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World Bank Document Documentof The World Bank Public Disclosure Authorized Report No. 13907-EE STAFF APPRAISAL REPORT REPUBLIC OF ESTONIA Public Disclosure Authorized HAAPSALU AND MATSALU BAYS ENVIRONMENT PROJECT MARCH 15, 1995 Public Disclosure Authorized Natural Resources Management Division Public Disclosure Authorized Country Department IV Europe and Central Asia Region CURRENCY EQUIVALENTS as of January 6, 1995 Currency Unit = Estonian Kroon (EEK) DM I = EEK 8 (fixed rate since 1992) US $1 - EEK 12.66 WEIGHTS AND MEASURES I metric ton = 1,000 kilograms = 2,205 pounds (Ibs) I kilometer (km) 1,000 meters (m) = 3,281 feet (ft) I meter (m) 3.281 feet (ft) I centimeter (cm) 10 millimeters (mm) I millimeter (mm) 0.1 centimeter (cm) I cubic meter (m3 ) 35.3 cubic feet (c ft) ABBREVIATIONS AND ACRONYMS BAAP Baltic Agricultural Run-off Action Program BITS Swedish Board for Investment and Technical Support BOD Biological Oxygen Demand CAS Country Assistance Strategy CED = County Environmental Departments CEM = Country Economic Memorandum, published in an expanded form as: "Estonia: The Transition to a Market Economy" CPAR = Country Procurement Assessment Report DM Deutsch Mark EAP = Environmental Action Program for Central and Eastern Europe EBRD = European Bank for Reconstruction and Development EIA = Environmental Impact Assessment EMC Environmental Management Component EU (LIFE) = A financial instrument of the European Union to support Env. Policy EU (PHARE) European Union Assistance Program for Central and Eastern Europe I-SU Former Soviet Union GDP = Gross Domestic Product GOE = Government of Estonia HELCOM = Baltic Marine Environment Protection Commission (Helsinki Commission) HWW Haapsalu Water Works ICR = Implementation Completion Report IBRD = International Bank for Reconstruction and Development (World Bank) ICB International Competitive Bidding IDA International Development Association IMF = International Monetary Fund IS = International Shopping JCP - Baltic Sea Joint Comprehensive Environmental Action Programme LS Local Shopping MIS Management Information System MLW/ATT Working Group on Coastal Lagoons and Wetlands Area Task Team MOE Ministry of Environment MOF Ministry of Finance MOH = Municipality of Haapsalu PIP = Project Implementation Plan PITF = Programme Implementation Task Force PIU = Project Implementation Unit PSC Project Steering Committee SOE Statement of Expenditure UN/ECE = United Nations Economic Council for Europe WWF = World Wide Fund for Nature WWIC = Water and Wastewater Improvement Component ESTONIAN FISCAL YEAR January I - December 31 REPUBLIC OF ESTONIA HAAPSALU AND MATSALU BAYS ENVIRONMENT PROJECT STAFF APPRAISAL REPORT Table of Contents LOAN AND PROJECT SUMMARY I. BACKGROUND A. Country Context ........................................... 1 B. Sectoral Context ........................................... 2 C. The Project Area .......................................... 6 D. Bank Environment Strategy in Estonia, Past Experience and Rationale ... ...... 9 II. THE PROJECT A. Project Origin and Formulation .12 B. Project Objectives .13 C. Participation by Other Organizations in Project Activities .14 D. Project Components and Description .15 E. Cost Estimates .16 F. Project Financing Arrangements .17 G. Procurement ............................. 19 H. Disbursements ........................................... 21 1. Environmental Aspects ........... .................. 22 III. PROJECT IMPLEMENTATION A. Organization and Management .............................. 24 B. Project Implementation Agencies ............................. 25 C. Project Supervision ............................. 26 D. Accounts and Audits ............................. 26 IV. FINANCIAL MANAGEMENT OF HWW A. Past Performance and Present Position .28 B. Tariff Levels and Revenues .29 C. Billing and Collection .29 D. Accounting System .29 E. Financial Issues .30 F. Future Financial Performance .30 G. Tariff Affordability .32 H. Financial Viability .32 V. PROJECT BENEFITS AND RISKS A. Project Benefits ....................................... 33 B. Project Risks ........................................ 35 VI. AGREEMENTS REACHED AND RECOMMENDATIONS A. Agreements Reached During Negotiations ....... ................... 37 B. Conditions of Effectiveness . .................................. 38 C. Recommendation ....................................... 38 LIST OF TABLES Table 1. Project Cost Sumrtmaryby Project Component Table 2. Disbursement by Year Table 2.1 Project Cost Summnaryby Project Component Table 2.2 Summarized Financing Plan Table 2.3 Procurement Arrangements Table 2.4 Disbursement by Year Table 4.1 Expected Tariff Increases LIST OF ANNEXES Annex I Project Implementation Plan Annex 2 Action Plan Annex 3 Terms of Reference 3A Twinning Arrangement 3B Water and Sewerage Tariff Study 3C Project Steering Committee 3D Project Implementation Unit Annex 4 Water and Wastewater Improvement Component - Environmental Aspects Annex 5 Environmental Data Sheet Annex 6 Review of Affordability MAP IBRD Map of Estonia no. 26164 This report is basedon the findingsof a pre-appraisalMission in September-October1994 and an AppraisalMission in January 1995. Members of the project preparation team included: Mr. Stephen F. Lintner (Task Manager), Ms. Sari Soderstrom(Deputy Task Manager),Mr. Hans Bergman(Economist, Swedish Ministry of Environment), Ms. Camilla Brown (Operations Analyst), Mr. Lars Eklund (EnvironmentalEngineer, Swedish Environmental Protection Agency), Ms. Emelie Enckell-Sarkola (Chemical Engineer, Finnish Ministry of Environment), Mr. AndersHalldin (SeniorEnvironmental Specialist), Mr. FrederickHasselback (Financial Specialist), Mr. Martin Hildebrants(Environmental Consultant), Mr. Kari Homanen(Regional Environmental Specialist), and Mr. Peteris Zilgalvis (Regional EnvironmentalSpecialist). Ms. Katherin Golitzen (ENVLW) served as the editor for the document. Technicalassistance for preparationwas provided by the World Bank, Governmentsof Finland and Sweden, and the World Wide Fund for Nature (WWF). Peer reviewers were BernardoGomez (ECIIN) and Carl Gustaf Lundin (ENVLW). The Division Chief is Geoffrey Fox (EC4NR) and the Department Director is Basil Kavalsky(EC4DR). REPUBLIC OF ESTONIA HAAPSALU AND MATSALU BAYS ENVIRONMENT PROJECT Loan and Project Summary Borrower: Republic of Estonia Beneficiaries: Haapsalu Water Works (HWW) IBRD Loan Amount: US $2.0 million equivalent Project Financing Plan: Local Foreign Total ------- US $ million ------- IBRD, (loan) 0.73 1.27 2.00 BITS, Sweden, (grant) 0.02 1.58 1.60 Min. of Environment, Finland, (grant) 0.00 1.02 1.02 Min. of Environment, Denmark, (grant) 0.42 0.18 0.60 Swedish Env. Protection Agency, (grant) 0.23 0.10 0.33 EU (PHARE), (grant) 0.20 0.10 0.30 Government of Estonia 2.02 0.24 2.26 Municipality of Haapsalu 0.26 0.00 0.26 TOTAL PROJECT COSTS 3.89 4.48 8.37 Terms: Fifteen years including five years grace, at standard IBRD variable interest rate. Onlending Terms: Fourteen years, with four years grace, from the Ministry of Finance (MOF) to the Haapsalu Water Works (HWW) and Municipality of Haapsalu at IBRD variable interest rate plus 1 percent. The onlending currency would be a single foreign denomination chosen by the MOF. Project Objectives: The proposed Project would: (a) strengthen the MOE's capacity to coordinate and implement environmental project; (b) reduce discharge of partially treated or untreated wastewater to the Baltic Sea; (c) restore and enhance the water quality in Haapsalu and Matsalu Bays; (d) improve water supply and sanitation services in Haapsalu; (e) improve the operational efficiency and management systems of the Haapsalu Water Works (HWW); (f) promote management of point and non- point source pollution from the catchment area of Matsalu Bay; and (g) promote environmentally sustainable management and development of the Matsalu Bay and its catchment area. - jj - Project Description: The proposed Project would be implemented over four years as an environmental management project for the coastal area of western Estonia. It would consist of a Water and Wastewater Improvement Component (WWIC) and an Environmental Management Component (EMC). The WWIC would consist of: (a) rehabilitation and expansion of the Haapsalu water and wastewater system, including equipment and works along with engineering services; and (b) institutional strengthening and training to assist in establishing an autonomous and financially independent water and wastewater utility in Haapsalu. This would include assistance for tariff restructuring/tariff planning and financial operations. The EMC would consist of: (a) technical and financial support through the MOE for the implementation of selected elements of the Management Plan for Matsalu State Nature Reserve by coordinating and providing funding for identified investments such as access roads, observation towers, information boards etc.; (b) design and implementation of a program of cost-effective activities to reduce point and non-point source pollution of Matsalu Bay from small settlements and agriculture; and (c) support for planning and management of eco-tourism. Project Benefits: The benefits of the WWIC would include: (a) improvements in water quality through reduction of leakages of wastewater into the groundwater and reduction in discharges of untreated and partially treated wastewater, thereby improving water quality in Haapsalu Bay, providing protection for the curative mud deposits and allowing for recreational use of the waters; (b) reductions in operating costs
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