World Bank Document

Documentof The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. P-6691-LV MEMORANDUMAND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTIONAND DEVELOPMENT TO THE Public Disclosure Authorized EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNTEQUIVALENT TO US $27.3 MILLION TO REPUBLIC OF LATVIA Public Disclosure Authorized FOR A MUNICIPAL SERVICES DEVELOPMENTPROJECT NOVEMBER 20, 1995 Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (as of July 12, 1995) Currency Unit = Latvian Lats (Ls.) Lats I = US$ 2 US$1 = .50 Lats WEIGHTS AND MEASURES 1 metric ton 1,000 kilograms = 2,205 pounds (Ibs) 1 kilometer (km) 1,000 meters (m) = 3,281 feet (ft) I meter (m) 3.281 feet (ft) 1 centimeter (cm) 10 millimeters (mm) 1 millimeter (mm) 0.1 centimeter (cm) I cubic meter (in3 ) 35.3 cubic feet (cu ft) LATVIAN - FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS CAS - Country Assistance Strategy DMEU - Daugavpils Municipal Enterprise Udensvads EU PHARE - European Union Assistance Program for Eastern Europe GDP - Gross Domestic Product IBRD - International Bank for Reconstruction and Development ICB - International Competitive Bidding MDF - Municipal Development Fund NBF - Not Bank Financed NCB - National Competitive Bidding NEFCO - Nordic Environment Finance Corporation PCU - Project Coordination Unit PMU - Project Management Unit PTU - Public Transportation Unit REPUBLIC OF LATVIA FOR OFFICIAL USE ONLY MUNICIPAL SERVICES DEVELOPMENT PROJECT Loan and Project Summary Borrower: Republic of Latvia Beneficiaries: The City of Riga The Daugavpils Municipal Enterprise Udensvads Municipal Development Fund Poverty Category: Not applicable Amount: US$27.3 million equivalent Terms: Payable in seventeen years, including four years of grace at the Bank's standard variable interest rate. Commitment Fee: 0.75 % on undisbursed loan balances, beginning 60 days after signing, less any waiver. Onlending Terms: To the City of Riga, to the Daugavpils Municipal Enterprise Udensvads and to beneficiaries of the Municipal Development Fund at the Bank's standard variable interest rate plus a mark-up for cross-currency risk and loan administration. Financing Plan: Total project cost is estimated at US$45.4 million of which: (i) US$27.3 million equivalent would be financed by the Bank; (ii) US$2.0 million would be financed by Nordic Environment Finance Corporation; (iii) US$9.0 million by grants from EU PHARE and the Governments of Sweden, Denmark and Finland; and (iv) $7. 1 million in local counterpart financing. See Schedule A, page 7. Economic Rate of Return: The economic rate of return for the project is estimated at 22% for the Riga urban transport component which represents US$18.7 million or 41 % of total project costs. The benefits for the Daugavpils water and wastewater component (US$22.3 million or 49% of total project costs) are not quantifiable, although assumed to be significant given the positive impact on health and environment; least cost analysis has been used in determining the appropriate investment program. Subprojects to be financed under the Municipal Development Fund (US$4.4 million or 10% of total project costs) must achieve a minimum 12% economic rate of return. Staff Appraisal Report: 14950 LV Map: IBRD No. 27295 Project ID Number: LV PA 34584 This documenthas a restricteddistribution and may be used by recipientsonly in the performanceof their official duties. Its contentsmay not otherwisebe disclosedwithout World Bank authorization. i MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF LATVIA FOR A MUNICIPAL SERVICES DEVELOPMENT PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed loan to the Republicof Latvia for the equivalentof US$27.3 million to help finance a project for the rehabilitationof municipalservices. Assistancewould be provided for Riga urban transport, Daugavpilswater and wastewatertreatment and a specialpilot MunicipalDevelopment Fund. The loan would be at the Bank's standard variable interest rate, with a maturity of seventeen years, includingfour years of grace. The proceeds of the loan would be onlent to Riga City, the DaugavpilsMunicipal EnterpriseUdensvads and beneficiariesof the MunicipalDevelopment Fund for seventeenyears includingfour years of grace with interest at the Bank's standard variable rate plus a mark-up of no more than thirty percent of the Bank interest rate. Co-financingin the amount of US$11.0 million would be provided for the DaugavpilsWater and Wastewatercomponent of the project by the Nordic EnvironmentFinance Corporation, the Governmentof Sweden, the Government of Denmark, the Governmentof Finland and EU PHARE. 2. Country/SectorBackground. Since the restorationof Latvian independencein 1991, the country has undertakena program of political and economicreforms aimed at achieving a transformationto a market economy. A formal macroeconomicstabilization program was launched in July 1992, supportedby an IMF standbyarrangement. A transitionalcurrency, the Latvian ruble, was introducedin 1992 and was replaced by the permanentcurrency, the Lats, in May 1993. The Governmenthas been successfulin containingmonetary expansionand fiscal deficits, though the Governmenthas recently been faced with an unanticipatedrevenue shortfall for 1995. Initial inflationhas been brought under control, falling from over 900 percent in 1992 to 36 percent in 1994. It is projected to decline to approximately25 percent for 1995. The sharp decline in GDP which occurred during the initial adjustmentperiod has been arrested and initial indicators show positive growth in 1995. 3. Structuraladjustment in key areas has progressed significantly: (i) most prices have been liberalized; (ii) an open trade regime has been introducedand privatizationof small business, agriculturalland and banking institutionsis well advancedand housing privatizationhas recently commenced;and (iii) the Governmentis reforming the social safety net through better means-testing to target benefits to low-incomegroups. Banking and industrial sector reforms, however, have been slower than initially anticipated. A banking crisis has emerged over the spring of 1995 and will pose additionaldemands on Governmentresources to fund planned partial compensationof depositors. National electionstook place in early October 1995. Since no party won a commandinglead, another coalitiongovernment will be created. While the implicationsfor the continuationof the economic reform process are not yet clear, there are good indicationsthat major political parties are committed to the reform. 4. The Country AssistanceStrategy (CAS) was discussedby the Board in September 1994. The World Bank's overall objective in Latvia has been shifting from supporting economic stabilizationand early structuralpolicy measures to deepeningstructural reforms and promoting private and public sector investments. In doing so, the Bank will also support decentralizationefforts made by the government, in particular, in delegatingauthority to municipalitiesin administrativeand financial decisionmaking. The focus of the Bank's strategy is to: (i) enhanceprivate sector development;(ii) improvepublic infrastructureservices and energy conservation;(iii) strengthen the social safety net and improve social services; and (iv) address pressing environmentconcerns. - 2 - Investmiientsin municipal infrastructure and environment have been identified as a priority in the Public Investment Program (1995-1997) of the Government; they are also in line with the CAS objectives and will be supported by the project. 5. Although basic coverage by municipal services is relatively high, substantial investment is required for rehabilitation and improvement of existing facilities, many of which are in extremely poor condition given the lack of maintenance and investment in the adjustment period following re-independence and given the already poor state of much plant and equipment. Urban transport systems are operating above capacity given low vehicle availability, aging fleets and lack of spares and new replacement vehicles. Municipal dump sites are nearing capacity and continued operations pose a threat to groundwater supplies in many areas. Water quality is poor, distribution systems inefficient and wastewater treatment limited. District heating systems are inefficient, which leads to higher costs and increased burden on local inhabitants. Roads are in poor condition and continue to deteriorate. 6. Reform of the sector has progressed rapidly. Municipal enterprises have been transforned into independent legal entities with budgetary autonomy. User charges are determined by the municipality according to legal guidelines established by the national government. There has been substantial movement towards cost recovery in all municipal services, and subsidies from both national and local governments have been largely eliminated. Some privatization of municipal services has already occurred, particularly in the area of solid waste collection. Reforms in intergovernmental fiscal relations have provided local governments with the clear expenditure and revenue assignment necessary for planning and capital budgeting and

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