Danida Business Finance Project proposal

Presentation to Danida Programme Committee

Wakiso West Water Supply and Sanitation Project

Uganda

Date: 18 December 2018

Udenrigsministeriet/VBE: Investment Director: Annelise Boysen, DBF

Kontorchef: Ole Thonke TL Tina Kollerup Hansen; VP Morten Elkjær,
Sagsbehandler: Lone B. Jensen Finance Sector
File: 2018-43359 PID: 9024 File no.: F-1746-1
 Background

As of 1. September 2017 Danida Business Finance, DBF, has been managed by IFU. The aim is to seek synergies
with IFU investments and to scale and further develop DBF in line with the overall strategy for development
cooperation, benefitting from IFU’s commercial knowhow and network.

The approval of DBF projects still rests with the Minister for Development Cooperation and follows the normal approval
process in the Ministry of Foreign Affairs, MoFA. According to the administration agreement between MoFA and IFU,
DBF projects can be presented to the Danida Programme Committee prior to initiating DBF Feasibility Studies, that is,
at an early stage of the project development phase where only limited project information are available.

To align and integrate DBF to IFU documentation and processes, and on request from the Danida Programme
Committee to reflect early stage DBF involvement in project development, IFU has adjusted the template for DBF
concept notes. Therefore, DBF concept notes differ from the standard Word templates presented to the programme
committee.

PAGE 2
 Abbreviations
AfDB – Africa Development Bank IC – Investment Committee

CG – Corporate Governance IFC – International Finance Corporation

CIP – Clearance in Principle IFU –Investment Fund for Developing Countries

CO2 – Carbon dioxide IRR – Internal rate of return

CSR – Corporate social responsibility NDP – National Development Plan

CWD – Communal Water Dispenser NWSC – National Water and Sewage Corporation

Danida – Danish International Development Assistance OHS – Occupational health and safety

DBF – Danida Business Finance O&M – Operation and maintenance

DKK – Danish Kroner PIU – Project implementation unit

EIA – Environmental Impact Assessment PS – Performance Standard;– referring to IFC Performance Standards

EIB – European Investment Bank RPF – Resettlement Policy Framework

ESIA – Environmental and Social Impact Assessment SDG – Sustainable Development Goals

E&S – Environment and Social TA – Technical Assistance

EUR – Euro TBD – to be determined

FS – Feasibility Study ToR – Terms of Reference

FSTP – Faecal Sludge Treatment Plant USD – United States Dollars

GoU – Government of Uganda VAT – Value added tax

GNI – Gross Domestic Income WTP – Water treatment Plant

PAGE 3
KEY DATA
Project name DBF project finance:
Wakiso West Water Supply and Sanitation Project
Bank fees
Country
Loan:
Uganda
Contractors
Gross National Income (GNI) per capita: USD 600 (World Bank, Atlas Method) contract
Repaid by
Product Supervision (TA) NWSC
contract
Production of Clean Water and Sludge Treatment, incl. transmission and distribution

Loan Agreement
systems

Implementing partner
National Water and Sewage Corporation (NWSC)
Implementing period
36 months

Sustainable development goals to be targeted

SDG 3, SDG 6, SDG 8, SDG 11, SDG 13 & SDG 17

Investment budget
DKK 1.013 million (cf. detailed budget sheet) Interest and margin Covered by
Danida
ODA budget Grant

DKK 619,9 million

assistance
Additional
technical
Type of financing Tender support
Soft loan
Monitoring and
Financial net IRR verification
Financially nonviable without subsidy

PAGE 4
 1: PROJECT CONTEXT

Context Documentation
• Uganda is one of the poorest countries in the world and its economic • Rambøll/Fichtner: Feasibility Study,
development presents a mixed picture. Between 2000 and 2010, the September 2018
country experienced impressive economic growth rates, averaging 7% per • Rambøll/Fichtner: Resettlement Policy
year. This made Uganda one of the fastest growing economies in the Framework RPF, September 2018
world, albeit starting from a very low level. However, between 2011 and • Rambøll/Fichtner: Scoping Report, September
2016 annual average growth slowed to 4.5 % p.a. This is further diluted by 2018
the high population growth and low income, with GNI per capita of USD • Rambøll/Fichtner: Optioneering Report,
600 in 2017. According to the IMF, Uganda's external debt is manageable August 2018
and the country is eligible for DBF financing. • Danida: Uganda Country Policy Paper, 2018-
• The National Resistance Movement and President Museveni have been in 22, 2017
power since 1986. The regime has provided stability; however, democratic • Danida: Uganda Country Programme, 2018-
space is challenged. Corruption is high and Uganda is ranked 151 on 22, 2017
Transparency International Corruption Index. Also, some human rights are
challenged.
• Uganda aims at reaching lower middle income status by 2021, i.e. a GNI
per capita of just above USD 1,000. Achieving this will require annual
growth rates of 10 % per year. The key priority areas in National
Development Plan II are related to infrastructure development,
commercialization of the agricultural sector and promotion of tourism.
• Water and sanitation is one of the priority areas for the Government, and
the target is 100% urban coverage of safe water by 2021. The current
coverage is 71%. With the rapid population growth rate and high
urbanization, significant investments and funds are required to meet the
target.
• Denmark has been a major donor in the water and sanitation sector since
1991, but the programme ends in 2018. It is expected that further Danish
support to water and sanitation will be provided by DBF.
• NWSC, established in 1972, is a Parastatal organization that operates and
maintains water supply and sanitation in urban areas. NWSC works under
3-year performance contracts. The past 5 contracts have been successfully
implemented.
• One project to improve water and sanitation in greater Kampala is financed
by EIB, France and Germany. The main development partners in the sector
are the World Bank, EIB, AfDB, Germany, Austria and France.
PAGE 5
 2. INVESTMENT CASE: Theory of Change

Outputs Outcomes Impact

Output 1: Water supply system
consisting of a 62,500 m3/day Water
SDG3: Improved health
Treatment Plant, with 48,940 new
67,240 households in Wakiso West
household connections and serving
have access to clean and affordable
18,300 existing connections. In addition,
water (through household
intake and raw water main, 4 reservoirs,
connections). SDG6: Clean water
8 booster stations, 76,5 km of primary
and sanitation
transmission mains, 51,4 km of
Pollution of the environment from
secondary mains, and a tertiary network
dumping of faecal sludge has been
covering an estimated area of 4,300 ha.
reduced
SDG8: Decent work
Output 2: 400 m3/day Faecal Sludge
The population in informal settlements and economic growth
Treatment Plant (FSTP).
have access to clean and affordable
water (through CWDs).
Output 3: Communal Water Dispensers
(CWD) in informal settlements
Demonstration of the potential savings SDG11: Sustainable
(approximately 1000).
from using renewable energy for cities and communities
pumping.
Output 4: Installation of 1,05 MW
capacity solar energy plant at the
Both temporary (during construction)
Water Treatment Plant.
and permanent (during operation) jobs SDG13: Climate action
have been created.
Output 5. New Jobs created.
The water company has introduced
Output 6. NWSC capacity to operate
energy-saving equipment SDG17: Partnerships
innovative systems in water supply.

PAGE 6
3. INVESTMENT CASE
Investment case Justification
• NWSC is a Government Parastatal under Ministry of Water and Environment. It develops, operates • Uganda is a priority country for Danish
and maintains water supply and sanitation in urban areas and has professional capacity for this. Development co-operation.
This includes household connections and installation and management of communal water • The project is fully aligned to Uganda’s
dispensers to serve informal settlements. Water prices are set at national level with some cross- second National Development plan aiming
subsidization from high consuming to low consuming costumers.
at increasing access to safe water in urban
• NWSC has an operating profit and is not reliant on government funding for operations and
areas to 100%. Current coverage is 71%.
maintenance. In addition, it can finance limited investments but the low tariffs prevents NWSC form
GoU is in urgent need for funds to meet the
operating on a full commercial basis.
• NWSC will, supported by a consultant, undertake a competitive tender following FIDIC Yellow Book
target.
(final project design done by the contractor) limited to short-listed Danish based contractors. The • Water demand in Greater Kampala is
tender will follow a life cycle cost approach, where Danish solutions are considered to be growing fast, reflecting rapid expansion of
internationally competitive. the city’s formal and informal settlements.
• The contractor selected will finalize the design, build the project and hand over to NWSC for The project will help meet the increasing
operations. With introduction of life cycle costing, new technologies will be introduced and there will demand with increased water supply.
be a need for capacity development of NWSC (pumping and pressure management, sludge • Lake Victoria is increasingly polluted by
treatment, renewable energy etc.) for the plant to be operated efficiently. The contractor will adhere untreated faecal sludge. The project will
to the environmental and social action plan, including resettlement plan, that will be a part of the reduce this pollution;
contract to ensure adherence to IFU (IFC) standards and protect human rights of those who will be • Potential for introducing life cycle costing,
affected temporarily or permanently by the project. which would reduce non-revenue water and
• During construction, a supervision engineer will support NWSC to undertake monitoring of the energy consumption, which can help pave
implementation and general performance of the contractor, including adherence to IFC standards. the way for more energy efficient solutions,
• DBF will appoint a consultant to monitor implementation and undertake verification at take-over/ including from Danish technology providers
end of defect liability. Final monitoring of outcome will take place 5 years after take-over. to the Uganda market;
• This would be the first DBF project in Uganda, but Denmark has a long standing relationship with • A DBF grant would mobilise additional
Uganda in the sector. The Danish Embassy, consultants and contractors have ample experience
financing from the private sector, which
working in the sector in Uganda.
would otherwise not be mobilised, thereby
catalysing the project impact.
Contribution to Sustainable Development Goals
The project will provide access to safe and clean water for people in the area and sanitation and
reduced environmental impact on Lake Victoria. The project will contribute to SDG 3, 6, 8, 11, 13 and
17. See page 7 for further detail.

Verification after
Construction Verification upon Defect Notification
Appropriation Loan agreement start taking over Period
April 2019 February 2020 March 2020
PAGE 7 March 2023 March 2024
4. SUSTAINABILITY

Development impact Environmental and social risks

• SDG 3: Good Health and Wellbeing, through increased access to clean • An Environmental Impact Assessment (EIA) is underway, which
water supply and sanitation for households in Wakiso West; will guide further design and construction. National Environment
• SDG 6: Provision of Clean Water and Sanitation through affordable water Management Authority (NEMA) will issue environmental approval
(at tariffs determined by the government, with a scheme of cross- and EIA certificate.
subsidisation for poorer customers). More than 67,000 households in • Some people will be affected temporarily (piping work) or
Wakiso West would be provided with access to clean and affordable
permanently due to resettlement from the site of construction. All
water;
land to be acquired has formal title and it is expected that the
• SDG 8: Decent jobs, created during both construction and operation of the process will be frictionless. Land acquisition is the responsibility of
water supply and faecal sludge treatment plants (the expected number of NWSC.
new jobs created will be determined during project formulation);
• Owners of the individual construction sites have indicated that
• SDG 11: Sustainable cities/communities through provision of essential they are willing to sell.
water and sanitation services to the rapidly growing population in Wakiso
West; and
• SDG 13: Climate action through reduction of actual and anticipated
pollution of Lake Victoria and surrounding areas through a faecal sludge Management of environmental and social risks
treatment plant and re-collection of waster water in the project area and
reduced energy consumption. • IFC performance standards are applied during design and
construction of the works to ensure appropriate labor and working
• SDG 17: The grant from DBF mobilises private funding from an conditions, resource efficiency, pollution prevention and land
international bank. acquisition.
Corporate Governance • NWSC will hold public consultations during design and
preparation of Environmental and Social Impact Assessment
• In Uganda, informal settlements cannot be connected to the water supply.
(ESIA). NWSC is being supported by DBF to carry out the ESIA.
Instead, NWSC will install water dispensers and ensure that water tariffs
Implementation will be monitored by the supervision consultant
follow government regulations to avoid overpricing of water from local
vendors. during design and construction. An Environmental and Social
Monitoring and Management Plan is developed to mitigate
• Corruption is widespread. IFU DBF’s anti corruption measures will be put negative environmental and social impacts.
in place, e.g. close monitoring of the tender processes, and
buyer/borrower’s and exporter’s declaration where DBF may require • NWSC will be responsible for Resettlement Action Plan based on
support repaid in case of misuse. the Resettlement Policy Framework developed as part of the
feasibility study.

PAGE 8
 5. BUDGET

DKK Million Budget for DBF Grant

Loan and Own financing Total
DKK Million
grant*
Total Investment 1,013.4 258.9 1.272.3
Cash grant element of loan 353.0
Output 1 (water supply system) 725.4 725.4
Interest subsidy 98.3
Output 2 (faecal treatment plant) 74.5 74.5
Margin to Danish lending
8.3
bank
Output 3 (communal water dispensers) 8.2 8.2 EKF premium
69.6
(Export loan guarantee fee)*
Output 4 (solar energy plant) 11.2 11.2
Technical Assistance 22.4

Catchment area protection (3%) 24.6 24.6 Budget margin (25%)** 137.9

Installation of household connections 222.0 DBF Total Grant 689.4

and water dispensers DBF Grant excl. budget
551.5
Land acquisition 32.1 32.1 margin

DBF appropriation
Supervision engineer 37.3 37.3 619.9
(excl. EKF premium)

Contingencies 15% 132.2 4.8 137.0 * DBF covers the EKF premium on behalf of borrower
on the loan guarantee required by lending bank. DBF
only releases the payment in case of actual default.
The fee is therefore not paid out and not included in
the appropriation.
** The budget margin only becomes effective if the
project during tender turns out to be more expensive

PAGE 9
7. OVERALL ASSESSMENT

Investment attractiveness/concluding remarks Major risks and development challenges

• At the end of the project, Wakiso West has a water treatment • Delays in land acquisition and compensation can delay
plant with capacity of 62,500 m 3/day and a faecal sludge implementation – it is a precondition that the land acquisition
treatment plant with a capacity of 400 m 3/day. be solved adequately before the loan agreement becomes
effective.
• Uganda’s second National Development plan aims at
increasing assess to safe water in urban areas to 100%. • Other risk factors are included in the project design, e.g. a
Current coverage is 71%. Using DBF financing for possible deterioration of the raw water quality if Lake Victoria
investments in the water sector, would meet part of these becomes more polluted, or changes in the settlement
requirements. patterns in the area.

• The project contributes directly to SDG 3, 6, 8, 11, 13 and 17 • There is a risk that not enough Danish based contractors will
through financing and construction of sustainable bid for the project. A meeting of potential Danish contractors
infrastructure based on life cycle costing, which could will be called prior to development of tender with a view to
contribute to more sustainable infrastructure in Uganda. ensure that there are at least 2, preferably more, contractors
that state that they would bid. Furthermore there will be a
• Key indicators of success are that people in Wakiso West pre-qualification which will inform how many are interested in
have access to affordable, safe and clean water, as well as bidding.
sanitation.
• For more detailed risk assessment, please refer to enclosure
• The project will provide opportunities for Danish engineering C.
companies, contractors and Danish suppliers.

PAGE 10
 ENCLOSURES

PAGE 11
A: Overall Process Action Plan

Action By date Responsible Comments

Feasibility study (FS), Final November, 2018 Rambøll & Fichtner In progress

Preparation of Draft Project December, 2018 DBF With assistance from external
Document (PD) consultant
Appraisal of PD February 2019 DBF With assistance from external
consultant
Preparation of Final Project February 2019 DBF
Document
Presentation of the Project April 2019 DBF
Document to the IFU investment
Committee
Presentation of the Project April 2019 Ministry of Foreign Affairs –
Document to the Council for VBE
Development Policy.
Appropriation by Minister May 2019 Ministry of Foreign Affairs –
VBE

Detailed design and tender May to August 2019 NWSC With assistance from
international TA
Contract awarded February 2020 NWSC DBF to give no-objection

Construction starts March 2020 Contractor Supervision engineer in place

Taking over of works March 2023 NWSC

PAGE 12
B. ASSESSMENT OF PARTNER, NWSC

Partner name Core business Importance Influence Contribution Capacity Exit strategy

What is the What is the How important is How much influence What will be the What are the main What is the strategy for
name of the main business, the project for does the partner have partner’s main issues emerging exiting the partnership?
partner? interest and the partner’s over the project (low, contribution? from the
goal of the activity-level medium, high)? assessment of the
partner? (Low, medium partner’s capacity?
high)?
National NWSC is a Medium. Even if High, full control. NWSC will finance NWSC has good The project is limited to
Water and public utility, it is a big project, household professional and the period of
Sewage which supplies NWSC is connections, land technical capacity. construction and
Corporation portable water. involved in larger acquisition and However, commissioning.
(NWSC) It also provides projects, compensations. considering that
sewerage and particularly in NWSC will be NWSC is involved
faecal sludge Kampala. responsible for the in many other
treatment. tender and projects and is
construction rapidly expanding
supervision. While by taking over
Ministry of Finance, water supply
Planning and facilities in small
Economic towns, there is a
Development will risk of overloading.
take out the DBF- The project
loan, this will be on- includes support
lent to NWSC. for the tendering
NWSC will pay the process, and it
VAT. also includes a
Construction
Supervision
Consultant.
Training for NWSC
in the operation of
the new facilities
will be included in
the contract with
the Design and
Build Contractor.
PAGE 13
C. PROJECT RISKS & RISK RESPONSE 1
Contextual risks
Risk Factor Likelihood Impact Risk response Residual risk Background to assessment

Significant domestic Unlikely Minor None Minor NWSC is a solid institution with presence in most
political and social of the country, and is not likely to be affected by
instability. Conflicts in the political conflicts. As it is financially running with a
region escalates with small surplus, it is not in need of transfers from the
negative spill-over effects treasury to keep operating.
to Uganda.

Programmatic risks
Risk Factor Likelihood Impact Risk response Residual risk Background to assessment

Land acquisitions are not Likely Major It is made a precondition that the land Minor The precondition will put a pressure on NWSC to
ready in time thus delaying acquisitions for the Intake, the WTP finish the land acquisition soon. Some issues will
the project. and the FSTP be in place before the depend on the final design (e.g. for access roads),
loan is made effective. which implies that there is a residual risk.

Intake water quality at Likely High 1. On demand measures such as Minor The design of the Water treatment plant, WTP
WTP deteriorates during Power activated carbon, PAC, dosing is includes measures for later additional treatment to
the lifetime of the project, included in the project. take into account possible deterioration of the water
particularly with respect to 2. Medium term improvements such as quality, including the setting aside space for extra
cyanotoxins (algae replacement of anthracite with Granual equipment should it be required in the medium to
growth). activated carbon, GAC in filter could be long term.
required later.
3. Medium to long term improvements
such as separate GAC filter, polishing
effluent with advance oxidation (e.g.
UV, Ozone, H2O2) could be required
later.

Water demand growth Likely Minor Phase I design includes water transfers Minor The exact distribution of the population is difficult to
different from that outside of the project area to areas predict as the settlements are largely spontaneous.
predicted (slower in some already in a water deficit so that these It is, however, highly likely that it will follow the
areas and faster in other transfers can be increased. Phase II of established transport corridors (as assumed in the
areas). the network can be adjusted. project design).

PAGE 14
C. PROJECT RISKS & RISK RESPONSE 2
Programmatic risks, continued
Risk Factor Likelihood Impact Risk response Residual risk Background to assessment
NWSC is stretched for senior Unlikely Major It will be made a precondition for the Minor Experience shows that a well-
technical resources and may be loan that a well staffed PIU is functioning and capable PIU is
reluctant to commit the necessary established. Furthermore, a essential for satisfactory project
full-time staff to the Project Construction Supervision Consultant implementation.
implementation unit, PIU, implying will be part of the contract
a weak PIU.

Inadequate operation and Unlikely Major The contractor will in the contract Minor NWSC has ample experience in
management of the installed water have an obligation to secure training managing large WTPs and FSTPs, as
supply system in O&M of the innovative elements to well as running the distribution
be introduced (specialised equipment, networks.
energy recovery etc.).

Inadequate operation and Likely Major The tender documents will make sure Minor It has been agreed that NWSC is
management of the communal that the specifications for the CWDs responsible for installing the CWDs.
water dispensers in the informal are adequate.
settlements.
Institutional risks
Risk Factor Likelihood Impact Risk response Residual risk Background to assessment
Possible corruption during Unlikely Significant Support to and close monitoring of the Insignificant as Transparency and anti-corruption are
tendering could affect NWSC and tender process the safeguards on the top of the agenda for Danida
DBF reputation. will make it and DBF. DBF will give no-objection to
very difficult for tender documents and the tender
corruption to evaluation report, and the tender
take place consultant will closely advise and
monitor the process

Inadequate consultation and Unlikely Significant Support to NWSC in the process by The risk will DBF has a commitment to comply with
compensation to the project the construction supervision still be there, the IFC guidelines. DBF has stressed
affected people consultant. Close monitoring by the but it will be the issue during project preparation,
consultant and the Danish Embassy. minor. and it will be reviewed during appraisal.
NWSC is advised to seek cooperation Also, it will be included in the ToR for
with an NGO specialised in the tender consultant and the
community mobilisation. construction supervision.

PAGE 15