Document of The World Bank

Public Disclosure Authorized Report No: ICR00001377

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-72260 TF-54882)

ON A

Public Disclosure Authorized LOAN

IN THE AMOUNT OF EURO 40 MILLION (US$47.54 MILLION EQUIVALENT)

TO THE

REPUBLIC OF CROATIA

FOR A

COASTAL CITIES POLLUTION CONTROL PROJECT Public Disclosure Authorized IN SUPPORT OF THE FIRST PHASE OF THE

COASTAL CITIES POLLUTION CONTROL PROGRAM

May 20, 2010

Public Disclosure Authorized Sustainable Development Department Southeast Europe Country Unit Europe and Central Asia Region

CURRENCY EQUIVALENTS

(Exchange Rate Effective) March 2010

Currency Unit = Croatian Kuna (HRK) 1.00 HRK = US$0.19 US$1.00 = 5.36 HRK

FISCAL YEAR (January – December)

ABBREVIATIONS AND ACRONYMS

APL Adaptable Program Lending MEPPPC Ministry of Environmental BOD Biochemical Oxygen Demand Protection, Physical Planning and CAS Country Assistance Strategy Construction CCPCP Coastal Cities Pollution Control MoF Ministry of Finance Program MRDFWM Ministry of Regional CPS Country Partnership Strategy Development, Forestry and Water d.o.o. Limited Liability Company Management (Croatian) MWSC Municipal Water and Sewerage EF Environmental Framework Company EIA Environmental Impact Assessment ‘NIMBY’ ‘Not in my backyard’ EIFF Environmental Infrastructure NPV Net Present Value Financing Facility O&M Operation and Maintenance EMP Environmental Management Plan OM Operations Manual EU European Union PAD Project Appraisal Document FMS Financial Management System PDO Project Development Objective GA Grant Agreement PE Population Equivalent GEF Global Environment Facility PIE Project Implementing Entity HRK Croatian Kuna PIU Project Implementation Unit HV Hrvatske Vode (Croatian Waters) PP Procurement Plan HVJP Hrvatske Vode Jadranski Projekt SA Social Assessment (HV Adriatic Project) SEA Strategic Environmental IBRD International Bank for Assessment Reconstruction and Development SLA Sub-Loan Agreement IFR Interim Financial Reports SOE Statements of Expenditure ISR Implementation Status Reports SPSC Special Purpose Subsidiary LA Loan Agreement Company LARAP Land Acquisition and Resettlement SS Suspended Solids Action Plan STAP Scientific and Technical Advisory LARPF Land Acquisition and Resettlement Panel Policy Framework WWTP Wastewater Treatment Plant

Vice President: Philippe Le Houerou Country Director: Peter Harrold Sector Manager: Wael Zakout Project Team Leader: Michael Webster ICR Team Leader: Sanyu Lutalo CONTENTS COASTAL CITIES POLLUTION CONTROL PROJECT – PHASE I

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

1. Project Context, Development Objectives and Design...... 1 2. Key Factors Affecting Implementation and Outcomes ...... 6 3. Assessment of Outcomes ...... 9 4. Assessment of Risk to Development Outcome...... 15 5. Assessment of Bank and Borrower Performance ...... 16 6. Lessons Learned...... 17 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners...... 18 Annex 1. Project Costs and Financing...... 19 Annex 2. Outputs by Component...... 20 Annex 3. Economic and Financial Analysis ...... 25 Annex 4. Bank Lending and Implementation Support/Supervision Processes...... 29 Annex 5. Beneficiary Survey Results ...... 32 Annex 6. Stakeholder Workshop Report and Results...... 33 Annex 7. Summary of Borrower’s ICR and/or Comments on Draft ICR ...... 34 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders...... 44 Annex 9. List of Supporting Documents ...... 45 MAP

A. Basic Information Coastal Cities Pollution Country: Croatia Project Name: Control Project (APL) Project ID: P065416 L/C/TF Number(s): IBRD-72260,TF-54882 ICR Date: 05/20/2010 ICR Type: Core ICR GOVERNMENT OF Lending Instrument: APL Borrower: CROATIA Original Total USD 47.5M Disbursed Amount: USD 53.9M Commitment: Revised Amount: USD 46.6M Environmental Category: F Implementing Agencies: Croatia Ministry of Environmental Protection, Physical Planning, and Construction Mr. Jadranko Husaric, General Manager, Hrvatske Vode (HV) Cofinanciers and Other External Partners:

B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 03/18/2002 Effectiveness: 12/17/2004 12/17/2004 Appraisal: 02/09/2004 Restructuring(s): Approval: 06/01/2004 Mid-term Review: 04/05/2007 03/27/2007 Closing: 11/30/2008 11/30/2009

C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately 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 Implementing Quality of Supervision: Satisfactory Satisfactory Agency/Agencies: Overall Bank Overall Borrower Moderately Satisfactory Satisfactory Performance: Performance:

i C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Rating Performance (if any) Potential Problem Project Quality at Entry No None at any time (Yes/No): (QEA): Problem Project at any Quality of No None time (Yes/No): Supervision (QSA): DO rating before Moderately

Closing/Inactive status: Satisfactory

D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration 10 10 General water, sanitation and flood protection sector 5 5 Sewerage 85 85

Theme Code (as % of total Bank financing) Access to urban services and housing 33 20 Environmental policies and institutions 17 17 Other urban development 17 17 Pollution management and environmental health 33 46

E. Bank Staff Positions At ICR At Approval Vice President: Philippe H. Le Houerou Shigeo Katsu Country Director: Peter C. Harrold Anand K. Seth Sector Manager: Wael Zakout Sumter Lee Travers Project Team Leader: Michael John Webster Manuel G. Marino ICR Team Leader: Sanyu Sarah Senkatuka Lutalo ICR Primary Author: Sanyu Sarah Senkatuka Lutalo

F. Results Framework Analysis

Project Development Objectives (from Project Appraisal Document) To improve the quality of Croatia's Adriatic coastal waters to meet EU ambient quality standards in the participating municipalities, in a financially and operationally sustainable manner.

ii Revised Project Development Objectives (as approved by original approving authority) The project development objective was not revised.

(a) PDO Indicator(s)

Original Target Formally Actual Value Values (from Revised Achieved at Indicator Baseline Value approval Target Completion or documents) Values Target Years Percentage of samples from monitoring bathing and shellfish areas water quality Indicator 1 : complying with EU standards in participating municipalities. 97.9 Reliable baseline data was not available during Value appraisal as the there was quantitative or no reliable sea water 98 98.5 Qualitative) quality monitoring system in place at the time -- actual value was assumed to be lower. Date achieved 07/01/2004 11/30/2009 11/30/2009 Early in implementation, it was confirmed up to 97.9% samples in Comments bathing/shellfish areas met required standards, rendering this indicator not very (incl. % useful. 98.5 % of samples complied with standards in participating achievement) municipalities, exceeding target. Technical and financial situation of MWSC in the participating municipalities as Indicator 2 : indicated by sewerage network coverage rate (average). Value quantitative or 56 65 68 Qualitative) Date achieved 07/01/2004 11/30/2009 11/30/2009 Comments The average sewerage coverage rates improved in the participating cities and met (incl. % the target. Five of the cities exceeded the targeted coverage rate. achievement) Technical and financial situation of MWSC in the participating municipalities as Indicator 3 : indicated by operating ratio (average). Value quantitative or 0.99 >1.1 0.97 Qualitative) Date achieved 07/01/2004 11/30/2009 11/30/2009 Operating ratio is defined as operating revenue divided by operating costs, Comments including adequate maintenance costs. Number presented is average of (incl. % Operating Ratios from 9 MWSCs (one exceeded target, 5 within 10% margin) -- achievement) see Annex 2 for individual results Technical and financial situation of MWSC in the participating municipalities as Indicator 4 : indicated by debt service ratio (average) Value quantitative or 4.7 >1.5 8.16 Qualitative)

iii Date achieved 07/01/2004 11/30/2009 11/30/2009 Comments Number presented is average Debt Service Coverage Ratio for 8 MWSCs with (incl. % data available, of which 5 exceeded target and one within 10 % margin. achievement) (Individual MWSC results given in Annex 2). Reduced pollution load discharged into coastal area in participating Indicator 5 : municipalities (measured by reduced BOD/SS in WWTP effluent in tons/year). Value BOD (122 ton) quantitative or No baseline. No specific target SS (145 ton) Qualitative) Date achieved 07/01/2004 11/30/2009 11/30/2009 Comments This indicator was introduced during implementation and confirmed a reduction (incl. % in pollution load to the Adriatic Sea. The baseline is assumed to be zero where achievement) no wastewater treatment plants operated before.

(b) Intermediate Outcome Indicator(s)

Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years The Special Purpose Subsidiary Company (SPSC) and the Environmental Indicator 1 : Infrastructure Financing Facility (EIFF) are established and capitalized. Value (quantitative No. Yes. Yes. or Qualitative) Date achieved 07/01/2004 12/17/2004 11/30/2009 Comments The SPSC and the EIFF were indeed established and capitalized before (incl. % implementation started. achievement) Indicator 2 : Participating MWSC contribute to Project investments as planned. Value (quantitative No. Yes. Yes. or Qualitative) Date achieved 06/01/2004 12/17/2004 11/30/2009 Comments All participating MWSC contributed to Project investments as planned and (incl. % established tariff surcharges to finance their contributions. achievement) Percentage of wastewater produced in the coastal area municipalities Indicator 3 : participating in the Project that is treated, and disposed of according to EU and Croatian requirements. Value (quantitative 6% 50% 45% or Qualitative) Date achieved 06/01/2004 11/30/2009 11/30/2009 Comments Targets were not set at appraisal and were introduced during implementation. (incl. % Actual performance was slightly below the target. achievement) Indicator 4 : Percentage of population in participating municipalities able to connect to

iv adequate wastewater collection and disposal sy stems. Value (quantitative 56% 65% 68% or Qualitative) Date achieved 06/01/2004 11/30/2009 11/30/2009 Comments Target was not set at appraisal due to lack of reliable data and was introduced (incl. % during implementation. Actual performance nonetheless exceeded the target. achievement) Capacity of the MoE laboratories for environmental monitoring to assess Indicator 5 : Program impact on coastal waters quality improved. Value (quantitative No. Yes. Yes. or Qualitative) Date achieved 07/01/2004 11/30/2009 11/30/2009 Comments (incl. % The capacity of MoE laboratories was improved. achievement) Number of county laboratories rehabilitated and equipped by the HV central and Indicator 6 : regional laboratories operational and inter -calibrated. Value (quantitative 0 2 2 or Qualitative) Date achieved 07/01/2004 11/30/2009 11/30/2009 Comments (incl. % 2 laboratories were rehabilitated and equipped as planned. achievement) Number of participating cities in which seawater quality monitoring system Indicator 7 : operational and baseline indicators in place. Value (quantitative 0 11 11 or Qualitative) Date achieved 07/01/2004 11/30/2009 11/30/2009 Comments Seawater quality monitoring system is operational, and baseline indicators are in (incl. % place in all the participating cities. achievement) Indicator 8 : Km of wastewater collection system constructed (Kilometers). Value (quantitative 0 101 102 or Qualitative) Date achieved 07/01/2004 07/01/2004 11/30/2009 Comments (incl. % The targeted length of sewer (km) was exceeded. achievement) Indicator 9 : No. of wastewater treatment plants commissioned (Number) Value (quantitative 0 6 6 or Qualitative) Date achieved 07/01/2004 11/30/2009 11/30/2009

v Comments (incl. % All planned wastewater treatment plants were constructed and commissioned. achievement)

G. Ratings of Project Performance in ISRs

Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 06/29/2004 Satisfactory Satisfactory 0.00 2 08/30/2004 Satisfactory Satisfactory 0.00 3 11/29/2004 Satisfactory Satisfactory 0.00 4 05/22/2005 Satisfactory Satisfactory 0.64 5 10/06/2005 Satisfactory Satisfactory 3.17 6 06/02/2006 Satisfactory Satisfactory 5.62 7 12/24/2006 Satisfactory Satisfactory 9.64 8 05/04/2007 Satisfactory Satisfactory 11.54 9 11/14/2007 Satisfactory Satisfactory 17.10 10 04/04/2008 Satisfactory Satisfactory 24.38 11 12/24/2008 Satisfactory Satisfactory 35.33 12 06/19/2009 Satisfactory Satisfactory 44.58 13 11/21/2009 Moderately Satisfactory Moderately Satisfactory 50.08

H. Restructuring (if any) Not Applicable

I. Disbursement Profile

vi 1. Project Context, Development Objectives and Design

1.1 Context at Appraisal

The Adriatic coastline is one of Croatia’s most valuable economic and environmental assets given the importance of water as a natural resource and its importance to the tourism and fisheries sector. In contrast to water supply, wastewater management in Croatia was and remains deficient, and water pollution due to inadequate wastewater treatment and/or disposal constitutes a problem in a number of Croatia’s coastal municipalities.

Issues. In 2004 when the Coastal Cities Pollution Control Program was appraised, only around 40% of households and 40% for industry were connected to a sewerage system and less than 12% of all collected wastewater was being treated in the country. About 56% of the households in the Project area were connected to a sewerage system and only 6% of wastewater was treated. A total of 82 wastewater treatment plants (WWTPs) were in operation countrywide but most of them suffered from operation and maintenance (O&M) problems and needed to be upgraded to meet EU environmental standards. The pollution of seawater quality in some parts of Croatia due to the inadequate discharges of raw sewage had resulted in visible problems, such as localized eutrophication and phytoplankton blooms, as well as less-visible contamination of the marine life by organic and non-organic micro-polluting substances. Although efforts were already underway to address the problem in some cities such as Dubrovnik, Split / Kastela Bay and Pula, little had been done in many others. The cost of inaction would have serious consequences for growth in the tourist industry, on which Croatia’s development depends to a great extent, and for other related industries such as aquaculture. More importantly, as part of Croatia’s EU accession agreement, the Government intended to meet EU environmental directives, which require much higher levels of wastewater service than currently exist.

Background. The Project was the first phase of a three-phase Adaptable Program Loan (APL) operation to be implemented over a period of ten years, designed to support Croatia’s comprehensive Program to improve the provision of efficient and sustainable sanitation services in its coastal cities in order to improve coastal water quality along the Adriatic coast. The Government chose to use an APL to provide a framework for a medium-term investment program to assist the Croatian Water Agency, Hrvatske Vode (HV), to comply with requirements for EU accession. An APL allowed HV to take a phased approach to identifying funding sources, while building the necessary regulatory, monitoring and management capacity. Phase I (for purposes of this ICR hereafter referred to as the Project) was intended to be implemented in four years while the other two phases were envisaged to be implemented in three years each. The Loan Agreement between the Bank and the Government for the Project was signed on July 2, 2004. The total cost of the Project was Euro 80 million, financed through an IBRD loan of Euro 40 million with a 15-year maturity (5 years’ grace period, 10 years’ maturity), with commitment-linked repayment, and the remainder financed through a combination of resources from the HV water protection fees, end users through specific Project

1 surcharges, contributions from the municipalities and utilities, and government budget transfers.

Triggers for second Phase. The following were the triggers agreed upon for proceeding from Phase I to Phase II of the APL:

(i) Disbursement and commitments reaching 40% and 70% of Component 1, respectively; (ii) The performance indicators for Phase I efficiency show that improvements targets have been met, including sewerage and wastewater treatment coverage; (iii) The upgraded monitoring system is in place and functional; (iv) The Government has adapted legislation concerning the treatment and discharge of municipal wastewaters in coastal areas to the relevant EU Directives and issued the declaration of ‘sensitive’ and ‘less sensitive’ areas; (v) A Strategic Environmental Assessment (SEA) that deals with regional cumulative effects has been completed; and. (vi) Each Municipal Water and Sewerage Company (MWSC) seeking investment under the first year of Phase II complies with similar eligibility conditions as of Phase I.

Program Objective and Phases. The objective of the overall Program is the improvement of Croatia’s ambient coastal water quality to meet the applicable EU standards in participating municipalities. The objective was to be achieved through technical assistance and investments in wastewater collection, treatment and disposal systems in municipalities participating in the Project. The Government and the Bank selected the sub-projects from a total of 163 sub-projects on the coast that would serve a population of just over one million people or 3.2 million population equivalents as far as wastewater treatment plant (WWTP) design is concerned. Eligibility was based on several criteria, such as pollution load, sensitivity of receiving waters, potential negative impact on tourist development, and readiness of design documentation. A total of 47 subprojects were selected for the program (representing a total of 477,000 people and population equivalent of 1.22 million) and total investment value of Euro 280 million.

The key elements of the Program’s first phase, the current project, were (i) expansion of sewerage networks, adequate treatment and disposal of municipal wastewaters; (ii) enhanced operation and management of Municipal Water and Sewerage Companies (MWSCs); (iii) expanded and improved monitoring of coastal water quality and wastewater discharges; (iv) reform of Croatia's financing and control instruments for wastewater management infrastructure at the regional level; and (v) sector reform for EU accession. In subsequent phases, the proposed APL Program would aim at expanding and consolidating the results of the first phase through: (vi) improvement of sector management through the establishment of financially viable water and sewerage companies with significant participation of the private sector; and (vii) further development of sewerage coverage and treatment levels, including the reuse of wastewater. Implementation of Phase I started in 2005. Eleven municipalities including Pula, Opatija, Rijeka, Novigrad, Zadar, Biograd, Rogoznica, Omiš, Dugi Rat, Makarska,

2 and Opuzen, participated in this Phase through a total of 11 (eleven) Subsidiary Loan Agreements and Subproject Agreements.

1.2 Original Project Development Objectives (PDO) and Key Indicators

The Project development objective (PDO) as presented in the Project Appraisal Document (PAD) was to improve the quality of Croatia’s Adriatic coastal waters to meet EU ambient quality standards in the participating municipalities, in a financially and operationally sustainable manner. The PDO, as defined in the Loan Agreement, was to improve the quality of the Borrower’s Adriatic Coastal Waters. There is some discrepancy in the wording of the PDOs in the PAD and Loan Agreement. The definition in the latter did not mention financial and operational sustainability nor the EU ambient quality standards per se, which according to the wording in the PAD specifies should be achieved. The PDO was to be achieved through (i) support for strengthening the institutional arrangements for financing and management of wastewater management in Croatia; and (ii) financing of wastewater collection, treatment and disposal infrastructure in selected coastal municipalities.

Key performance indicators: The key Project performance indicators were (i) percentage of wastewater produced in the coastal area municipalities participating in the Project that is collected, treated, and disposed of according to EU requirements; (ii) percentage of population in participating municipalities with adequate wastewater collection and disposal systems; (iii) percentage of samples from bathing and shellfish areas in participating municipalities complying with EU water quality standards; and (iv) the technical and financial situation of MWSCs in the participating municipalities, as indicated respectively by their level of unaccounted for water (where applicable) and sewerage network coverage rates and by their operating and debt service ratios.

1.3 Revised PDO

The Project development objectives were not revised during implementation of Phase I.

1.4 Main Beneficiaries

The primary beneficiaries of the Project were the population in the Project areas in the participating cities, totaling about 300,000 permanent residents as well as seasonal tourists bringing the total to about 850,000 people during peak periods, who would benefit from the improved wastewater services and the associated impacts such as environmental improvements and reduced risks to public health. Project benefits were also expected to reach beyond the participating municipalities to the broader regional and national economic sector, as improved environmental conditions would enhance prospects for the growth of tourist and fishing activities and improve prospects for the multiplier-effect growth and private sector investment which would accompany growth in the tourism sector. Government authorities involved in the sector were also expected to benefit from the Project in terms of implementation of their long-term vision for the rehabilitation and efficient provision of water services by sustainable local utilities.

3 Additionally, the municipalities would benefit since the opportunity to connect new areas to the sewerage network would facilitate municipal urban expansion, increase the land value of connectable areas and reinforce the potential for economic development of the municipality. Finally, the Project was expected to enhance the capacity of local authorities to finance and manage water sector infrastructure during Project implementation and beyond, directly impacting the viability of local utilities in the sector.

1.5 Original Components

Component 1: Coastal Environmental Infrastructure Component (Euro 61.65 million; US$73.25 million equivalent), was to finance investments in the construction and expansion of sewerage networks, main collectors, pumping stations, wastewater treatment plants and submarine outfalls. Investments would be financed by HV through the Special Purpose Subsidiary Company (SPSC), using a combination of loan, resources from the HV Water Pollution fees, specific Project surcharges, contributions from the municipalities and utilities, and government budget transfers.

Component 2: Institutional Strengthening and Program Management Component (Euro 4.67 million; US$5.55 million equivalent), was to finance equipment, technical assistance, training and studies to: (a) devise and implement an institutional framework for water pollution control; (b) complete engineering designs and environmental and social assessments for investments after the first year of the Program and supervise Project investments; (c) ensure the capacity of the SPSC for Project implementation, evaluation and monitoring, including financial management; and (d) strengthen and bring utilities to reasonable levels of management, operational efficiency and financial viability and potentially facilitate private sector participation. Technical assistance for the strengthening of municipal water utilities would be provided on a grant basis by HV through the SPSC.

Component 3: Strengthening of the Coastal Waters Monitoring Network (Euro 7.68 million; US$9.12 million equivalent) was to finance equipment, civil works and technical assistance to: (a) improve the capacity of the Ministry of Environmental Protection, Physical Planning and Construction (MEPPPC) network of laboratories for environmental monitoring to assess the impact of the Program on coastal waters quality; and (b) improve the capacity of HV’s laboratories to assess the individual discharges of municipalities and industries, determine the overall pollutants load contributed by Croatia to the Adriatic sea and evaluate and control the efficiency of the financed infrastructure. The first part of this Component, to be implemented by MEPPPC, would be financed on a grant basis from Government funds and loan proceeds, through direct budgetary transfers from the Ministry of Finance. The second part of the Component would be implemented by the SPSC on behalf of HV.

Implementation arrangements: HV was responsible for implementation of Components 1, 2 and 3a. This was done through the SPSC known as HV Jadranski Projekt (HV Adriatic Project, or HVJP d.o.o) established within HV during preparation of the Program. During preparation of Phase I, HVJP was envisaged to become an autonomous limited liability (d.o.o) agency that could become a financial intermediary for both public

4 and possibly even private funds to MWSCs. During the implementation however, HVJP did not become an intermediary for funds outside of the Project due to lack of support for this concept from HV and the government as a whole. The Ministry of Environmental Protection, Physical Planning and Construction (MEPPPC) was responsible for implementation of Component 3b.

1.6 Revised Components

The Project components were not revised.

1.7 Other significant changes

Closing date extension: The Project closing date was extended by one year from November 30, 2008 to November 30, 2009 to allow sufficient time for completion of investments after some of the sub-projects experienced implementation delays due, in addition to the seven-month delay in loan effectiveness, to issues such as time lost in securing location permits, resolution of property rights issues, unearthing of archaeological sites, and cessation of construction during the summer tourist season in some cities.

Re-allocation of loan financing: Due to the financial crisis, the Croatian government faced budget constraints in 2009, resulting in insufficient budget allocation to cover its financial obligations under the Project. It requested the Bank to increase the financing percentage from the loan, to provide bridge financing and therefore ensure timely payments until the Project closing date. The Bank agreed to increase the portion of loan financing from 50% to 72% provided that the government financed 100% of remaining works.

Changes in the Results Framework: Some modifications to the results framework were made during the course of implementation. The changes involved addition of an outcome indicator on "reduced pollution load discharged into coastal area in participating municipalities (measured by reduced BOD (Biochemical Oxygen Demand) /Suspended Solids (SS) in wastewater treatment plant (WWTP) effluent)", in order to better capture the impact of the Project. This change was introduced after monitoring of the bathing water in the Sea in the eleven cities during implementation confirmed that the water quality was already good (97.9% of samples met required standards) and that the baseline of about 60%1 originally assumed was inaccurate. In addition, during the mid-term review mission, the Interest Coverage Ratio was replaced with Debt Service Coverage Ratio. A decision was however made in consultation with Management not to restructure the Project to reflect the changes because it was considered too close to the closing date for Phase I and preparation of Phase II provided an opportunity for incorporating the changes. The Project could have benefitted from these issues having been raised earlier during implementation in order to be able to allow for restructuring of Phase I earlier on.

1 At appraisal there was no reliable sea water quality monitoring system in place and information on sea water quality was largely anecdotal. Consequently the Project design included a component primarily focused on strengthening the coastal water quality monitoring framework.

5 Changes in the triggers: Two of the triggers for progressing from Phase I to Phase II of the Program were amended during the mid-term review. (i) The trigger concerning “The upgraded monitoring system is in place and functional” was amended to “set the baseline for wastewater discharged for the 11 municipalities participating in Phase I”; (ii) The trigger concerning “The government has adopted legislation concerning the treatment and discharge of municipal wastewaters in coastal areas to the relevant EU directives and issued the declaration of ‘sensitive’ and ‘less sensitive’ areas” was amended to “HV endorses the Sea Sensitivity Stud”’. The latter amendment was agreed as the process of adopting the said legislation is beyond the scope of the Project and is politically complex since it is linked to EU accession negotiations that would only be finalized at a much later stage.

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry The strategic APL approach adopted ensured that there was room for addressing any shortcomings identified in the first phase and improving them in subsequent phases of the Program. The Project was relevant and its objective (as defined in the Loan Agreement) was responsive to Croatia’s development priorities and the Bank’s Country Assistance Strategy (CAS) for the country. The rationale for the Bank’s involvement was sound given its previous involvement with the Coastal Areas Management Programme within the framework of the Mediterranean Action Plan in other parts of Croatia such as Split and Eastern Slavonia, and its experience in environmental management and urban water supply and wastewater treatment projects in other countries. Project preparation and design was based on sound analysis for purposes of investment lending of the technical, environmental, institutional, economic and social issues related to Croatia’s Adriatic Coastal waters. Detailed preparatory work including engineering and technical designs for the first year of the Project, including environmental and social assessments, financial models, and tariff schedules were completed before appraisal and agreed upon with the respective municipal officials. The Borrower, through HV, was closely involved in Program/Project preparation and the Government demonstrated its commitment through the implementation of supportive sector reforms and allocation of about Euro 1 million from its budget for project preparation. Critical risks to the Project successfully meeting its objectives were identified and rated overall as moderate, and appropriate measures to mitigate them were identified during preparation.

The main shortcoming in the quality at entry of the Project related to the formulation of the development objective as stated in the PAD and its alignment with the relevant key outcome indicator in the Results Framework. The objective as stated in the PAD was somewhat ambiguous because there were no clear EU2 ambient quality standards for the

2 EU standards apply only to bathing areas, which are not much affected by the wastewater discharges (before or after the Project). It was agreed to keep the existing indicator to measure the quality of the bathing water (which needs to be maintained), and add another indicator to better capture the actual impact of the Project. The additional indicator was: "reduced pollution load discharged into coastal area in participating municipalities (measured by reduced BOD/SS in wastewater treatment plant (WWTP) effluent)".

6 Sea in general at the time. EU standards apply only to bathing areas, hence the outcome indicator on “% samples from monitoring bathing and shellfish areas water quality complying with EU standards in participating municipalities” was not well suited for measuring sea water quality improvements in most of the municipalities because the investments made through the Project typically impacted parts of the Sea other than the bathing and shellfish areas. In the said bathing and shellfish areas, water quality was in fact found to be high during implementation. It should be pointed out however that the definition of the PDO in the PAD, which did not refer to EU ambient quality standards, was more appropriate. During implementation the team brought these issues to the attention of Management to explore remedies, including the possibility of restructuring the Project to address them. It was agreed that the benefits of restructuring would not outweigh the transaction costs nor substantively change implementation of Phase I, which at the time was due to close within the year. Therefore to address the identified weaknesses, the Results Framework was strengthened by adding relevant indicators that would better capture the impact of the Project. Given the adaptable nature of the APL, the lessons were incorporated in the design of Phase II and both the development objective and relevant indicators were revised. In light of these shortcomings the ICR rates the quality at entry for Phase I of the program as moderately satisfactory.

2.2 Implementation

Physical Cultural Safeguards Issues: Several sites of important archaeological value dating as far back as the Roman empire were excavated during construction of investments in some towns such as Pula. Although adequate procedures for addressing these issues were in place under the Project, their resolution resulted in loss of time, in some cases up to a year.

Delays in obtaining construction permits and property rights issues: Significant delays were encountered in implementation of construction works in some towns such as Opatija due to delays in obtaining construction permits from relevant local and central government authorities. Resolution of property rights issues including processing of expropriation also resulted in additional loss of time. Most of the delays in construction were the result of the lengthy process required to establish rights in the maritime domain or to transfer land from one government unit to another.

Location of sites: There were difficulties in securing the location of suitable sites for WWTPs in some cities due to the ‘not in my backyard (NIMBY)’ thinking3, which is a common problem in securing sites for WWTPs.

Asset Ownership Issues: Completion and commissioning of the WWTP in Biograd was seriously delayed because the Mayor denied the contractor permission to make the

3 The so-called ‘NIMBY’ (not in my backyard) syndrome reflects the propensity of local citizens and officials to insist on siting unwanted but necessary facilities such as those considered to have a potential for adverse impacts on the environment, anywhere but in their own community.

7 electrical connection to the plant pending resolution of ownership issues with the other three municipalities to be served by the Plant. This issue was later resolved through discussion and negotiation with all stakeholders, with support from the Bank team and Government.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization HV through the SPSC was responsible overall for M&E of the sub-projects against the performance indicators while the MWSCs through the sub-loan and implementation agreement with the SPSC were responsible for M&E in their respective sub-projects. M&E arrangements under the Project were adequate, with moderate shortcomings mainly stemming from the issues already discussed regarding the Results Framework, which were remedied in design of Phase II. Another monitoring weakness related to the lack of reliable baseline data with respect to several indicators. On balance the Project design addressed this issue by designing Component 3 primarily to strengthen Croatia’s coastal waters monitoring network. Moreover at appraisal specific targets were not set for the performance indicators given the financial intermediary approach whereby some of the participating cities were yet to be confirmed and baseline data was not fully available. In these cases targets were introduced during implementation.

2.4 Safeguard and Fiduciary Compliance

Environmental Assessment: Project design took into account the Bank’s safeguards policies and included procedures and implementation arrangements to ensure full consideration of environmental safeguards in accordance with OP 4.01. The Project was rated Financial Intermediary (FI) given that specific physical investments to be financed were to be defined during the course of implementation on the basis of the sub-projects in participating cities. Overall, in most towns management of the Environmental Assessment (EA) process was carried out in a satisfactory manner in accordance with the agreed arrangements during implementation although there were shortcomings in environmental monitoring in some cities such as Opuzen and Rogoznica, which were later rectified on the advice of the Bank team.

Involuntary Resettlement and Physical Cultural Resources: Both safeguards were triggered in Phase I. A Land Acquisition and Resettlement Policy Framework (LARPF) was prepared based on existing requirements and standard practices in Croatia and approved by the Bank prior to appraisal and the Operations Manual contained provisions for managing chance finds. The LARPF required a simple land acquisition plan for each sub-project, which had to be approved by the Bank. In practice, there was little acquisition of private land and only one instance of expropriation in the Phase I investments and little acquisition of right of way through private property. Most rights of way were granted without direct compensation, or residential connections were provided in lieu of compensation. HVJP obtained the services of a lawyer to advise municipalities on land acquisition issues as needed even though many municipalities already had experience with land acquisition and did not need additional support. The Ministry of Culture identified possible sites of historical value during the final design stage and oversaw construction in those areas. Croatian laws and regulations dealing with physical

8 cultural resources are fully consistent with OP 4.11. County offices of the Ministry of Culture and local archaeological museums investigated and managed chance finds professionally, as demonstrated by their response to discoveries in Pula that triggered the policy.

International Waterways: During project preparation, procedures for notification of riparians of the Adriatic Sea about the Project were adhered to in accordance with OP 7.50. The Government informed the riparian countries of the Program content and proposed investments even though they were not expected to result in any adverse effects. No objections were received.

Procurement Compliance: Procurement arrangements under the Project were reviewed periodically as part of Bank supervisions and were found to be satisfactory. HVJP has competent and well-educated staff with adequate procurement skills and experience. Bank post-reviews of procurement documentation revealed no serious deviations or issues of concern.

Financial Management (FM) Compliance: The FM arrangements under the Project were reviewed periodically as part of Bank supervisions and also found to be satisfactory. HVJP has well-trained, competent FM staff with experience in managing Bank projects. Adequate control procedures were in place and interim un-audited financial statements (IFRs) acceptable to the Bank were submitted to the Bank regularly. No significant inconsistencies were identified and any discrepancies were corrected in due time. All audits of financial statement reports were unqualified.

2.5 Post-completion Operation/Next Phase

The triggers for proceeding from Phase I to Phase II of the APL were substantially achieved and lessons learned from Phase I were incorporated in the design of Phase II. The latter was prepared and approved by the Bank’s Board on December 11, 2008 and became effective on June 4, 2009. Phase II is supported by an IBRD loan for Euro 60 million and a GEF grant of US$6.4 million and is being implemented under the same loan terms as Phase I. Phase II will be implemented over a period of five years and will scale up the number of cities participating in the Project from 11 to 30 using the same financing structure as for Phase I. Five of the eleven participating Municipal Water and Sewerage Companies (MWSCs) will likely take further sub-loans in Phase II of the Project (including the larger towns of Pula, Rijeka, Zadar, and Opatija.)

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation Rating: High

The relevance of the PDO of improving the quality of Croatia's Adriatic coastal waters as defined in the Loan Agreement4 is rated high, as it not only reflects Croatia’s

4 Refer to Section 1.2 on the discrepancy between the PDO in the PAD and Loan Agreement.

9 development priorities at appraisal which focused on fostering growth and creating conditions for competitiveness through maintaining existing infrastructure and protecting the environment, especially in the coastal area, but also supports one of the goals in the FY09-12 Country Partnership Strategy (CPS) dated August 8, 2008, to support the completion of Croatia’s EU accession process. Improving wastewater collection and treatment is considered a high priority in achieving this goal.

3.2 Achievement of Project Development Objectives Rating: Moderately Satisfactory

The ICR assesses achievement of the PDO as moderately satisfactory considering its efficacy on the basis of the definition of the PDO in the Loan Agreement, which refers simply to improving Croatia’s Adriatic coastal waters, as well as the extent to which the MWSCs achieved operational and financial sustainability as measured by the relevant performance indicators. Table 1 below and Annex 2 provide a summary of results in the eleven cities.

Overall, coastal water pollution in the Adriatic Sea adjacent to the participating cities was reduced, resulting in improved water quality due to the Project. While the first outcome indicator on the percentage samples from monitoring bathing and shellfish areas water quality complying with EU standards does not adequately reflect achievement of the Project objective, the second indicator shows significant reduction in pollution loads entering the Adriatic Sea from untreated wastewaters in the Project cities by an average of 122 tons of BOD (64%) and 145 tons of Suspended Solids (65%) per year. It is also evident from the increase in the percentage of wastewater produced in the coastal municipalities participating in the Project that is treated and disposed of according to EU and Croatian requirements (from 6% to 45%) and in the increase in the population that is able to connect to a wastewater collection system (from 56% to 68%), that there is a significant improvement in the quality and coverage of wastewater services in the participating municipalities. This not only contributed to overall environmental quality and sustained potential for associated indirect economic benefits such as tourism and aquaculture, but also represented progress towards Croatia’s meeting EU environmental requirements related to wastewater management.

10 Table 1: Summary of Results based on achievement of aggregated key performance targets End of Baseline Current project Objective Key Performance Indicators (May (Nov (Nov 2004) 2009) 2009) Project Development Outcome/Impact Indicator Actual Target Objective Improve the quality of Percentage of samples from monitoring 97.9% 98.5% 98% Croatia’s Adriatic coastal bathing and shellfish areas water quality waters to meet EU complying with EU standards in participating ambient quality standards municipalities. in the participating Reduced pollution load discharged into None BOD municipalities, in a coastal area in participating municipalities (target (122 ton) financially and (measured by reduced BOD/SS in WWTP introduc SS operationally sustainable effluent)5 ed later) (145 manner tons) Technical and financial situation of MWSCs: • Unaccounted for water 32% 30% 6 <35% • Sewerage network coverage rate 38% 68% 65% • Operating Ratio 0.99 0.977 >1.1 • Debt Service Coverage Ratio 4.73 8.168 >1.5 Project Outputs Output Indicators Actual Actual Target Strengthened institutional The SPSC and the EIFF are established and No Yes Yes arrangements for finan- capitalized. cing and management of Participating MWSCs contribute to project No Yes Yes wastewater treatment in investments as planned. Croatia Improved and expanded Percentage of wastewater produced in the 6% 45% 50% wastewater treatment coastal area municipalities participating in the infrastructure in selected Project that is treated and disposed of coastal municipalities according to EU and Croatian requirements. monitoring system in place Percentage of population in participating 56% 68% 65% municipalities able to connect to adequate wastewater collection system. Km of wastewater collection systems 0 102 101 constructed. No. of WWTPs commissioned. 0 6 6 Monitoring System in HV central and regional laboratories 0 2 2 place rehabilitated, equipped, operational and inter- calibrated. Number of participating cities in which 0 11 11 seawater quality monitoring system operational and baseline indicators in place. Highlighted results met requirement or exceeded targets.

5 Indicator added in final year of the project to strengthen the DO, thus no end-of-project target was set. 6 The UFW figure is the average of data from six MWSCs with reliable data, for which five met the target. 7 Number presented is average of Operating Ratios from nine MWSCs of which one exceeded target and five were within a 10% margin. 8 Number presented is average Debt Service Coverage Ratio for 8 MWSCs with data available, of which 5 exceeded target and one within 10 % margin.

11 Operational Sustainability: In addition to supporting project management, the Project through implementation of the Institutional Strengthening components sought to strengthen and bring utilities to reasonable levels of management, operational efficiency and financial viability. Operational sustainability of the MWSCs in the participating cities was assessed on the basis of indicators such as the levels of Unaccounted for Water and Sewerage network coverage rate. While results varied from one MWSC to another they showed an overall improvement in operational performance. The average increase in sewerage network coverage rate from 56 to 68% in the participating cities exceeded the target, although coverage within individual cities varied. Data on the levels of Unaccounted for Water (UFW) from the MWSCs ranged between 20 and 30% with one outlier (Opuzen which reduced from 63 to 53%), however on average it improved slightly from 32% in 2004 to 30% in 2008. A detailed breakdown of the operational performance indicators by city is presented in Annex 2.

Financial Sustainability: Overall, there are still significant differences among participating MWSCs and although the trend remains positive several participating utilities have not yet achieved desired financial sustainability. Achievement of financial sustainability in the participating MWSCs was assessed through several indicators: (i) Operating Ratio9 greater than 1.1; (ii) Current Ratio10 greater than 1.2; and (iii) Interest Coverage Ratio11 greater than 1.5. During the mid-term review mission, the Interest Coverage Ratio was replaced with Debt Service Coverage Ratio12, with a target of above 1.5. Financial indicators were monitored by the team on a regular basis. A breakdown of the financial performance indicators by city is presented in Annex 2. A detailed assessment of the MWSCs financial performance undertaken in May 200913 indicated that in most MWSCs, the collection ratio, debt service coverage ratio and current ratio were at satisfactory levels, and improved during the Project implementation period. Most of the utility companies however were out of compliance with the Operating Ratio target. Out of 10 monitored MWSCs, only Novigrad was able to meet the target of 1.1 in 2008. Other MWSCs had about equal operating revenues and expenses, resulting in operating ratio around 1. This was mostly attributed to the fact that the water and wastewater tariffs are not keeping up with the increased costs of operation and maintenance (O&M), which will further increase now that project-financed investments are completed. It should be noted that overall tariffs in the participating cities are quite high already (>Euro 1.0/cubic meter and in some as high as Euro 3.0/cubic meter). While a few utilities such as Rijeka adjusted their tariffs, most of the other utilities were not immediately planning to do so, which will affect their financial sustainability. Average Current Ratio (current assets/current liabilities) for the 10 listed municipal water companies in 2008 was 1.36, above the 1.2 target. However, according to data provided, five MWSCs were below that target. All of the MWSCs had satisfactory debt service

9 Operating Ratio is equal to Total Operating Revenue divided by Total Operating Expense. 10 Current Ratio is equal to Current Assets plus Paid Future Expenses and Deferred Income divided by Current Liabilities and Deferred Payments and Future Period Income. 11 Interest Coverage Ratio is measured as Earnings before Interest and taxes divided by Interest expenses. 12 Debt Service Coverage Ratio equals to Internal Cash generation divided by Debt Service obligations. 13 Data for November 2009 has been availed based on provisional accounts data for the year. 2008 data however is based on audited accounts.

12 coverage ratio, with the exception of Opuzen and Rijeka. Finally, the average collection ratio of the listed companies has been increasing, from an average of 77% in 2004 to 87% in 2008.

Other impacts: Other impacts of the Project relate to assisting Croatia in carrying out preparatory work for EU accession discussions with respect to the wastewater sub-sector. The Project undertook a number of significant environmental studies that will assist with EU accession negotiations. The most salient are: (i) a classification of the sensitivity of the sea to define the level of treatment required as per EU directives; (ii) a Strategic Environmental Assessment to assess the cumulative environmental impacts of the Project; and (iii) consulting services to monitor the seawater quality of the coast, both at the point of discharge from the WWTP and modeling of the pollution in the Project sites.

3.3 Efficiency

During appraisal, economic and financial analyses were conducted for the investments in four of the eleven cities: Novigrad, Opatija, Biograd and Zadar participating in the Project. The economic rates of return (ERR) were substantively positive and ranged from 11-24%, confirming that the sub-projects in all the cities were economically feasible. The PAD did not present the methodology used for the cost-benefit analysis, which made it difficult to replicate the analysis in the ICR. Failure to properly document and file this methodology was a shortcoming in the presentation of the PAD. Nonetheless the ICR has attempted to assess the efficiency of three of the four sub-projects that were identified at appraisal, based on other methods such as cost effectiveness criteria. A summary of the per capita costs at appraisal compared with the final costs is given in Table 2 below.

Table 2. Summary of the per capita investment costs in three cities Appraisal Cost Appraisal Final per Population City Estimate Per capita Final Cost capita served (Euro millon) Investment investment 1 Opatija 29,000 24.4 841 21.5 741 2 Biograd 10,500 9.9 942 10.7 1019 3 Zadar 75,000 17.7 236 15.2 203

Out of the three MWSCs reviewed, the final per capita investment costs for two of the MWSCs, Opatija and Zadar are lower than the appraisal per capita investment cost estimates. In light of the successful completion of the sub-projects in these towns at lower actual investment costs than appraisal, it is assumed that the benefits materialized and that investments financed under the respective sub-projects were feasible. Only in the case of Biograd did the final per capita cost estimate of EUR 1,019 exceed the appraisal per capita cost estimate of EUR 942. According to the sensitivity analysis conducted at appraisal sub-projects would be economically feasible if cost overruns were less than 10%, so it may be argued that even the investment in Biograd was economically feasible.

Although a similar analysis has not been carried out for the remaining towns which had not been confirmed at appraisal, the per capita investment costs vary widely from a low

13 of HRK 390 (or US$70) for Makarska to a high of HRK 14.450 (US$2,650) for Rogoznica, with a median value of HRK 2,640 (US$480). Such variations are to be expected given the large range of population size of the Project towns. It is symptomatic to find the highest per capita investment in the smallest town, Rogoznica, with only 1,100 permanent inhabitants. The reason for such a wide range of per capita investment costs are the considerable economies of scale in this type of investments. It should be noted that one of the guiding principles of sub-project evaluation and eligibility included confirmation that the option considered was the least-cost option.

3.4 Justification of Overall Outcome Rating Rating: Moderately Satisfactory

The overall outcome rating for the Project is moderately satisfactory in light of its high relevance, moderately satisfactory efficacy and moderate efficiency with respect to achievement of its objectives.

3.5 Overarching Themes, Other Outcomes and Impacts

(a) Poverty Impacts, Gender Aspects, and Social Development Not applicable.

(b) Institutional Change/Strengthening The Program supported the consolidation of HV as the key institution for the management of wastewater services in Croatia resulting in more efficient management of these services. It also supported the Government’s efforts to put in place an independent environmental monitoring and evaluation capacity in the MEPPPC. The Program was also designed to support technical and managerial capacity building at the local level through HV and to support the institutional reform needed to create a favorable environment for private sector participation as a mechanism for enhanced management and for the mobilization of additional financial resources.

The SPSC was created as a subsidiary company within HV to manage and supervise project implementation, reporting, procurement and disbursements, controlled by HV’s Department of Wastewater Management in cooperation with the respective water utilities. However the expanded role of HVJP, d.o.o as a financial arm for the sector envisaged in Phase I did not materialize as planned. An assessment of the efficacy of this unit carried out in 2007 revealed that the SPSC had no employees of its own. It relied entirely on loosely seconded Hrvatske Vode staff who work in the SPSC. Staff were seconded without formal contracts as to the duration of their tenure within SPSC and without any salary supplement for their demanding work within SPSC. Such an arrangement limited the de facto autonomy of the SPSC and placed great demands on the drive and self-motivation of SPSC staff and on its Director’s ability to motivate them.

In spite of the formal differences in governance structure it would appear that the SPSC productivity and quality of work is fairly comparable to the performance of the Project Implementation Unit in Hrvatske Vode that was used under the Bank-financed Eastern

14 Slavonia project. SPSC has been responsible for a large amount of the procurement- related tasks under the Project. From November 2005 to March 2007 (a span of about 18 months) the SPSC staff of 10 professionals managed all such aspects for about 35 ICB bids, and another 35 bids with National Competitive Bidding (NBC). As a comparison, Hrvatske Vode with about 500 professional staff manages about 1,500 contracts annually, of which about 500 contracts were under competitive procurement. In truth, Hrvatske Vode has a wide range of activities but the relation between the number of competitive bids and staff shows the large effort made by SPSC to implement the Project successfully.

The quality of the SPSC implementation could have been further improved if its Director had received additional advice and support as intended from a Supervisory Board or an analogous body of experts. Article 14 of the SPSC Founding Statement provides details on the Board of Supervisors where most of the members are nominated for five years. The composition of the Board of Supervisors suffers from the peculiarity that only one of the seven members is from Hrvatske Vode although HV owns the totality of shares in HVJP. In the event, the Board of Supervisors, represented by its chairman, elected not to meet more than twice: in September 2005 and in January 2006, respectively. The infrequency of meetings deprived the SPSC director of the guidance and support that a Supervisory Board brings, apart from sharing the responsibility for implementation.

(c) Other Unintended Outcomes and Impacts (positive or negative) As a result of the wastewater investments in cities such as Pula and Rijeka there have been positive improvements in the land-based environmental conditions in areas impacted by the investments, which is expected to impact property values.

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops

Not applicable.

4. Assessment of Risk to Development Outcome Rating: Low

The risk to development outcome of the Project is low given the technical quality of the investments, high capacity for implementation, and commitment from all levels of government and stakeholders. This is evidenced by the strong demand for the Project and the willingness to contribute financially to the investments, particularly from local government, local utilities and citizens. All the MWSCs levied and collected adequate surcharges to the tariff to contribute to the investments. Sustainability is also strengthened by the programmatic approach of the Program and the coverage of a cohesive area of the Adriatic Sea, with a long-term view that is shared by local participants to improve their own environments and health, coupled with the objective to protect and enhance the local tourism industry and economy. In addition, the long-term objective is supported at higher levels with the ambition to meet agreed EU directives on the quality of Adriatic Sea. In Phase I, HVJP acquired the capacity to solicit and prepare sub-projects and implement them in accordance with Croatian and Bank requirements.

15 Experience acquired in Phase I strengthens the sustainability for Phase II and the overall Program. Mid-term and final assessments of Phase I were undertaken and lessons learned were incorporated into the design of Phase II. The Program has also increased awareness and participation by local governments and their MWSCs to decrease reliance on central government funding.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance

(a) Bank Performance in Ensuring Quality at Entry Rating: Moderately Satisfactory Overall, Bank allocation of staff and resources were adequate and substantial preparatory analytical work was carried out to facilitate sound preparation and appraisal of the Program. Preparatory activities were consistent with the Bank’s fiduciary and safeguards requirements. The Bank team had very fruitful dialogue with relevant central and local government officials which contributed to the appreciation of the concept and strong buy- in to the Program by the participating cities as well as relevant policy reforms to facilitate it. Further detail on the preparation is given in Section 2.1 above. There were however shortcomings primarily related to formulation of the Project development objective and selection of the relevant outcome indicator as discussed above, which affected the Project’s overall quality at entry. On balance however, the team identified the significant weaknesses in the existing Sea Water monitoring system, including inter alia lack of reliable baseline data, and Component 3 of the Project was specifically designed to strengthen this system. Furthermore, it may be argued that the Project design, through the adaptable nature of the APL, was designed to allow for learning and subsequent remedy of the weaknesses from Phase I in subsequent phases.

(b) Quality of Supervision Rating: Satisfactory Overall, the quality of Bank supervision is rated satisfactory. Adequate budget and staff resources with an appropriate skill mix were allocated throughout the Project implementation period. Project supervision was carried out in a satisfactory manner, with Washington-based staff and country-based staff complementing each other. In addition to day-to-day coordination of activities, supervision missions covering overall implementation progress, fiduciary aspects including procurement and financial management and safeguards aspects were carried out at least twice a year. Mission aide- memoires and Implementation Status and Results Reports (ISRs) were comprehensive and candid, and they adequately reflected the performance in terms of both achievement of objectives and implementation progress. Weaknesses in the design were identified and addressed in a proactive manner, albeit, not as early as could have been, and the team was instrumental in the dialogue and preparatory work that led to approval and commencement of implementation of Phase II of the Program in a timely manner.

(c) Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory

16 The ICR rates the overall Bank performance as moderately satisfactory, considering the moderately satisfactory rating for performance in ensuring quality at entry and satisfactory quality of supervision that led to successful project implementation and outcomes, as well as to an improved quality at entry for the second Phase.

5.2 Borrower Performance

(a) Government Performance Rating: Satisfactory Borrower performance is rated satisfactory on the basis of the Government’s strong supporting role during project preparation and implementation. There was close coordination and dialogue between relevant government entities and the Bank at all times, and the Government demonstrated its commitment to the program through sector reforms including redefinition of responsibilities for HV and the MoE and establishment of the SPSC as well as timely passing of the Water Act. In addition to providing timely counterpart funding for implementation most of the time,14 government was able to contribute Euro 1 million for project preparation.

(b) Implementing Agency or Agencies Performance Rating: Satisfactory The ICR rates the performance of the main implementing agencies as satisfactory. As the main institutional player in the provision and management of wastewater services in Croatia in addition to being the main implementing agency during preparation, HV was closely involved in the Program/ Project preparation process. Through its SPSC (HVJP), it was able to handle the overseeing of subprojects and TA activities under the Project effectively. The envisaged organizational scheme did not quite function as originally planned for most of the implementation period because most of its staff who were seconded from departments within HV maintained their old responsibilities and compensation arrangements. Consequently, the unit was understaffed and staff, although competent and dedicated, were overstretched. Nonetheless they were able to adequately carry out all technical, fiduciary, legal and safeguard responsibilities with respect to the Project under the difficult circumstances. In light of the increased number of sub-projects under Phase II it was recommended to increase the number of staff.

(c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory Overall Borrower performance takes into consideration both the Government and the Implementing Agency’s performance during preparation and implementation. On the basis of justification provided above, the Borrower’s overall performance is rated Satisfactory.

6. Lessons Learned

14 Counterpart funds were timely except in 2009 when the Government requested the Bank to increase its percentage of financing on all expenditure categories from 50% to 72%, due to fiscal constraints caused by the global financial crisis.

17 The following lessons have been learned from the Project. Several of these lessons have been taken into consideration in the design of Phase II of the APL.

(i) As in all projects, a high level of Borrower commitment and capacity is essential for successful project implementation and ensuring sustainability.

(ii) Adaptable Program Loans are suitable for reaching long-term objectives in sectors such as wastewater management through a measurable phased approach and subsequent phases provide the Bank and the Government with the opportunity to improve project design and performance.

(iii) Performance monitoring indicators should be carefully selected to be able to fully capture achievement of the Project/program development objectives and the Results Framework should be aligned with the objective.

(iv) The creation of the Special Purpose Subsidiary Company (SPSC) was an interesting departure from the tradition of relying on project implementation units within the Borrower. However, it might have functioned better had it been given the necessary support to achieve autonomy such as: (a) sufficient staff designated exclusively to the SPSC with adequate incentives; (b) an operational Board to provide the SPSC management with guidance; and (c) an ability to earn a margin on its financing extended in order to gradually build up equity. On balance, the added value of this approach appears to have been limited.

(v) Users are willing to pay higher costs (in this case over 50% of the capital costs) for sewerage where there is a specific economic interest such as in this case, protecting of tourist markets.

(vi) Investment surcharges from users can be an effective means to reveal demand and improve sustainability of investments. However, as in many places, increasing tariffs to achieve financial sustainability is often a challenge.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners

(a) Borrower/implementing agencies None.

(b) Cofinanciers None.

(c) Other partners and stakeholders None.

18 Annex 1. Project Costs and Financing

(a) Project Cost by Component (in USD Million equivalent) Appraisal Actual/Latest Percentage of Components Estimate (USD Estimate (USD Appraisal millions) millions) 1. COASTAL ENVIRONMENTAL 73.25 92.66 127 INFRASTRUCTURE 2. INSTITUTIONAL STRENGTHENING AND 5.55 5.81 105 PROGRAM MANAGEMENT 3. STRENGTHENING OF THE COASTAL WATERS 9.12 9.87 108 MONITORING NETWORK UNALLOCATED 7.13

Total Baseline Cost 95.05 108.34 114 Physical Contingencies 0.00 Price Contingencies 0.00 Total Project Costs 95.05 Front-end fee PPF 0.00 Front-end fee IBRD 0.00 Total Financing Required 95.05 108.34 114

(b) Financing Appraisal Actual/Late Type of Estimate st Estimate Percentage Source of Funds Cofinancing (USD (USD of Appraisal millions) millions) Loan Borrower 47.51 54.3 114

International Bank for Loan 47.54 54.1 114 Reconstruction and Development

19 Annex 2. Outputs by Component

Component 1 – Coastal Environmental Infrastructure. The main outputs of the Project are summarized in Table A2.1 below.

Table A2.1 Component 1 - Summary of investments Combined water Sub-marine and sewerage Wastewater Sewers Pumping Population outfall MWSC company (WS) or treatment (km) Stations equivalent (length, separate sewerage plant depth) company (S) Biograd WS 19 5 Mechanical1 27,000 3.6km/30m Dugi Rat WS 2 2 Mechanical2 30,000 - Makarska WS 0 0 Mechanical 50,000 - Novigrad S 7 1 Mechanical3 33,000 1.5km/23m Omiš WS 4 5 Mechanical2 (see Dugi - Rat) Opatija WS 52 17 - - - Opuzen WS 2 0 Mechanical 9,000 - Pula S 3 3 Mechanical4 50,000 - Rijeka WS 7 3 - - - Rogoznica WS 6 4 - - - Zadar S 0 0 Biological 100,000 4.1km/31m TOTAL 102 40 7 299,000 1 Biograd WWTP is completed but not connected to electric grid 2 Dugi Rat and Omis have a joint Mechanical Wastewater Treatment Plant serving both cities 3 Novigrad WWTP is under construction but will be completed in Phase II of the Program 4 Pula WWTP is only being rehabilitated and part of the equipment replaced

Tables A2.2 and A2.3 present a summary of the technical and financial results indicators in the participating cities.

20 Table A2.2. Sewerage network coverage and wastewater disposal coverage rates

Population able to Population with Population able Population with Population BOD BOD SS SS connect to adequate to connect to adequate Unaccounted MWSC number produced removed produced removed wastewater collection and wastewater collection and for water (%) (2001) * (t) ** (t) * (t) ** (t) network disposal system network (%) disposal system Baseline Mar-10 Baseline Mar-10 Baseline Mar-10 Baseline Mar-10 Baseline 2008 Oct-09 Oct-09 Oct-09 Oct-09 Biograd 13,305 2,100 4,515 - 4,515 16% 34% 0% 34% 27% 27% 9.9 0.5 11.5 0.6 Dugi Rat 3,507 - 365 - 365 0% 10% 0% 10% 30% 27% 0.8 0.0 0.9 0.0 Makarska 13,033 12,040 13,033 - 13,300 92% 100% 0% 102% 25% 25% 29.1 2.9 34.0 3.4 Novigrad 5,004 3,000 3,400 - - 60% 68% 0% 0% 0.0 0.0 0.0 0.0 Omis 9,663 2,470 2,990 - 2,990 26% 31% 0% 31% 30% 26% 6.5 0.3 7.6 0.4 Opatija 25,088 13,630 20,300 - - 54% 81% 0% 0% 0.0 0.0 0.0 0.0 Opuzen 5,163 320 1,280 - 1,280 6% 25% 0% 25% 63% 53% 2.8 0.1 3.3 0.2 Pula 62,984 45,708 46,880 12,300 17,580 73% 74% 20% 28% 11.6 1.2 13.5 1.3 Rijeka (Grobnik) 12,000 - 3,600 - 3,600 0% 30% 0% 30% 19% 20% 7.9 0.8 9.2 0.9 Rogoznica 2,324 - 385 - 385 0% 17% 0% 17% 0.8 0.0 1.0 0.0 Zadar 71,468 45,000 56,250 - 56,250 63% 79% 0% 79% 123.2 117.0 143.7 139.4 Total 223,539 124,268 152,998 12,300 100,265 192.6 122.9 224.8 146.3 Average 56% 68% 6% 45% 35% 50% 2% 32% 32% 30% 0% 64% 0.0 65%

21 Table A2.3. Summary of Financial Indicators (2004-2009) 2004 2005 2006 2007 2008 2009* Operating Ratio Biograd 1.13 0.93 0.88 0.87 0.86 0.88 Makarska 1.00 1.01 0.99 0.96 0.99 1.09 Omis (+Dugi Rat) 1.00 1.00 0.97 1.00 1.00 1.00 Opatija 0.98 0.98 0.99 0.98 0.99 1.00 Opuzen 0.80 1.02 1.08 1.02 0.94 0.96 Pula 0.94 0.97 0.87 0.94 1.00 0.99 Rijeka 0.89 0.79 0.87 0.86 0.81 0.74 Sibenik (Rogoznica) 1.08 0.98 1.04 Umag (Novigrad) 1.02 1.00 1.21 1.11 1.11 1.10 Zadar 1.00 1.20 0.95 0.87 0.94 1.00 Average 0.99 0.99 0.98 0.96 0.96 0.97 Current Ratio Biograd 2.54 1.04 1.81 1.92 1.14 1.44 Makarska 3.70 3.21 1.72 1.87 2.69 2.57 Omis (+Dugi Rat) 1.25 1.65 1.37 1.39 1.26 1.17 Opatija 1.59 1.56 1.76 1.41 1.71 0.73 Opuzen 1.13 1.19 1.34 0.99 0.90 0.92 Pula 4.31 3.36 2.96 2.77 2.49 2.55 Rijeka 1.63 1.48 1.61 1.32 1.04 0.00 Sibenik (Rogoznica) 2.44 1.84 1.80 Umag (Novigrad) 1.25 0.80 1.34 0.81 0.69 0.71 Zadar 3.76 1.93 0.60 0.36 0.28 0.36 Average 2.36 1.81 1.63 1.43 1.36 1.30 Collection Ratio Biograd 80% 80% 83% 88% 78% 81% Makarska 76% 80% 78% 99% 95% 95% Omis (+Dugi Rat) 77% 75% 78% 79% 77% 76% Opatija 84% 87% 86% 89% 85% 87% Opuzen 70% 71% 72% 66% 92% 92% Pula 50% 52% 67% 73% 77% 80% Rijeka 85% 85% 85% 86% 85% 85% Sibenik (Rogoznica) 51% 57% 62% Umag (Novigrad) 98% 96% 98% 94% 93% 97% Zadar 98% 105% 103% 104% 99% 96% Average 77% 79% 81% 86% 87% 88% Debt service coverage ratio Biograd 4.78 5.61 3.75 4.18 3.88 1.79 Makarska 17.32 19.89 21.44 1363.75 86.55 49.50 Omis (+Dugi Rat) 2.19 2.17 1.58 2.78 3.32 1.42 Opatija 4.97 6.58 21.58 1.67 5.15 5.37 Opuzen 0.00 0.71 0.46 1.22 0.61 0.56 Pula 4.74 3.05 4.51 3.73 4.65 3.70 Rijeka 1.35 0.95 1.48 2.36 1.03 1.09 Sibenik (Rogoznica) 1.12 0.93 2.31 Umag (Novigrad) 1.41 0.75 1.25 2.38 1.73 1.87 Zadar Average 4.73 4.52 6.48 2.62 13.37 8.16 *All 2009 financial data based on projection at project closing since audited data was not available.

22

Component 2: Institutional Strengthening and Program Management. All activities envisaged under this component including the following, were carried out: (i) Supply and installation of information technology equipment. (ii) Development of water pollution control institutional framework. (iii) Final designs, associated Environmental and Social assessments and supervision of investments financed under approved sub-projects. (iv) Technical Assistance to the SPSC for project implementation and evaluation, monitoring and financial management. (v) Technical assistance for the strengthening of municipal water utilities.

Although the above activities were completed in a satisfactory manner, the impact on the improvement of the performance of the participating MWSCs was limited. Therefore, this component has been redesigned in Phase II, with the aim to improve planning and targeting of institutional strengthening activities.

Results for Indicators15 of Financial Sustainability. As stipulated in the Project Appraisal Document (main loan conditions), the participating MWSCs should maintain (i) operating ratio16 greater than 1.1; (ii) current ratio17 greater than 1.2; and (iii) interest coverage ratio18 greater than 1.5. During the mid-term review mission, the interest coverage ratio was replaced with debt service coverage ratio19, with the target above 1.5. The results of the above as well as the collection ratio of these 10 municipal companies are presented below.

Operating Ratio. Out of 10 monitored MWSCs, only Novigrad was able to meet the operating ratio target of 1.1 in 2008. Other MWSCs have about equal operating revenues and expenses, resulting in operating ratio around 1. The input data are transferred from companies’ official financial statements, and in some cases include the municipal subsidies.

Component 3: Strengthening of the Coastal Waters Monitoring Network.

Component 3a. HV Monitoring: The objective of this sub-component was to assess the impact of wastewaters entering the sea by activities financed by the Project. Because the majority of outfalls were not operational in 2008 (the period of monitoring) and for those in operation a relatively small number of Population Equivalent was connected, the nutrient load at sampling sites was minimal. As a consequence, the number of sampling points was decreased. The results of this work can potentially feed into: (i) flow data for future monitoring when the outfalls are operational, though the hydrodynamics may change by the discharge plume; and (ii) model calibration performed by Component 3b of the Project.

15 Results for 2009 are based on provisional unaudited accounts data. 16 Operating ratio is equal to total operating revenue divided by total operating expense. 17 Current ratio is equal to current assets plus paid future expenses and deferred income divided by current liabilities and deferred payments and future period income. 18 Interest coverage ratio is measured as earnings before interest and taxes divided by interest expenses. 19 DSCR equals to internal cash generation divided by debt service obligations.

23

Component 3b. MEPPPC monitoring: The objective of this work was to assist MEPPPC in the development of a monitoring network and compliance with EU directives. This subcomponent produced: (i) a final report, (ii) model results based on field calibration and the associated data set; and (iii) working models delivered to MEPPPC.

24 Annex 3. Economic and Financial Analysis

In the case of Croatia the main driver for investments in wastewater management is the convergence with the directives of the European Union for which Croatia has accession status. Specifically, Croatia is implementing wastewater projects to enable compliance with the EU Wastewater Directive. Specifically, the EU Wastewater Treatment Directive 91/271/EEC requires:

• The Collection and treatment of waste water in all agglomerations of > 2,000 population equivalents (p.e.);

• Secondary treatment of all discharges from agglomerations of > 2,000 p.e., and more advanced treatment for agglomerations >10,000 population equivalents in designated sensitive areas and their catchments;

• A requirement for pre-authorization of all discharges of urban wastewater, of discharges from the food-processing industry and of industrial discharges into urban wastewater collection systems;

• Monitoring of the performance of treatment plants and receiving waters; and

• Controls of sewage sludge disposal and re-use, and treated waste water re-use whenever it is appropriate.

Accordingly, the decision has been taken to offer participating municipalities financial incentives to comply with the EU Wastewater Treatment Directive. In the case of the municipalities on the Adriatic Sea the financial incentives are coupled with the incentives to create the conditions for a sustainable environment in view of the economic importance of the tourism industry. The fact that Croatia is striving to attract upscale tourism makes it all the more important to offer a clean and sustainable marine environment.

Those making the decisions to invest in wastewater management can then focus on how to comply with the Wastewater Treatment Objective as cheaply as possible through least- cost analysis. To this end, Hravatske Vode has attempted to minimize the investment costs through complementing the already existing wastewater infrastructure. Participating municipalities have generally been able to finance the first two stages of the wastewater sequence: (i) the individual household connection to (ii) the secondary sewers that are laid in the streets of the towns. On occasion, some municipalities may have built trunk sewers to intercept the wastewaters collected and running in the secondary sewers, or even submarine outfalls. The economic investment criterion has then attempted to complete all the five steps of wastewater management: (i) household connections: (ii) secondary sewers; (iii) intercepting trunk sewers that convey collected wastewaters to the treatment plants; (iv) wastewater treatment plants; and (v) submarine outfalls through which the treated effluents are disposed. The table at the end of this annex shows the results of this optimality analysis for the 11 municipalities.

25

The per capita investment costs vary widely from a low of HRK 390 (or US$70) for Makarska to a high of HRK 14.450 (US$2,650) for Rogoznica and with a median value of HRK 2,640 (US$480). Such variations are to be expected given the large range of population served. It is symptomatic to find the highest per capita investment in the smallest town, Rogoznica, with only 1,100 permanent inhabitants. Although the per capita costs are high, they would have been still higher for towns with investments required for: (i) house connections; (ii) secondary sewers; (iii) interceptors; (iv) wastewater treatment; and (v) submarine outfalls. Instead, without exception the Project towns had already investments in two or more of the five stages and some, such as Rogoznica and Omis, already had four of the five stages resolved before the Project.

Cost effectiveness evaluation. Out of the three MWSCs reviewed, the final per capita investment costs for two of the MWSCs are lower than the appraisal per capita investment cost estimates. The appraisal per capita investment costs for Opatija was EUR 841, while the final per capita investment cost is only EUR 741. The appraisal per capita capital investment cost estimate for Zadar was EUR 236, while the final per capita cost is EUR 203. Only in the case of Biograd did the final per capita cost estimate of EUR 1,019 exceed the appraisal per capita cost estimate of EUR 942, but it is still within 10% margin defined at appraisal.

Financial Sustainability Evaluation. Achievement of financial sustainability in the participating MWSCs was assessed through several indicators: (i) Operating Ratio greater than 1.1; (ii) Current Ratio greater than 1.2; and (iii) Interest Coverage Ratio greater than 1.5. During the mid-term review mission, the Interest Coverage Ratio was replaced with Debt Service Coverage Ratio, with the target above 1.5. A detailed assessment of the MWSCs financial performance undertaken in May 2009 indicated that in most MWSCs, the collection ratio, debt service coverage ratio and current ratio were at satisfactory levels, and improved during the Project implementation period.

Operating ratio. Most of the MWSCs have been out of compliance with the Operating Ratio target. Out of 10 monitored MWSCs, Novigrad was able to meet the Operating Ratio target of 1.1 in 2007 and 2008, which was an improvement from its 2004 level of 1.02. Opatija, Omis, and Makarska did not experience substantial change in their Operating Ratios over the Project years and their Ratios stayed very close to 1. The Operating Ratios for most other MWSCs declined slightly but most MWSCs still have about equal operating revenues and expenses, resulting in Operating Ratios of around 1.

Current Ratio. Six out of nine MWSCs reviewed have had Current Ratios over the Project years that are at or above the targeted value of 1.2. Some MWSCs, such as Pula, Opatija, and Makarska, exceed the target indicator by substantial margin with 2.49, 1.71, and 2.69 Current Ratios in 2008, respectively. Average Current Ratio for the 10 listed municipal water companies in 2008 was 1.36, above the 1.2 target.

Debt Service Coverage Ratio. All but one MWSCs have maintained Debt Service Coverage Ratios above the target of 1.5 for most of the Project years. Most MWSCs,

26 namely Pula, Opatija, Biograd, Omis, and Makarska, have had Debt Service Coverage Ratios that have substantially exceeded the targeted 1.5 level throughout the review period. Only Rijeka and Opuzen did not meet the Debt Service Coverage Ratio target, although the former’s coverage level declined below the target only in 2008. Average Debt Service Coverage Ratio for the 10 listed MWSCs in 2008 was 13.37, well above the 1.5 target.

Collection Ratio. The Collection Ratio of the listed companies has been increasing, from an average of 77% in 2004 to 87% in 2008. Virtually all of the MWSCs either improved their Collection Ratios or maintained the same level they had at the beginning of the review period. Some of the MWSCs improved their collection performance substantially. For example, Pula’s Collection Ratio improved from 50% in 2004 to 77% in 2008. Makarska improved its Collection Ratio from 76% to 95%, and Opuzen improved it from 70% to 92% over the same period.

27 Table A3.1. Waastewater (WW) System Components and Costs Investment (HRK million) Per capita cost (HRK)

WW WW WW WW WW WW Total Town Population House WW Treatment WW Disposal Intercep- Collection Interception Treatment Disposal Project connection tion

Biograd 10,500 ENP ENP CCPCP 66.6 CCPCP 13.8 CCPCP 8.9 6,340 1,310 850 8,500 Dugi Rat 7,300 ENP ENP CCPCP 14.0 CCPCP 5.7 ENP 1,920 780 2,700 Makarska 14,000 ENP ENP CCPCP 0.5 CCPCP 4.9 ENP 40 350 390 Novigrad 4,000 ENP ENP CCPCP 6.2 CCPCP 13.2 CCPCP 5.8 1,550 3,300 1,450 6,300 Omis 6,500 ENP ENP CCPCP 16.4 ENP ENP 2,520 2,520 Opatija 29,000 ENP ENP CCPCP 111.6 CCPCP II ENP 3,850 3,850 Opuzen 3,200 ENP ENP CCPCP 4.8 CCPCP 2.7 ENP 1,500 840 2,340 Pula 58,600 ENP ENP CCPCP 48.8 CCPCP 2.7 ENP 830 50 880 Rijeka 12,000 ENP ENP CCPCP 31.7 ENP ENP 2.64- 2,640 Rogoznica 1,100 ENP ENP CCPCP 15.9 ENP ENP 14,450 14,450 Zadar 75,000 ENP ENP CCPCP 5.1 CCPCP 91.5 CCPCP 26.3 70 1,220 360 1,640

Notes: CCPCP=Croatia Coastal Cities Pollution Control Project Phase 1 CCPCP II=Croatia Coastal Cities Pollution Control Project 2 (Phase II) WW=wastewater ENP=existing, sunk cost, not financed by CCPCP WW house connections were not eligible to be financed by CCPCP WW collection, secondary sewers, were not eligible to be financed by CCPCP WW interception, interceptors and trunk sewers, were financed by CCPCP WW treatment was financed by CCPCP WW disposal, submarine outfalls, were financed by CCPCP

28 Annex 4. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members Responsibility/ Names Title Unit Specialty Lending Name Manuel G. Marino Team Leader, Lead Water ECSIE Engineer, and Sanitation Specialist Environmental David N. Sislen Co-Team Leader ECSIE Economist Stjepan Gabric Water and Sanitation ECSIE Water and Sanitation Specialist Stan Peabody Senior Social Specialist ECSSD Social Safeguards Rita Klees Senior Environmental ECSSD Environmental Specialist Assessment Xavier Chauvot de Engineer ECSIE Engineer Beauchene Takao Ikegami Sanitary Engineer ECSIE Engineer Salim Benouniche Procurement Specialist ECSPS Procurement Mike Gascoyne Financial Management ECSPS Financial Management Specialist Irina L. Kichigina Senior Counsel LEGEM Lawyer Menahem Libhaber Senior Water and Sanitation LCSSD Peer Reviewer Specialist Louis Saliba Environmental Health ECSSD Peer Reviewer Specialist Michael Schaeffer Consultant ECSIE Financial Stanislav Tedeschi Consultant ECSIE Water and Sanitation Carlos Orsini Consultant ECSIE Institutional Domagoj Racic Consultant ECSIE Economist Vladimir Skendrovic Consultant ECSIE Engineer Maria Teresa Lim Program Assistant ECSIE Team Support

29 Supervision/ICR Michael Webster Senior Water and Sanitation ECSS6 Task Team Leader Specialist Lynette Alemar Senior Program Assistant ECSSD Team Support Maha J. Armaly Senior Urban Finance ECSS6 Urban Finance Specialist Salim Benouniche Lead Procurement Specialist MNAPR Procurement Ljiljana Boranic Team Assistant ECCHR Team Support Sandy Chang Consultant SASDU Consultant Xavier Chauvot De Senior Water & Sanitation MNSWA Water & Sanitation Beauchene Specialist Majed El-Bayya Lead Procurement Specialist ECSC2 Procurement Stjepan Gabric Senior Operations Officer ECSS6 Operations Hana Huzjak Operations Analyst ECSS6 Operations Henry Laino Consultant LCSUW Consultant Lamija Marijanovic Financial Management ECSC3 Financial Specialist Management Philippe Marin Senior Water & Sanitation MNSWA Water & Sanitation Specialist Manuel G. Marino Lead Water and Sanitation ECSS6 Water & Sanitation Spec Mirela Mart Consultant ECSPS Consultant Shelley Mcmillan Water Resources Spec. AFTWR Water Resources Kishore Nadkarni Consultant EASCS Consultant Norval Stanley Peabody Consultant ECSSD Consultant Klas B. Ringskog Consultant ECSSD Consultant Sudipto Sarkar Sector Leader EASIN Sector Leader David N. Sislen Sector Leader LCSSD Sector Leader Natasa Vetma Operations Officer ECSS3 Operations Antonia G. Viyachka Procurement Specialist ECSC2 Procurement Iwona Warzecha Senior Financial ECSC3 Financial Management Specialist Management Amelito Velasco Procurement Assistant ECSC2 Procurement Klas Ringskog Consultant ECSSD ICR Co-Author Sanyu Lutalo Environmental Engineer ECSS6 ICR Primary Author

30

(b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY00 2 7.73 FY01 7 49.67 FY02 11 96.39 FY03 17 84.18 FY04 39 220.48 FY05 -2.05

Total: 76 456.40 Supervision/ICR FY05 20 93.65 FY06 22 110.85 FY07 20 112.18 FY08 20 74.86 FY09 23 0.00

Total: 105 391.54

31 Annex 5. Beneficiary Survey Results

A beneficiary survey was not carried out.

32 Annex 6. Stakeholder Workshop Report and Results

A stakeholder workshop was not held for Phase I.

33 Annex 7. Summary of Borrower’s ICR

HRVATSKE VODE Coastal Cities Control Pollution Program

Coastal Cities Control Pollution Project 1 Borrower’s Evaluation Report Summary

November 2009

34

I) Assessment of the Program and Project Objectives, Scope, Implementation and Operation Experience

Program objectives The Adriatic coast is one of the most important "resources" of Republic of Croatia, which generates considerable portion of national income. Except for a few isolated spots, the environment is still capable to mitigate the negative impact of economic activities. However, the more frequent repetition of "natural" incidents like flourishing of the see indicates that system is becoming more sensitive, easy to be pushed out of balance and probably very close to the edge of its receiving capacity.

On the other hand, the development of the region rely upon the fact that the Adriatic coast is and will be healthy environment for living and relaxation and assumes intensification of economical activities especially tourism, shipyards and fishery. The investment in expansion of touristic capacities will surely be followed with development of transportation, agriculture and trading, as well as with intensifying of real estate investments.

The basic objectives of the Program are: ¨ first to preserve and to protect the existing environment before the permanent damage to the quality of environment can be done, ¨ second to provide the basis for safe and environmentally acceptable economy development, and ¨ third to improve the existing quality of the environment. ¨ In order to achieve these goals this Program will give technical and financial support to all activities streamed into improvement of efficiency of water quality protection and water pollution control sector such as: f construction of the wastewater collection and treatment facilities, f regulatory and institutional strengthening f development of monitoring f promoting active public involvement f mobilizing joint technical, professional and financial resources on a local and national level.

In general, the Program is of a long-term nature, and first ten/fifteen years activities that will be supported by the World Bank should be used as beginning of the long-term commitment to continuous, well planed, self supported, socially and economically acceptable investment into environment protection.

Program scope The Program activities are systematized into 3 general groups: ¨ Investment into improvement of the wastewater collection and treatment facilities ¨ Investments into improvement of regulatory and institutional framework of the sector, and ¨ Investment into improvement of communal services efficiency. Due to limited financial possibilities of the area that are available for this purpose, it is necessary to identify, mobilize and channel all possible sources of financing towards the Program: ™ available funds of the Republic of Croatia (National Budget, Islands Development Fund, funds of Hrvatske vode for water protection, etc.) ™ corresponding EU funds, ™ international financial institutions, ™ private sector. The remaining part of the funds has been financed by the proceeds of IBRD loan, which would be repaid by final beneficiaries of the loan.

35 ™ municipal companies, through water tariff ™ Hrvatske vode, from water protection charge.

Implementation of the Program is planned in three stages, and the first stage of the Program has been implemented in the period of five years (from 2005 to 2009). The total estimated cost of realization of the Program is ca 280 million, and the value of the first stage is ca 80 million.

The Loan Agreement for the implementation of Phase I of the Program was signed with the International Bank for Reconstruction and Development in Zadar on July 2, 2004, in the amount of 40 million, which, together with the local funds (State Budget, local authorities and Hrvatske vode) makes the total amount of 80 million.

The possibility of ensuring funds for the implementation of Phases II and III of the Program was also arranged (Phase II: 60+60=120 million, Phase III: 40+40= 80 million) upon fulfilling of two conditions: contracting of 80% of the total amount and disbursement of 40% funds of the loan for the previous phase.

Consistent with the scope and objectives identified above, the Program has three components: I. Coastal Environmental Infrastructure component to be financed according to the following principles: - The wastewater treatment and discharge systems - Sewerage and like infrastructure II. Institutional Strengthening and Program Management Component to finance equipment, technical assistance, training and studies to: − Devise and implement an institutional framework for water pollution control; − Complete engineering designs and environmental and social assessments for investments after the Phase I of the Program and supervise Project investments; − Ensure the capacity of the PIU for Project implementation, evaluation and monitoring, including financial management; III. Strengthening of the Coastal Waters Monitoring Network to finance equipment, civil works and technical assistance to: − Improve the capacity of the Ministry of Environment network of laboratories for environmental monitoring to assess the impact of the Program on coastal waters quality; − Improve the capacity of laboratories of Hrvatske vode to assess the individual discharges of municipalities and industries, determine the overall pollutant load contributed by Croatia to the Adriatic, and evaluate and control the efficiency of the financed infrastructure; − Give the decision-makers a decisive and reliable tool for achieving concordance of Croatian coastal waters quality monitoring with the relevant EU standards and adaptation of the degree of wastewater treatment so as to achieve concordance through target investments implemented in phases.

Phase I - Coastal Cities Control Pollution Project 1 1.3.1 The objectives of the project implementation

One of the basic principles of the Project is that financing had been available to technical solutions which are: ¨ technically rational ¨ socially and economically feasible and ¨ acceptable from the environmental standpoint.

Therefore, the Project favorites the technical solutions that allows gradual construction (in phases), with regard to financial possibilities of the particular area or region. The next, for Project implementation, very important principle is that the Project is of the regional nature, balancing:

36 ¨ the requirements and possibilities, ¨ priorities and potentials, but also promoting the development of minor, less developed communities.

The guiding principles for evaluation of subprojects and determination whether they meet the criteria from the subprojects included the following: ¨ Technical and environmental feasibility, least-cost and in compliance with environmental requirements of the proposed civil works and goods ¨ Decision on capital cost contribution (Financial analysis, taking into account all sources of financing, demonstrating whether the funds will be sufficient to cover the costs of construction, loan repayment, and depreciation) ¨ Procedures for O&M and tariff collection

Implementation of Phase I of the Project started in 2005. Eleven municipalities participated in the first phase of the Coastal Cities Pollution Control Program, Phase 1. A total of 11 (eleven) Subsidiary Loan Agreements and Subproject Agreements were signed (for 11 subprojects): Pula, Opatija, Rijeka, Novigrad, Zadar, Biograd, Rogoznica, Omiš, Dugi Rat, Makarska and Opuzen. This included some of the largest municipalities, with the exception of Split. In table no.1 total contracted values are presented for each component of the Project.

Table no. 1 Contracted values for each component of the Project

PHASE I OF PROJECT Domestic IBRD Total component component Components mil mil mil (%) 50% 50 % o Wastewater Component I: treatment plants Coastal o Submarine outfalls 34,3 34,3 68,6 Environmental o Sewerage network 85,75 % Infrastructure expansion o IT equipment Component II: o Studies for sector Institutional development and Strengthening and 2,11 2,11 4,22 Project management Program 5,27 % o Final solutions Management and supervision services Component III: o MEPPPC (MOE) Strengthening of the laboratory 3,59 3,59 7,18 Coastal Waters o HV laboratory 8,98 % Monitoring Network

TOTAL 40,0 40,0 80,0 100,00 %

Necessary funds are ensured from loans and current revenues in the ratio of 50%-50%.

During construction, the funds from current revenues are ensured from:

State Budget - 22% Hrvatske vode - 9% and Final beneficiary/municipalities - 19%.

Component I Following Environmental Infrastructure were financed with the funds from Component I: • Zadar (100.000 PE) – waste water treatment plant and submarine outfall • Biograd Rivijera (32.000 PE) - waste water treatment plant, submarine outfall, pump stations and pressure-gravitational pipelines

37 • Rogoznica - pump stations and pressure-gravitational pipelines • Dugi Rat - pump stations and pressure-gravitational pipelines • Omiš (30.000 PE) - waste water treatment plant, submarine outfall, pump stations and pressure-gravitational pipelines • Makarska (50.000 PE) - pump stations and pressure-gravitational pipelines • Opuzen (9.000 PE) - waste water treatment plant and gravitational pipelines • Rijeka - pressure-gravitational pipelines • Opatija (58.000 PE) - waste water treatment plant, pump stations and pressure-gravitational pipelines • Novigrad (33.000 PE) - waste water treatment plant, submarine outfall, pump stations and pressure-gravitational pipelines • Pula (100.000 PE) - reconstruction of the waste water treatment plant, pump stations and pressure-gravitational pipelines

Component II Institutional Strengthening and Program Management Component was implemented through two categories :

o Goods: purchasing the IT equipment and special vehicles for sewerage maintains o Consultant services: technical assistance, training and studies to: • Devise and implement an institutional framework for water pollution control; • Complete engineering designs and environmental and social assessments • Ensure the capacity of the PIU for Project implementation, evaluation and monitoring, including financial management;

The objective of the Study for the Institutional strengthening of HVJP is to strengthen the Special Purpose Subsidiary Company. The Consultant developed a framework and strategy for strengthening the SPSC (HVJP), in line with the goals of the Project and recommended follow-up action to carry through the reforms, and define the support necessary to transform the SPSC into effective and efficient organization.

The objective of the Study for the Institutional strengthening of utility companies is to strengthen Water Supply & Wastewater Utility Enterprises in the following municipalities: Biograd, Novigrad, Omiš, Opatija, Opuzen, Pula, Rijeka, Rogoznica, Zadar. These Utility Enterprises are hereinafter referred to as “the target Enterprises”.

Component III Monitoring system is in place and functional. Objective of the Project is to determine the Impact of the project on the quality of the Adriatic Sea, and thus the achievement of the overall Program objective of improving the quality of the seawater.

Dutch Grant Funds In mid January 2006, the Ministry of Finance and the Kingdom of the Netherlands signed a Grant Agreement for a grant awarded to the Costal Cities Water Pollution Control Project through the World Bank for the purposes of financing the preparation of studies within the preparation of Phase II of the Project, institutional strengthening of HVJP d.o.o., institutional strengthening of utility companies, and procurement of equipment for the utility companies.

In respect of the overall Project Development objectives which are;

¾ to improve the quality of Croatia’s Adriatic coastal waters to meet aplicable standards in the participating municipalities, in a financially and operationally sustainable manner, ¾ to provide technical assistance and financing for engineering services, ¾ improvements in the environmental monitoring system for the assessments of Project results, and

38 ¾ support of Project implementation the Dutch Grant Funds has provided the sufficient financial frame to meet the key financial triggers required for the Second Phase of the Program, by using the Funds to prepare projects for the Phase II and support the institutional strengthening of Hrvatske vode Jadranski Projekt d.o.o. and the MWSCs involved in Phase I.

Following up the Procurement plan established for the Dutch Grant Fund 100% of the funds have been committed, out of which app. 100% has been disbursed (2.461.645,00$).

1.3.2 Assessment of the outcomes of the Project against the agreed objectives From the beginning of June 2005, after the signing of the first Subsidiary Loan Agreements and Direct Agreements for the first subproject, and after the implementation plans were adopted and approved by the World Bank, and up to November 30, 2009, a total of 158 public bidding procedures were prepared and completed, on the basis of which 158 contracts were signed.

All public tenders were completed for objects with valid project documents and valid construction permits, except for submarine outfalls and wastewater treatment plants, whose tenders also included the development of design. Such tenders were advertised based on valid location permits, and obtaining of the construction permits shall follow after the development of the main designs by the Contractors, which are all regulated by the contract documents.

Even though Project implementation in 2008 (November 2008 was current) was in full momentum, withdrawal of all contracted and planned funds by the deadline defined in the Agreement, i.e. November 30, 2008 (original closing date), was questionable. This is due to: - the loan became effective 7 months upon signing, - sub loaning started 4 months after efficiency (11 months after loan signing), - delayed commencement of works, mainly due to delays in obtaining Construction Permits and solving property-rights relations (expecialy rights of servitude and to processes of expropriating plots owned by the Republic of Croatia), - an additional aggravating circumstance is the cessation of works in the summer months due to the tourist season. In June, 2008, the request for an extension of the Loan closing date was forwarded to the World Bank. Request is approved and the loan was extended until November 30, 2009.

Having in mind that June, July and August of 2005 were spent in preparation, development and approval of the first bidding documents (according to the strict procedure of the World Bank), and that the first public tenders were advertised in the last week of August, it is easy to calculate that, on average, one public tender has been advertised every five days. Since the same employees (a total of 7 employees of Hrvatske vode) worked on the evaluation of submitted bids, development of required reports, and the preparation and development of the Contract documents, the achieved results of Project implementation in the segment of realization of the procurement plan are more than satisfactory.

By November 2009 in the construction of infrastructure facilities have been invested 86% of available funds. These funds are invested in the construction of a total of around 170 km of sewage collectors associated with 40 pumping stations and the construction of 3 submarine outfall and 7 wastewater treatment plants.

By November 2009, the commissioning of 75% of constructed facilities was carried out, since when the Investors have been taking care of its operation and maintains. The commissioning of the remaining 25 % is expected upon final calculations and obtaining operation permits, expected by end of the March.

The objectives of the Project, which can be measured on the basis of agreed indicators: percentage of households in participating cities able to connect to wastewater services; percentage of wastewater

39 collected that is treated as per applicable legislation are being attained. Furthermore, the existing sewage network and treatments plants were improved and the new ones were built, which upgraded the safety and reliability of the collecting and treatment of waste water in the area.

Indirect Project effects are also visible because reliable waste water collection and wastewater disposal systems create preconditions for the development of tourism as one of the most significant sectors of the Croatian economy.

Under the Project a Strategic Environmental Assessment (SEA) has been provided (giving the decision-makers a decisive and reliable tool for achieving concordance of Croatian coastal waters quality monitoring with the relevant EU standards and adaptation of the degree of wastewater treatment so as to achieve concordance through target investments implemented in phases, which is under the competence of Hrvatske vode). SEA also deals with regional cumulative effects. Based on the results of the presented calculation it can be concluded that, in all analyzed areas where there is a significant load in the aquatorium in terms of a large number of public sewerage systems with accompanying submarine outfalls, the required criteria was met (Guidelines for submarine outfall structures for Mediterranean small and medium-sized coastal communities, UNEP, Athens, 1995). The Study has to be updated with assessment and interpretation of cumulative effect of the outfalls to be built under entire APL.

Under the Project, HV commissioned a Sea sensitivity study to determine the areas of sea sensitivity (giving the decision-makers a decisive and reliable tool for achieving concordance of Croatian coastal waters quality monitoring with the relevant EU standards and adaptation of the degree of wastewater treatment so as to achieve concordance through target investments implemented in phases, which is under the competence of Hrvatske vode). Considering the pace of implementation of the Adriatic Program, and since substantial investments in development of sewer utility systems and wastewater processing are expected, it became necessary to propose a list of protected areas where more intensive protective measures would be implemented before the final plans and codes are approved. Therefore the preliminary proposal of protected areas summarizes new protection requirements conforming to EU water related legislation with national legislation which still applies, and therefore determines construction practice in the field of water protection. Thus it shall be ensured that design solutions are technically applicable (requirements and permits) and environmentally acceptable. Since protected areas are preliminary determined on the basis of EU water management requirements and available data, it may be concluded that this proposal shall largely be completely harmonized with Registry of protected areas which should be in effect in 2010.

Sea Water Monitoring System Two projects were financed with the funds from Component III: Strengthening of the coastal waters monitoring network: 1. Strengthening of the coastal waters monitoring network - The Adriatic Sea Monitoring Program; and

2. Monitoring system of the laboratories of Hrvatske vode, authorized laboratories and municipal water and sewerage companies (MWCS)

This was in line with the project’s main objectives: 1. To protect the Adriatic Sea against pollution by urban wastewater; and

2. To assist in harmonization, i.e. approximation to the requirements and standards of the European Union.

The Water Framework Directive (WFD), transposed in its entirety into Croatian legislation, highlights particularly in its regulatory part the need for establishing complex and comprehensive monitoring of waters (inland surface water, transitional and coastal water, and groundwater). The establishment of appropriate monitoring of coastal waters in the Republic of Croatia is additionally complicated by a very indented coastline and developed “archipelago”, so that the selection of representative monitoring

40 stations according to the Water Framework Directive requires good knowledge of the sea’s hydrographic characteristics.

According to the observed status, monitoring of the characteristics of the marine environment in Croatia is within the competence of different state administration bodies. For example:

1. Monitoring of beach water quality (bathing water quality) is within the competence of the Ministry of Environmental Protection, Physical Planning and Construction (MEPPPC), and it is conducted by the licensed laboratories of County Public Health Institutes;

2. Monitoring of the sea within the Project Adria (Projekt Jadran) is within the competence of the Ministry of Science, and it is conducted by the Institute of Oceanography and Fisheries, Split and Ru er Boškovi Institute, the Centre for Marine Research, Rovinj at the level of annual projects;

3. Monitoring of the sea within the Vir-Konavle Project, which was extended to the island of Pag in 2006, is within the competence of Hrvatske vode and is conducted by the Institute of Oceanography and Fisheries, Split;

4. Monitoring of land-based pollution of the sea is within the competence of “polluters” in accordance with water rights permits for the discharge of treated wastewater, and is conducted by contracted laboratories.

Each of the above operates under a special monitoring program, and some of the results might also be used for reporting under the WFD. However, such program is usually either limited in area (e.g. the Pag-Konavle Project covers only the southern part of the Adriatic) or insufficient (e.g. monitoring of beach water quality).

Through implementation of Phase 1 of the Coastal Cities Pollution Control Project (CCPCP) two monitoring projects were implemented whose concepts correspond to the requirements of the WFD both in terms of the coverage (the Adriatic Sea) and the program: Research and analyses carried out within the project “Strengthening of the Coastal Waters Monitoring Network - The Adriatic Sea Monitoring Program” form the basis for the establishment of surveillance monitoring, i.e. monitoring of the status of the coastal waters, and serve as a descriptor for the assessment of the ecological status. A condition for establishing a proper sea monitoring system implies good knowledge of hydrogeographic characteristics (currents, waves, temperature, salinity, etc.), on the basis of which sections of the sea with “homogenous” characteristics are delineated (“the water body”), at which a monitoring location is established and a regular monitoring program is defined. Data on the qualitative status of the sea on that location is regularly submitted to the agencies of the European Commission and is used for assessing the general and/or ecological status of the coastal sea. Since there is no systematic research available to cover the Adriatic Sea as a whole (models for only individual smaller parts at the level of the general status of the coastal sea my be regarded only as a point), the presented research and analyses are a high-quality step forward towards the establishment of high-quality, systematic and long-term monitoring on the basis of which the Republic of Croatia will officially report to the European Union on the status of the sea.

Another project implemented within the CCPCP - Monitoring system of the laboratories of Hrvatske vode, authorized laboratories and municipal water and sewerage companies (MWCS) - is also related to the monitoring to be performed according to the requirements of the WFD, i.e. operational monitoring. The type, number of indicators and frequency of sampling at monitoring stations under this monitoring differ significantly from surveillance monitoring, and it should illustrate changes in the quality of a water body resulting from the application of some of the water management measures or activities. The beginning of this monitoring is related to the area (“water body or its part”) for which it has been identified that it is under a significant impact of human activities, due to which its status is already poor, or there is a downgrading potential. In other words, this project has established the monitoring of locations for which it was identified that in Phase 1 of the CCPCP outfalls of treated wastewater would be constructed, thus forming a high-quality basis for identifying the effects of actions taken (the task of operational monitoring). 41

Both projects have fulfilled the set tasks: they have provided a large amount of data which will be entered into databases about the quality of coastal waters within the Water Information System, and they have provided interpretation of results related both to the regulatory framework in force and to EU standards, with recommendations for further activities. Bringing the monitoring system to the level of compliance with the requirements of EU legislation requires a certain period of adjustment, in particular in relation to the available financial and professional capacities and particularly under conditions when competencies for conducting coastal waters monitoring are still not fully regulated. Consequently, the assistance provided during that process by the CCPCP, which through its Component III finances projects within which at the moment appropriate sea quality monitoring activities are conducted on the basis of both of the above monitoring aspects, is extremely significant, and it should definitely continue in Phase 2 of the CCPCP, supplemented on the basis of the recommendations obtained from the two monitoring projects.

1.3.3 Assessment of the Project Implementation and Operation experience

Water protection projects are very complex and demanding. The majority of problems in the implementation of Project relate to long duration of procedure for obtaining construction permits.

Ownership and legal issues have significantly slowed down the procedure for obtaining construction permits. For Project and for all other significant construction projects, obtaining of construction land has to be regulated first through complete and incomplete expropriation, all pursuant to the Expropriation Act. Taking into account that cadastre records and lands registry are not updated status, the expropriation seems to be an extensive and time consuming procedure.

The changes in legal regulations proposed by the Ministry of Environmental Protection, Spatial Planning and Construction have contributed to resolving of the mentioned problems and to the reduction of procedure for obtaining construction permits.

Organization Even though all planned activities related to Project implementation, i.e. advertising of public tenders and signing of contracts with the selected bidders, were performed within the sub-projects which fulfilled all the conditions, and along with the extraordinary efforts and dedication of the employees of Hrvatske vode assigned to the tasks of Project implementation, and the employees of the Investors – utility companies and appointed representatives of local authorities status of Project implementation were not always in accordance with the desired timetables, neither in the sense of implementation of the procurement plan nor in the segment of the financial realization of the Project, i.e. fulfilment of the plan of fund withdrawal.

One of the reasons for the delays in implementation of the planned activities was the insufficient number of staff working on the Project, as well as the unresolved relations in the domain of authority for Project implementation on the level of sectoral ministries of the Republic of Croatia, despite the relations clearly defined in the document preceding Project approval.

The Project has been implemented by 13 employees, out of which 9 civil engineers, 1 lawyer, 2 economists and 1 administrative employee.

Generally speaking, work on the Project is unattractive for most employees, since it is not adequately stimulated. Employees rather choose other responsibilities with the same salary, but with less obligations, temporally limited tasks and responsibilities.

The organizational scheme of Project implementation did not produce the expected effects. Since 2008 the Project team was not systematized in one organizational unit, but five of them (Department of Water Protection, Office for Economic and Financial Affairs, Office for Legal and Personnel Affairs, Water Protection Division at WMD Split, and Water Protection Division at WMD Rijeka). Some of the employees performed other tasks in their parent departments, according to the priorities determined

42 by the heads of those departments. In 2008 Project team was systematized in one Implementation unit.

Withdrawal of funds of Hrvatske vode and funds from the State Budget The Loan Agreement with the World Bank defines the method of withdrawal of funds which, in general, corresponds to the method of advance payment. The amount withdrawn (the limit is 2.5 million) is then justified by valid bookkeeping documentation. If the withdrawals are justified, the agency is then qualified for a new withdrawal of Loan proceeds.

The same methodology was arranged with Hrvatske vode for withdrawal of funds of Hrvatske vode and the State Budget, with the limit of HRK 2 million (Implementation Agreement for the Coastal Cities Water Pollution Control Project dated June 20, 2005), but this is not being implemented.

The purpose of this methodology is to avoid prior review of valid documents by all co-financiers (it is performed by the investor - utility company - and the implementing agency - HVJP); and post review is performed by all co-financiers. The process of payment is quicker, and potential faults can be rectified (after complaints by the co-financiers) in the subsequent tranches. The arranged procedures are not adhered to on any level.

Due to the lack of the government part in 2009 for financing the project Loan agreement was changed in July 2009. Government applied for increasement of the % of Bank financing on all expenditure categories from 50% to up to 72% however the total loan about will remain at Euro 40 million. Original scope of the loan would remain, and the Government will caver the remaining full cost of the project value.

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During the preparation and implementation of the Project we received the full support, understanding and co-operation by the Bank. All problems that occurred during the implementation of the Project were resolved jointly, and the support of the Bank was always prompt and extremely kind. The Bank’s team was changed when the Project was already in the advanced stage of readiness. However, this change did not have any influence on the continuity of the Project implementation, but contributed to an even better understanding of the situation in which the Project team was. The Bank’s team has established a very good co-operation with HV and HVJP and the missions were always a good chance for additional advices and professional support. During the procurement process, withdrawal and disbursement of the loan, all enquiries and demands were met in time by the Bank.

43

Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders

None.

44 Annex 9. List of Supporting Documents

• Country Assistance Strategy for Croatia, 2001 • Country Partnership Strategy for Croatia for FY09-12 • Project Information Document • Project Appraisal Document, Report No. 27759-HR • Loan Agreement • Feasibility studies and Consultants reports (Various) • Environmental Management Plan Framework • Financial Management Supervision Reports • Investment Plans (Various) • Project Management and Audit Reports (Various) • Aide memoires • Implementation Status Reports • Annual Benchmarking Project Reports • Monthly and Quarterly Project Progress Reports

45 IBRD 32862 A U S T R I A C R O A T I A

H U N G A R Y Danube COASTAL CITIES POLLUTION MEDIMURSKA CONTROL PROJECT

Varazdin R. VARAZDINSKA ADAPTABLE PROGRAM LOAN PHASE I Sav a R Koprivnica ITALY iv er KRAPINSKO- KOPRIVNICKO- ZAGORSKA KRIZEVACKA SUB-PROJECTS IDENTIFIED FOR THE Ljubljana FIRST YEAR OF APL PHASE I S L O V E N I A Bjelovar OTHER SUB-PROJECTS CONSIDERED FOR APL PHASE I ZAGREB ZAGREBACKA Drava River OTHER POTENTIAL SUB-PROJECTS WITH COMPLETED VIROVITICKO- SERBIA LEAST-COST ANALYSIS ZAGREBACKA BJELOVARSKO- PODRAVSKA V. Gorica BILOGORSKA GRAND AND OTHER POTENTIAL SUB-PROJECTS FOR ZAGREB OSJECKO-BARANJSKA MONT. APL PHASES II-III Osijek R. MAJOR TOWNS Karlovac Kupa PRIMORSKO- Sisak NATIONAL CAPITALS GORANSKA POZESKO-SLAVONSKA Opatija Rijeka Vukovar Novigrad SISACKO-MOSLAVACKA RIVERS Kostrena Novska Vinkovci Porec-Sjeverˇ ISTARSKA Rijeka Kraljevica N.Gradisk N. SELECTED MUNICIPAL BOUNDARIES Moscenickaˇˇ´ Draga ˇ Jadranovo Porec-Jug Omisaljˇ BRODSKO-POSAVSKA Kapela Slav Brod Brsecˇ Crikvenica VUKOVARSKO- DISTRICT OR COUNTY BOUNDARIES Malinska- Selce KARLOVACKA SRIJEMSKA Plomin Dobrinj Novi Vinodolski Rovinj-Sjever Njivice Sava R. Rabac Vrbnik INTERNATIONAL BOUNDARIES Rovinj-Jug Brgod Sveta Marina Krk Klenovica Tunerica Ravni Cres Senj Pula-Sjever Koromacno 050100 150 Brijuni Valun Sveti Juraj Medulin Volarice Pula KILOMETERS Banjole Stari Grad Martinscica SupetarskaRab Draga Jablanac Osor Stinica LICKO-SENJSKA This map was produced by the Map Design Unit of The World Bank. Nerezine Punta Lun The boundaries, colors, denominations and any other information shown Unije Prizna Kriza on this map do not imply, on the part of The World Bank Group, any Vele Srakane Cunski Novalja Cesarica Male Srakane Mali Losinjˇ Karlobag judgment on the legal status of any territory, or any endorsement or Losinjˇ Metajna Susak Veli Vidovac Cesaricki acceptance of such boundaries. Lukovo Sugarje Ilovik Pag Baric Draga Tribanj Povljana 10° 20° 30° Silba-Olib Starigrad Zadarski SWEDEN RUSSIAN Vir Razanac LATVIA Nin Posedarje Obrovac B O S N I A A N D FEDERATION DENMARK Ugljan Zadar Novigrad Zadarski Baltic Zadar LITHUANIA Preko ZADARSKO- H E R Z E G O V I N A Sea Bozava Kali Sukosan KNINSKA Knin Kukljica RUSSIAN Zdrelac FED. Biograd Pasman Sali Sarajevo Tkon Pirovac- Vrlika BELARUS Tisno- Jezera Skradin NETH. Betina- Vodice Murter Prvic Sibenik POLAND Kaprije- Zirje Zlarin GERMANY SIBENSKA Grebastica BELG. Primosten Kastela- 50° Trogir Rogoznica Split LUX. A d r i a t i c S e a UKRAINE Marina Podstrana CZECH Omis REP. Maslenica FRANCE Necujam Sutivan Postira Baska Voda SLOVAK REP. Supetar Povlja Stomorska Makarska Milna Pucisca LIECHTENSTEIN Sumartin Tucepi Bol MOLDOVA Drasnice AUSTRIA Jelsa- Igrane Zivogosce SWITZERLAND Hvar Starigrad Drvenik Zaostrog HUNGARY Sucaraj Brist-Podaca SPLITSKO-DALMATINSKA Gradac Komin Sveti Ploce SLOVENIA ROMANIA Andrija Ploce Metkovic´ Komiza Lovisteˇ CROATIA Orebic Trpanj SERBIA Vela Opuzen Blato Korculaˇ Luka LumbardaJanjina Smokvica- AND BOSNIA AND Brna Ston Adriatic (Malostonski) SAN HERZEGOVINA MONTENEGRO MARINO SERBIA AND Black Susac Slano Trsteno Mljet Zaton MONTENEGRO Sea DUBROVACKO- BULGARIA Lastovo Lopud-Sipan Zupaˇ NERETVANSKA Kolocep Dubrovackaˇ ITALY Sea Dubrovnik FYR Cavtat MACEDONIA Tyrrhenian ALBANIA 40° Sea 40° Palagruza Aegean GREECE TURKEY Sea

10° 20°

FEBRUARY 2004