Document of The World Bank Public Disclosure Authorized Report No: ICR2569
IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-74530)
ON A
Public Disclosure Authorized LOAN
IN THE AMOUNT OF EURO 100.00 MILLION
TO THE
REPUBLIC OF CROATIA
FOR A
Public Disclosure Authorized INLAND WATERS PROJECT
June 27, 2013
Sustainable Development Department Central Europe and the Baltics Country Unit Europe and Central Asia Region Public Disclosure Authorized CURRENCY EQUIVALENTS (Exchange Rate Effective December 31, 2012)
Currency Unit = Croatian Kuna (HRK) EURO 1.00 = HRK 7.49 US$ 1.00 = HRK 5.74 EURO 1.00 = US$ 1.32
FISCAL YEAR (January 1- December 31)
ABBREVIATIONS AND ACRONYMS
CAS Country Assistance Strategy CEB Council of Europe Bank CCPCP Coastal Cities Pollution Control Project EBRD European Bank for Reconstruction and Development EF Environmental Framework EIB European Investment Bank EMP Environmental Management Plan ERR Economic Rate of Return EU European Union FM Financial Management FRR Financial Rate of Return HV Croatian Waters (Hrvatske vode) ICR Implementation Completion and Results Report ISR Implementation Status and Results Report IWP Inland Waters Project ISPA Instrument for Structural policies for Pre-Accession JASPERS Joint Assistance to Support Projects in European Regions M&E Monitoring and Evaluation MWSC Municipal Water and Sewerage Company MOA Ministry of Agriculture, and initially MOAFWM Ministry of Agriculture, Forestry, and Water Management MRDFWM Ministry of Regional Development, Forestry, and Water Management NPV Net Present Value O&M Operations and Maintenance PAD Project Appraisal Document PIU Project Implementation Unit PDO Project Development Objective PHRD Policy and Human Resources Development RF Results Framework SFA Subsidiary Financing Agreements TA Technical Assistance WWT(P) Wastewater Treatment (Plant)
Vice President: Philippe H. Le Houerou Country Director: Mamta Murthi Sector Manager: Sumila Gulyani Project Team Leader: Elisabetta Capannelli ICR Team Leader: Elisabetta Capannelli ICR Author: Anna Cestari CROATIA Inland Waters Project
CONTENTS
Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph
Executive Summary ...... 1 1. Project Context, Development Objectives and Design...... 2 2. Key Factors Affecting Implementation and Outcomes ...... 7 3. Assessment of Outcomes ...... 13 4. Assessment of Risk to Development Outcome...... 20 5. Assessment of Bank and Borrower Performance ...... 20 6. Lessons Learned ...... 22 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ..... 23 Annex 1. Project Costs and Financing ...... 24 Annex 2. Outputs by Component ...... 25 Annex 3. Economic and Financial Analysis ...... 33 Annex 4. Bank Lending and Implementation Support/Supervision Processes ...... 44 Annex 5. Stakeholder Workshop Report and Results...... 46 Annex 6. Summary of Borrower's ICR and/or Comments on Draft ICR ...... 47 Annex 7. Comments of Cofinanciers and Other Partners/Stakeholders ...... 58 Annex 8. List of Supporting Documents ...... 59 MAP A. Basic Information Country: Croatia Project Name: Inland Waters Project Project ID: P098948 L/C/TF Number(s): IBRD-74530 ICR Date: 06/27/2013 ICR Type: Core ICR REPUBLIC OF Lending Instrument: SIL Borrower: ROATIA CROATIA
OmitnaTt:l USD 133.41M Disbursed Amount: USD 122.65M Commitment: Revised Amount: USD 133.41M Environmental Category: F Implementing Agencies: Hrvatske vode (HV) Cofinanciers and Other External Partners:
B. Key Dates Revised / Actual Process Date Process Original DateDate(s)
Concept Review: 03/16/2006 Effectiveness: 01/29/2008 01/29/2008 Appraisal: 03/15/2007 Restructuring(s): 12/14/2011 Approval: 05/30/2007 Mid-term Review: 12/15/2009 02/05/2010 Closing: 12/31/2012 12/31/2012
C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Satisfactory Risk to Development Outcome: Low or Negligible Bank Performance: Moderately Satisfactory Borrower Performance: Satisfactory
C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Moderately Satisfactory Government: Satisfactory of Supervision: Satisfactory Implementing Satisfactory uality Agency/Agencies: Overall Bank Overall Borrower PerorBan: Moderately Satisfactory Satisfactory Performane Performance: C.3 Quality at Entry and Implementation Performance Indicators Implementation Indicators QAG Assessments Rating Performance (if any) Potential Problem Project Quality at Entry No Nn at any time (Yes/No): (QEA): Problem Project at any Yes Quality of None time (Yes/No): Supervision (QSA): DO rating before Stsatr Closing/Inactive status: Stsatr
D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration 4 4 Flood protection 9 12 Wastewater Collection and Transportation 26 22 Wastewater Treatment and Disposal 27 30 Water supply 34 32
Theme Code (as % of total Bank financing) City-wide Infrastructure and Service Delivery 49 49 Environmental policies and institutions 13 13 Regional integration 13 13 Water resource management 25 25
E. Bank Staff Positions At ICR At Approval Vice President: Philippe H. Le Houerou Shigeo Katsu Country Director: Mamta Murthi Anand K. Seth Sector Manager: Sumila Gulyani Sumter Lee Travers Project Team Leader: Elisabetta Capannelli Sudipto Sarkar ICR Team Leader: Elisabetta Capannelli ICR Primary Author: Anna Cestari
F. Results Framework Analysis
Project Development Objectives (from Project Appraisal Document) The objective of the project is to improve water supply services, wastewater services, and flood protection measures in municipalities selected from the inland part of Croatia. Revised Project Development Objectives (as approved by original approving authority)
(a) PDO Indicator(s)
Original Target Formally Actual Value Values (from Revised Achieved at approval Target Completion or documents) Values Target Years Indicator 1 : Projects submitted to the Government that will be proposed for financing by the EU or other financial institutions (number) Value quantitative or 0 3 7 8 Qualitative) Date achieved 01/01/2008 12/31/2012 12/31/2012 12/31/2012 Comments Target has been exceeded. Projects prepared are valued at EUR 123 million, (incl. % already have been reviwed by the EU (JASPERS) and are likely to receive achievement) financing. Indicator 2 : Water supply coverage (percentage) 40% 85% (Baseline indicators were (coverage is 85% established at defined as % of (3 sub-projects -- Value estructuring in households in the Northern Baranja: quantitative or December 2011. 3 sub- service area of the 90%; Davor-Nova Qualitative) rojects -- Northern utility company Gradiska: 70%; Baranja: 48%; Davor- able to connect to Slatina Donji ova Gradiska: 27%; water supply Miholjac: 95%) Slatina Donji Miholjac: network) 4 7 % ) _12 / 3 1/ 2 0 1 2 ______[Date achieved 05/01/2007 12/31/2012 12/31/2012 Comments Target has been met. The team retroactively calculated the population weighted (incl. % average water supply coverage, which increased from 45% in 2008 to 87% in achievement) 2012. Indicator 3 : Sewerage coverage (percentage) 35%76% (Baseline indicators were (Coverage defined (Target was 73% established at Vleestabcting in as % of established at (4 sub-projects -- Valuehouseholds in 2011 Ogulin quantitative or December 2011. 4 sub- restructuring 50%, Virovitica (Coerage efmed) ro Qualitative) projects -- Ogulin 0%, in light of the 80 %, Nasice 78%, ViroviticaVirvitca 57%,7%,Nasce Nasice utility company scope of sub- Southern Baranja 62%, Southern Baranja able to connect to poects being 80%) 0%). implemented) [Date achieved 101/01/2008 12/31/2012 12/31/2012 12/31/2012 Comments Target has been met. The team retroactively calculated the population weighted (incl. % in 2012. achievement) average sewerage coverage, which increased from 39% in 2008 to 74% Original Target Formally Actual Value Values (from Revised Achieved at approval Target Completion or documents) Values Target Years Indicator 4 : Retention volume for flood protection (mln m3) 600 Value (Baseline indicators were quantitative or established at 720 800 Qualitative) restructuring in December 2011) Date achieved 01/01/2008 12/31/2012 12/31/2012 Comments (incl. % The target has been exceeded. achievement) Indicator 5 : ICustomers satisfied with the services (percentage) Value 65 quantitative or (based on surveys 90 80 80.9 Qualitative) erformed in 2010) Date achieved 04/01/2010 12/31/2012 12/31/2012 12/31/2012 Comments (incl. % The target established when baseline was taken has been met. achievement) Indicator 6: Working ratio (number) 0.7 (To assure consistency, calculation based All utilities had working on weighted ratios greater than 1. average working (To2 asure1 Value Working ratio is ando for ate quantitative or calculated by dividing 1 and wastewater Qualitative) operating expenses sv basedon (excluding depreciation) dataicected in by operating revenues. 2012 anled01 directly from utilities for all years of project ad_implementation) Date achieved 01/01/2008 05/31/2012 c12/31/2012 Comments Worbong ratio during project was reported based on all activities performed by a (incl. % rultu-service utility. The team retroactively calculated the weighted average achievement) working ratio for WWS only, improved from 0.9 in 2008 to 0.7 in 2012. (b) Intermediate Outcome Indicator(s)
Original Target Actual Value FormallyromAchieved at Indicator Baseline Value Values (from Revised cmplet approval Completion or documents) Target Years Indicator 1 :Number of projects completed by the consultants 65 (the last Value procurement 6 (quantitative 0 20 planuset 67 or Qualitative) revise e. revised end target) Date achieved 01/01/2008 12/31/2012 12/31/2012 12/31/2012 Comments (incl. % This indicator reflects the number of consulting contracts completed. achievement) Indicator 2: % contract value disbursed for works related to water supply, sewerage, wastewater treatment, and flood protection Value (quantitative 0 100 92.2 or Qualitative) Date achieved 01/01/2008 12/31/2012 112/31/2012 Comments According to the latest data from HV, as of June 26, 2013, total disbursements (inc. % ac. t amounted to 92.2%. achievement) Indicator 3 : Number of water utilities that the project is supporting Value (quantitative 0 12 12 or Qualitative) Date achieved 12/19/2011 12/31/2012 12/31/2012 Comments (incl. % Core sector indicator, target has been met. achievement) Indicator 4 : Number of procurement contracts for works/goods completed Value (quantitative 0 42 52 52 or Qualitative) ______[Date achieved 01/01/2008 12/31/2012 12/31/2012 12/31/2012 Comments (incl. % Target has been met. achievement) Original Target Actual Value FormallyromAchieved at Indicator Baseline Value Values (from Revised cmplet approval TargetCompletion or documents) Target Years Indicator 5: Completion of customer surveys (yes/no) Value (quantitative No Yes Yes or Qualitative) Date achieved 01/01/2008 12/31/2012 12/31/2012 Comments (incl. % Results of survey posted on the municipality websites achievement) Indicator 6: % consulting contract for technical assistance to utilities disbursed Value (quantitative 0 100 100 or Qualitative) [Date achieved 101/01/2008 12/31/2012 12/31/2012 Comments (incl. % Target met. achievement)
G. Ratings of Project Performance in ISRs
Actual Date ISR Ata No. Ate DO IP Disbursements (USD millions) 1 06/26/2007 Satisfactory Satisfactory 0.00 2 04/06/2008 Satisfactory Satisfactory 0.00 3 12/04/2008 Satisfactory Moderately Satisfactory 1.57 4 ~Moderately 35 4 02/24/2009 Moderately Satisfactory Unsatcy3.58 Unsatisfactory 5 08/10/2009 Moderately Satisfactory Moderately Satisfactory 9.24 6 02/20/2010 Satisfactory Moderately Satisfactory 20.57 7 10/16/2010 Satisfactory Moderately Satisfactory 29.23 8 01/03/2011 Satisfactory Moderately Satisfactory 34.42 9 10/15/2011 Satisfactory Moderately Satisfactory 59.86 10 01/25/2012 Satisfactory Moderately Satisfactory 73.38 11 08/18/2012 Satisfactory Satisfactory 98.34 12 12/26/2012 Satisfactory Satisfactory 108.25 H. Restructuring (if any)
ISR Ratings at Amount Restructuring Board Restructuring Disbursed at Reason for Restructuring & Date(s) Approved Restructuring Key Changes Made PDO Change DO IP in USD millions (i) reallocate some loan proceeds from Component B 1 (Utility Investments) to Component B2 (Flood Protection Investments) in order to better align the investments with the project objectives; (ii) extend Component B2 (Flood Protection Investments) beyond the Central Posavina area, in the Sava River, to cover investments also in the Drava and Danube river basins; (iii) more adequately define the scope of the technical assistance (TA) under Component Al (EU Accession Support) aiming at facilitating the water sector reforms; (iv) reallocate loan proceeds 12/14/2011 S MIS 68.08 between Component BI (Utility Investments) to Component A (Technical Assistance) to better reflect the costs for consulting and TA services for the preparation of sub-projects under Component B, the preparation of sub-projects and studies for future EU financing, and the cost of TA for strengthening of project utilities; (v) drop one of the project indicators, (Volume of wastewater treated as per applicable legislation); and (vi) inform about the revision of the Project Disbursement Letter to allow the Borrower to increase the ceiling of the special account from EUR 1.0 million to EUR 2.0 million. 1. Disbursement Profile Original ---- Formally Revised -- Actual 150-
125-
100-
50-
m cn ro o o o oe o o rno r C, C, CC, Executive Summary
The Inland Waters Project (IWP) aimed to improve water supply and wastewater services as well as flood protection systems in the inland areas of Croatia. This operation followed the successful World Bank Eastern Slavonia Reconstruction Project, which targeted the same region and helped address post-war rehabilitation needs.
The project is rated satisfactory having achieved its development objectives. All outcome indicator targets were met, and at times exceeded. Disbursements as of end-June, 2013 are at 92.2%1 of the loan. As the first Bank water project prepared during Croatia's accession to the European Union (Croatia will enter the EU on July 1, 2013), it helped address key EU membership requirements. Each component had groundbreaking features. The pioneering aspects of the project will not only help it meet EU targets, it set the stage for the absorption of EU grants in the water sector. In fact, more than EUR 3.5 billion out of the approximately EUR 12 billion accessible to Croatia over the next EU financing period of 2014-2020, is expected to be allocated to the water and sanitation sector.
The project's Technical Assistance (TA) was particularly successful. It helped strengthen participating utilities' operational and financial performance, including their operating ratio, as well as billing and collection. Croatian Waters (HV) was the project's implementing agency, and its capacity to implement externally funded projects and to assess feasibility studies and detailed designs increased through IWP implementation. The project financed the preparation of water supply and wastewater projects for EU financing worth about EUR 123 million. Major institutional reforms were undertaken with the preparation of a study on utility optimization and agglomeration -- a precondition for increased sector efficiency and effective use of EU funds. TA and investments contributed to the ecological restoration of several Eastern Slavonia sites.
The Investment component also achieved substantial results. It financed investments in water supply, wastewater and flood protection. A total of twelve utilities, serving over 200,000 people, benefitted from the project. Four utilities improved their water supply systems with access increasing from 40% to 85%. Eight undertook wastewater schemes and increased access from 35% to 73% in targeted areas. Some utilities pioneered new technologies in Croatia, including tertiary wastewater treatment in Ogulin and biological treatment ponds in Ilok. While the coverage of water and wastewater significantly increased due to new investments, utility financial management systems now meet international best practice.
Investments in flood protection substantially increased flood retention capacity in the 3 3 target areas, from 600 to 800 million in , and is expected to increase to 1000 m through investments by HV. Given the trans-boundary nature of flood protection and wastewater
1 Taking into account EUR 1.6 million that was processed on June 26, 2013. This is the most up-to-date figure, which may differ from the disbursement table in the system.
1 treatment in the region, the project helped link countries in a post-war region, facilitating joint work in the sector.
1. Project Context, Development Objectives and Design
Croatia will enter the European Union (EU) on July 1, 2013. The IWP was a key project in the Bank's 2004 Country Assistance Strategy (CAS), which had as its main objective assisting Croatia in joining the EU. The project was fully in line with the CAS's focus on sustainable natural resources management and measures to address improvements in Croatia's wastewater and water supply management and services, to comply with the EU acquis. Countries joining the EU had to comply with EU directives since unmet targets within the agreed timeframe could result in penalties. As such, countries had to quickly develop adequate sector strategies and policies to maximize absorption of huge volumes of funds from the EU.
1.1 Context at Appraisal
Water Sector Strategy. When negotiations to enter the EU began, the Government committed to meet the EU directives related to the water sector. Accordingly, it prepared a strategy, which included the following objectives (to be met by 2023 but with intermediary targets in 2018 and 2020):
* Water Supply: (i) improve access to reliable water supply services from 76% to 90% of the overall population. Special focus was given to the inland river basins of the Sava and Drava where coverage rates were as low as 31% in some counties; and (ii) improve service efficiency, as water losses were high (46% on average, nationally) and water supply and sewerage services very fragmented. At the time, there were 160 municipally-owned water companies in a country of 4.5 million people.
* Wastewater: (i) increase sewerage collection coverage from 44% to 60% of the population, with 100% coverage for municipalities that have more than 15,000 people; and (ii) construct new and upgrade existing wastewater treatment plants with the goal of providing wastewater treatment for: (a) all systems that serve more than 15,000 people, and (b) 70% of the systems that serve 2,000 to 15,000 people.
* Floodprotection: (i) increase the flood protection coverage by completing the priority investments as identified in the flood protection scheme designed in the late 1960s and updated by EU requirements; (ii) promote co-ordination among agencies that are responsible for managing flood protection; and (iii) establish a comprehensive insurance scheme that would cover damages related to floods. Special focus was given to the Sava and Drava river basins where the flood protection scheme had not been completed.
2 IWP design contributed to the implementation of the water sector strategy. In 2006, the IWP was designed to support the Government of Croatia make progress towards the above objectives and preconditions for joining the EU. The project followed a World Bank-funded operation in the same geographical area, the Eastern Slavonia Reconstruction Project, and it was implemented in parallel with two additional World Bank investments in the sector - Coastal Cities Pollution Control (CCPC) Projects 1 and 2 which focused on the collection, treatment, and disposal of wastewater in coastal areas, with the objective of improving the quality of coastal waters.
1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved)
The objective of the project was to improve water supply services, wastewater services, andflood protection measures in municipalities selectedfrom the inlandpart of Croatia.
PDO and geographical areas of focus. The project focused on the Sava and Drava/Danube basins, areas which are economically weaker than the rest of the country. The project components were all designed to support the EU accession process by: (i) financing physical infrastructure to meet EU directives on water supply and wastewater; (ii) identifying and implementing institutional reforms necessary for EU compliance; and (iii) financing the preparation of feasibility studies for water supply, wastewater collection and treatment, and flood protection, to be financed through EU grants.
Key Indicators. The following were the key indicators: * coverage ofpublic water supply in targeted municipalities;2 * coverage ofsewerage in targeted municipalities; * volume of wastewater treated as per applicable legislation in the targeted municipalities (dropped following level-2 restructuring in December 2011 - see restructuring section for details); * retention volumeforfloodprotection in the Lonjsko Polje flood plain; * working ratio, defined as cash operating expenses divided by collected revenues and should decline due to improvements in operational efficiency; * percentage of customers satisfied with the service measured through an increase in percentage of satisfied customers and verified through surveys collected before and after the implementation of each sub-project; and * projects submitted to the Government and then proposed for financing by EU grants or other financial institutions.
2 In the PAD, coverage was defined as number of people connected divided by the number of people in the designated utility service area. During the implementation progress monitoring and for this ICR, people connected were counted as those who are connected or have the possibility to connect in the near future. By Croatian law, connections to WSS services are compulsory within a year from the date when the service becomes available, and are required for compliance with the EU acquis. Connections are normally financed by end users, which is also the case for other IFI or EU supported projects in the sector.
3 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification
The PDO was not revised. One outcome indicator - the "volume of wastewater treated: this will be achieved through wastewater treated - as per applicable legislation - in the targeted municipalities"- was dropped with the level-2 restructuring in December 2011. The Government and the Bank team considered the indicator inaccurate because it depended on the volume of wastewater entering the wastewater system (not all connections were to be completed by the end of the project). The achievement of objectives was considered better monitored by another indicator, the "percentage of sewerage coverage .
1.4 Main Beneficiaries
The project had multiple beneficiaries: (i) the users of water supply, wastewater and flood protection services (about 200,000 people); (ii) the municipal water and sewerage companies (MWSCs) which received support from the project to improve water supply services, wastewater collection and treatment, as well as technical assistance to improve utility performance; (iii) the river basin authorities that received support from the project to improve flood protection capacity; and (iv) the Ministry of Agriculture 3 and Hrvatske Vode (HV), which is the agency that oversees the water supply and sewerage sector and prepares investments in the country.
1.5 Original Components (as approved)
The project had two components: Technical Assistance and Investments.
Component A: Technical Assistance. The Technical Assistance Component included the following three sub-components.
Sub-component Al - EU Accession Support: HV as a national entity for water management is principally responsible for the implementation of activities related to meeting EU directives and absorption of EU funds. To this end, it implements the Water Management Strategy that involved strengthening of institutions and preparing projects that would receive funds from the EU or other sources. This component included: * institutional strengthening of HV and Ministry of Agriculture (MOA) to implement the Water Management Strategy, including training and technical assistance linked to absorption of EU funds; and * preparation of projects for financing by the EU and other sources. The Bank loan was to finance feasibility studies and other documentation needed for location and construction permits, including preliminary design, final design, environmental assessments, and bidding documents.
At the time of appraisal, the line ministry in charge of water was the Ministry of Agriculture, Forestry and Water Management (MOAFWM) but was later named Ministry of Regional Development, Forestry and Water Management (MRDFWM) during the time of the 2011 restructuring. Due to changes in government in December 2012, the name of the ministry was changed to the current Ministry of Agriculture (MOA).
4 Sub-component A2 - Project Implementation Support: This sub-component was implemented by HV and included financing of: * preparation of the Bank-financed investment program, including preparation of feasibility studies, securing necessary construction and environment permits, and preparation of bidding documents; * meeting the project's fiduciary (financial management and procurement) and safeguards requirements (environment and land acquisition); * preparation of project reports; and * preparation of annual audit reports.
Sub-component A3 - InstitutionalStrengthening of Utilities: This sub-component focused on providing TA to the participating utilities and included: * preparation of feasibility studies and other documentation needed for location and construction permits, including preliminary design, final design and environmental assessments; * preparation of bidding documents; * construction supervision; * measures to increase operating efficiency and improve customer service, including specific TA to help utilities reduce commercial water losses and improve their financial position; * reporting to HV on the sub-project progress; and * customer surveys, at the beginning and end of sub-project implementation.
Component B: Investments. The Investments Component included the following three sub-components.
Sub-component B] - Utility Investments. This sub-component included three sets of utility investments: * Set 1 Investments: (i) Virovitica - increase sewerage coverage; (ii) Northern Baranja - improve water supply coverage; and (iii) Ogulin - increase sewerage coverage and construct a wastewater treatment plant. Feasibility studies for these investments were prepared with support from the Japanese Policy and Human Resources Development (PHRD) Fund. * Set 2 Investments: (i) Davor-Nova Gradiska - improve water supply coverage; (ii) Slavonska Podravina region - improve water supply coverage; (iii) Nasice - increase sewerage coverage and construct a wastewater treatment plant; and (iv) Southern Baranja region - increase sewerage coverage. The PHRD grant also supported the preparation of feasibility studies for set 2. * Set 3 Investments: At the time of appraisal only a partial list of projects was identified and ready, this included: (i) Vukovar - increase the sewerage coverage; (ii) Ilok - increase the sewerage coverage; (iii) Ivankovo - increase the sewerage coverage and construct a wastewater treatment plant; (iv) Otok and Komletinci - increase the sewerage coverage and construct a wastewater treatment plant; and (v) Cema - increase the sewerage coverage and construct a wastewater treatment plant.
5 * During implementation, an investment in the sewerage system of Dugo Selo-Rugvica was also identified by HV as a priority and included in the investment program of the project.
Sub-component B2 - Flood Protection. This sub-component financed rehabilitation and expansion of flood protection infrastructure, including dykes, canals, and channels. At the time of appraisal it envisaged only works in the Central Posavina area in the Sava river basin, but following the 2011 restructuring, activities were extended to also cover the Drava and Danube river basins. Six investments were initially proposed - two in Lonjsko Polje (designated Ramsar wetlands), and four outside the wetland area. Through the investments, the volume of flood water retained was expected to increase from 600 million m3 to 720 million M3 , reducing the risk of downstream flood damage (for a 25- year flood event). The PHRD grant also financed a feasibility review of these investments.
1.6 Revised Components
Level-2 restructuring (Country Director Approval). In 2011 the project was restructured with the objective of maximizing the project's outcomes towards flood protection and EU accession support. The value of several construction contracts was lower than estimated. The savings allowed for more investments under component BI (in Dugo Selo-Rugvica) and for reallocation to other components. Loan proceeds from Component B 1 (Utility Investments) were allocated to Component B2 (Flood Protection investments) and to Component A (Technical Assistance) to meet higher than expected expenses for consulting services and enable expanded activities under these components. Accordingly: * Component B2 (Flood Protection Investments) was extended to cover investments in the Drava and Danube river basins, beyond the Central Posavina area, in the Sava River basin. * Component A (EU Accession Support, Project Implementation Support and Institutional Strengthening of Utilities) was adjusted to reflect project support for implementing water sector reforms. This included TA services for institutional reform studies, the preparation of sub-projects and studies for future EU financing, and the cost of TA for strengthening project utilities. Preparation of the water management strategy was dropped and subsequently carried out by HV.
Project Costs (EUR million) . Original After Restructuring IBRD Borrower IBRD Borrower Component A: Technical Assistance 4.84 0.25 9.69 0.61 Component B: Investments 95.16 5.05 90.31 4.70 (Bl) Utility Investments 88.15 4.68 78.81 4.10 (B2) Flood Protection Investments 7.01 0.37 11.49 0.60 Total 100.00 5.30 100.00 5_.30_4
4 Totals do not sum up due to rounding.
6 1.7 Other significant changes
Changes to the Results Framework. One of the project indicators was dropped for the reasons explained in section 1.3. Revised baselines and targets were also included in the Results Framework at the time of restructuring. Since the number and full scope of project activities were not defined at the beginning of the project, the baseline values were only established at a latter stage, when the final list of sub-projects and activities became known. For the same reasons, the targets in the Results Framework were not set at the beginning of the project due to lack of baseline data. Baselines were determined in 2007 (and revised at restructuring) and the first customer satisfaction survey was conducted in 2010.
Involuntary Resettlement OP/BP 4.12. With the restructuring in 2011, the wording in the loan agreement regarding compliance with the Bank's Operational Policy on Involuntary Resettlement was strengthened. During the initial part of project implementation, HV had used simplified tables (matrices) regarding expropriated land to request the Bank's no objection in lieu of standard Land Acquisition Plans (LAPs). While the documentation was found acceptable to the World Bank in an ex-post review, they had not been submitted to the Bank for prior review and no-objection, as prescribed in the project's Policy Framework for Land Acquisition and Resettlement (LARAP). Accordingly, the Client and the World Bank agreed to undertake a full retroactive review of OP 4.12 compliance, aiming to ensure that due diligence had been applied in land acquisition matters as agreed to in the LARAP. See section 2.4 for further detail.
Special Account Ceiling. The project Disbursement Letter was modified to allow the Borrower to increase the ceiling of the Special Account from EUR 1.0 million to EUR 2.0 million. The grace period to process project expenses after the closing date was subsequently5 extended from 4 to 6 months. This was to allow sufficient time for the payment of invoices before the project closing date. This extension was necessary given the large size of the payments and the relatively limited ceiling of the Special Account.
2. Key Factors Affecting Implementation and Outcomes
2.1 Project Preparation, Design and Quality at Entry
Project preparation. The project was prepared in about one year, with the project concept note approved in mid-March 2006 and Board approval May 30, 2007. Feasibility studies for seven sub-projects, part of the first and second set of investments, were prepared with the support of a PHRD grant. Feasibility studies for another set of investments, and detailed designs were to be done within the project. To some extent, the disbursement projections included in the Project Appraisal Document (PAD) reflected the likely initial disbursement lag associated with the tight preparation schedule and the unavailability of all detailed design and bidding documents at the early stages of implementation.
5 Not part of restructuring
7 Project design. The project was designed in line with the 2004 CAS objectives, which were to support the government's growth and reform strategy for successful EU accession, while ensuring broad participation in growth and sustainable natural resource management. Importantly, the project was prepared to help Croatia comply with the two EU directives on water supply and wastewater - the Drinking Water Directive that focuses on the quality of the drinking water and the Urban Wastewater Directive that aims to protect the environment from the adverse effects of wastewater discharges from households and industries. Reflecting on the lessons learned from implementation of the previous CAS, the World Bank's strategy focused on private sector-driven growth through rationalization of the public sector, establishment of a supportive investment climate, and macroeconomic sustainability. Thus the project was also designed to support Croatia in identifying and implementing reforms for a more efficient water supply and wastewater sector.
Previous operations and lessons learned considered at design. The World Bank had already financed two projects in the sector, from which lessons were learned and adopted for the design of this project. The previous operations included the Istria Water Supply and Sewerage Project, and the Reconstruction Project for Eastern Slavonia, Baranja and Western Srijem. The latter focused on about the same geographical area of IWP and it was successful. The Bank was aware of the limited capacity of the Municipal Water and Sewerage Company (MWSCs) in the area hence the project was designed to provide extensive support to the participating MWSCs during implementation, and envisaged a substantial TA component to improve the utilities institutional capacity.
Risks analysis. The risks were well analyzed and realistic. From previous experience, the project stakeholders were aware that without a ready sub-project pipeline, implementation would likely be delayed. They flagged it as a risk. However, given the pressing conditions and the tight EU accession timeline the project could not be held back to identify all needed investments before approval. In retrospect, the lack of a defined pipeline and important early delays in establishing a fully staffed Project Implementation Unit (PIU), compressed the construction phase of the IWP to about 2.5 years. The Government of Croatia and the WB team faced tremendous challenges to make the project take off, as shown by the fact that as of July 2010 (30 months into project implementation) disbursements were only at 25%.
The PAD also identified the inability of utilities to make repayments to HV on their portion of the Bank loan as a moderate risk. This was accurately assessed, as some of the utilities are now requesting HV to revise their repayment conditions, as agreed to in the Subsidiary Agreement, because their financial situation is not strong enough. The design included a working ratio target precisely to help mitigate this risk.
The project supported a study on utility agglomeration, which proposed a substantial reduction in the number of utilities (from more than 160 to between 6 and 33), according to the model chosen for the service area. The Ministry and HV management intend to move forward on the study's recommendation on agglomeration, recognizing that it is key to implementing EU requirements for sector efficiency and financial sustainability.
8 2.2 Implementation
Implementation timing and disbursements. The project was implemented satisfactorily and the loan disbursed 92.2%. Over the implementation period, about 110 contracts were implemented, comprising construction of utility facilities in 12 sub-project areas, 6 investments for improving flood protection, and many technical assistance contracts to support the participating utilities, strengthening the water utility sector in Croatia, and preparing proposals for EU financing.
Approved on May 30, 2007, the IWP became effective on January 29, 2008 and closed as originally scheduled on December 31, 2012. This is the first World Bank infrastructure project in Croatia to close without an extension. Physical construction began 20 months after board approval. The slow start was mainly due to: (i) delays in signing the first two sub-loan agreements with participating utilities, a condition of effectiveness; (ii) delays in properly staffing the Project Implementation Unit (PIU); (iii) long processing for subsequent sub-loan agreements with the other 10 utilities; and (iv) time needed to complete design and bidding documents. The project made considerable progress in the last two years of implementation, when over 60% of the loan was disbursed.
Restructuring. The project was restructured in December 2011. The restructuring requested in May 2011 by the Ministry of Finance (MoF) was in line with the changes proposed by the Ministry of Regional Development, Forestry and Water Management (MRDFWM) 6 to the World Bank. The project restructuring did not entail changes to the project's development objectives, total project costs, disbursement percentage, or project duration. As noted earlier, the Flood Protection Component was scaled up to cover investments in the Drava and Danube river basins. The Technical Assistance (Component A) was expanded to allow the preparation of a larger number of sub-projects to be financed under future EU cohesion funds. About EUR 4.5 million was allocated from the utility Investments Component BI to B2, and about EUR 4.85 million was reallocated from Component B 1 to the Technical Assistance Component A.
2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization
Results Framework design and changes. The Results Framework (RF) was well designed, with specific and measurable PDO indicators to keep track of the results achieved. Some of the intermediate outcomes were included purely for monitoring physical project implementation. The percentage of contract value disbursed could have been substituted with more meaningful indicators measuring physical progress like km of sewer collector or drinking water pipelines built. Baseline data were not collected until project implementation was underway. A customer satisfaction survey was carried out only in 2010 due to delays with contracting the consulting company for this work and the novelty of the concept by the PIU/HV. To keep the RF manageable with sub-projects ongoing in 12 utilities, HV and the Bank agreed to measure the indicators as averages.
6 Renamed Ministry of Agriculture.
9 One indicator was dropped at restructuring in 2011 because it was found to be misleading and not representative of project achievements.
Core Indicators. One core indicator was added, namely the number of utilities supported by the project. Given universal access to piped drinking water in Croatia, other core indicators in the sector were not significant. The indicator "amount of BOD pollution loads removed by the treatment plant supported under the project - (tons/year)" can be measured once the plant is operational for a few months.
M&E challenges. Despite the limited number of indicators, HV and participating utilities struggled to keep up with data collection, analysis and reporting. Since not all sub- projects were initially identified, HV carried out an accurate baseline survey only in 2010, when all subsidiary agreements were in effect, but prior to the commencement of construction. The baselines, however, were only updated in the results framework during the December 2011 restructuring. Given the fast pace of implementation, HV and the utilities focused more on procurement and implementation then on data monitoring. Initially, the utilities expected HV to do the M&E, but it did not have sufficient capacity. At Bank insistence, additional consulting services were subsequently contracted to collect the necessary data and allow for results to be more accurately measured. 2.4 Safeguard and Fiduciary Compliance
Safeguards Compliance
Safeguards compliance of the project was satisfactory. Five World Bank safeguards policies applied to the project: Environmental Assessment, Involuntary Resettlement, Projects on International Waterways, Natural Habitat, and Forests.
Environmental Assessment OP/BP4.01: The project's Environmental category was Financial Intermediary (FI), with category A and B sub-projects. As per Bank policy, an Environmental Framework (EF) was prepared, disclosed and followed. Environmental Impact Assessments (EIAs) were prepared for the sub-projects as part of the Feasibility Studies. Environmental Management Plans (EMP) were prepared and closely monitored by HV. The HV environmental specialist visited the sites regularly and collected EMP reports from the site supervisors. Irregularities were corrected in a timely manner and reported to the World Bank. The Bank monitored the quality of the EIAs as well as the implementation of EMPs carefully and regularly.
Involuntary Resettlement OP/BP 4.12: The project followed Croatian Law on Expropriation, and in November 2012 a detailed ex-post review confirmed that there were no claims and that the project was in compliance with Bank policies. This review was undertaken because the project may not have fulfilled all requirements as laid out in the Land Acquisition and Resettlement Policy Framework, which was prepared and disclosed before appraisal. Specifically, Land Acquisition Plans and grievances redress mechanisms were not prepared and submitted to the Bank for prior approval. The retrospective review found that in five cases the law on expropriation had to be applied, accounting for about 0.4% of the land affected by the project. No further legal issues
10 arose from the expropriation. In another six cases, land was regularly purchased. Finally, for about 11% of the land plots affected, agreement on the right-of-way was reached without the need to invoke the law on expropriation. The assessment concluded that the designs were done considerately as to minimize the impact on private land. Execution of works was also optimized to minimize disruption to private activities and property.
Projects on International Waterways OP/BP 7.50: On April 3, 2007, the Croatian Government notified the International Commission for the Protection of the Danube River (ICPDR) and the riparian countries about the project. No issues were raised by the other riparian countries. Overall, by financing improved wastewater treatment and the project is expected to have a positive impact on effluents.
Natural Habitat OP/BP 4.04: The policy was triggered due to project activities in Ramsar7 (such as Lonjsko Polje). The investment not only did not damage or negatively affect critical habitats within the park area, it had a positive impact. The Environmental Impact Assessments (EIA) and EMPs envisaged mitigation measures for borrow pits8 that would enhance biodiversity and extend water/wetland habitats. This was done in consultation with the public, HV, and local non-governmental organizations (NGOs). The borrow pits were designed outside the wetlands in a manner that excavations replicate naturally shaped ponds and wetland areas. These newly created areas were later reconnected with the original Lonjsko Polje wetland. Specific measures were included in the EMPs, and the design and execution of civil works were closely monitored by the HV environmental specialist.
Forests OP/BP 4.36: The policy was triggered due to project activities and dykes built in Lonjsko Polje that increases water levels during flood events affecting the trees in the wetlands and flood plain. Given that the water would be retained in the area for limited period of times, the impact on the local plants is not substantial. No other negatively impacting activities were identified during the project execution.
Fiduciary Compliance
FinancialManagement: Financial management (FM) has been satisfactory throughout the project. Unaudited Interim Financial Statement Reports (IFRs) were received by the Bank regularly and found acceptable. The project and entity audits were generally conducted on time (only the 2008 annual audit was reported delayed but was received by September 2009). Over the project life, the auditors expressed unqualified opinions. The staff of the PIU working on the project reported that FM entailed a lot of work as the FM software of HV was not re-programmed to produce reports according to Bank requirements, hence IFRs had to be prepared "manually" using spreadsheets.
7 The Ramsar List was established in response to Article 2.1 of the Convention on Wetlands (Ramsar, Iran, 1971) Areas where material (soil, sand, gravel, etc.) has been dug for use in a construction project.
11 Procurement: Procurement was a major challenge because of the large number of contracts and the speed at which the project had to be implemented. While the outcomes have been positive, procurement is rated moderately satisfactory. About 110 contracts were awarded during the project. Of these, all but 6 were completed by the project closing date of December 31, 2012. The pending works under the remaining open contracts will be financed by HV. Only one procurement package, of about EUR 1 million for equipment, had to be cancelled due to substantial delays in awarding it. Given the large number of contracts to be processed in a short period of time and the initially limited staff capacity allocated by HV to the PIU, the World Bank provided extensive support. The HV staff who worked on the procurement of the project reported that they have greatly benefitted from the learning experience and found Bank's guidelines clear and adequate.
2.5 Post-completion Operation/Next Phase
Uncompleted contracts. Due to harsh weather conditions in December 2012, as well as previously accumulated delays, six contracts were not fully completed by the end of the project (Table 2 Annex 2). HV committed to complete and finance all works remaining from its own budget. Given the adequate financing capacity of HV, it is expected that all works will be completed and the assets put in operation. The Bank team will file additional reports in WB Docs to supplement this ICR as works are completed.
Operation and Maintenance. Operation and maintenance of the new assets will be the responsibility of the local utilities. The local capacity of the sector is generally adequate and the local engineers and technicians can perform the tasks for optimal operations and maintenance of the systems installed. Also, as part of the design and build contracts for the most complex infrastructure, the local engineers have received training from the contractors, while additional support is provided by HV.
Cost recovery, tariffs and users connections. To ensure long-term sustainability and coverage of operations and maintenance costs, the utilities should aim to achieve full cost recovery. Many participating utilities improved their financial situation over the course of the project, as reflected in substantial improvement in their working ratio (Annex 3). Tariff structures have also improved and include a development surcharge that would help cover their share of repayments of the World Bank loan. To maintain this positive trend, the first priority for the utilities and the municipalities is to accelerate the connection rate of users to the new assets. This is especially critical for utilities that have implemented wastewater collection and treatment facilities. However, one of the obstacles delaying connection is the regularization of the construction permits since many households do not have the needed documentation. The municipalities are working to address this problem, while the newly passed Water Act (May 2013) has relaxed water supply and sanitation service connection requirements to include properties with unresolved permitting issues.
Institutional strengthening. The project financed substantial technical assistance activities, (see outcome section and Annex 2 for details). A particularly important output was the 'Study on Institutional Options in the Water Supply and Wastewater Sector.' The
12 study was well received by Croatian authorities, but reforms have stalled in recent months due to changes in the government. It is important for Croatia to capitalize on the reforms undertaken in the water sector and keep the momentum going throughout the EU membership process. The Bank envisages further support through new or ongoing projects in the next phase of the Country Partnership Strategy.
EU investments. As Croatia becomes an EU member state on July 1, 2013, it will be eligible for large grants to comply 9 with EU water and wastewater directives. It is also receiving substantial funding from EIB and the CEB. This support, however, will require substantial co-financing. While these investments are expected to significantly improve the sector's infrastructure, major reforms are needed to enhance its sustainability.
3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation
Relevance of objectives and EU accession context. The project's objectives and design responded adequately to the needs of the sector. The project was appraised in March 2007 as Croatia was carrying out negotiations for EU accession. In this context, a critical priority for the country was to begin compliance with EU directives, including the Drinking Water and the Urban Wastewater Directives.
The project was designed to focus investments in the poorer areas of Croatia, and to target communities where access to water supply and wastewater services was comparatively low. The TA Component focused on strengthening the financial capacity of local utilities, analytical studies, and the preparation of EU-funded projects. These were highly relevant to the MOA, HV and the participating MWSCs. The 'Study on Institutional Options in the Water Supply and Wastewater Sector' provided a foundation for the agglomeration of water and sewerage utilities, a necessary condition for compliance with the EU directives on service efficiency.
Implementation. Project implementation was carried out within the period agreed to at negotiations. As of June 26, 2013, 92.2% of the loan was disbursed, a remarkable achievement given initial delays. Project savings of about EUR 500,000 were achieved due to the exchange rate. More savings came from the utility component as explained in section 1.6. The project became effective about 8 months after World Bank Board approval on May 30, 2007. Furthermore the first works contracts (for sewerage network in the district of Virovitica and water supply system in Batina, district of Southern Baranja) were signed in April 2009, about two years after World Bank Board approval and 15 months after effectiveness.
Project implementation accelerated after summer 2008, when a new PIU Director was recruited. Shortly thereafter negotiations with all utilities/municipalities were completed
' The cost to comply with EU water and wastewater directives by 2023 was being estimated at EUR 4.5 billion.
13 and subsidiary financing agreements signed. Strong leadership by the PIU, with Bank support, played an important role in accelerating implementation in 2010 and 2011. By end-2012 only six works contracts were not yet complete (see Table 2 in Annex 2). Works were also ongoing in two of the 12 projects areas at the writing of this ICR. Dugo Selo was recently added as a new project site, and the Slatina component of the Davor- Nova Gradiska sub-project was delayed. Testing is ongoing for the Wastewater Treatment Plant in Ogulin. HV is financing all works not completed by the project. A closing date extension was considered, even though all PDO indicators were achieved, but the Borrower preferred to cancel the remaining portion of the loan and avoid extension. HV had the funds to complete the works.
3.2 Achievement of Project Development Objectives
The objective of the project - to improve water supply services, wastewater services, and flood protection measures in municipalities selected from the inland part of Croatia- was achieved. It contributed to strengthening infrastructure, especially trunk infrastructure and treatment facilities of the utilities and participating municipalities, which are now in the process of connecting the users to the new system. It increased retention capacity of flood areas beyond initial expectations. It supported the sector in preparing for EU accession. It financed preparation of more investment proposals for EU financing than originally envisaged. It strengthened the institutional capacity of HV to manage and plan water supply, wastewater and flood protection services in line with EU requirements. Lastly, it financed a critical study on optimizing the water sector, and all participating utilities received assistance to improve their services and financial sustainability.
Results achieved - summary of PDO indicator measures. The targets set out for the PDO indicators in 2011 have been achieved. * On average, infrastructure investments increased: (i) water supply coverage in target areas from 40% (2007 baseline) to 85%; and (ii) sewerage coverage from 35% (December 2011 baseline) to 73% (reduced during the 2011 restructuring from 76%). These targets, established at sub-project feasibility, were achieved. Coverage is defined as the availability of the water supply and wastewater service, to which users connect. In Croatia, when a water supply pipe or a wastewater collector is available in the street, connection is compulsory and enforced by local authorities. Coverage will be fully attained once all connections are in place. * The retention volume was increased by 30%, meeting the targeted 800 million m3 The target was increased during restructuring in 2011 from 720 to 800 million m3 * Eight (8) project designs were submitted to the Government for future EU financing or other financial institutions, exceeding the target of 7, set at restructuring. The total estimated value of investment prepared is about EUR 123 million, or over 30 times the value of funds invested in this component. * Working ratio is calculated by dividing operating expenses (excluding depreciation) by operating revenues, and was measured with fresh data collected from the utilities
14 for 2012. The data demonstrate a remarkable turnaround in their financial position, with an average (for all 12 utilities) of 0.7, substantially exceeding the target of 1.10 * Customer satisfaction with water and wastewater services was measured through a survey with varying results. Some municipalities exceeded 93% satisfaction (Nasice was the best) while others were as low as 68% among those connected (Northern Baranja was the worst). On average, the satisfaction was about 81% among those who have been connected, compared to a target of 80%.
Infrastructure Output. The IWP financed 52 contracts for works and goods to address the water supply and wastewater needs of 12 service areas. All schemes were designed and implemented according to EU standards. Some infrastructure, however, used pioneering technology for Croatia. Examples include: (i) the biological treatment ponds in Ilok, a wine producing area in the vicinity of the Danube; (ii) the tertiary level wastewater treatment, with ultra and nano-filtration in Ogulin, a karst area where the only option was to discharge the outflow of the plant into a small river that goes underground; and (iii) a plant management system that is fully computerized and remotely accessible in Nasice. The beneficiary utilities were particularly proud of their state-of-the-art systems and highly committed to their maintenance.
Technical Assistance. In addition to the impressive infrastructure implemented, the main achievements of the project include results of the TA. About 60 consulting contracts for design and feasibility studies to be financed by the EU or other IFIs worth about EUR 123 million. Thus the EUR 3.9 million leveraged more than 30 times its value. The TA components also supported the development of a model-based decision making process for the selection Wastewater Treatment (WWT) technology and the improvement of technological operation of WWT plants. A study on Institutional Options for the Water Supply and Wastewater sector was widely praised for recommending a set of proposals for utility optimization and agglomeration. The Ministry and HV recognized this as key to implementing the EU requirement for the sector efficiency and financial sustainability. This component also financed project preparation for ecological and hydrological revitalization, predominately the revitalization of flood plains, the rehabilitation of meanders, and the creation of new aquatic systems. Finally TA was directed at reducing water losses, improving efficiency, and strengthening the financial position of the utilities.
3.3 Efficiency
A detailed economic and financial analysis of the utility investments (see Annex 3) covering 83% of the project costs was conducted. No data was available to do a thorough assessment of the flood protection investments, but these are considered critically important given that the country is prone to flooding, which has dramatically affected people and assets in the last years. In 2010 alone, flooding caused about EUR 150 million of damage in central Croatia. Specifically, the project has contributed to the protection of: (i) at least 51,300 people living in the Sava river basin area; (ii) at least 12,000 ha of
10A working ratio below 1 indicates that the company is able to recover operating costs from its annual revenues.
15 agricultural land; (iii) the international transport "Corridor X" and several regional roads; and (iv) the flora and fauna in the Lonjsko Polje Nature Park. The project also benefitted neighboring countries by lowering the water levels of the Sava.
Per capita cost. For the utility component of the project, about EUR 400 was invested for each person beneficiary (assessed to be about 205,000 people). The investments were designed to satisfy EU compliance requirements and yet not overburden utilities with excessive loan repayments or operations and maintenance costs, which would put them under considerable financial stress. Such per capita costs are fairly small when compared with typical investment projects to meet EU requirements in other EU member states.
Ex-ante Economic and Financial Analysis. An economic and financial analysis was not conducted during appraisal, as investments were not identified at the time. The PAD therefore did not present the methodology used for the cost-benefit analysis nor provided the baseline values. It stipulated though, that the economic and financial analysis will be part of the feasibility studies for each sub-project, and included in the subsidiary financing agreements (SFAs) signed with the 12 participating MWSCs during the course of the project implementation. The Bank reviewed and approved the SFAs, and checked that all such analyses were prepared. See Annex 3 for details.
Ex-post Economic and Financial Analysis The economic rate of return (ERR) for the overall project at completion is 16% and the NPV is HRK 2.04 billion. The economic analysis is based on the assumption that the economic benefits of compliance with EU Water related Directives is quantifiable with the willingness to pay for improved water supply and wastewater services. Collection was used as a proxy for estimating the economic value of the willingness to pay. The other proxy is the costs savings for consumers. Economic costs of the project include investment and operational cost. Two scenarios were developed to estimate the project's financial rate of return (FRR) and NPV. The first and more conservative scenario assumes a gradual increase in tariffs until full cost recovery over the 30 years period, and produces an FRR of 8% and a financial NPV of HRK 16.9 million. The second scenario assumes tariffs increase to meet full cost recovery in 3-4 years after project completion and generates an FRR of 13% and a financial NPV of HRK 622 million. Individual results are similar and the FRR of different MWSCs' spans from 4-12% and 11-16% in Scenario 1 and Scenario 2, respectively. Likewise, Scenario 1 results with a negative NPV for four sub-projects out of twelve, predominantly war damaged municipalities with a majority of the population being the elderly; while NPVs for all sub-projects were positive and relatively high in Scenario 2.
Working Ratio and Improved Operating Efficiency. The FRR results signal that MWSCs have in principle strengthened their financial position over the course of the project as highlighted in the significant turnaround in the working ratio (PDO outcome indicator). The project's working ratio at completion stood at 0.7, reduced from the 2008
16 value of 0.9, which is the baseline calculated with fresh data1 collected during the ICR analysis. The result is well below 1.0, which determines a situation in which MWSCs can meet their cash commitments through operating revenues.
Improvement in operating efficiency was measured by the bill collection rate. Billing revenue nearly doubled between 2008 and 2012 as a result of increased water and sewerage tariffs. The collection rate over the same period was high and relatively stable, at around 90%. Although these results vary by MWSCs, any decline in collection rate is probably linked to the global economic crisis, which has had a severe impact on household incomes in Croatia, especially among the poorest located in the project areas (e.g., Darda). Financial efficiency was also enhanced mainly due to better financial management practices, such as the introduction of separate cost-accounting systems for multi-purpose utilities. Operating revenues rose at a higher pace than the operating costs. Staff costs, however, still make up nearly half of the operating cost, signaling that staff size should urgently be adjusted to business needs.
The loan repayment is utility specific and MWSCs contributed up to 30% of the total debt service. All MWSCs were requested to introduce development fees specifically to cover increased capital expenditures. Revenues from the development fees are used for loan repayment, which began in 2012 for a period of 15 years. According to the SFAs, municipalities also guarantee full coverage of the service cost, in case collected revenues from the development fees are not sufficient to cover annuity costs. 3.4 Justification of Overall Outcome Rating
Rating: Satisfactory The project achieved its development objective to improve water supply services, wastewater services, and flood protection measures in municipalities selected from the inland part of Croatia. Its overall outcome rating is assessed satisfactory. It especially succeeded in improving the infrastructure assets of the participating municipalities and their utilities, contributing to their compliance with EU directives. It also contributed to EU integration by financing feasibility studies for more investments to be financed by the EU, and by delivering studies that support the reform process necessary to bring the water sector in Croatia in compliance with EU efficiency and management standards.
Relevance is rated as highly satisfactory as it contributed substantially to sector progress towards EU requirements and standards in a disadvantaged area of Croatia. The sector's relevance in the EU integration process is further shown by the fact that about a quarter of the EU funds to be allocated to Croatia in the next 7 years is for water and wastewater investments.
" During the very thorough data collection for the ICR, it was found that the data provided by the utilities earlier also contained other services (such as greenery and grave yards); thus the baseline set at the time of restructuring, 1.21 for 2009, was not correct and is revised to 0.9.
17 Efficacy is rated satisfactory. The project was well implemented and achieved substantial results. This is all the more evident considering that feasibility studies, design, and bidding had to be done after Board approval (January 2008-December 2012), which meant that a substantially shorter time was available for construction.
Funds were re-allocated from the utility Investments Component B1 to B2 in 2011 and that helped achieve a flood retention capacity of 800 million m 3 - increased from the originally envisaged target of 720 million m 3 set in 2009. This over-achievement under the Flood Protection Sub-component is considered highly satisfactory.
Furthermore participating utilities have improved their operational performance by noticeably reducing their working ratio to 0.7 on average. They have also improved their billing and collection capacity and have begun to adjust tariffs towards cost recovery levels. The two graphs below show these improvements.
Figure 1: Improvement of the working ratio Figure 2: Improvement of billing and collection for participating utilities water supply and (revenues) for participating utilities' water supply and wastewater services between 2008 and 2012 wastewater services between 2008 and 2012
1.00 14- o -o-
0DA -
070 - O------10000000oo--o------
0,60
0.50 2011 2002012 2009 2010 2098 2009 2010 2011 2012 Yuer Year -- [email protected]
Efficiency is rated satisfactory. It is important to note that the project targeted the most economically disadvantaged areas of Croatia, where utilities are financially weak and tariffs relatively low, with no summer surcharge. During the project's lifetime, the participating MWSCs have steadily improved their financial position, as reflected by the Operating Ratio analysis. The project also provided technical assistance to help reduce water losses and improve the financial capacity of the participating MWSCs.
3.5 Overarching Themes, Other Outcomes and Impacts
(a) Poverty Impacts, Gender Aspects, and Social Development The project targeted communities in the poorest areas of Croatia. These communities were also the most affected by the war. The project delivered significant social benefits due to increased coverage of basic service of water and wastewater. Additional flood water retention reduces the risk of widespread flooding, with its associated loss of assets and business, which would cause particular hardship for the poorer and more vulnerable.
(b) Institutional Change/Strengthening The project made a substantial contribution to the institutional analysis and strengthening of the sector. It exceeded expectations on the number of feasibility studies for
18 infrastructure investments to be financed by EU funds. HV's capacity has also improved. Other financier and sector experts have reported noticeable progress in HV's capacity to manage the preparation of feasibility studies and designs of sub-projects to be financed by the EU and other IFIs. Finally, beyond targeted technical assistance to the participating utilities, it financed a well-received study on institutional optimization of the sector, which now requires follow up and implementation. The study analyzed utility agglomeration options that would help achieve efficiency, ensure sustainability, and greatly help in the absorption of EU funds. A tangible benefit, achieved by the project closing date, has been the improved capacity of local utilities as reflected in the improved operating ratio and the collection rate in the targeted MWSCs. The graphs in Annex 3 illustrate this progress.
(c) Other Unintended Outcomes and Impacts (positive or negative) According to HV, the project helped streamline procurement procedures and build substantial procurement capacity within the organization. The World Bank procurement guidelines were found to be very clear and easy to follow, and the team provided clear support during complex procurement processes. New technologies were introduced by the project, especially for wastewater treatment, which included biological treatment ponds and tertiary treatment with nano-filtration of the effluent. Such investments have brought new knowledge to the water sector in Croatia and are likely to be replicated as necessary. HV and utility staff have been trained on new technologies as well as project management. Finally, the project piloted utility agglomeration in Virovitica, Davor-Nova Gradiska, and Virovitica where municipalities joined forces and formed one "regional" utility to implement and manage the built assets over the long term.
(d) Ecological revitalization through TA The project also assisted in ecological restoration of several sites in the Slavonia area, where anthropogenic activities led to degradation of habitats, namely over-engineering or non-maintenance post engineering intervention. Through several TAs, the project contributed to ecological and hydrological revitalization, predominantly through project preparation for revitalization of flood plain, rehabilitation of meanders, and creation of new aquatic systems. Furthermore, these activities allowed for streamlining discussions with the public and local communities and led to improvement of tourist offerings and services through the planning of agro- and eco-tourism, fisheries, and the creation of recreational areas (jogging/paddling/rowing, etc.).
3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops
This is a core ICR and no dedicated beneficiary survey was carried out. However, as the project closed, HV carried out a customer survey to measure satisfaction with water supply and sewerage services in the project target areas. Satisfaction rates varied by area and were dependent on the level of completion and the direct benefits to customers from project investments. On average satisfaction rates were about 81% among those customers already connected to a service, meeting the target of 80%.
19 4. Assessment of Risk to Development Outcome Rating: Low Given the imminent accession of Croatia to the EU and the attention and funding of the sector, the risk to the development outcome is considered low. However, there are some critical measures that HV has to implement to ensure effective start-up of all project investments as well as their long-term sustainability: * The financial position of the utilities has improved, however to ensure sustainable revenues the municipalities must take action to accelerate the connection rate to new assets, especially sewer lines. In some areas the willingness to connect is low - as shown by the customer survey. This appears to be due to a lack of construction permits for many houses in the project areas. A new policy was recently introduced to allow for connections to properties without permits and for connections to become mandatory within a year of water supply and sanitation construction. Some municipalities have already taken steps in this regard. * The project delivered an important and well-received study on the institutional options for the Water Sector. If the recommendations are not implemented, compliance with EU requirements may be delayed.
5. Assessment of Bank and Borrower Performance
5.1 Bank Performance
(a) Bank Performance in Ensuring Quality at Entry Rating: Moderately Satisfactory. The design proved to be relevant, despite being prepared within a short period of time, with a clear vision and objective. If more time was available for preparation, it would have been possible to have more sub-projects ready by effectiveness -- the primary cause of delay in the first two years of implementation. The Team could have developed a methodology for economic and financial analysis to be later used to appraise the sub- projects. Additional preparation time would also have allowed more discussion on repayment terms and the contribution of municipalities, a better staffed PIU, and a completed Operations Manual. It would also have reduced uncertainty and miscommunication between the PIU and the Bank. The TA component was designed flexibly enough to respond effectively to emerging demand, such as the study on agglomeration.
(b) Quality of Supervision Rating: Satisfactory. The Bank team developed a strong partnership with HV and the PIU. It support HV at critical phases of the project. While there were some TTL changes, handovers were carried out smoothly. In addition to procurement and FM, the team worked closely with HV on all financial, economic, institutional, environmental and EU-related matters, which helped shape the TA component of the project to maximum effect.
20 (c) Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory. Overall Bank performance is rated moderately satisfactory. More time for preparation could have allowed for smoother implementation during the early years and the completion of all preparatory activities. The supervision team provided excellent implementation support and worked closely with the client in every aspect of the project. Supervision was regular and benefitted from the presence of a team based in Zagreb, which included an engineer, an environmental specialist, and an economist. Subsequently, the TTL was assigned to the region, which allowed for more frequent visits. The Bank team responded in a timely manner to client requests for variation orders and restructured the project to refocus its components and outputs, especially on the TA component.
5.2 Borrower Performance
(a) Government Performance Rating: Satisfactory. There was a delay in the signing the first two Subsidiary Financing Agreements between HV and the municipalities, and therefore, in project effectiveness and the start of implementation. Such delays were associated with the project being implemented in several municipalities, with varying capacity. In particular, negotiations on the local contribution and repayment conditions with many of the participating municipalities took a long time. There were also some delays with the establishment of a speedy mechanism to approve the numerous withdrawal applications. Difficulties were finally overcome and the project implemented and closed on time without extension. Generally, there was strong support and interest in the project from the sector Ministry, even though attention shifted to other priorities, especially to the challenge posed by huge EU investments towards the final years of the project. The Borrower decided not to ask for an extension of the project closing date and to use HV's funds instead to complete all pending contracts. While this decision put considerable pressure on HV to complete all contracts, it is considered positively in this evaluation and a sign of maturity by the Borrower in managing its external debt commitments.
(b) Implementing Agency or Agencies Performance Rating: Satisfactory. HV implemented the project well, although it took a long time for HV to establish adequate implementation capacity. Very little happened in the early years of the project and the PIU was inadequately staffed until the end of year two. Implementation substantially accelerated from the third year of implementation as the PIU was better staffed and a new, and highly effective PIU Manager was brought in to lead the project. The PIU was strategic in the use of the project's funds. While in the early years of the project it focused mainly on designing and launching the physical components, only later did it pay increased attention to implementing the project's TA component. It strategically revised the content of the TA and asked for the Bank's support to supervise and design new TA activities, such as the study on utilities agglomeration.
21 (c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory. The overall assessment of borrower performance is satisfactory. HV and Croatia are seasoned partners of the World Bank and did well in completing the project on time, with about 92.2% of the loan disbursed and all targets met or exceeded.
6. Lessons Learned
Lessons learned include: * Time for preparation was too short, in particular for the utility investments component (Component BI). At the early stages of project implementation, HV had difficulties staffing the project, as its specialists were busy implementing other projects including those financed by the Bank. At the time of Board approval, the sub-project pipeline for components B 1 and B2 should have been at a more advanced stage of preparation. It took nearly two years from the Board date to sign the first works contract. A longer preparation period would have allowed a less concentrated physical implementation. At the same time, the TA component had no pre-determined pipeline, which allowed for flexibility to address the sector's priority needs as the EU preparation process unfolded. Utilities with committed business improvements plans were able to put forward their proposals and receive the support needed from the project. * While some utilities had the capacity to implement, engage beneficiaries, and supervise the works effectively, others required considerable support from HV. In the weakest utilities works were delayed. This indicates that a further concentration of utilities would not only foster financial but also technical efficiency. The PIU took some risk in selecting financially weaker and less capable utilities, but the investment and payoff proved worthwhile. * Political support is critical for these types of projects. Municipalities and elected mayors and council members had to make tough choices on tariff adjustments and enforce connections. Absence that support, implementation can be delayed and utility performance minimal. Political commitment must also be sustained at the central level to implement reforms to move the sector towards EU compliance. It is important for HV and the MoA to maintain strong capacity, a clear sector vision, and to sustain their commitment to agglomerate utilities. * The PIU was not ready and staffed at the beginning of the project and this substantially contributed to the initial delays. When a project is to be implemented very quickly, with designs to be done during the implementation phase, sufficient capacity should be mobilized and trained at the very start of the project to accelerate the preparation of the pipeline. * Feasibility studies prepared for EU funding (Component A) were reviewed by the New EU members' infrastructure project advisory (JASPERS). The reviews and inputs by JASPERS, conducted for the first time under IWP, increased the likelihood of financing by the EU. * Through the installation of new wastewater treatment technologies, the project helped introduce innovative solutions in Croatia. The know-how developed through the IWP is expected to facilitate expansion and use of these new technologies as part of the EU
22 co-funded projects in the upcoming EU financing period, 2014-2020, to meet the EU acquis. * The location of the task team leader and operations officer in Croatia and Central Europe helped the project advance at critical moments. This was especially the case in the final years of project implementation.
7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners
(a) Borrower/implementing agencies MoF had no comments on the ICR. There were no issues raised by HV and Ministry of Agriculture. Their comments were sent in a draft version and were addressed. Comments received from MoA and the final report from HV are included in Annex 6.
(b) Cofinanciers Not Applicable
(c) Other partners and stakeholders JASPERS commended the project for its capacity building. It reported improved capacity, especially within HV for the assessment and validation of investment proposals and feasibility studies. It also commended the TA component of the project and its contribution to the sector reform analysis and agenda for Croatia.
23 Annex 1. Project Costs and Financing
(a) Project Cost by Component (in Euro million) Estimate Appraisal Restructuring Actual/Latest Estimate PAD Paper financed by Percentage of (EUR Dec 14, 2011 Bank funds Appraisal millions) (EUR (EUR millions) millions) (A) Technical 4.84 9.69 5.65 117% Assistance A.1. EU Accession 2.06 support A.2. Project 5.36 3.88 126% Implementation 1.03 Support A.3. Institutional 1.75 4.33 1.77 101% Strengthening (B) Investments 95.16 90.31 81.44 86% B.1. Utility Investmets 88.15 78.81 70.53 80% Investments B.2. Flood Protection 7.01 11.50 10.91 156% Investments Interest and other 3.42 charges on the Loan TOTAL 100.00 100.00 90.5112 9
(b) Financing
Appraisal Actual/Latest Percentage of Source of Funds Estimate PAD Estimate (USD millions) (USD millions) Borrower 6.67 6.96 104% International Bank for 133.41 119.63 90% Reconstruction and Development Total 140.08 126.59 90%
12 Table does not reflect the final application for EUR1.6 million that was being processed on June 26, 2013.
24 Annex 2. Outputs by Component
Component A
The component financed the preparation of feasibility studies and designs to be implemented under the project. It also financed Technical Assistance for the sector, including for utilities. This included (i) the development of a model-based decision making process for the selection Wastewater Treatment (WWT) technology and the improvement of technological operation of WWT plants; (ii) a very well received study on Institutional Options for the Water Supply and Wastewater sector, i.e., a set of proposals for utility structure optimization and agglomeration.
The project also supported utility capacity building, including technical assistance to reduce water losses, improve efficiency and the financial position of the utilities.
Finally and very importantly, the component financed the preparation of studies and designs for more investments in the water supply, wastewater and flood protection sector that amount to about EUR 123 million for EU and other IFIs financing. The details and status of the studies are shown in the following table:
Table 1: Project applications for EU financing prepared through the Project *
IWP financed project applications prepared for EU financing Estimated value of Component Type of task Status/Comment ivsmn ER investment (EUR) Wastewater investments in Preparation of Feasibility Prepared documentation was 72,645,506 Krapina-ZagorjeCounty Studies, Preliminary reviewed by Jaspers. Contract (Sewerage system Zabok and Designs and Appraisal completed by end-2012. Zlatar documents Wastewater investments in Preparation of Feasibility Prepared documentation was 20,305,460 Krapina-ZagorjeCounty Studies, Preliminary reviewed by Jaspers. Contract (Sewerage system_Krapina Designs and Appraisal completed by end-2012. Sub- documents project Krapina is included in HV's priority list for financing by EU Structural Funds. Sewage network and WWTP Preparation of Conceptual Contract completed and presented 4,500,000 in Jastrebarsko City Solution, Feasibility to representatives of municipal Studies and Preliminary company and town of Design Jastrebarsko. Sewerage network and Preparation of Feasibility Contract completed in December 7,266,667 WWTP in Pozega Studies, Preliminary 2012. For financing either by EU Design and Main Design Structural Funds or EIB. Sewerage network and Preparation of Feasibility Contract completed in December 4,266,667 WWTP in Varazdinske Studies, Preliminary 2012. For financing either by EU Toplice Design and Main Design Structural Funds or EIB.
25 IWP financed project applications prepared for EU financing Estimated value of Type of task Status/Comment Estmen (eR) Component investment (EUR) WWTP in PetrinjaCity Preparation of Conceptual Contract completed in December 5,266,667 Solution, Preliminary 2012, included in the EU priority Design and bidding list. HV is financing in parallel the documents in accordance preparation of Feasibility Study, with FIDIC rules Environmental Impact Assessment, and application document for the project and the main design for sewage collector. WWTP in Moscenica Preparation of Conceptual Contract completed in December 4,480,000 Solution, Preliminary 2012, included in the EU priority Design and bidding list. HV is financing in parallel the documents in accordance preparation of Feasibility Study, with FIDIC rules Environmental Impact Assessment, and application document for the project and the main design for sewage collector. Rainwater drainage in Dugo Preparation of Contract completed by end-2012. 6,133,333 Selo - Martin Breg Preliminary Design and To be financed either by EU or Final Design EIB funds. Ecological revitalization of Study Based on the study, project 1,000,000 Laslovo_meander application had been prepared and was financed through IPA Cross Border Cooperation. Revitalization is already completed. *One of the feasibility studies covered 2 areas, thus 9 items in the table instead of the 8 reported in the RE
IWP financed project documentation Estimated value of Component Type of task Status/Comment ivsmn ER investment (EUR) Revitalization of Bapska area Study Contract completed in December N/A. Preparatory - Ilok 2012. documentation for project application (for EU funds or IFI financing) that is still not prepared. Regulation of the water Study Contract completed in December N/A. Preparatory regime and revitalization of 2012. documentation for watercourses in the project application Baranjska Karasicariver (for EU funds or IFI basin financing) that is still not prepared. Ecological revitalization of Study Contract completed in December N/A. Preparatory the area of old Vuka riverbed 2012. documentation for - Antinski serpentine project application (for EU funds or IFI financing) that is still not prepared.
26 Component B
Sub-component Bi: Utility Investments Virovitica. Virovitica sewerage system consists of the sewerage network covering the central part of the city, transport pipeline to the location of the existing wastewater treatment plant the (WWTP), joint municipal/industrial WWTP and discharge to the outfall canal. It covers the majority of the city population. IWP financed the expansion of the existing network to the neighboring settlements and the construction of additional sewerage system retention space. Specifically: (i) Construction of the sewerage collectors in the settlements of Korija, Sv. Durad, Podgorje and Golo Brdo (ii) Construction of the a Retention basin of 5000 m3 needed to increase retention for storm water.
All planned bidding procedures for the procurement of equipment, execution of construction works and supervision services were advertised and completed. A total of five bidding procedures were conducted for the procurement of pumps and pipe material, construction of approximately 30.5 km of sewerage collectors and the retention tank.
For Rezova6ka Kr6evina and Milinovac, works started in October 2011 and by project closing 9.5 km were completed, as well as all works on two pumping stations.
Ogulin. Ogulin was without a functioning sewerage system and the population relied on septic tanks for discharging their wastewaters. IWP constructed the sewerage network for the central part of the city, transport main and a tertiary level WWTP. Due to the carst nature of the area and the lack of a surface water body that could be used for discharge of plant effluent, a high level of effluent quality has been set as a condition by the Ministry of Environment and Nature Protection. IWP financed: (i) Construction of sewerage network (approximately 15 km) and 12 pumping stations (ii) Design, construction, testing and handover of biological WWTP for Ogulin. (capacity of 7500 PE with wastewater treatment to the level required for discharge into the ground in carst conditions).
Northern Baranja. In Northern Baranja the water supply system was only partially in place. The project financed the development of additional water sources and the extension of the water supply network into the eastern part of the area. Investments financed by the IWP included: (i) Designing, construction, testing and handover of well fields "Topolje" and "Prosine (ii) Construction of the water reservoir and water supply network in the settlement of Batina (including pressure pipeline, water reservoir of 200 m3 and water supply network). 14.5 km of water supply pipelines were constructed as well as well field Topolje 40 1/s, well field Prosine 30 1/s and water reservoir.
27 Nagice. The sewerage system for the Municipality of Nasice was mainly completed, covering the central part of the city, and including recently completed mechanical WWTP, but it was necessary to upgrade the existing WWTP and expand existing sewerage network to cover neighboring settlements. Controlling of waste water disposal was a priority to safeguard regional drinking water sources. Investments financed under the project included: (i) Construction of the sewerage system in the settlement of Velimirovac, (ii) Construction of the sewerage system in the settlements of Jelisavac, Ladanska, Lila, Ribnjak, (iii) Designing, construction, testing and handover of biological WWTP for the city of Na§ice, (iv) and SCADA.
A total of 48.5 km of collector network were constructed as well as 16 pumping stations - 2 in the area of Velimirovac and 14 in the area of Jelisavac.
Davor - Nova Gradiska. The regional water supply system Davor - Nova Gradiska (DNG) was developed to provide water supply for the town of Nova Gradiska and 10 other municipalities with more than 50,000 people. A regional water supply system was established because in this area, there is only one reliable source of drinking water, which can deliver adequate quantity and quality of water; it is located in Davor. From Davor the water has to be transported by a transmission main to the whole project area. Investments financed under the IWP included: (i) Construction of the water supply mains and distribution network. These investments were divided in to 3 separated construction contracts (due to the size and the status of readiness) 'Davor - Staro Petrovo selo' 'Staro Petrovo selo - Nova Gradiska' and 'Adamovci - Batina'. (ii) Construction of the water reservoir 'Staro Petrovo selo'. (iii) Design and construction of a water treatment plant 'Davor' of capacity of 150.0 1/s and the well field.
All works are completed by the project closing date, except the construction of inter- county water supply pipeline Staro Petrovo Selo - Zapolje - PS Ljupina, pumping station Ljupina, and water treatment plant in Davor that are being completed by HV. The total length of water supply pipelines constructed under this sub-project is 127 km, including auxiliary facilities (well field Davor 150 1/s, water reservoirs Staro Petrovo Selo and Davor #2 and #3, and 2 pumping stations in Ljupina and Cernik), about 15% more works than initially planned.
Southern Baranja. Investment in southern Baranja covered the construction of the sewerage network in the settlements of Bilje and Darda, located north of Osijek. This area is close to the Kopacki Rit National Park, and it is important to secure high standards of environmental protection from wastewaters in the area. After evaluation of different options, it was decided that all wastewaters from those two municipalities will be transported to Osijek for treatment at Osijek's WWTP. The main collector was constructed by HV financing while IWP financed the construction of the collection
28 network in both municipalities. 24 km of collector network was constructed under IWP (13 km in the area of Bilje and 11.8 km in the area of Darda) as well as 5 pumping stations - 4 in the area of Bilje and one in the area of Darda.
Slavonska Podravina. The Slavonska Podravina sub-project was divided into two sub- projects: Podravska Slatina and Donji Miholjac, both with the objective to create a foundation for development of a regional water supply system and secure sufficient quantity of water for the residents of the Podravina region.
Podravska Slatina: The water supply mains Medinci-Moslavina Podravska were constructed. This included construction of 24 km of water supply pipelines and increased the capacity of the well field by 40 1/s. The contract was signed for design, manufacture, supply, installation, testing and commissioning of the water treatment plant "Medinci" that included reconstruction of the existing facility and extension up to the total capacity of 99 1/s. Works in Slatina were not completed by December 31, 2012 and are being completed by HV.
Donji MihoIjac: Activities included construction of water supply mains Donji Miholjac- Kapelna-Viljevo and water supply network of the settlements Ivanovo, Bockovac, Blanje and Viljevo, Kapelna and Cret Viljeva6ki Works were launched in March 2011 and the technical inspection was conducted in June 2012. The total length of water supply pipelines constructed under this sub-project is 37.5 km, which is 7.5 km more than the initially planned length.
Vinkovci (Ivankovo, Cerna, Otok and Komletinci). The area around Vinkovci included a number of smaller municipalities that did not have a wastewater collection, treatment and disposal system. The population instead relied on septic tanks for discharging wastewater. The IWP financed construction of the sewerage networks and WWTP in 4 municipalities: Ivankovo, Cerna, Otok and Komletinci (Otok and Komletinci are connected in a single system).
The 3 biological WWTP were constructed with the following design capacities: Ivankovo - 8500 PE, Cema - 6000 PE and Otok - 8000 PE. Completion of investment has allowed development of sewerage systems in the Vinkovci area (that was started under the previous Bank-financed Reconstruction Project for Eastern Slavonia, Baranja, and Western Srijem). All newly constructed systems are operated and maintained by Vinkovci water and sewerage company. 22 km of collector network were constructed under this sub-project as well as 4 pumping stations and one overflow facility.
Vukovar. Following the devastation in the recent war, and the post-war recovery, the municipality of Vukovar needed to upgrade and expand its sewerage network. Part of this effort was also financed by IWP and included the construction of the sewerage collector and the pumping stations to connect the sewerage systems of Borovo Naselje with the city of Vukovar, and so eliminate sewerage outfalls in to the Danube. IWP financed the construction of the main collector till the presumed location of future biological WWTP (that will be financed with EU funds). 6.3 km of main collector were constructed under
29 the project as well as 4 pumping stations, 3 overflow facilities, approximately 5 km of secondary collector network and 3.5 km of connections to the main collector.
Ilok. The sewerage collection system for Ilok had been reconstructed and expanded (including under WB Eastern Slavonia project), but all collected wastewaters were discharged into the Danube. The IWP financed the municipal WWTP, an 8000 PE biological treatment ponds (aerated lagoon) situated near the Danube.
Dugo Selo and Rugvica. Dugo Selo and Rugvica are middle size municipalities in Zagreb County, located in the Sava river plain. Before IWP they had only a partially completed wastewater collection network, and wastewater was discharged into the Sava. IWP financed: (i) Design and construction of the WWTP Dugo Selo-Rugvica (25,000 PE). Contracts were signed in December 2010 but were not completed by Decmber 31, 2012. HV is completing the remaining works with its funds. (ii) (ii) Construction of the wastewater collector needed to bring wastewater to the WWTP including: Hru§6ica-Rugvica in the length of approximately 10 km, collector Connecting point A - Dugo Selo, collector connecting point A - Je2evo in the length of 11 km, collector Velika Ostrna-Obedi§6e Je2evsko in the length of approximately 8.5 km with 7 pumping stations
The total length of collector network constructed under this sub-project is 40 km, including auxiliary facilities (15 pumping stations, 3 overflow facilities).
30 Table 2: Value of works under different sub-subprojects that could not be completed by December 31, 2012
Contract price without VAT Value of works that could not % of be completed by end 2012 unfinished Exchange works per rate at (EUR) sub-project Comments Project description days of (EUR) (HRK) 1 EUR= 7,5 (HRK) until bids HRK 12/31/2012 opening Construction of the inter-county water Works unfinished until end- HV/NC supply pipeline Staro Petrovo Selo - 2012 financed by HV. Sub- B/D- Zapolje - PS Ljupina, pre-pump station 7.38 3,081,525.86 22,740,459.06 315,650.39 2,367,377.89 10% project completed by June 30, NG - Ljupina, water supply for the section 2013. W1 Batrina - Dragovci, Nova Kapela - Donji Lipovac and Adamovci HV/IC Designing, constracting, testing and Works unfinished until end- B/D- handover of Well field "Davor" 7.19 4,772,257.52 34,305,936.33 50,609.82 379,573.68 1% 2012 financed by HV. Sub- NG - project completed by June 30, CWG1 2013. TOTAL DAVOR - NOVA GRADIKA 7,853,783.38 57,046,395.39 366,260.21 2,746,951.57 Projektiranje, izrada, dobava, izgradnja, Works unfinished until end- HV/NC testiranje i primopredaja vodocrpiligta 2012 financed by HV. Sub- B/SP - "Medinci" / Designing, constracting, 7.26 2,115,784.83 15,352,490.18 168,167.38 1,261,255.32 8% project to be completed by CWG1 testing and handover of Well field September 30, 2013. "Medinci" TOTAL SLATINA: 2,115,784.83 15,352,490.18 168,167.38 1,261,255.32 unfinished until end- HV/NC Designing, constracting, testing and Works by HV. Sub- B/DS - handover of Wastewater Treatment Plant 7.29 4,336,879.58 31,608,657.26 276,096.84 2,070,726.29 7% 2012 financed project to be completed by CWGI of the city Dugo Selo September 30, 2013. Construction of the collectors "Spojna Works unfinished until end- HV/IC toka A-Je2evo" in the city ofDugo Selo 7.42 1,559,526.81 11,565,418.04 38,718.11 290,385.83 3% 2012 financed by HV. Sub- B/DS - project completed by June 30, W2 2013. until end- HV/NC Construction of the collector Obedig6e Works unfinished by HV. Sub- B/DS - Je2evsko - Velika Ostrna in the town of 7.29 1,447,445.30 10,549,474.92 739,029.80 5,542,723.52 53% 2012 financed to be completed by W4 Dugo Selo project September 30, 2013. TOTAL DUGO SELO 7,343,851.69 53,723,550.22 1,053,844.75 7,903,835.64 TOTAL 17,313,419.90 126,122,435.79 1,588,272.34 11,912,042.53 9%
31 Sub-component B2 - Flood Protection Investments under this sub-component were: * Rehabilitation of the north dike in the Lonjsko Polje wetland area. This will protect the Zagreb-Lipovac motorway and agricultural land north of the motorway from high flood waters. The said investment prevented flooding of the area during the floods in late 2010 and 2011; * Construction of part of the south dike in the Lonjsko Polje wetland area; * Construction of overflow structure in Palanjek which is required for water management and system utilization; * Rehabilitation of dikes in Trebarjevo Desno and Martinska Ves Desna which was needed as the existing dikes were old and in a risk of collapsing. Works included construction of a protection wall to protect nearby houses; * Rehabilitation and expansion of the existing left Sava dike on the section Gunja - Rajevo Selo (km 14+020.92 to km 24+608); * Reconstruction of the Drava-Danube dike in Baranja (1.3 km of the Drava-Danube dike in Baranja was reconstructed) * Contracts for construction of the South dyke of the Lonjsko Polje retention basin - phase I, km 12+745 to km 19+120, revetment and protective wall in Trebarjevo Desno, as well as for consulting services of supervision of works was signed and completed, except for the South dike, where approx. 90% of the works were completed.
32 Annex 3. Economic and Financial Analysis
I. Background
The main goal of the Project was to improve water supply services, wastewater services, and flood protection measures in selected municipalities in Croatia. Proposed investments would also enable Croatia to meet EU directives. Implementation of the Project was to result in benefits to individuals and society via (a) provision of piped water supply that will ensure quality and security of supply while permitting increased consumption; and (b) collection and treatment of wastewater through sewerage networks and wastewater treatment plant that will reduce health risks by isolating wastewater from humans, directly and through groundwater contamination. The Project was also expected to contribute to improved operating efficiency and overall financial position of participating utilities.
At the time of the Project's appraisal, investments were not yet identified. Therefore, the Project Appraisal Document (PAD) did not carry out the economic and financial rate of returns of the overall project, and instead stipulated that the economic and financial analysis was to be carried out as a part of the feasibility study of each sub-project that would be part of the Inland Waters Project1 3 . The feasibility studies were made part of Subsidiary Financing Agreements (SFAs) signed with participating MWSCs.
A total of 12 sub-projects were identified, at different stages of the Project's lifetime. The baseline information is thus sector wide and not specific to each participating utility. The bases for ex-post economic and financial analysis (NPV and IRR) are the respective feasibility studies.
The working ratio 14 was the only financial indicator among the Project Development Objective (PDO) indicators, measuring improvements in the operating performance of MWSCs. While its baseline value was not available due to the above mentioned reasons, during the course of the Project it was reported on an annual basis as a simple average value for all participating utilities. A target value at the Project's closure was set at 1.0, which means that at the Project level, MWSCs should break even, i.e., meet their cash commitments through operating revenues.
The financial analysis, in addition to working ratio, takes also into account improvements in the bill collection rate to measure improvements in the operating efficiency of MWSCs. Moreover, HV had to ensure through SFAs that (a) utilities raise tariffs within affordable levels, in a timely manner to meet operating and investment costs; and (b) utilities submit their financial statements to HV on an annual basis, so that their financial situation could regularly be monitored.
" Project Appraisal Document, Inland Waters Project, page 17/paragraph 49, and page 18/paragraph 51. 14 Working ratio is calculated by dividing operating expenses (excluding depreciation) by operating revenues. A working ratio below 1 indicates that company is able to recover operating costs from annual revenue.
33 II. Economic and financial analysis assumptions
As the majority of sub-projects were identified at the later stage and investments were largely completed by June 2013. Their impact will be visible from 2013 or 2014. Therefore, the ex-post economic and financial analysis is based on the expected outcomes as estimated by participating utilities and confirmed by HV.
In the financial analysis, incremental revenues are calculated as a result of the increase in population connected to water supply and sewerage systems and projected tariff increases over the economic life of investments. The capital investment costs at the Project's closure amount to HRK 618.4 million.
The cost and benefit streams are forecasted for a period of 30 years and include only the incremental costs and benefits that result from the Project. The discount rate used is 8 percent, which was used in feasibility studies, and considered appropriate for these types of projects, where the water supply and sanitation services are public services. Costs and benefits are expressed in real prices.
The data at appraisal are taken from the respective feasibility studies. However, the Bank team was not able to validate the methodology used for NPV and IRR calculations by different consultancy companies that were in charge of producing feasibility studies. The information that was made available to the team was taken informatively, but the ERR and FRR at completion were done using a more conservative approach (i.e., for tariff or population increase forecasts). Moreover, in some cases the quality of data received from MWSCs (e.g., KG Park - Donji Miholjac) was poor or not credible, and the team had to use its own best judgment in making certain projections.
III. Economic Analysis and Financial NPV and IRR
Feasibility studies of each sub-project outline results of the conducted financial NPV and IRR. An ex-post calculation of the financial NPV and IRR was performed at the Project closure for all sub-project investments in 12 different utilities.
A. Economic analysis
The economic rate of return (ERR) for the overall project at completion is 16% and the NPV is HRK 2.04 billion. The economic analysis is based on the assumptions that the economic benefits of compliance with EU Water related Directives is quantifiable with the willingness to pay for improved water supply and wastewater services; the collected amount has been used as a proxy for estimating the economic value of the willingness to pay. The other proxy used in this analysis is the costs savings for consumers. Economic costs of the project include investment and operational cost.
Table 1 shows the ERR of 16% and a positive economic NPV of HRK 2.04 billion for the overall project at its completion. The resulting NPV is relatively high due to vast cost savings from customers that will connect to the sewage system. For example, the cost of cleaning a septic tank is four times the monthly costs of the sewerage service charged by
34 utility to an average household. The ERR is also good considering the nature and location of investments, as well as a dismal socio-economic environment in Croatia during the entire period of project implementation.
Table 1: Results of the economic benefits and costs for 12 MWSCs Net Present Value (in HRK) Benefits 2,523,496,432 of which willingness to pay 1,067,800,567 of which cost savings to customers (from septic 1,455,695,865 tank cleaning, sewerage service, and prevented costs of bottled water purchase) Costs 485,599,444 of which operational costs 186,236,446 of which investment costs 299,362,998 NPV 2,037,896,988
NPV ERR B/C Discount rate 2,037,896,988 16% 5.2 8.0% Source: World Bank calculations,SFAs, feasibility studies
The total amount of capital expenditure for the improved access to water supply and sanitation services and improved quality of water to domestic population in the service area of 12 participating utilities was estimated at around EUR 81 million. With around 200,000 project beneficiaries, this is equivalent to around 81 EUR/capita/year of investments during the project implementation.
The ERR does not quantify the benefits of significant investments in the flood protection, as no systematic data were available to do a comprehensive analysis. A total of HRK 95.6 million was invested into flood protection infrastructures in the Sava river basin. Retention volume for flood protection (PDO indicator) in the basin has increased from the baseline's 600 million m3 to 800 million m3 at the Project's closure, reaching a target value set in the Results Framework. Additional complementary investments planned by HV for 2013 would further increase the retention volume to around 1 billion in 3 . The main objectives of these investments were (i) to protect households and infrastructure facilities directly threatened by flooding in the Sava basin; and (ii) to increase retention volume in the basin and lower the Sava's water levels, which also has a positive impact on neighboring countries (Serbia and Bosnia & Herzegovina). Additionally, these investments contributed to protection of agricultural production (region's predominant activity) and preservation of flora and fauna in the Lonjsko Polje Nature Park.
In particular, the following benefits have been assessed by sub-components: (i) Rehabilitation of Lonjsko Polje north dyke - protection of the international transport Corridor X (Zagreb-Lipovac) and agricultural land in the area (ii) Construction of part of Lonjsko Polje south dyke - protection of 7,000 directly threatened inhabitants in seven villages and part of the city of Sisak (37,000 inhabitants), and 12,000 ha of agricultural land (iii) Construction of overflow structure in Palanjek - protection of the city of Sisak (37,000) and several smaller villages
35 (iv) Rehabilitation of dykes in Trebarjevo Desno and Martinska Ves - protection of 800 inhabitants and several important regional roads (v) Reconstruction of left Sava dyke Gunja-Rajevo Selo - protection of 6,500 inhabitants
B. Financial rate of return
One of the main objectives of the project following its closure was to achieve a financially balanced situation for all participating utilities. Two scenarios are developed to estimate the financial NPV and FRR at completion. The first scenario assumes gradual increase of tariffs until full cost recovery over the 30 years period. It results with an FRR of 8% and a financial NPV of HRK 16.9 million for the overall project (Table 2). Because reaching a cost recovery in 30 years for this type of investment is a conservative assumption, Scenario I is considered as a low-case scenario. The second scenario assumes tariffs increase to meet full cost recovery in 3-4 years after project completion and generates an FRR of 13% and a financial NPV of HRK 622 million at project's completion. This is a result of a strengthened financial position of MWSCs, measured by improvements in the working ratio. By end-2012, 10 out of 12 MWSCs were able to cover their operating and maintenance costs from collected revenues.
Table 2: Financial rate of return at project closure for 12 MWSCs Financial Rate of Return At appraisal At completion Scenario 1 Scenario 2 Net Present Value (NPV) in HRK million N/A 16.9 622 Internal Rate of Return (IRR) N/A 8% 13% Source: World Bank calculations
Financial results at completion were tested by two scenarios also at the sub-project basis (Table 3). FRRs are positive in both scenarios, with the majority of MWSCs being in the upper range (8-16%). NPVs under Scenario 2 are positive and larger than those at appraisal for all utilities except for Darda; while Scenario 1 results with NPVs below values estimated at appraisal for some utilities. In those cases, tariffs should be modified in the medium-term to ensure cost recovery.
Table 3: Financial Rate of Return by sub-project Net Present Value (NPV) T Internal Rate of Return (IRR) in HRK million At At completion At At completion appraisal Scenario 1 Scenario 2 appraisal Scenario 1 Scenario 2 Water supply sub-project investments Donji 3.4 8.0 8.0 9.9% 12.0% 12.0% Miholjac Beli Manastir N/A 1.7 53.7 N/A 8.4% 15.5% Davor-Nova -57.0 -63.0 95.5 0.1% 4.1% 11.2% G. Slatina 5.7 -1.1 15.5 9.2% 7.6% 12.0%
36 Net Present Value (NPV) T Internal Rate of Return (IRR) in HRK million At At completion At At completion appraisal Scenario 1 Scenario 2 appraisal Scenario 1 Scenario 2 Sewerage sub-project investments Nasice -5.2 6.6 68.2 6.4% 8.0% 11.2% Ogulin N/A 2.2 83.8 N/A 8.3% 15.5% Virovitica N/A -6.0 22.6 N/A 6.5% 11.9% Darda 275 11.8 46.4 9.4% 10.0% 15.3% Dugo Selo -46 47.3 108.0 1.3% 9.1% 13.4% Ilok -0.4 7.4 28.2 9.0% 10.4% 15.6% Vukovar 32.1 -42.0 39.9 19% 1.1% 11.0% Vinkoyci N/A 58.9 58.9 6% 12.0% 12.0% Source: World Bank calculations,SFAs, feasibility studies
IV. Financial and operational performance of participating MWSCs
Enhanced operating efficiency of participating MWSCs leads to their long-term financial viability. This is to be achieved through improvements in the bill collection rate and working ratio. Additionally, utilities were requested to increase their tariffs and introduce development fee to cover incremental operating expenses and new capital investment costs. Tariff modifications required prior approval of the local self-governments, as they need to be socially affordable but also set at level which is sufficient to cover operating expenses incurred by utilities.
A. Working ratio
The analysis of 12 participating utilities at the project completion shows that most utilities have improved their financial position during the course of the project. The average working ratio in 2012 amounted to 0.7, exceeding the target value of 1.0 for the year (Figure 1). Moreover, 11 out of 12 utilities have achieved the working ratio below 1.0 (Table 4), which indicates a solid financial cash position of each of them at the project completion.
Figure 1: Evolution of working ratio for 12 MWSCs 2008-2012 1.00 0.90- a 0.80- 0.70- S 0.60- 0.50 2008 2009 2010 2011 2012 Year Source: World Bank calculations, MWSCs
37 Table 4: Working ratio at project of 12 MWSCs at 2008-2012 Working Ratio MWSC Baseline YR 5 (2008) (2012) Ilok 0.8 0.9 Vinkovci 0.7 0.7 Darda 1.3 0.9 Beli Manastir 1.4 0.9 Nasice 0.7 0.8 Virovitica 0.8 0.7 Vukovar 1.3 0.6 Davor - Nova Gradiska 0.6 0.4 Dugo Selo 1.4 0.9 Ogulin 1.1 1.0 Slatina 0.2 0.5 Donji MihoIjac 0.6 0.6 Average working ratio 0.9 0.7 Source: World Bank calculations,MWSCs
Evolution of the working ratio by utility is illustrated by Figure 2. Most utilities have improved their operating performance in the course of the project implementation.
Figure 2: Evolution of working ratio by MWSCs 2008-2012
KG Park (Donji MihoIjac) Dukom (Dugo Selo) Komrad (Slatina) Vodov. Kanalizacija Ogulin Regionalni vodovor Davor - Nova Gradiska Vodovod grada Vukovara Vodovod Virkom Nasicki vodovod
Baranj ski vodovod (Beli Manastir) Vodoopskrba (Darda) Vinkovacki vodovod i kanalizacija
Komunalije Ilok
- 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8
m2012 m2011 m2010 m2009 m2008
Source: World Bank calculations, MWSCs
B. Billing and collection efficiency
All utilities increased their billing revenues during the project implementation (with the exception of Davor - Nova Gradiska), due to higher water and sewerage tariffs and high collection efficiency. The aggregate increase in billing and collection revenues was 48 and 47%, respectively, in period 2008-2012 (Figure 3).
38 Figure 3: Evolution of billing and collection for 12 MWSCs 2008-2012 (in HRK)
140,000,000 r------
130,000,000 ------
120,000,000 ------
110,000,000 ------
100,000,000 ------
90,000,000--- 90,0 0,0 0 ------80,000,000 2008 2009 2010 2011 2012 Year wm*emBilling -0Collection Source: World Bank calculations,MWSCs
Collection efficiency rates are among the most critical factors that affect the utilities' operating efficiency. The aggregate collection rate for all utilities decreased slightly from 91% in 2008 to 90% in 2012 (Figure 4). Although results vary by MWSCs, they are mostly a product of the global economic crisis that has been looming since 2008.It has had a severe impact on household income in Croatia and affected mostly its poorest areas, such as municipalities in Baranja or Slavonija.
Figure 4: Collection rate evolution for 12 MWSCs 2008-2012
100.00% ------
95.00% ------
C)85.00% ------
80.00% 2008 2009 2010 2011 2012 Year
Source: World Bank% calculations,MWSCs % 008 201
Table 5: Billing and collection revenues for 12 MWSCs (in HRK 000) Billing Collection Collection rate MWSC Baseline YR 5 % Baseline YR 5 % 208 01 2008 2012 2008 2012 1 . Ilok 2,276 2,271 100% 2,011 1,999 99% 88% 88% 2. Vinkoyci 28,764 37,819 131% 22,977 29,248 127% 80% 77% 3. Darda 1,550 3,073 198% 2,527 2,823 112% 163% 92% 4. Beli Manastir 6,222 9,854 158% 5,667 9,356 165% 91% 95% 5. Nasice 7,383 13,099 177% 5,901 10,376 176% 80% 79% 6. Virovitica 8,502 17,552 206% 7,952 15,704 197% 94% 89% 7. Vukovar 6,467 16,989 263% 6,575 16,682 254% 102% 98% 8. Davor-Nova 934 1,923 206% 631 1,515 240% 68% 79% Gradiska
39 Billing Collection Collection rate
MWSC Baseline YR 5 Baseline YR 5 % 2008 2012 2008 2012 2008 2012 9. Dugo Selo 11,957 14,569 122% 9,477 12,518 132% 79% 86% 10. Ogulin 7,654 8,519 111% 10,724 11,921 111% 140% 140% 11. Slatina 4,785 4,738 99% 3,886 4,792 123% 81% 101% 12. Donji Miholjac 4,480 4,480 100% 4,310 4,310 100% 96% 96% Total for 12 90,973 134,887 148% 82,639 121,245 147% 91% 90% MWSCs Source: World Bank calculations,MWSCs
C. Water production and sales
The PAD estimates that an increase in water production and sales volume would be one of the key factors contributing to incremental revenues of 12 participating utilities. However, this factor cannot be captured in this analysis at this stage, since the expected impact of investments will be seen as of 2013. Several utilities experienced an increase in the volume of water produced and sold. While the impact of it on the aggregate volume of water produced and sold in all utilities is minor (Figure 5), these utilities managed to influence billing over the period and thus improve their financial performance. The access to piped water and sewerage system by population in the service area of participating utilities, as a consequence of the project, is expected to grow sharply from 2013 and thus further contributed to financial and operational efficiency.
Figure 5: Evolution of water production and sales for 12 MWSCs 2008-2012 27,000,000 25,000,000 ~. 23,000,000 ...... Z21,000,000 19,000,000
17,000,000
15,000,000 2008 2009 2010 2011 2012 Year - Water production memnWater sales Source: World Bank calculations,MWSCs
D. Financial efficiency
Another incremental benefit for utilities is enhanced financial efficiency and improvements of financial management practices. The project has contributed to it through consultancy services provided to all utilities, which mainly focused on setting up separate cost-accounting systems for multi-purpose utility companies. The water and sewerage activities of each respective utility were thus looked at separately and cross- subsidization of other activities performed by the MWSC was eliminated.
40 The operating revenue has a growing trend, higher than that of the operating costs, as a result of tariff increase at a higher pace than expenses (Figure 6). It should be noted however that the impact of the project investments on the operating costs, and of the sub- loan cost on the total cash expenses, will be seen starting from 2013.
Figure 6: Evolution of operating revenue vs. operating costs for 12 MWSCs 2008-2012 (in HRK)
160,000,000 - 140,000,000 - 120,000,000 100,000,000 80,000,000 60,000,000 40,000,000 - 20,000,000 - 0 2008 2009 2010 2011 2012 a Operating costs maOperating revenues Source: World Bank calculations,MWSCs
The overall operating expenses have increased by 15%, while the operating revenues rose 49% over the project's lifetime (Table 6). However, results vary significantly by utility.
Table 6: Operating costs and revenues for 12 MWSCs 2008-2012 (in HRK)
Operating costs Operating revenues
Baseline YR 5 Baseline YR 5 2008 2012 2008 2012 1. Ilok 1,855,103 1,916,970 103% 2,276,075 2,270,913 100% 2. Vinkovci 20,166,687 24,590,755 122% 28,764,173 37,819,322 131% 3. Darda 2,000,360 2,442,189 122% 1,549,934 3,073,456 198% 4. Beli Manastir 8,707,817 8,352,376 96% 6,222,134 9,854,486 158% 5. Nasice 5,307,064 9,345,865 176% 7,382,722 13,098,887 177% 6. Virovitica 6,947,633 7,940,945 114% 8,501,803 17,551,587 206% 7. Vukovar 8,598,584 9,566,078 111% 6,466,520 16,989,335 263% 8. Davor - Nova 523,071 661,298 126% 933,933 1,923,372 206% Gradiska 9. Dugo Selo 17,111,421 17,639,581 103% 11,957,182 14,569,224 122% 10. Ogulin 8,413,792 8,599,682 102% 7,653,957 8,518,634 111% 11. Slatina 1,182,561 2,135,827 181% 4,784,725 4,738,120 99% 12. Donji Miholjac 2,500,000 2,500,000 100% 3,953,786 4,175,725 106% Total 83,314,092 95,691,564 115% 90,446,945 134,583,061 149% Source: World Bank calculations,MWSCs
Energy and personnel expenses make up the bulk of operating expenses. In 2008, energy and personnel expenses accounted for 65% of the total operating costs, while in 2012 their share increased to 69%.
41 The electricity costs as a percentage of the total operation and maintenance (O&M) costs is within the range of 12-18%, which is a very good indicator of energy efficiency, compared to average electricity cost of utilities in Western Europe. During the period 2008-2012, the portion of energy costs in operating costs was constant and at around 13- 14% for all 11 utilities taken together, demonstrating a good direction towards sustaining operating expenses and improving utilities' efficiency.
Personnel expenses take up more than half of the total operating costs, due to a relatively high number of staff per 1,000 water connections in comparison to most Western European utilities. Moreover, personnel expenses increased by 31% over 2008-2012, which is higher than the 19% increase in the total O&M costs over the same period. Reduction of the staff costs is one of the key challenges for Croatian utilities to improve their operating efficiency in the future and achieve financial sustainability.
Other than high collection rates, significant tariff increases were among the most important factors contributing to improved financial efficiency of utilities. Tariffs for water and wastewater services nearly doubled since 2007, which was a significant step towards covering the incremental operating expenses, resulting from new investments in the water and sewerage network.
E. Loan repayment capability
The Bank loan was transferred from the Ministry of Finance to HV. HV then signed SFAs with participating MWSCs and transferred 70-95% of the Bank loan as a grant from HV to the utility. The remaining portion was transferred as a loan. The repayment of the Bank loan is utility specific. In principle, MWSCs contribute up to 30% of the total debt service, HV contributes with 25% of the debt service, while the remaining portion is covered by the central government budget. MWSCs' share of the debt is recovered from the development fee, introduced specifically for the purpose of this project and collected by the utilities. Municipalities are co-signers of the SFAs and also guarantors of a debt service in the event of utilities' default on repayment.1 5
It should be noted that most of the participating MWSCs are multi-service public companies under the ownership of local self-governments. The utilities are financially and legally independent entities and have to operate on cost coverage basis, according to the law. 16
The SFAs were signed under the same conditions as those of the main loan from the Bank to the Ministry of Finance. Grace period for the loan is 5 years hence, as per SFAs utilities will commence the sub-loan repayment (which includes a capitalized interest from beginning of the sub-project) in 2012, in two equal annual installments for a period
15 The Subsidiary Financing Agreement will also specify that the debt service payments will be made by the utilities to HV. Project Appraisal Document, Inland Waters Project, page 18/paragraph 53. 16 The principle of full cost recovery for water services' from the Framework Water Directive has been transposed into the Act on Water Management Financing, primarily through Article 3.
42 of 15 years. Interest rate is EUR LIBOR + 0.22 to 0.35%, the commitment fee is 0.25% and the front-end fee is 0%.
All utilities have introduced development fee to cover sub-loan repayment, which in some cases was increased over the project implementation to ensure full coverage of the debt service costs. The Bank team determined that in cases of Beli Manastir and Donji Miholjac the 2012 level of development fee is not sufficient to service the annual debt cost, and therefore municipalities will have to approve a fee/tariff adjustment in 2013. The other challenge for utilities is to achieve a high (i.e., sufficient) collection rate of this fee.
43 Annex 4. Bank Lending and Implementation Support/Supervision Processes
(a) Task Team members Responsibility/ Names Title Unit specialty Specialt [Lending Stjepan Gabric Senior Operations Officer ECSUW Water Engineer Hana Huzjak Operation Analyst Consultant ECSTR Financial Analysis [Maria Teresa R. Lim Program Assistant ECSSD Team Support Mirela Mart Consultant ECSOQ FM Norval Stanley Peabody Consultant EASIS Social Sudipto Sarkar Sector Leader EASWE TTL Antonia G. Viyachka Procurement Specialist ECSO2 Procurement Michael John Webster Sr Water & Sanitation Spec. AFTU1 Engineer
Supervision/ICR Nurul Alam Senior Procurement Specialist ECSO2 Procurement Lynette Alemar Senior Program Assistant ECSSD ISR/Team support Blanka Babic Consultant ECSUW Economist Arben Bakllamaja Financial Specialist ECSUW ICR Ljiljana Boranic Team Assistant ECCHR {Team Support Elisabetta Capannelli TTL ECSRO {TTL [Majed El-Bayya Lead Procurement Specialist ECSO2 Procurement Stjepan Gabric Officer Operations ECSUW Engineering Financial Analysis! Hana Huzjak Operation Analyst ECSTR Moniorn Monitoring Bogdanka Krtinic Program Assistant ECCHR Team support Lamija Marijanovic Financial Management Specialist ECSO3 FMS .Marino Lead Water and Sanitation . Manuel G. Specialis ECSUW Water Specialist Specialist Kishore Nadkarni Consultant ECSEG Financial/Economics Norval Stanley Peabody Consultant EASIS Social Sudipto Sarkar Sector Leader EASWE TTL Amelito Velasco Procurement Analyst ECSO2 Procurement Natasa Vetma Senior Operations Officer ECSEN Environment Antonia G. Viyachka Procurement Specialist ECSO2 Procurement Anneliese Viorela Voinea Financial Management Analyst ECSO3 FMS Michael John Webster Senior Water & Sanitation AFTU1 TTL Specialist\.
44 (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including F No.ofsaff eeks travel and consultant costs) [Lending I FY06 1 52.08 FY07 1 198.39 Total: 250.47 Supervision/ICR FY07 1.02 FY08 32.13 136.02 FY09 37.02 107.55 FY10 35.78 108.97 FY11 31.06 108.26 FY12 18.36 69.90 FY13 18.73 86.24 Total: 173.08 617.96
45 Annex 5. Stakeholder Workshop Report and Results
Not applicable.
46 Annex 6. Summary of Borrower's ICR and/or Comments on Draft ICR
1. Relevance of Project Objectives
The project's development objective was to improve water supply services, wastewater services, and flood protection measures in municipalities selected from the inland part of Croatia.
Higher level objectives to which the project was designed to contribute were: (i) to increase the service coverage of water supply and wastewater collection and treatment, in the inland part of Croatia, by investments in construction of the water utility management infrastructure and technical assistance supporting service. Envisaged and performed activities were in line with the objective of the country to meet EU directives to provide good quality water and collect and treat wastewater. The Technical Assistance component was tailed to help: (a) prepare projects that would help the country to absorb EU funds and meet EU directives; and (b) strengthen the beneficiary water utilities which in turn will help to promote better management for the provision of water and wastewater services; and (ii) to minimize impact of floods in the Sava River Basin in Croatia as well as in downstream riparian countries which provides a positive regional impact of the project by envisaged investments in the central Posavina area which will increasing the flood water retention volume.
The following key performance indicators to measure the project's success were used to determine the success of the project related to the utilities. The indicators presented below are the entire set of indicators for the project. However, their application depended on the nature of the investments as determined in the Results Framework: o coverage of public water supply: this will be achieved through the proposed investments in targeted municipalities; o coverage of sewerage: this will be achieved through the proposed investments in targeted municipalities; o volume of wastewater treated: this will be achieved through wastewater treated - as per applicable legislation-in the targeted municipalities; o retention volume for flood protection: through the flood protection component the retention volume will increase from 600 to 800 million m3 in the Lonjsko Polje flood plain; o working ratio: this initiative to improve the operational efficiency of the utilities will be supported through the Technical Assistance (TA) component. Working ratio is defined as cash operating expenses divided by collected revenues and should decline due to operational efficiency; o percentage of customers satisfied with the service: the TA component supported an improvement in the quality of service provided by the utilities. This has been measured through an increase in percentage of satisfied customers, verified through surveys collected before and after the implementation of each sub- project; and
47 o projects submitted to the Government that will be proposed for financing by the EU or other financial institutions.
2. Suitability of Project Design
Project Design was defined through multiannual programme of cooperation between the World Bank and the Republic of Croatia were concept of the Inland Waters Project was introduced in September, 2005. PAD concept was confirmed by signing of the Loan Agreement and Project Agreement on June 12, 2007 in Davor and ratified on July 13, 2007. by the Croatian Parliament. Upon the conclusions of the Joint Portfolio Review of 21 February 2011, the Government of the Republic of Croatia requested restructuring of the Loan and reallocation of the Loan amounts, the Bank approved the proposed restructuring in May 2011. The approved restructuring did not cause changes in project design only improve already defined objectives by including potential flood protection investments in the Drava and Danube river basins.
Therefore relevant amendments were added to the Loan Agreement. The amendments included the replacement of text in Schedule 1. Project Description,Part B: Investments, point 2 of the Loan Agreement to include potential flood protection investments in the Drava and Danube river basins, and reallocation of Loan proceeds in Schedule 2. Project Execution, Section IV WithdrawalofLoan Proceeds, PartA: General,point 2:
Category Amount of theLoan allocated Category(EUR million) (1) Consultants' Services and Training for Parts A. 1 and A.2 of 3 5.2 the Project (2) Consultants' Services and Training for Part A.3 of the 1.7--+4.2 Project (3) Works and Goods for Part B.1 of the Project 85.5 76.45 (4) Works and Goods for Part B.2 of the Project 6.8 11.15 (5) Interest and other charges on the Loan accrued on or before 3 October 15, 2012. TOTAL AMOUNT 100
It was also request that the Annex 5 to the Loan Agreement, Section I, para (iv) Advances (sections 5 and 6), sub-para Ceiling (section 6.1) is amended to read "E 2 million" instead of "E 1 million".
3. Suitability of Implementation Arrangements
The Republic of Croatia, represented by the Ministry of Finance as the Borrower of the Bank loan. The Bank loan proceeds pass on to HV to implement the project in accordance with the project objective and in line with the Government's plan to implement the Croatian Water Management Strategy. An Project Implementation Unit (PIU) - comprising 9 staff - was created in HV and this unit co-ordinate day to day project activities and draw upon the resources and expertise of HV as necessary.
48 Nowadays the Ministry of Agriculture (MOA), previously Ministry of Regional Development, Forestry, and Water Management (MRDFWM), and initially Ministry of Agriculture, Forestry, and Water Management (MoAFWM) is the sector ministry that oversees the development of the water sector including compliance with EU directives at the municipal utility level and proper installation of flood protection measures. The MOA also supervised the activities of HV, so also this project to its finalization. The key functions of HV are outlined below: o implement the flood protection component and the TA related to national policies; o prepare sub-projects with the utilities for investments to be made at the utility level, with support from consultants; o carry out procurement functions for expenditures incurred by HV under the project. HV will also carry out the procurement on behalf of utilities as they have limited number of trained staff and would need assistance on procurement matters. HV's assistance could include: preparation of bidding documents; evaluation of bids (utilities will be represented in evaluation committees), o make all disbursements from the Designated Account for all components of the project; o ensure that the utilities make their debt service payments to the escrow account in a timely manner; o monitor the flow of funds for the financial management purposes of the project; and o report the progress made in the project through the Project Reports on a six-month basis o prepare final report of the Project
The utilities benefit from the project and carry out the investments with the assistance from HV so that the expected service standards are met. The utilities also generate resources through increases in tariffs to pay for their portion of debt service. The utilities also implement the Technical Assistance component so that it makes operational improvements. The key functions of utilities are outlined below: o prepare the sub-projects with HV and consultants; o carry out the procurement functions with HV; o ensure that debt service payments are deposited in the escrow account in a timely manner; o supervise the contractors, with the support from HV, to ensure that project objectives are being met; o implement the institutional strengthening component so that the utilities operate more efficiently; and o provide necessary information to HV so that the Project Reports are prepared on a timely basis.
Municipalities that would benefit from the project signed the Subsidiary Financing Agreement with HV, along with the participating utilities. The municipalities are shareholders of the utilities and take important decisions on investments and tariffs. As a result, they were involved through the Subsidiary Financing Agreement and assured HV
49 that the utilities satisfactorily implemented the project and utility tariffs raised within affordable levels to provide the resources that are necessary for debt service.
The implementation arrangements have been provided for adequate involvement of the different stakeholders. No difficulties have been encountered in this regard.
4. Project Implementation
The project implementation commenced with short delays, due to delays in preparation by HV, but also long lasting the Banks approvals of the fundamental sub-projects documentation such as Terms of References for the Feasibility Studies and the Feasibility Studies as such, but generally the Bank provided necessary support the work of PIU.
Delays were also during implementation of the activities during construction works but finally planned activities have been proceded and mostly completed within the original timeframe.
Based on the Project Implementation Plan, adopted by Hrvatske vode and the World Bank, subsidiary financing agreements (SFA) were signed in the second half of 2007 and early 2008 with all the towns and municipalities accepted and approved by the Croatian Government and the World Bank in the process of preparation of Project implementation, namely: Ogulin, Virovitica, municipalities in the area of Northern Baranja and Nagice, since they have fulfilled all the conditions for the commencement of Project realization. In 2009, SFAs were signed with municipalities in the area of Southern Baranja, as well as the municipalities in the area of the County of Slavonski Brod-Posavina (sub-project Davor - Nova Gradi9ka). In mid-2010, two SFAs were signed with the towns Vukovar and Ilok, and in October 2010 with the municipalities of Cerna, Ivankovo and Otok. In December 2010, the SFA was signed for the sub-project Dugo Selo-Rugvica, and in February 2011 the last SFAs were signed for the sub-projects Podravska Slatina and Donji Miholjac. A total of 12 Subsidiary Financing Agreements were signed, by which EUR 84.699 million was committed or approx. EUR 79 million of World Bank Loan. At project completion, addendum to the Subsidiary Financing Agreements can be signed in accordance with actually incurred costs of sub-projects.
The value of contracts signed under Component A. Technical Assistance amounted to EUR 9 million.
The value of contracts signed under Component B 1 amounted to EUR 81.6 million.
The value of contracts signed under Component B2 amounted to EUR 11.8 million.
By the end of 2012, activities under almost all contracts were completed. There are 6 remaining contracts for construction works representing the functional units which were not completed by the end of 2012 (2 contracts under the Davor-Nova Gradi§ka project: "Design, manufacture, supply, installation, testing and commissioning of the well field Davor", "Construction of the inter-county water supply pipeline Staro Petrovo Selo - Zapolje - PS Ljupina, pre-pump station Ljupina, water supply for the section Batrina -
50 Dragovci, Nova Kapela - Donji Lipovac and Ad2amovci"; 1 contract under the Podravska Slatina sub-project: ,,Design, manufacture, supply, installation, testing and commissioning of the of the well field Medinci", and 3 contracts under the Dugo Selo sub-project: "Design, manufacture, supply, installation, testing and commissioning of the wastewater treatment plant in Dugo Selo" and "Construction of the collector Obedi§6e Je2evsko - Velika Ostrna in the town Dugo Selo", "Construction of the collector Connecting point A - Je2evo in the town Dugo Selo". Approx. EUR 1.6 million remains unrealized. Also, an additional EUR 0.8 million is not achieved in 2 contracts in Flood Protection, but these contracts are implemented as functional units. As per the Contractors' dynamic plans, completion of unrealized works is foreseen in June 2013, and they are financed through the regular budget of Hrvatske vode. Unfinished contracts per subprojects are presented in Appendix 5.
5. Project Cost and Financing
Compared with the original estimate made at project appraisal, the project has utilized the available funds. Reallocation of project funds was made in timely and effective manner. A total of EURO 92,9117 millions of Loan amount was withdrawn by the end of June 30, 2013.
Information regarding the project costs, financing and procurement are provided in the Attachments.
6. Project Benefits
The primary beneficiaries have been the population of areas targeted by the project where householders have access to water supply and wastewater services. In addition, farmers and local agricultural organization are now realizing increased yields and incomes due to better flood control. The table "Project Outcome indicators" summarizes the status of performance indicators. The Project exceeds the initial development targets for all elements.
Technical Assistance Component
Sub-component Al - EU accession support: The project produced three major achievements: o The sub-project "Preparation of sub-projects of the sewerage system in the County of Krapina-Zagorje" has contributed to preparation of feasibility studies, preliminary designs, environmental impact assessments and documents required for applying to the EU. The project has been included in the priority list of 39 projects being prepared for financing from the future Cohesion funds. It has also ensured successful implementation of the IPA Environmental Protection Operational Programme 2007-2013, which for the wastewater projects focuses on increasing connection levels to sewerage and wastewater treatment facilities, by
17 One final application for EUR 1.6 million was being processed on June 26.
51 constructing new WWTPs and networks, as well as increasing the efficiency and reliability of the public sewerage and WWTP as well as by repairing existing sewerage networks with significant permeability. o The sub-project "Consultants' services for development and application of models and guidelines to facilitate decision-making in the extension of wastewater treatment plants and to increase operational efficiency of existing WWTPs" has provided an overview of the efficiency of operation of existing WWTPs and will facilitate decision-making regarding the selection of technology for upgrading to tertiary treatment. The results of this project are aimed at protecting Croatia's water resources and complying to EU standards. o The study "Study of the institutional options in the water supply and wastewater sector" provide analyse and elements for prescribing the by-laws necessary for establishment of water service areas and institutional capacities.
Sub-component A2 - Project Implementation Support: The objective of this sub- component was realized through preparation of feasibility studies, bidding documents and contract documents, review of designs and preparation of annual audit reports. Consulting services related to this sub-component included services of expert supervision of construction and preparation of innovative studies related to flood management and wetland revitalization.
Sub-component A3 - Institutional Strengthening of Utilities: The objective of this sub- component was achieved through the preparation of feasibility studies, design documents required for obtaining the necessary permits, assistance in reducing water losses and improvement of financial statuses of municipal utilities, customer surveys at the beginning and end of Project implementation, and conducting construction supervision.
Investment Component.
Sub-component B] - Utility investments: The Government has adopted the goal of meeting EU standards of wastewater treatment and collection. The wastewater treatment potentially eliminated the threats to the quality of groundwater aquifer, which is the population's primary source of clean water. Reduced biological oxygen demand (BOD) has also improved water quality to downstream areas, thereby improving the quality of water discharged in the Sava and Drava and, later in the Danube.
Sub-component B2 - Flood control: The expected benefits consist of increased protection against floods for valuable agricultural land and rural infrastructure. The project has improved the overall economic situation in the area and at the same time contributed to increased farmers' incomes.
7. Borrower's Performance and Lessons Learned
The Borrower's and implementing agency's performance have been satisfactory with outstanding performance starting from the preparation phase, during which the Borrower showed a high degree of commitment and cooperation with the Bank and throughout the project implementation as the Borrower and HV have been prompt in resolving problems
52 and responding in timely and efficient manner to Bank requirements. In particular, HV was very effective with support from the Borrower. There have been no problems with the provision of counterpart funding.
All procurement actions have been managed by the PIU established by and within HV. The PIU has managed the project implementation with little delay in the beginning but highly effectively at the end of the project. HV as implementing agency has taken full responsibility for the financing of all works that could not be completed by the project closing date.
Lessons Learned - 1. Project preparatory phase must take adequate time to help to avoid problems in the implementation phase. 2. It is essential from the beginning of the project to have sufficient capacity of staff in the PIU, and the remuneration system in the implementing agency or in the PIU must be adequately established depending on the commitment on the work in order to be able to motivate staff. 3. Utility companies that do not have sufficient capacity necessary for implementation of the project should be supported by the HV.
8. Bank's Performance and Lessons Learned
Bank's performance has been satisfactory, less in the preparatory phase, but very cooperative in project implementation phase. Bank's team was changed during the project implementation, but the change did not have impact on the continuity of the project performance. Supervision and procurement review were performed in timely manner providing advice to the Borrower and PIU whenever needed. The Bank's team has established a very effective relationship with the implementing agency.
53 P 5 4 7 2
REPUBLIC OF CROATIA MINISTRY OF AGRICULTURE
10000 Zagreb, UI. grada Vukovara 78, P.P. 1034 Phone: (+385 1)61 06 111, Fax: (+385 1)61 09 201 Class: 900-02/10-01/33 RefNo: 525-12/0926-13-6 Zagreb, June 21, 2013
The World Bank Office , Croatia INTARNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Radnidka cesta 80/IX 10000 Zagreb
OBJECT: INLAND WATERS PROJECT (LOAN 7453-HR) Implementation Completion and Results Report - Comments
On June 12, 2013 you sent to us the Implementation Completion and Results Report (ICR) for the Croatia Inland Waters Project prepared by the Bank. You asked our review and official comments on the report including those on the ratings and you also asked Borrower's own evaluation of the Project.
We have reviewed the ICR and our comments are as follows:
BORROWER PERFORMANCE ImplementingAgency or Agencies Performance
ORIGINAL TEXT Croatian Waters implemented the project well, although it took a long time for Croatian Waters to establish adequate implementation capacity. Very little happened in the early years of the project and no Pll was actually set-up until the end ofyear 2. COMMENT PIU was set up from the begining of the Project but PU was not fully staffed.
ORIGINAL TEXT Implementation substantially acceleratedfrom the third year of implementation as the PIU was fully staffed. The delays accrued in the final months of the project, however, could have been managed more timely. Croatian Waters could have worked more closely with some of the utilities, supportingthem with the management of the ongoing contracts.
54 Municipalities that would benefit from the project signed the Subsidiary Financing Agreement with Croatian Waters, along with the participating utilities. The municipalities are shareholders of the utilities and take important decisions on investments and tariffs. As a result, they were involved through the Subsidiary Financing Agreement and assured Croatian Waters that the utilities satisfactorily implemented the project and utility tariffs raised within affordable levels to provide the resources that are necessary for debt service.The implementation arrangements have been provided for adequate involvement of the different stakeholders. No difficulties have been encountered in this regard.
The project implementation commenced with short delays, due to delays in preparation by Croatian Waters, but also long lasting the Banks approvals of the fundamental sub-projects documentation such as Terms of References for the Feasibility Studies and the Feasibility Studies as such, but generally the Bank provided necessary support the work of PIU.
Delays were also during implementation of the activities during construction works but finally planned activities have been proceded and mostly completed within the original timeframe. the Compared with the original estimate made at project appraisal, the project has utilized available funds. Reallocation of project funds was made in timely and effective manner. A total of EURO 92,91 millions of Loan amount was withdrawn by the end of June 30, 2013.
The primary beneficiaries have been the population of areas targeted by the project where householders have access to water supply and wastewater services. In addition, farmers and local agricultural organization are now realizing increased yields and incomes due to better flood control.
The Borrower's and implementing agency's performance have been satisfactory with outstanding performance starting from the preparation phase, during which the Borrower showed a high degree of commitment and cooperation with the Bank and throughout the project implementation as the Borrower and Croatian Waters have been prompt in resolving problems and responding in timely and efficient manner to Bank requirements. In particular, Croatian Waters was very effective with support from the Borrower.
All procurement actions have been managed by the PIU established by and within Croatian Waters. The PIU has managed the project implementation with little delay in the beginning but highly effectively at the end of the project. Croatian Waters as implementing agency has taken full responsibility for the financing of all works that could not be completed by the project closing date.
Bank's performance has been satisfactory, less in the preparatory phase, but very cooperative in project implementation phase. Bank's team was changed during the project implementation, but the change did not have impact on the continuity of the project performance. Supervision and procurement review were performed in timely manner providing advice to the Borrower and PIU whenever needed.
55 Inland Waters Project (Loan 7453-HR) Implementation Completion and Results -summary
The Inland Waters Project development objective was to improve water supply services, wastewater services, and flood protection measures in municipalities selected from the inland part of Croatia.
The project was designed to contribute to increase the service coverage of water supply and waste water collection and treatment in the inland part of Croatia by investments in construction of the water utility management infrastructure and technical assistance supporting service. All those activities were in line with objectives of the country to meet EU directives to provide good quality of water and collect and treat wastewater. Technical Assistance was tailed to help to prepare projects that would help the country to absorb EU funds, meet EU directives and strengthen the beneficiary water utilities to promote better management for the provision of water and wastewater services. Also to minimize impact of floods in the Sava River Basin in Croatia as well as in downstream countries which provide a positive regional impact of the project by investments in the central Posavina area which will increasing the flood water retention volume.
Inland Waters Project was defined through multiannual programme of cooperation between the World Bank and the Republic of Croatia where concept of the Inland Waters Project was introduced in September, 2005. PAD concept was confirmed by signing of the Loan Agreement and Project Agreement on June 12, 2007 in Davor and ratified on July 13, 2007. by the Croatian Parliament. Upon the conclusions of the Joint Portfolio Review of 21 February 2011, the Government of the Republic of Croatia requested restructuring of the Loan and reallocation of the Loan amounts. The Bank approved the proposed restructuring in May 2011. The approved restructuring did not couse changes in project design only improve already defined objectives by including potential flood protection investments in the Drava and Danube river basins.
The Republic of Croatia, represented by the Ministry of Finance as the Borrower of the Bank loan. The Bank loan proceedes passes on to Croatian Waters to implement the project in accordance with the project objective and in line with the Government's plan to implement the Croatian Water Management Strategy.
Nowadays the Ministry of Agriculture, previously Ministry of Regional Development, Forestry, and Water Management, and initially Ministry of Agriculture, Forestry, and Water Management is the sector ministry that oversees the development of the water sector including compliance with EU directives at the municipal utility level and proper installation of flood protection measures. The Ministry of Agriculture also supervised the activities of Croatian Waters, so also this project to its finalization.
The utilities benefit from the project and carry out the investments with the assistance from Croatian Waters so that the expected service standards are met. The utilities also generate resources through increases in tariffs to pay for their portion of debt service. The utilities also implement the Technical Assistance component so that it makes operational improvements.
56 COMMENT Croatian Waters worked hard to cooperate with utility companies during the project implementation. Delay in project implementation was to come up at the turn of 2011-2012 years, there was a delay in flow of money of relevant institutions to pay the contractor and Croatian Waters had to suspend work on most construction sites. Delay in payment did not last long, but it impact on delay in project implementation for several months and it was reflected at the end of the project.
Lessons Learned
ORIGINAL TEXT The fifth and last, a PIU was not ready and fully staffed at the beginning ofthe project and this substantiallycontributed to the initialdelays. When a project is to be implemented very fast, with designs to be done during the implementation phase sufficient capacityshould be mobilized at the very start ofthe project to accelerate the preparationof the pipeline. COMMENT We think that PIU was ready, we agree that problem was the lack of the staff at the beginning of the project.
Regarding the ratings of the project we don't have remarks.
Attached please also find the summary of the Borrower*s Implementation Completion Report.
Regarding the World bank's policy to make final ICR available to the public after they are distributed to the Executive Direktors, we think that data in ICR are not confidential so the ICR can be published.
Sincerely,
ASSISTANT MINISTER
DRAZEN KUREd
57 Annex 7. Comments of Cofinanciers and Other Partners/Stakeholders Not applicable
58 Annex 8. List of Supporting Documents
* Project Appraisal Document * Environmental Framework * Aide memoires * ISRs * Restructuring Paper * Borrower progress reports and final report with annexes * Available EU accession documentation * Implementation Plan for Water utilities Directives revised 2010 * Croatia Policy notes, a Strategy for Smart, Sustainable and Inclusive Growth * Report on Institutional Options in the Water and Wastewater Sector * Report on retrospective review of land acquisition
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