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WEST DELTA IRRIGATION REHABILITATION PROJECT

1- Introduction

Almost all agriculture in Egypt takes place in some 30,000 km² (8 million feddans, or about 3% of Egypt territory) of fertile soil in the Nile Valley and the Delta region. The Delta region alone constitutes about 80% of all cultivable land in the country. Despite the extremely limited land available for agriculture, urbanization of these lands is growing. Comparisons of digital mosaics of LANDSAT MSS and TM scenes, acquired over the Nile Delta in 1972, 1984, and 1990, indicate troubling trend. Urban areas occupied a minimum of 3.6%, 4.7%, and 5.7% respectively of the total Delta land area, or an increase of 58% in the 18 years of study. About half of this increase occurred between 1984 and 1990 meaning that by 2010, as much as 12% (720,000 feddans or about 302,500 ha ) of the total area of the Delta would be lost to urbanization.

Although urban growth is significant around the cities, the growth around the thousands of small villages poses the greatest threat to the agricultural lands in the Nile Delta. Between 1972 and 1990, cities and large villages grew by 37%, while growth of small villages was more than twice, or 77% during the same period. However, one practical circumstance of the growing urbanization in the Nile Valley and Delta is that water savings from these areas can be used elsewhere.

To compensate for the loss of agricultural land in the Delta region, and to provide opportunities to generate new jobs, increase production and widen the development base, the Government of Egypt (Government of Egypt) has supported commercial farmers in reclaiming desert lands since the late 1960s. In this context, Government of Egypt has identified an area of about 255,000 feddans (equivalent to 107,000 ha), located approximately 60 kilometers north of Cairo to the west of the Nile Delta, which has experienced noticeable agricultural growth through exploitation of groundwater resources. Today, this area is a flourishing agricultural economy estimated between US$300 million to 1/2 billion dollars annually, serving both domestic and export markets in the European Union (EU) and elsewhere. Moreover, the area is now home to 500,000 people and provides about 250,000 jobs in the agriculture sector alone. However, with the rapid development over the past few years, there has been an excessive depletion of the groundwater reserves. With about 47% of the total 255,000 feddans under cultivation, water extraction by the year 2000 reached 870 million m 3 annually, or an increase of 36.2% in just over a decade. Groundwater is quickly depleting with a commensurate effect on overall water quality.

 

To resolve this problem, Government of Egypt has been reviewing options to replace groundwater with surface water irrigation. The goal is to minimize, if not totally halt the depletion of the groundwater resource. To achieve this goal, Government of Egypt wishes to implement a surface water conveyance system and to introduce important reforms in the sector, particularly full cost recovery tariffs and volumetric pricing. Such reforms are part of the Government of Egypt's own Integrated Water Resources Management Action Plan (IWRMAP) developed in 2005 to ensure correct incentives to conserve and utilize water more efficiently .

Beyond its objective to achieve full cost recovery, Government of Egypt also wishes to identify practical ways of involving the private sector in the design, operation and financing of the new irrigation system. While Government of Egypt fully endorses the West Delta Water Conservation and Irrigation Rehabilitation Project (WDWCIRP), it is keen to share the implementation and other related risks; and to assign responsibilities for the operations, maintenance and loan amortization to a private operator. Using the private sector as a partner through Public Private Partnerships (PPP) is a concept that has been studied and is included as a specific action in the 2005 IWRMAP specifically for addressing the needs of the West Delta area.

Government of Egypt is implementing cost recovery of operation and maintenance (O&M) in old lands and full cost recovery in new lands. The project area is considered new lands and therefore, full cost recovery policy will apply.

2- Project Phases

The coverage of this project is threefold:

Phase (I) : To replace groundwater source by surface water source from the Nile in the southern part of the West Delta, this area amounts to 255,000 acres . The objective is to guarantee the provision of adequate water duties that conserve the existing cultivation.

Government of Egypt is implementing cost recovery of operation and maintenance (O&M) in old lands and full cost recovery in new lands. The project area is considered new lands and therefore, full cost recovery policy will apply.

Phase (II) : To add new agricultural lands of a minimum of 100,000 acres (in Wadi Notroun area) that can be extended to 200,000 acres through reclamation as part of the country's plan to reclaim 3.4 million acres.

Phase (III) : To improve the irrigation efficiency in the new lands of the most of the northern part of the West Delta which amounts to 500,000 acres (depends mainly on supplementary irrigation spread over the area served from Nubariya, Nasr, Bustan, Mariout, Bahig, Hammam and Extension of Hammam Canals).

3- Project Description

1-Lending instrument

Lending Instrument: - The 4-year project will utilize a Specific Investment Loan (SIL) instrument. The SIL will be used together with equity financing from the selected private operator and participating farmers to design, build, operate, and maintain a surface water system in the project area. This mix of financing has been chosen to ensure technical and financial viability of the project; i.e., the private operator will assume key responsibilities for system design, construction, and O&M activities and will assume some of the related financing risks of the project. This will contribute towards financial sustainability with important incentives in place such that the system will not be over-designed. Farmers are expected to buy into the project, knowing that volumetric charges will in part be the basis for water conveyance fees. Cost recovery policies through volumetric tariffs will promote greater efficiency and conservation of water utilizing modern irrigation technologies.

Financing Plan (US$m)

Source

Amount

Private Sector (Farmers and Operator)

30

IBRD

145

Netherlands

6

AFD

32

Total:

213

2-Project Development Objective and Key Indicators

Project Development Objective (PDO): To improve the livelihood and increase the income of people in the West Delta region through: (i) mitigating further environmental degradation caused by excessive drawdown of the groundwater resources; and (ii) establishing a framework for financial sustainability of irrigation infrastructure in the use of water resources.

 

Key Indicators: To achieve the above development objective, the project design includes three intermediate performance benchmarks (IPBs): (i) an operational and financially sustainable surface water supply system covering an area ranging between 25,200 ha to 37,800 ha as part of a concession area covering up to 79,800 ha; (ii) farming communities in the area participated in the determination of system design options based on their willingness and capacity to pay for the cost of service; (iii) institutional arrangements to ensure successful implementation of the project which will guide relationships between Government of Egypt and the private operator, the private operator vis-à-vis the farmers and relationships between farmers in the area. Institutional arrangements (i.e, contract management procedures, regulatory arrangements, and user associations) would be established and work according to design. Progress towards achieving the project development objective performance benchmarks and IPBs will be measured against the milestones below.

Table 4: Key Outcome and Intermediate Results Indicators

Key Indicators Baseline Target values
2008 2009 2010 2011
PDO Financially sustained operation of surface water system       100%  
Average water used per hectare per year - TBD TBD TBD TBD
IPB (i) Progress of construction and successful financial operation of the surface water system (actual vs. planned) 0% 15% 75% 100% 100%
IPB (ii) Progress of connection program (Actual vs. planned) 0% 0% 10% 50% 100%
IPB (iii) Proportion of farmers represented in key decision-making meeting 0% 50% 100% 100% 100%

3-Project components

The project's total investment cost for Component 1 is US$205 million, of which the Bank loan will finance US$145 million. Farmers and the private operator and Agence Française de Développement (AFD) will fund the remainder through co-financing. An additional US$8 million will be made available as grants and sub-loans to farmers from bilateral donors (AFD and the Government of Netherlands for Components 2 and 3.

4-Project Components

1-  Component No. 1:

Design, Construct, and Start Up of the Surface Water System, and Connection Program for Participating Farms (US$205 million).

This component will finance activities leading to the final design and construction of a surface water irrigation system for the project area of between 25,200 ha to 37,800 ha in the West Delta. Initial design work was carried out during the technical preparation studies which were based on a "demand-driven approach to planning" where the growers' willingness to pay for connection guided the technical design options with commensurate tariffs. In addition, a piped system was chosen as the preferred option given its advantages over open channel systems, particularly with regard to efficient water resource use and lower environmental and social safeguards risks. The private operator contracted to construct and operate the system on a long-term basis will complete the final design. A fixed allocation of water resources will be made available by Government of Egypt to the project area based on the estimated average annual requirement of 12,376 m 3 per year per ha. The preliminary design of the system has been sized to meet the peak demand in the summer months. Over the entire year, total usage converges to the total annual allocation. Based on this, it is anticipated that the surface water system would meet most of the water resource needs of the farms that will be connecting, allowing the aquifers to recharge and to benefit farmers in adjacent areas.

2- Component No. 2:

Market-Driven Technical Assistance to Small and Medium Scale Farmers (US$2 million).

This component will initially be funded through donor grants by AFD and will provide technical assistance (TA) to small and medium growers, traders and food processors to increase West Delta products' (fresh or processed) market share on national and international markets. Technical assistance to small and medium size growers, traders, exporters and food processors would be provided in the following areas:

a)-  Production, post harvest technology and farm management to small and medium size growers to improve competitiveness and quality of products;

b)-   Market intelligence (for local and export market) and logistics to small growers, traders and exporters, to look for new market opportunity and/or increase market share;

c)-  Food processing, packing and marketing to food processors, to improve competitiveness and/or create new food products; and

d)-  Organizational arrangement for growers, traders and/or food processors to work in a coordinated manner within formal or informal organizations to achieve economy of scale and improve supply chain competitiveness.

Following a successful evaluation of the first phase activity, which is funded by grants, cited above, loan facilitation could, if necessary, be provided directly to participating farmers.

3- Component No. 3:

Support for Institutional Development and Capacity Building of the Project Management Unit (PMU), Regulatory Office and Water Users Council (WUC) (US$6 million)

This component will be funded through donor grants from the Government of the Netherlands and will support capacity building of the Ministry of Water Resources and Irrigation (MWRI) for Public Private Partnership contract management, construction supervision consultants, regulatory oversight, and to the Water Users Council association along the lines of the policies for institutional reforms proposed by the MWRI and in cooperation with the Government of Netherlands. In addition, it will support activities to disseminate a possible replication of the adopted Public Private Partnership approach to other areas in Egypt and its riparian neighbors.

 

The main capacity building activities financed under this component include: (i) strengthening the Project Management Unit and the contract management activities which would oversee contractual matters between MWRI and the private operator on all aspects of the implementation phases, including environmental and social safeguard compliance during implementation of the project, inclusive of groundwater monitoring; (ii) capacity building of the economic regulatory office to ensure effective regulatory oversight and equitable treatment of interests between the farmers and the private operator; and (iii) capacity building of the Water Users Council that has been formed to oversee the relationship between farmers vis-à-vis entitlements and usage of surface and ground water resources. Given the unique nature of the Public Private Partnership transaction arrangement, the Technical Assistance will also provide for oversight supervisory engineers and technical audits of technical milestones achieved.

5- Implementation

1-Partnership arrangements

The proposed project is built based on a partnership with the commercial farming community in the West Delta. In this context, and in agreement with Government of Egypt, the Bank has made every effort to seek active participation in the project by engaging other international development agencies involved in the water resources development sector in Egypt . The Bank has succeeded in securing partnership arrangements with:

i)-  Public Private Infrastructure Advisory Facility: to finance preliminary work to define the scope of the project and options for involving the private sector in project implementation, as well as the regulatory functions needed to support the proposed transaction.

ii)-  Government of the Netherlands to finance the transaction advisors for managing the bid for the private operator and additional preparatory work for institutional development of the Water Users Council (WUC).

iii)-  The Bank Netherlands Water Partnership Program (BNWPP) provided two grants for carrying out social and environmental assessments and engages in stakeholders' consultations through a Drain Assessment Integrated Framework analytical approach. AFD has also contributed towards the recruitment of international consultants for the final review of the agreements that will be utilized for the Public Private Partnership transaction.

Further partnership between the Bank, the Government of the Netherlands , and AFD is envisaged for financing the implementation of the project in all three components. At the national level, partnership with the Bank's Integrated Irrigation Improvement and Management Project (IIIMP) will be pursued in order to ensure water resources management improvements aimed at simultaneously enhancing water conservation and increasing land productivity. In addition, project mainstreaming of environmental considerations will involve further partners in the areas of environment and public health. Sustainability of the project will depend on effective partnerships between project beneficiaries, Water Users Council and the private operator.

2-Institutional and implementation arrangements

Overall direction will be provided by the Minister of Water Resources and Irrigation and managed on a day-to-day basis by a Project Management Unit, which will be established. The line department of MWRI entrusted to overview the project and assist in its preparation and facilitates its implementation is the Horizontal Expansion Projects Sector (HEPS). Since the project will be implemented, using a Design, Build and Operate contract with the private sector, the establishment of a Regulatory Office will also be necessary. In addition, an Independent Panel of Expert (IPE) will be set up as needed to serve as an intermediate mechanism for handling disputes and conflict resolution.

Both the Project Management Unit and the Regulatory Office will be under the jurisdiction of MWRI. The Project Management Unit will include the financial management and disbursement functions and will supervise the contractual arrangements for the initial construction and expansion of the irrigation system. In addition, it will oversee the implementation of the Technical Assistance component of the project. Most of the staff of the Project Management Unit have already been designated by MWRI and have been involved throughout the preparation discussions.

A Water Users Council has also been established as an independent farmers' organization to take active part in the project preparation and ultimately govern water users associations that will be formed once actual beneficiaries of the project are subscribed. During implementation, the Water Users Council will monitor the relationships and potential conflicts between farmers on such matters as water entitlements, usage, alternating hours of irrigation, etc. The Water Users Council will also monitor groundwater pumping in the area, along with the more formal program that will be implemented by the Groundwater Sector within the Ministry.

The Regulatory Office will provide traditional economic regulatory functions for rate adjustments and tariff rebasing and will oversee the contractual commitments of the operator with regard to the prescribed service standards. As indicated, specialists would be recruited when warranted to serve in the Independent Panel of Experts to resolve specific disputes prior to formal arbitration in case conflicts arise between the private operator and farmers, or between the private operator and Government of Egypt.

Management at Component Level: Component 1 will be managed by the Project Management Unit, which will be a permanent structure within MWRI, established to oversee the Design, Build and Operate contract with respect to the responsibilities of the operator to the Government of Egypt. During project implementation, the Project Management Unit will be responsible for the overall administration and Financial Management of the contract. For this purpose, the private operator will appoint a general construction project manager who will report to both the Project Management Unit and its own board of directors. As part of its contract, the private operator will be responsible for implementing the environmental and social safeguards mitigation action plans assigned to it. Following construction, the Project Management Unit will continue to monitor the private operator's contractual obligations to the Government of Egypt and will be the main focal point for addressing issues that may arise during the contract period. Issues relating to economic regulation and disputes that may arise between the operator and the farmers will be the responsibility of the Regulatory Office and, in special cases, the Independent Panel of Experts.

With regard to Components 2 and 3, the Project Management Unit will appoint a Coordinator for the Technical Assistance. The Coordinator will assume responsibility for preparing and monitoring the work plans and budgets of the unit in line with the objectives in the component description. Support staff, short-term consulting inputs and funds for activities in support of the smooth and efficient running of the unit is budgeted in the project under the Project Management Unit.

3- Monitoring and evaluation (M&E) of outcomes/results

The Project Management Unit will establish a system for monitoring and evaluating the expected outcomes, intermediate results, and outputs of the project. Data to track indicators will be generated by: (i) the Project Management Unit; (ii) the Regulatory Office; (iii) the Water Users Council organized to oversee matters relating between farmers; and (iv) the private operator. The Project Management Unit will analyze Monitoring & Evaluation findings and include them in periodic progress reports that will be submitted to the Bank, donors and stakeholders. Monitoring & Evaluation findings will then be used to improve project implementation.

4- Sustainability

The West Delta Water Conservation and Irrigation Rehabilitation Project will directly address two important issues related to sustainability: (i) cost recovery; and (ii) continued groundwater degradation and greater efficiency in irrigation. Both will be mainstreamed in the project using a Public Private Partnership with clear contractual responsibilities between MWRI and the private operator, and between the private operator and the beneficiaries. In this context, MWRI will make financing available to the project through the proposed loan from the Bank. The private operator will pay a concession fee to MWRI equal or in excess of Government of Egypt's debt service commitment to the Bank and other Donors. The beneficiaries will pay an irrigation service fee to the private operator in order to operate and maintain the surface irrigation system and to repay the capital investments made by it and the Government of Egypt. The farmer community is expected to participate during the Operation and Management phase through the Water Users Council.

 

As indicated, the surface water system is expected to accommodate the water resources needs of the agricultural community, and through the proposed tariff structure that is based on a minimum flat fee, there are few incentives for additional groundwater usage among the participating farms. Groundwater degradation should diminish substantially in the project area. Full cost volumetric pricing will provide additional incentives for farmers to utilize the water resources efficiently as it will impact the cost competitiveness of the end crops.

5-Loan conditions and covenants

No conditions are requested for Board presentation. The bid process has already been initiated and with the submissions of pre-qualification applications. For loan effectiveness, one action must be completed: Establishment of the Project Management Unit with organization, staffing and terms of reference acceptable to the Bank.

Covenants applicable to project implementation include:

i)- Establishment of Regulatory Office by December 31, 2008.

6- Lessons learned and reflected in the project design

The proposed project design has benefited from some broad lessons learned from: (i) successful experience in the water supply and sanitation sector; (ii) a "participatory approach" to system planning and design; and (iii) the involvement of private sector and users in all stages of project preparation. In addition, lessons gained from the design of comparable Bank financed projects are also being used, including the Provincial and Peri-Urban Water and Sanitation Project that features Design, Build and Operate /Design-Build Lease (DBL) contracts to construct, operate and maintain provincial water town systems in Cambodia; and the LGU Urban Water and Sanitation Project APL2 that features a Design, Build Lease contract in provincial towns in Philippines.

Lessons in transaction design are also taken from the Guardane Private Irrigation Project in Morocco . Relevant lessons include: (i) various project-related risks should be allocated to the party (i.e., public or private) that is more able to handle them; and (ii) contract management capacity at the public sector usually needs strengthening for negotiating, overseeing and monitoring contracts with the private sector.

Given the pioneering nature of the project concept, particularly because of the potential continuation of groundwater exploitation, the feasibility of the project had to be assessed under a markedly different approach. This approach aimed at designing and implementing a system that would largely correspond to the needs of growers, their willingness to connect to the new system, and to pay the full cost of service. As such, project preparation activities shifted from the traditional supply-driven approach where demand forecasts and technical specifications guide the overall planning process, to a "demand-driven approach to planning" where the growers' willingness to connect and pay would guide the development of technical design options with commensurate tariffs.

 

A key feature of this approach relied on a promotional outreach to the farmers, soliciting their involvement in key aspects of project planning, system design, risk allocation, tariff structure and commercial arrangements as well as in environmental and social safeguards. A Farmer Advisory Council composed of more than 20 farmers representing the area actively participated in all aspects of project design and has been tremendously beneficial in providing promotional outreach to other farmers in the area. A series of stakeholder workshops were held with larger farmer representation as part of a formal promotional and participatory campaign to share information surrounding all aspects of the project.

1- Alternatives considered and reasons for rejection

Given the important policy reforms that the Government of Egypt is willing to undertake through the implementation of the proposed project, including: (i) full cost recovery for irrigation infrastructure to be implemented in new lands like the one being financed by this project; (ii) demand management through volumetric tariffs; (iii) involvement of private sector in project implementation, Operation and Management of irrigation infrastructure; and (iv) the introduction of water entitlements, the alternatives for project implementation substantially focused on the institutional options of different Public Private Partnership models. However, the preparation work considered the technical option of implementing a project encompassing the entire 255,000-feddan area in the West Delta. This broader project concept was not pursued for a number of reasons, including: (i) the technical constraints of implementing a project of a much larger scope given the need to complete construction in the shortest period possible such that the loan could be amortized over the longest possible time frame in order to render tariffs affordable; (ii) the feasibility of a private operator taking on the entire concession area in an already challenging project concept; (iii) the intention to have a smaller pilot effort that can be tried and successfully managed prior to potential replication to other areas, subject to adequate safeguards; and (iv) practical limitations on debt absorption capacity for the Government of Egypt.

 

The preliminary technical alternatives considered the use of an open channel for water conveyance in addition to the selected piped system. In addition, water management alternatives studied the possibility of prohibiting continued groundwater use. The open channel option was ruled out due to environmental and commercial reasons while the explicit prohibition of groundwater use could not be practically enforced.

 

With regard to the alternative institutional options, the project team reviewed transaction models that could better balance risks between the Government of Egypt, the private operator and the beneficiaries in the area. The Design, Build and Operate option contract managed by a Project Management Unit and a Regulatory Office (RO)/Independent Panel of Experts (IPE) under MWRI, was chosen as the most viable option in order to introduce and successfully implement such policy reforms under the investment project. Alternatives considered and reasons for rejection follow.

  The Government of Egypt uses the concept of a West Delta Holding Company (WDHC) as the Design, Build and Operate contract manager. This option was rejected in the short-term because the West Delta Holding Company had not yet been established and would thus require substantial organization and institutional development in order to become operational. Involving the West Delta Holding Company can later be achieved, nonetheless in the event it becomes organized by MWRI, turning over its contract management functions and assets of the irrigation network.

Government of Egypt contracts out construction of surface water system infrastructure to the private sector and thereafter signs a performance management contract with a private operator - instead of the Design, Build and Operate contract - for the Operation and Management of such infrastructure. This option was rejected because, in addition to the reasons cited above, under a performance management contract most of the risks would be retained by the Government of Egypt, leaving the private sector with few opportunities and incentives to achieve the Government of Egypt's policy reforms mentioned above.

The Government of Egypt signs a Public Private Partnership full concession contract with the private sector to finance entirely, build, operate and maintain the surface water for the irrigation system. This option was rejected because project preparation studies concluded that a full concession-type PSP, which would mobilize private financing on commercial terms, would be too costly for growers or would likely require substantial capital subsidies from the Government of Egypt in order to successfully implement, as in the case of the Guardane Project in Morocco . Moreover, it was also found that private operators and financiers would be reluctant to assume the total financing risks related to a first-time project of this nature. The blend of public-private financing in the proposed Design, Build, and Operate contract tends to balance more equitably the associated risks of the project at the outset and will provide beneficial demonstration effects for replication elsewhere in the sector.