Second National Water Development Project - Supplemental Credit

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This report proposes a supplemental development credit to the ongoing Second National Water Development Project in Mozambique, to assist with adequate finance support of the revised lease, and management contracts with the private operator, Aguas de Mozambique (AdeM), as well as operating costs of the project executing agency FIPAG (Fundo de Investimento e Patrimonio do Abastecimento de Agua). The devastating floods in Mozambique in early 2000, and the withdrawal of the lead partner in AdeM, Saur International, coupled with the under-priced original bid from the consortium led by Saur International, resulted in the contract renegotiations. Consequent to the withdrawal of the lead firm (Saur International), Aguas de Portugal (AdP), took over the lead partnership in AdeM in December 2001, under a Memorandum of Understanding which included revised rates, fees and costs, reflecting more realistic market conditions. The credit will also support increases in operating costs, as a result of the revised agreements. The supplemental credit is consistent with the main development objective - to improve the quality, reliability and sustainability of water services - for the cities of Maputo, Beira, Quelimane, Nampula, and Pemba, through promoting greater private sector participation in the provision of these services. The Supplemental Credit will finance the increased cost of the delegated works program, and support operational costs for FIPAG, as a result of the revised contract. The delegated works program is mainly made up of items to rehabilitate the water supply networks including meters, pipes and connections. Also included in the delegated works are program management fees, procurement costs, and site supervision undertaken by the private operator. This Supplemental Credit meets the requirements for supplemental financing, i.e., cost overruns are due to exceptional circumstances beyond the borrower's control; the project is being implemented in compliance with all covenants set forth in the Project's relevant legal agreement; reduction in the project scope would significantly impair the project's financial viability, and the capacity to achieve its objectives; and, the Government's commitment has remained strong, in spite of the extremely difficult operating conditions.