March 2007 Panel
meeting. The team sought confirmation from the Panel on whether it would be fine that the
operator does not pre-finance the connections in the Cameroun water, while it explicitly required
that the PO pre-finances outputs in the Mozambique water project. The panel confirmed it was
fine with this.

The team also explained that the GPOBA subsidy requirement had significantly been reduced as
the President reduced the required connection charge by half.




3
 This however would not happen unless the GPOBA program is put in place as the connection fee would
not be affordable for most urban households.


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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion         September 13, 2007


                       Institutional Arrangements of GPOBA Project



   Camwater                                                                          GPOBA

                    0. Initial SCF funding plus          5. Periodic reimbursements
                    periodic replenishment


      Lease
     Contract                     Subsidized connection                                                  4. Output
                                                                                                      verification by
                                  Fund (SCF)                                                           Independent
                                                                                                       Verification
                                                                                                           Agent
                                                  2: ONEP withdraw funds to install connection


                                  Private operator ONEP

                1: Household pays                            3: ONEP install new
                10% fee contribution                         connection
                and initial deposit



                                  Beneficiary household




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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion   September 13, 2007




                        ACRONYMS AND ABBREVIATIONS


AFD          Agence Française de Développement
Camwater     National Water Asset-Holding Company
CFA          Franc CFA
E-IRR        Economic Internal Rate of Return
E-NPV        Economic-Net Present Value
EIB          European Development Bank
GPOBA        Global Partnership on Output Based Aid
F-IRR        Financial Internal Rate of Return
FMM          Financial Management Manual
F-NPV        Financial-Net Present Value
GNI          Gross National Income
GoC          Government of Cameroon
IBRD         International Bank for Reconstruction and Development
IDA          International Development Agency
IFC          International Finance Corporation
IFR          Interim Financial Reports
IRR          Internal Rate of Return
MDG          Millennium Development Goal
MoF          Ministry of Finance
OBA          Output Based Aid
ONEP         Office National de l’Eau Potable
PoE          Panel of Experts
SOP          Standard Operating Procedure
TA           Technical Assistance
TF           Trust Fund
ToR          Terms of Reference
WB           World Bank




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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion                                   September 13, 2007


                                                    Table of Contents

Project Summary.....................................................................................................................1
Project Fact Sheet ...................................................................................................................3
Panel of Experts’ Issues raised at Eligibility Stage (August 2006) ........................................5
Panel of Experts’ Issues raised during the March 2007 discussion ........................................8
A. STRATEGIC CONTEXT AND RATIONALE ..............................................................12
A.1. Background: low access for piped water and the introduction of a private operator....12
A. 2. Rationale for a connection subsidy program................................................................13
A. 3. Rationale for GPOBA involvement .............................................................................13
A. 4. Coordination with sector policy and overall Bank strategy .........................................14
B. PROJECT DESCRIPTION ..............................................................................................15
B.1. Project development objective and key indicators ........................................................15
B. 2. Project design ...............................................................................................................15
B. 2. 1. Subsidy amount & structure .....................................................................................15
B. 2. 2. Other design components .........................................................................................17
B.3. Economic and financial analysis ...................................................................................19
B.3.1 Economic analysis: ......................................................................................................19
B.3.2 Financial Analysis: ......................................................................................................19
B.4. Lessons learned and reflected in the project design ......................................................20
B.5. Alternatives considered and rejected.............................................................................20
C. IMPLEMENTATION ......................................................................................................21
1. Milestones for project implementation .............................................................................21
2. Partnership arrangements ..................................................................................................22
3. Institutional and implementation arrangements ................................................................22
4. Monitoring and evaluation of outcomes/results ................................................................23
5. Sustainability....................................................................................................................23
6. Critical risks and possible controversial aspects ...............................................................24
                                                      Annexes
Annex 1. Project Costs Schedule .........................................................................................26
Annex 2: Financial Management and Disbursement Arrangements ...................................27
Annex 3. Procurement ..........................................................................................................32
Annex 4. Safeguards - Environment & Social Issues (OP/BP 4.01) ...................................34
Annex 5. Project Preparation and Supervision .....................................................................35
Annex 6. Documents in the Project File ...............................................................................36
Annex 7. Map........................................................................................................................37




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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion          September 13, 2007




A. STRATEGIC CONTEXT AND RATIONALE

A.1. Background: low access for piped water and the introduction of a private operator

Urban access figures for piped water are very low in Cameroon
With access to piped water estimated at 35% of the urban population in 2006, Cameroon lags
well behind countries such as Cote d’Ivoire and Senegal (70% and 80% respectively), despite
having one of the highest GNP per capita of sub-Saharan Africa. This has a negative impact on
public health, economic development and the well-being of a large portion of the population.
Even in the two largest cities of Douala and Yaoundé (population 2 million each), the
development of the water distribution network is limited to some neighborhoods, where the richer
households are now concentrated, given that piped water availability drove property prices up.
The poor and low-middle income families are essentially located in the neighborhoods without a
distribution network, and have to obtain water either through unsafe local wells, street vendors or
privately managed standpipes at a much higher price.
The few poor and medium-low income families who live in areas covered by the distribution
network usually do not have either an individual household connection, because they can not
afford the high connection fees. They typically purchase water from neighbors who have
individual connections, but often again at a much higher price that the tariff paid by those with a
household connection.

Reform of the national water utility and introduction of a private operator
This situation is the direct consequence of years of mismanagement at the national public water
utility (SNEC). Chronic poor management and governance concerns led to donors’ withdrawal,
resulting in serious under-investment in rehabilitation and system expansion. By 2006, SNEC
had around 220,000 customers nationwide (60% in Douala and Yaoundé), and around 6,000 new
connections were being added every year, essentially through network extension in affluent areas
financed by developers. This represents an annual rate of 2.7%, equivalent to the urban
population growth rate (2.6%), which is obviously insufficient to make any impact on coverage.
A new management was installed at SNEC in 2003 and has so far made some significant inroads
in improving operational and financial performance. However, the Government of Cameroon
(GoC) was well aware that much more needs to be done to establish a viable national water
utility that could be able to tackle the coverage challenge. Consensus was built nationally with
support from the World Bank and other donors (AFD, EIB) for a major institutional reform, and
the GoC decided to contract an international operator to operate the national water utility through
a 10-year lease contract. While the operator will be entirely responsible for the operational and
commercial management of the utility, the responsibility for most investment financing will
remain with the Government through a state-owned created asset-holding company (Camwater)
established in 2006 with transfer of SNEC assets.
Although the proposed PPP model is not necessarily optimal in terms of allocation of risks and
responsibilities, especially as it leaves most of the investment responsibility with the government
thereby creating potential delays and coordination problems for the private operator, it has
nonetheless proved successful in other countries in the region (Senegal, Cote d’Ivoire and
Niger). Lessons learned from previous PPP projects were applied in the design of the Cameroon
water lease, and the contract provides for a portion of the investment to be carried out directly by
the private operator. The Bank will support this operation with a US$ 33 million loan from IDA


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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion            September 13, 2007


(P084002) which includes US$ 14.9 million for emergency investment to be executed in the first
two years under the direct responsibility of the private operator. The lease contract also includes
a provision for the operator to directly execute and fund out of the tariff revenues collected, a
portion of network investment (amounting to US$4 million per annum)..
A consortium of financial, legal and technical consultants was contracted by the GoC with
World Bank funding, and financing is being arranged from a pool of donors (WB, AFD, EIB,
China) to fund the first investment program. The tender bid for the selection of the private
operator was launched January 2007, and two consortia submitted technical and financial offers:
Veolia and ONEP (the state-owned water utility of Morocco). The tender was based on the
lowest operating fee per m3 to be retained by the operator and ONEP submitted the best proposal
with 176 CFA per m3, compared with 269 CFA per m3 for Veolia. The technical commission of
the Ministry of Finance (MoF) in charge of the bid recommended in July 2007 the award of the
lease contract to ONEP. The Bank’s procurement department issued a non-objection in August
2007 and the official award to ONEP has been made through a unanimous vote by an inter-
Ministerial Committee on September 6th, 2007. The closing of the lease contract is now pending.


A. 2. Rationale for a connection subsidy program

The introduction of a private operator should bring significant improvement in the quality of
service, including solving the problem of intermittent supply affecting large portions of the
connected population. However, the beneficiaries of these service improvements will be those
already connected to the network (i.e. the richer households), unless a specific program is put in
place to make individual connections more affordable to poor and modest-income households.

Demand analysis carried out during project preparation suggests that while there is a large
unsatisfied demand for individual connections, the cost of an individual connection represented a
major barrier for low- and middle-income households. For a typical household connection (15
mm, 17 meters), the connection cost amounts to 96,056 CFA (US$ 198), plus 25,542 CFA (US$
53) as an initial guarantee deposit, giving a total of 121,598 CFA (US$ 251) to be paid upfront by
a new customer.

Based on the figures available for average monthly income of urban households, the cost of a new
connection can be estimated at one month income on average for the richest quintile, 3 to 4
months of income for families in the 4th and 3rd quintiles, and as much as 5 to 8 months of income
for the poorest families in the first and second quintiles. This cost is prohibitive for a large portion
of the population, which means that unless a program is put in place to subsidize household
connections, the expertise and efficiency brought by the private operator will not be translated
into increased access and benefits for the majority of the population. This is confirmed by the
experience from other Bank PPP projects in African countries such as Senegal, Cote d’Ivoire and
Niger where the private operator was fully able to “do the job”, improving service and expanding
the systems, but where subsidized connections programs had also to be put in place to ensure that
the poor family could gain access to an individual connection and therefore also benefit from the
presence of a private operator.


A. 3. Rationale for GPOBA involvement

GPOBA has a mandate to fund pro-poor infrastructure services through output-based subsidies,
with special emphasis on the poorest countries and a particular interest in increasing access to


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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion          September 13, 2007


water in Sub-Saharan Africa. This proposed project in Cameroon does fulfill these and other
operational criteria:

        a)   explicit use (i.e. targeting) of subsidies;
        b)   increasing accountability of service providers;
        c)   attracting increased private participation in operations and financing;
        d)   providing incentives for innovation and efficiency;
        e)   enhancing sustainability; and
        f)   monitoring of results.

The project will make a direct and tangible contribution in achieving the water MDGs in
Cameroon by subsidizing household connections. The introduction of a private operator shall
significantly improve the accountability and efficiency of the national water utility, and the
proposed project will help to strengthen the reform by ensuring that the presence of a private
operator also benefits the poor.

The private operator will have strong incentives for expanding access via the GPOBA project.
The cost of installing new connections will be calculated on the basis of the detailed cost schedule
included in the lease contract, which has been established following a detailed cost analysis to
ensure full cost recovery by the private operator. The main remuneration of the private operator
comes from water bills collection, itself dependent on the number of customers. The subsidized
connection program will also facilitate social acceptance of the private operator during the first
years of the lease contract, both elements which will make the proposed lease contract more
attractive to international operators and enhance the sustainability of the PPP reform. The project
will finance an independent auditor to verify outputs before disbursement and monitor results and
profile of beneficiaries.

Chances for replication are high after the 4-year period, as Cameroon is far from meeting the
MDGs in water access, and a viable scheme with a private operator in place is almost certain to
get access to further donors financing.


A. 4. Coordination with sector policy and overall Bank strategy

The proposed GPOBA project is fully in line with the Bank strategy in Cameroon. The first
Poverty Reduction Strategy (PRS) was finalized in 2003 and emphasized private sector
development, improved governance, and improved access to infrastructure and basic services in
line with the MDGs. Cameroon completed the negotiation for debt reduction under the Heavily
Indebted Poor Countries (HIPC) Initiative in April 2006, freeing up resources for development

The proposed water connection subsidy project is an integral part of an Urban and Water
Development Support (P084002) IDA loan, approved in May 2007 by the Board, following an
Urban Economic and Sector Work (ESW) finalized in May 2004 which elaborated on the
dialogue initiated in the PRSP. It is based on the CAS and follows the recommendation of the
Progress Reports on the PRSP of April 2004 and February 2006 to promote participation of the
private sector in utility services, especially for urban water supply. It also directly supports the
GoC strategy to reduce poverty in urban areas and achieve the MDGs (target 10 for water access).




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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion                    September 13, 2007



B. PROJECT DESCRIPTION

B.1. Project development objective and key indicators

The objective of the project is to improve piped-water access for the urban population of
Cameroon by adding 55,000 new household to the urban water supply system, equivalent to a
population of 330,000 gaining access to pipe water.

Key indicators: The main development objective of increased access will be measured by the
number of new individual household connections added to the system via the subsidy scheme.


B. 2. Project design

B. 2. 1. Subsidy amount & structure

Subsidy amount & structure:
The connection fee for new customers was modified in September 2007 by Presidential decree, in
a first attempt by the government to alleviate the access affordability problem for the population.
While the connection fee was previously set to cover the full cost of installation of a new
connection, this fee was reduced by half in September 2007, meaning that the connection cost
represents now around twice the connection fee4. Under the lease contract, Camwater is
responsible for covering the difference5 between the connection cost (as calculated in the
contractual price schedule) to be received by the private operator, and the connection fee (as
established in the users’ tariff structure) to be paid by the new customer. This means that the
Government is now subsidizing via Camwater around 50% of the connection cost.

The GPOBA program will complement this reduction of connection fees, financed by Camwater,
by subsidizing the remaining portion of the connection fee. The connection fee to be paid by each
new customer is directly linked to the connection length. Two guiding principles were applied in
the design of the subsidy structure: (i) ensuring ownership by the beneficiaries, by having a
portion of the connection fee still at the charge of each household, and (ii) discouraging the
installation of connections of excessive length. The following subsidy structure will apply:
        i.    The GPOBA program will contribute up to a maximum of 44,000 CFA (91 US$
              equivalent) for each newly connected household (6 persons per household).
       ii.    Each newly connected household will be responsible for paying at least 10% of the
              connection fee (equivalent to 5% of connection cost), plus the initial deposit.
      iii.    The maximum OBA subsidy of 44,000 CFA corresponds to a connection of 17.67
              meters, and a connection fee of around 48,880 CFA of which 4,880 CFA (10% of
              total) would be paid by the beneficiary household.
      iv.     For smaller connections, the OBA subsidy payment will be reduced prorata so that
              10% of the connection fee is still paid by the beneficiary household.


4
  50% approximately since the calculation formula for the connection cost in the price schedule annexed to
the lease contract, is different from the tariff formula for the calculation of the connection fee (the formula
for the connection fee including more parameters).
5
  It is important to keep in mind that, under the lease contract, the tariff structure applied to customers is not
linked from the operator remuneration


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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion         September 13, 2007


      v.   For longer connections, beneficiary household will receive only 44,000 CFA, and
           will be responsible for paying the rest of the amount due for the connection fee. This
           means that more than 10% of the connection fee (5% of the total connection cost)
           will be the responsibility of the end user.

The following table shows the connection cost and connection fee for 4 different connection
lengths, and the amount and proportion to be paid respectively by Camwater, GPOBA and the
beneficiary household under the proposed program. The graph which follows presents the
evolution of the total connection depending on the length of connection, and the 3 sources of
funding: Camwater, GPOBA and beneficiary household. It illustrates the fact that the amount to
be paid by beneficiary households will increase significantly with the length of the connection.
The amount of Camwater funding will also increase although it will remain in proportion at half
of the total cost. GPOBA contribution will be capped at 44,000 CFA, corresponding to around
45% of the cost of a 17-meter connection but much less for longer connection.

       In CFA             12 meters      15 meters      17 meters      20 meters       25 meters
        (US$)

 Connection cost           83,756         91,136         96,056         103,436         115,736
                          (US$ 173)      (US$ 188)      (US$ 198)      (US$ 213)       (US$ 239)
 Camwater                  41,878         45,568         48,028         51,718           57,868
 contribution
    % connection cost       50 %           50 %           50 %           50 %             50 %
 Connection fee            41,878         45,568         48,028         51,718           57,868
                          (US$ 86)       (US$ 94)       (US$ 99)       (US$ 107)       (US$ 119)
 GPOBA                     37,690         41,011         43,225         44,000           44,000
                          (US$ 78)       (US$ 85)       (US$ 89)       (US$ 91)         (US$ 91)
    % connection cost       45 %           45 %           45 %           40 %             40 %
    % connection fee        90 %           90 %           90 %           45 %             45 %
 Household share of         4,188          4,557          4,803          7,718           13,868
 connection cost/fee
                           (US$ 8)        (US$ 9)       (US$ 10)       (US$ 16)         (US$ 28)

    % connection cost        5%            5%              5%              7%            12 %
     % connection fee       10 %           10 %           10 %            15 %           24 %
 Table 1: Connection cost, connection fee and source of funds for 5 different connection lengths




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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion            September 13, 2007



               Connection cost (CFA) and sources of fund                            Household
                    by connection length (meters)                                   OBA subsidy
                                                                                    Camwater
 140,000

 120,000

 100,000

  80,000

  60,000

  40,000

  20,000

        -

               10   11    12   13   14    15   16   17    18   19    20   21   22     23   24   25
   Graph 1: Connection cost (excluding initial deposit) and Sources of funding, depending on
                                      connection length

As illustrated above, the relative proportion of funding for connection costs between Camwater,
GPOBA and the beneficiary household will vary according to the length of each connection. Up
to a length of 17.67 meters this will be respectively 50% for Camwater, 45% for GPOBA and 5%
for the beneficiary household. The household’ contribution will increase with the length of the
connection, representing as much as 12% of connection costs for a 25-meter connections.

Under the proposed program, the upfront disbursement to be made by each beneficiary will be
comprised of two items: its share of connection cost and an initial deposit on advance
consumption. We analyze the affordability of this amount in the chapter below.

B. 2. 2. Other design components

Eligibility criteria: domestic connections (15 mm diameter or less) for new household customers
of the national water utility, excluding those using new network expansions financed by third
parties (real estate developers). Also explicitly excluded from the scope of the program is the
financing of the replacement of connections of already existing customers which are regularly
registered in the customer database, and carried out as part of network rehabilitation.

Responsibilities: Although the nominal recipient of the GPOBA grant will be the asset-holding
company Camwater (which is the legal concessionaire of the system), the responsibility for
implementing the proposed project has been entirely transferred to the private operator, acting as
service provider under the terms of annex 12 to the lease contract. Under this two-layer structure,
both Camwater and the service provider (via the lease contract) remain accountable, but
implementation risks are significantly reduced compared to a situation without a private operator.

Incentives framework: the private operator will have strong incentives under the lease contract
to implement efficiently the proposed connection subsidy program:
           For installing new connection, connection costs specified in the price schedule which was
            attached to the lease contract prior to the bid was based on a detailed market study, and
            ensures full cost recovery.



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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion                    September 13, 2007


        For service provision, its remuneration is based on the combination of a fixed fee of 176
         CFA per m3 (US$ 0.36 per m3) plus a fixed fee per customer (around US$ 3 per month),
         independent of the customer’s tariff category and consumption level. This remuneration
         structure ensures that the private operator can achieve adequate O&M cost recovery even
         for small consumptions. Given the presence of significant fixed costs in its overall cost
         structure, the private operator will have a strong incentive to rapidly expand the customer
         base (the proposed program shall result in a 25% increase in the number of customers in
         4 years) in order to improve the overall profitability of the lease contract.
Affordability: The table below provides an illustration of the affordability of subsidized water
connections, depending on the level of income of beneficiaries, based on the upfront payment to
be made by a new residential customer for a 17-meter connection (including the connection fee
plus the initial deposit of 25,542 CFA). This total upfront payment was 121,598 CFA before the
September 2007 connection fee reduction, including installation costs of 96,056 CFA plus initial
deposit. Since the September 2007 connection fee reduction, this upfront payment is now 73,570
CFA, and under the proposed GPOBA program it would be lowered to 30,345 CFA.

                                 1st quintile    2nd quintile    3rd quintile     4th quintile    5th quintile
          in CFA                  (poorest                                                          (richest
                                    20%)                                                             20%)
Average monthly urban              15,225          24,675          33,075           45,675         120,750
household income                  (US$31)         (US$51)         (US$68)          (US$94)        (US$249)
Current situation in terms          Not             Not         Only a small       Mostly         Almost all
of access to piped water         connected       connected        portion         connected       connected
                                                                 connected
Number of month of income to cover connection cost plus initial deposit for households:
Before September 07:                 8.0             4.9             3.7              2.7            1.00
Full connection fee
Since September 07:                  4.8             3.0             2.2              1.6            0.61
Reduced connection fee
With GPOBA program                   2.0             1.2             0.9              0.7            0.25



For a beneficiary household under the GPOBA program, the total upfront payment for a
residential connection will represent close to one month of income for households in the 3 rd and
4th income quintiles, and two months of income for the poorest households in the 5th quintile.
The Bank has gathered considerable experience on the affordability of subsidized water
connection programs in the region (Senegal, Burkina, Niger), whose key lessons are:
        Most households in the second and third income quintile are typically willing to pay this
         share of their income to get access to an individual water connection (for instance in
         Senegal 80% of the urban population is now connected to piped water via an individual
         connection);
        Typically the poorest households belonging to the first income quintile are not interested
         in an individual connection6, but prefer to get water from a community standpipe.

6
  Their earnings tends to be irregular and they are not interested in a monthly subscription with a utility
requiring regular monthly payments at fixed periods.


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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion            September 13, 2007


Based on the above, it is expected that most of the GPOBA program will benefit households
belonging to the second and third income quintiles. It is important to highlight that these are poor
households, with a total monthly income per family of between around US$ 51 to 68, equivalent
to less than US$ 0.40 per person per day (based on 6 persons per household). In fact, even for
households in the 4th income quintile, the average income per person is still only around half a US
dollar per day.

Regarding the poorest quintile, improving access for them will be provided under the IDA loan
which includes the construction of 1,200 community fountains, so that even those who can not
afford to become regular customers of the water utility will still gain access to safe pipe water as
defined under the “improved access” criteria of the MDGs.

B.3. Economic and financial analysis

B.3.1 Economic analysis: The economic analysis of the project is based on the standard
methodology for calculation of Net Present Value (NPV) and economic Internal Rate of Return
(E-IRR), using a “with and without GPOBA subsidy” scenario.

The analysis has been done for 55,000 household connections. Household consumption and
expenditure are based on primary information on demand and willingness to pay for improved
access to water supply services. Costs include the costs of investments for increasing access to
target households and the associated incremental operation and maintenance costs.

Economic benefits are confined to expenditure savings, time savings as a result of lower
collection and wait time, and health savings in the form of adult productive days gained and
reduced patient treatment costs. While expenditure savings are based on the change in
consumption and expenditure patterns of target households due to improved water services; time
savings and adult productive days gained are based on the project team’s estimates. Reduced
patient treatment costs are valued based on adjusted World Health Organization (WHO)7
estimates. The methodology assumes one productive adult wage earner per household and
minimum wages as the opportunity cost of time. The minimum wage is also adjusted downward
for the high proportion of self and low-wage contractual employment among target households.

The economic Net Present Value (E-NPV) of the project is US$ 22,719,394 and the economic
Internal Rate of Return (E-IRR) is 46 % percent. The E-IRR is 12 percent with only expenditure
savings taken into account. It increases to 43 percent when time savings are added and to 46
percent with value of health benefits added. As a percentage of total benefits, expenditure savings
account for 4 percent, time savings for about 89 percent and health benefits for 7 percent. The
analysis uses a 12 percent discount rate and the useful life of the project is assumed 15 years.

B.3.2 Financial Analysis:

The financial analysis takes into account the investment costs for connecting the 55,000
households and operating costs that are directly linked to the increased access to services.



7
 Guy Hutton and Laurence Haller, Water, Sanitation and Health Protection of the Human Environment,
Evaluation of the Costs and Benefits of Water and Sanitation Improvements at the Global Level, World
Health Organization, Geneva 2004.



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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion                September 13, 2007


The OBA subsidy accounts for 45 percent and user contributions for about 5 percent of the total
investment costs. The project has a financial IRR of 5 percent without the subsidy and 16 percent
with the OBA subsidy.

No.        of E-IRR             E-NPV              %    Benefits % Benefits                 % Benefits
Households                                         (Expenditure) (Time)                     (Health)
55,000        46%               $ 22, 719, 394     6%            87%                        7%

The economic analysis demonstrates clearly the social benefits of the subsidy, with expenditure
and health benefits constituting a relatively smaller than time benefits. Most of the economic
benefits will therefore go to women and children, who are the one who spend time fetching water.


B.4. Lessons learned and reflected in the project design

   From other subsidized connection programs in the region: lessons from social connection
    programs in Senegal, Cote d’Ivoire, Niger and Burkina Faso have shown that it is highly
    desirable that the beneficiary customer still contributes a sizeable proportion of the new
    connection cost. Otherwise there is a risk that a significant number of connections be installed
    but not be put to use, or are rapidly disconnected thereafter. The level of upfront payment to
    be required to beneficiary households will be comparable to those applied in similar IDA-
    funded connection subsidy projects in the region, as it appears to provide a proper balance
    between ensuring affordability and sufficient ownership by beneficiaries.
   From lease contracts in developing countries: The separation of responsibilities between
    the asset-holding company, in charge of investment, and the private operator can result in
    significant coordination problems for system rehabilitation and expansion. In the case of the
    proposed project this could result in delays for major civil works preventing the connection of
    new users. The design of the lease contract incorporates important elements to mitigate this
    risk, with a US$ 14.9 million loan from the Bank to finance emergency work during the first
    2 years that will be entirely under the responsibility of the private operator. In addition, the
    private operator has been made throughout the duration of the contract responsible for a
    portion of the rehabilitation work (US$ 4 million per year), financed directly via a portion of
    the user tariffs collected.


B.5. Alternatives considered and rejected

   Pre-financing risk: while it would have been preferable to have the private operator, as
    service provider, to take the pre-financing risk for the new connection (US$ 0.8 million
    necessary to set up the revolving fund), the project team concluded from discussions with the
    pre-qualified bidders that this would not be possible in the current market conditions. As
    several international private water operators are withdrawing from most developing countries,
    only Veolia among the “traditional” player expressed interest in the tender while the other
    prequalified companies (Suez and SAUR) declined. It was thanks to the arrival of ONEP, the
    state-owned water utility from Morocco which is embarking on a regional expansion, that a
    truly competitive bid with two bidders could be conducted8. Underscoring the difficulties of


8
  The tender was in fact “truly” competitive as Veolia initiated procedures to cancel ONEP financial bid,
including writing to the Bank procurement department, which ruled that the complain was unfounded.


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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion         September 13, 2007


    current market conditions, it is important to note that the Cameroon lease contract shall be the
    only major water utility PPP awarded in 2007 in an IDA country to an international operator.
   OBA payment structure: The option to use a simpler calculation for the OBA subsidy, with
    for instance a lump sum identical for all connections, was considered but discarded. Practice
    in Cameroon has been to install household connections for large lengths, sometimes up to 30
    meters, even though this is unadvisable as it tends to increase water leakages and the risk of
    future illegal connections. To create a disincentive for installing large connections, the OBA
    payment system as outlined in B.2.1 “Subsidy amount and structure” was made so that the
    extra cost of large connections would not be financed by GPOBA but by the households.
   Fixed monthly users’ payment: the project team involved in the design of the lease contract
    had initially considered to reduce the fixed monthly payment for small consumers, in an
    attempt to increase consumption affordability for the poor. This option however was not
    recommended by the Expert Panel during the PCN review since it would have reduced the
    cost-recovery level, and hence created a potential disincentive for the private operator to
    serve the poor. Following this line of thought, the remuneration structure of the private
    operator was also modified compared to previous Bank-led lease contracts in Senegal and
    Niger, by adding the fixed monthly fee to the operator remuneration (which typically already
    included remuneration per m3 billed and collected). This shall ensure that service provision
    for small consumers is based on full cost recovery and that the private operator has sufficient
    financial incentives to serve them.
   Funds management: implementation of the proposed subsidy program via a formal trust
    fund was discarded due to legal and administrative complexities of setting up and managing
    such a fund in Cameroon. The opening of a dedicated Bank account by Camwater, to be
    managed directly under the operator, was chosen instead as a simple and practical solution.
   Targeting: the project team carefully reviewed options for targeting, and chose to make the
    subsidy available to all household connections of small diameter, except for the case of new
    housing developments financed by third parties. This solution was chosen due to the absence
    of data at national level on which to base a better targeting scheme, and the fact that rich
    households are already connected and concentrated in the urban areas already covered by the
    water network. While the system expansion might modify over time the geographical
    repartition of households, this should take several years and the monitoring of social profile
    of beneficiaries included the project will help improve targeting in the next phase.


C. IMPLEMENTATION

1. Milestones for project implementation

Disbursement period: 4 years

The disbursement period has been set to match the capacity of the private operator and Camwater
to expand the systems in parallel, thereby allowing for the connection of 55,000 new households.
During the first 18 months of private operation, it is expected that the new connections will take
place mostly in urban areas already covered by the network, or at its immediate periphery, for
those households which could not previously afford an individual connection (such as those
currently buying from a neighbor). It is estimated that between 12,000 to 15,000 additional
connections can be done with the current network infrastructure, the rest depending on future
system expansion to be funded by donors (WB, AFD and EIB).



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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion         September 13, 2007




                                           Table 6: Key Milestones
                                     Activities                             Indicative Schedule
                                                      9
    GPOBA provides subsidy commitment endorsement                             September 2007
    Project design and documentation finalized, including Grant Agreement      October 2007
    Documentation to government for review                                     October 2007
    Signature of GPOBA Grant Agreement                                        November 2007
    The private operator initiates operation                                  December 2007
    Project implementation begins                                              January 2008
    Contracting of Independent Verification Agent                             February 2008
    GPOBA disbursement begins                                                   April 2008
    Mid-Term Review                                                            January 2010
    GPOBA Subsidy disbursement (all tenders) ends                             December 2011



2. Partnership arrangements

No other international agencies are financing this project.


3. Institutional and implementation arrangements

The relationships between the parties to this project are governed by the lease contract between
Camwater and the private operator. The responsibilities are as follows:
      Private operator: implementation of program including collection of users fee, management
       of the dedicated bank account of the Subsidized Connection Fund (SCF) and bookkeeping,
       installation of connection and opening of new customer account;
      Camwater: establishing the SCF, contracting of the Independent Verification Agent, ex-post
       supervision of the program;
      GPOBA/World Bank: Assistance in development of the overall project concept, and
       financing for consultancy assistance and investment subsidy.

Camwater will establish the SCF by opening a dedicated Bank account with an initial apportation
of 400 million CFA (around US$0.8 million). The responsibility for managing the SCF and
corresponding bank account will be delegated to the private operator. The private operator is also
responsible for installing the new connections and providing the corresponding water supply
service in accordance with standards established in the lease contract.

Whenever an eligible household submits a request for a new connection, the private operator will
issue the corresponding invoices, with one portion to be paid by the beneficiary and the rest
charged to the SCF based on the Price Schedule included in the lease contract.

Starting from the end of the 3rd month following the launch of the program, an Independent
Verification Agent will validate that the water connections charged to the SCF have been
physically installed and are in working condition. Based on this report, GPOBA and Camwater

9
    Approval subject to funding availability.


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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion         September 13, 2007


will replenish the SCF with the corresponding amount as defined in the Subsidy formula (for
GPOBA) and Price Schedule (for Camwater). Camwater will also be responsible for funding any
gap that may arise due to the impact of exchange rate variation on the value in CFA of the
GPOBA grant, based on budget submitted by the private operator.


4. Monitoring and evaluation of outcomes/results

The outputs of the project upon which GPOBA subsidies will be disbursed are new household
connections meeting the eligibility criteria.

Each output will be certified by an Independent Verification Agent (see above), appointed by
Camwater (with a “no objection” from GPOBA) as per the Project Operational Manual and
related agreements.

For the financial monitoring of the SCF, the private operator will provide at the end of each
month a detailed report on the operations of the dedicated bank account, together with a list of the
new connections installed and corresponding use of the SCF.

In addition to verifying that the new connections have been physically installed and are
functioning on a sample basis (minimum 7% on quarterly basis), the Independent Verification
Agent will document the socio-economical profile of each beneficiary household. A mid-term
review report will be produced analyzing the beneficiary profile, in order to verify whether there
was any significant portion going to affluent households (4th and 5th income quintiles), and if that
was the case propose appropriate adjustments in the eligibility criteria.


5. Sustainability

Sustainability has been factored into the project design in several ways:
       Subsidies are one-off investment subsidies, and not for consumption
       The GoC through Camwater will contribute 50% of the cost of the subsidized
        connections under the program;
       There will be significant contribution from beneficiary users to guarantee that new
        connections are financed and installed only if there is real user demand;
       The private operator has strong incentives to install the new connections and expand its
        customer base. Its remuneration for new connection will cover the cost of civil work, and
        operating fee plus monthly payment shall cover marginal O&M even for small
        households;
       The private operator will be able to execute directly US$ 14.9 million of emergency civil
        work funded by IDA during the first two years, as well as US$ 4 million every year of
        network investment funded by tariff collection;
       The IDA loan supporting the lease contract includes US$ 2.55 million to finance the
        Camwater coordinating unit, including staff, operating costs, training, monitoring, and
        technical and financial audits.




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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion         September 13, 2007


6. Critical risks and possible controversial aspects

There are a series of risks associated with this proposed GPOBA project. The following table
outlines sources of potential risk and seeks to offer mechanisms for managing those risks.

 Risk                                            Rating and Mitigation


 Lease contract not reaching closure.            Low. The technical commission of GoC
                                                 recommended award to ONEP and the Bank
                                                 procurement department gave no-objection. On
                                                 September 6th, 2007 an inter-ministerial
                                                 committee approved unanimously the award of
                                                 the lease contract to ONEP
 Lease contract getting into crisis during the   Moderate. Of all the developing regions, Sub-
 implementation frame of the project.            Saharan Africa is the one which has seen the
                                                 highest rate of water PPP cancellation. However
                                                 the rate of PPP cancellation has been much lower
                                                 for leases which appears well suited to the
                                                 institutional framework of Francophone countries
                                                 and for which the rate of success is high (Senegal,
                                                 Cote d’Ivoire, and Niger). The Cameroon PPP is
                                                 an important “window” project for ONEP and
                                                 high commitment can be expected from its
                                                 management and staff to make it work. In addition
                                                 the design of the Cameroon lease incorporates a
                                                 series of lessons from earlier projects.
 Limited experience of the private operator      Low. Although this will be the first time ONEP
 affecting project implementation and            operates water services outside of its home
 outputs.                                        country, its track record of operating urban water
                                                 systems in Morocco is good. In addition ONEP
                                                 already has experience of OBA approaches in
                                                 Morocco.
 Problems with civil works for system            Moderate. The project team estimated that more
 expansion resulting in delays for expanding     than 15,000 connections could already be made
 the customer base.                              based on current system capacity. The presence of
                                                 experienced donors (WB, EIB and AFD) should
                                                 mitigate the risk of civil work problems. The 4-
                                                 year disbursement period has been set to allow for
                                                 possible delays in civil work in the first two years
                                                 of the contract. Financing of the Camwater
                                                 coordinating unit via the IDA loan should also
                                                 reduce the risk of Camwater non performance.
 Insufficient demand from household due to       Low. The upfront payment to be made by a
 upfront connection payment still too            beneficiary household under the program has been
 expensive                                       set at comparable level to already successful
                                                 subsidized connection programs in the region
                                                 (Senegal, Burkina, Niger). The overall experience
                                                 if that most households are willing to contribute
                                                 one month of their income in exchange of getting


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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion   September 13, 2007


                                          a water connection, which represent a major
                                          improvement in lodging conditions (and property
                                          value).
 Significant portion of the GPOBA program Moderate. Most of the household belonging to
 not benefiting poor households.          the richer income quintile are already connected.
                                          Most of the new connection shall benefit
                                          households in the 2nd and 3rd income quintile, as
                                          well as some households from the 4th income
                                          quintile. In all 3 cases these will be poor families
                                          with daily revenue per person of between US$
                                          0.30 to 0.50 only. As for the poorest household
                                          who might not afford a subsidized connection,
                                          they will still benefit under the program as the
                                          IDA-loan shall fund at least 1,200 community
                                          standpipes.
 Newly installed connection not in use or Low. The fact that each beneficiary household
 being disconnected after a short period. will still be required to make a significant initial
                                          lump-sum payment shall ensure that only
                                          motivated households join the program.
 Governance issue with respect to GPOBA Low. The SCF will be directly managed by the
 funds management.                        private operator. Disbursement from SCF will be
                                          authorized by Camwater, after appropriate
                                          verification and GPOBA disbursement will take
                                          place only after certification by Independent
                                          Verification Agent. The IDA loan component to
                                          support Camwater coordinating unit will also
                                          include the funding of financial audits




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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion   September 13, 2007




                               Annex 1. Project Costs Schedule
                                           Local          Foreign
                                                                              Total
               Component                 US$ million     US$ million
                                                                            US$ million
                                         Govt./Users      GPOBA
Civil works:
                    Connection costs      $6,500,000      $5,000,000         $11,500,000

Consulting services :
        Independent verification agent                    $250,000            $250,000
  (including midterm targeting review)

Project supervision:
          Bank/GPOBA supervision                          $100,000            $100,000

                             TOTAL       $ 5,750,000     $ 5,350,000         $11,850,000


A disbursement schedule is presented in Section 3 of Annex 3.




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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion          September 13, 2007




             Annex 2: Financial Management and Disbursement Arrangements

1. Summary of the Financial Management Assessment

A comprehensive of financial management and disbursement arrangements for both Camwater
and the prospective private operator was carried out as part of the preparation of the IDA loan
(Urban and Water Development Support Project, P084002) whose component 3 will support the
first years of implementation of the lease contract. One portion of the US$ 33 million IDA loan
for this component (subcomponent 3.3, US$ 14.2 million) will be executed for civil works
executed by Camwater as assets-holding agency, the other portion (subcomponent 3.2, US$ 14.9
million) will be executed directly by the private operator. It was assessed that the overall risks
related to financial management and disbursements were moderate, mostly due to Camwater
limited capacity, and a comprehensive financial management strengthening program (US$ 2.55
million) was designed and will be financed by the IDA loan. Annex 7 of the PAD for the Urban
and Water Development Support Project (P084002) provides details on financial and
disbursement arrangements.

The GPOBA program will be implemented by the private operator, which will directly manage
the Subsidy Connection Fund (SCF) and its dedicated bank account, with ex-post supervision by
Camwater. GPOBA will disburse only after certification of the outputs by an independent
verification agent. Under these agreed implementation arrangements, the financial management
arrangements of the GPOBA program are considered adequate.

2. Risk Analysis

A Public Expenditure Management and Financial Accountability Review (PEMFAR) was
conducted and issued in June 2006. It identified substantial shortcomings and fiduciary risks in
GoC procedures. As for SNEC, the national water utility predecessor to Camwater, its poor track
record in term of governance had led to the exit of all international donors from the water sector.
Since the reform of the urban water sector started in 2003, a new management has been put in
place in Camwater and significant progress achieved. The confidence of donors in the new
institutional scheme, with an international private operator in charge of operating the services, is
underwritten by the support of various IFIs (including the World Bank, EIB and AFD) which will
finance the next 5 years of investments under the lease contract. The comprehensive financial
management and accounting strengthening program to be financed under the IDA loan, and
whose gradual implementation is a condition of effectiveness for disbursement, shall significantly
mitigate the risks related to Camwater limited experience and capacity.

The fact that the GPOBA program will be directly under the responsibility of the private operator
ONEP shall considerably reduce the risks related to financial management. The lease contract
follows international best-practices for reporting and monitoring, with an independent and
qualified international consulting firm contracted to assist the GoC in monitoring the private
operator’s compliance with the lease contract. The CSF has been designed as a dedicated bank
account to facilitate tracking, with strict reporting requirements specified in annex 12 of the lease
contract. ONEP has already experience with implementing a GPOBA connection subsidy
program in Morocco (city of Meknes). Its familiarity with the GPOBA concept, as well as
knowledge of monitoring and reporting requirements, shall greatly facilitate the financial
management aspect of the program.



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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion       September 13, 2007



With the incorporation of the Financial Management Strengthening Program for Camwater
supported by the IDA loan, the overall project risk for financial management is rated as
“Average”.


3. Implementation Arrangement

The relationships between the parties to this project are governed by the lease contract between
Camwater and the private operator. The responsibilities are as follows:
   Private operator: implementation of program including collection of user fees, management
    of the dedicated bank account of the Connection Fund and bookkeeping, installation of
    connection and opening of new customer account
   Camwater: establishing the Subsidized Connection Fund (SCF), contracting of the
    Independent Verification Agent, ex-post supervision of the program, replenishing of the SCF
    every trimester.
   GPOBA/World Bank: Assistance in development of the overall project concept, and
    financing for consultancy assistance and investment subsidy.

Camwater will establish the SCF by opening a dedicated Bank account with an initial apportation
of 400 million CFA (around US$ 0.8 million). The responsibility for managing the SCF and
corresponding bank account will be delegated to the private operator. The private operator is also
responsible for installing the new connections and providing the corresponding water supply
service in accordance with standards established in the lease contract.

Whenever an eligible household submits a request for new connection, the private operator will
issue the corresponding invoices, with one portion to be paid by the beneficiary and the rest
charged to the SCF based on the Price Schedule included in the lease contract.

Starting from the end of the 3rd month following the launch of the program, an Independent
Verification Agent will validate that the water connections charged to the SCF have been
physically installed and are in working condition. Based on this report, GPOBA and Camwater
will jointly replenish on a quarterly basis the SCF with the corresponding amount as defined in
the Subsidy formula (for GPOBA) and Price Schedule (for Camwater). Camwater will also be
responsible for funding any gap that may arise due to the impact of exchange rate variation on the
value in CFA of the GPOBA grant, based on budget submitted by the private operator.

The following diagram summarizes the flow of funds:




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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion           September 13, 2007



   Camwater                                                                            GPOBA

                        Initial SCF funding plus           Periodic replenishment
                        periodic replenishment             (OBA based)




                                   Subsidized connection
                                   Fund (SCF)


                                                    2: ONEP withdraw funds to install connection


                                   Private operator ONEP

                                                               3: ONEP install new
                 1: Household pays                             connection
                 10% fee contribution
                 and initial deposit


                                   Beneficiary household


4. Staffing

The private operator will bring experienced staff from ONEP in Morocco to manage the water
services in Cameroon under the lease contract. The capacity of ONEP’s human resources was
assessed through the technical evaluation during the tender, and was deemed fully satisfactory.

Regarding Camwater, the Financial Management Strengthening program financed by the IDA
loan will include the contracting of qualified staff including at least a financial management
specialist and an accountant in charge of project management. The selection of the financial
management specialist, trained in Bank procedures and systems, is a condition of effectiveness of
the loan. Intensive training will be provided to Camwater staff concerning the Bank policy and
procedures on financial management and disbursement arrangements.

5. Accounting Policy and Procedure

The project will follow the accounting procedures outlined in Annex 7 of the PAD for the Urban
and Water Development Support Project (P084002). This includes an Internal Controls and
Financial Management Manual (FMM), whose finalization and approval by the Bank is a
condition of effectiveness of the IDA loan. The FMM will describe in details the accounting
system and procedures to be followed including fund flows processes, accounting records and
supporting documents, financial reporting processes and budgeting, monitoring procedures,
procedures for replenishment of the SCF dedicated account, and auditing arrangements.

Dedicated accounting software will also be installed by Camwater, with its selection following
non-objection by the project team’s financial management specialist.



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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion          September 13, 2007




6. Funds Flow and Disbursement Arrangement

Allocation of GPOBA Proceeds: GPOBA proceeds of US$ 5.25 million will be disbursed over a
4-year period. Disbursement will be against the following expenditure categories: OBA subsidies
for households water connections ($5.0 million) and Consultants’ Services ($250,000) (please see
disbursement schedule in Annex 3).

Subsidy Payment: Disbursement will be based on reimbursements. The payment of GPOBA
subsidy will be done at the end of every trimester, following the submission of a detailed report
prepared by Camwater (as nominal recipient of the grant) of the new connections installed under
the program, based on information submitted by the private operator with a non-objection by the
Independent Verification Agent (IVA).

For each new eligible connection requested by a household, the private operator will establish an
invoice detailing the connection fee, with the corresponding amounts to be paid by the
prospective beneficiary. Based on the subsidy structure outlined in Annex 12 of the lease
contract, as well as the pricing schedule, included in the lease contract, the private operator after
collecting the beneficiary household contribution will draw the remnants of funds from the SCF
in order to finance the installation of the connection.

Designated Account: The SCF will be managed via a dedicated bank account, opened by
Camwater but managed directly by the private operator. All documentation on the movements on
the SCF bank account, as well as expenditures submitted for disbursement, shall be retained at the
implementing unit and shall be made available to the auditor for audit and to the Bank and its
representatives if requested.

7. Independent Verification Agent & project targeting assessment

The GPOBA grant will fund an Independent Verification Agent (IVA) throughout the
implementation of the project.

The IVA will validate outputs on a quarterly basis before payment by GPOBA, verifying that: (i)
the new connections claimed have been installed and are in working conditions, and (ii) the
corresponding beneficiaries were eligible according to the criteria of the GPOBA program.

In addition, the IVA will also be responsible for collecting socio-economical information on all
households benefiting from a connection installed under the subsidy program. Based on this
information, the IVA shall prepare a mid-term assessment of the program at the end of year 2,
with the objective of establishing a socio-economical profile of beneficiaries, and assess whether
the current eligibility criteria need reinforcement to ensure that only low and modest-income
households benefit from the subsidy program.

8. Financial Reporting Arrangements

As part of the Financial Reporting Arrangements of IDA project P084002, Camwater will be
responsible for the quarterly preparation of submission of Interim Financial Reports (IFR), in
accordance with the FMM. This IFR shall include in a specialized annex all information
regarding the implementation of the connection subsidy program, and corresponding movements
of the SCF dedicated bank account. The format of the IFR shall be finalized with the country
financial management specialist, with its SCF annex subject to non-objection by GPOBA.


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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion    September 13, 2007




9. Audit Arrangement

The auditing procedures outlined by Annex 7 of the PAD of IDA project P084002 shall apply to
the GPOBA project. Audits reports including a special annex dedicated to the GPOBA program
shall be prepared and submitted to GPOBA within 6 months after the end of each financial year.




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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion       September 13, 2007



                                    Annex 3. Procurement
1. General

Procurement for the proposed project shall be carried out in accordance with the World Bank’s
“Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004 revised October
1, 2006; and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers”
dated May 2004 revised October 1, 2006, and the provisions stipulated in the Grant Agreement.
The various items under different expenditure categories are described in general below.

Output-Based connections: The installation of all new water connections to be financed by the
program will be carried out by the private operator, as established under the lease contract. The
private operator was competitively selected in accordance with World Bank guidelines, with non-
objection by the Bank’s procurement department. The lease contract includes a price schedule
outlining how much the private operator should receive for each new water connection installed,
which was known therefore by prospective bidders before submitting their financial proposal.
The price schedule has been established following a detailed market study carried out by the
transaction advisers in late 2006, using benchmarking from other countries in the region as well
as quotes from suppliers. The lease contract provides for periodic revision of the price schedule
based on market benchmarks, to ensure that the remuneration of the private operator for each new
connection installed is based on full cost recovery.

In accordance with Bank’s Operational Memorandum from James Adams, Vice President and
Head of Network Operations Policy and Country Services (OPCS), dated November 7, 2005:
“Application of paragraph 3.13 of the Procurement Guidelines to Cases involving Incumbent
Concessionaires”, and since the incumbent private operator was competitively selected under a
procurement procedure acceptable to the Bank, the private operator will be using its own
procurement methods and documents for goods, works and services to be performed as part of the
project.

Selection of Consultants: A budget of US$ 250,000 has been allocated for the contracting of the
Independent Verification Agent, whose contract will run through the 4-year duration of the
project. The firm will not only carry out the certification of each new water connections before
payment of the GPOBA subsidy, but will also build a socio-economical profile of all beneficiary
households and conduct a mid-term assessment of targeting efficiency. The consulting firm shall
be selected through the Quality and Cost Based Selection (QCBS) method, using the Bank’s
Standard Request for Proposals.

2. Assessment of the agency’s capacity to implement procurement

The selection of the private operator under the 10-year lease contract has already been completed,
the contract being awarded to ONEP from Morocco following non-objection by the Bank in
September 2007.

As part of the preparation of the IDA loan, an analysis of the procurement capacity of Camwater
was carried out, and a risk assessment rating of “high” was made due to the lack of financial
management procedures, lack of experience in World Bank procurement procedures, and lack of
efficient filing system. A comprehensive financial management strengthening program will be
financed by the IDA loan.




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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion       September 13, 2007


Since the private operator has already been selected under a transparent international tender
process, and the only responsibility of Camwater for procurement under the project shall be the
selection of the Independent Verification Agent, the overall assessment of procurement risk of the
GPOBA project is rated as “Average”.

3. Disbursement Plan

The table below outlines the estimated disbursement under the GPOBA grant for the 4 years of
implementation of the program.

                            Year 1         Year 2         Year 3         Year 4          Total
Connection subsidies       750,000       1,250,000      1,500,000      1,500,000      5,000,000
Independent                 50,000        100,000*        50,000         50,000        250,000
Verification Agent
Total                       800,000      1,350,000      1,200,000      1,600,000      5,250,000
* additional cost in year 2 corresponding to mid-term review

The disbursement plan will be updated by Camwater on a six-monthly basis or as required to
reflect the actual project implementation.




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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion   September 13, 2007




             Annex 4. Safeguards - Environment & Social Issues (OP/BP 4.01)


Analysis of the potential impact of the proposed GPOBA program was carried out as part of the
overall safeguards evaluation of the IDA-funded Urban and Water Development Support Project
(P084002). The proposed GPOBA operation was specifically included within Component 3 of
this IDA operation and was reviewed accordingly. Specifically the GPOBA project will be
limited to small civil work for installing new water connections.

Overall the project falls under Environmental Category B as no adverse long term impacts are
anticipated. An ESMF will be prepared by the borrower as provided under Annex 10 of the IDA
loan PAD. As such, no additional EA will be carried out for the purpose of the project, which
would independently be a Category C.




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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion       September 13, 2007



                         Annex 5. Project Preparation and Supervision

A. Institutions responsible for project preparation:

        1) GPOBA c/o World Bank
        2) Camwater
        3) Private operator under the lease contract with Camwater

B. GPOBA/World Bank Team:

        Core Team:

        Name                      Title                               Unit
        Philippe Marin            Task Team Leader                    ETWWA
                                  Sr. Water & Sanitation Specialist
        Chantal Reliquet          Co-TTL, Sr. Urban Specialist        AFTU2
        Richard Verspyck          Consultant                          AFTU2
        Gilles Marie Veuillot     Sr. Counsel                         LEGAF
        Kouami Messan             Procurement Analyst                 AFTPC
        Fridolin Ondobo           Financial Management Specialist     AFTFM
        Yvette Laure Djachechi    Sr. Social Development              AFTS3
                                  Specialist
        Africa Eshogba Olojoba    Sr. Environmental Specialist        AFTS3

        Advisory team:

        Name                         Title               Role                 Unit
        Patricia Veevers-Carter      Program             Peer Review/         FEU/GPOBA
                                     Manager             Advisory
        Yogita Mumssen               Infrastructure      Advisory             GPOBA
                                     Economist
        Xavier Chauvot de            Infrastructure      Advisory             GPOBA
        Beauchene                    Specialist
        Irving Kucynski              Panel of Experts    Advisory             GPOBA
        Alejandro Jadresic           Panel of Experts    Advisory             GPOBA


C. Project Preparation Costs
The project was entirely financed via loan preparation funds for the IDA operation approved in
May 2007 (P084002), no recourse to GPOBA




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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion   September 13, 2007



                          Annex 6. Documents in the Project File


1. PAD for IDA loan “Urban and Water Development Support” (P084002) (report 37979 – CM)
2. Lease contract between Camwater and the Private Operator
3. Concession contract between Camwater and the GoC
4. Annex 12 of the Lease contract detailing the mechanism of the GPOBA subsidy program




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GPOBA Commitment Paper: Cameroon Water Lease –OBA for Coverage Expansion   September 13, 2007



                                      Annex 7. Map




                                                                                          37

				
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