Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No: 42 122-BG

PROJECT APPRAISAL DOCUMENT

ON A

Public Disclosure Authorized PROPOSED LOAN

IN THE AMOUNT OF EURO 8 1.OO MILLION (US$ 1 18.70 MILLION EQUIVALENT)

TO THE

REPUBLIC OF BULGARIA

FOR A

MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT Public Disclosure Authorized November 2,2009

Sustainable Development Department Central Europe and the Baltic Countries Europe and Central Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World

Public Disclosure Authorized Bank authorization. CURRENCY EQUIVALENTS

Exchange Rate Effective (September 30,2009) Currency Unit = BGN - Bulgarian Lev 1 Euro (e) = BGN 1.96

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS CFAA Country Financial Management Assessment CoM Council of Ministers CPAR Country Procurement Assessment Report CPS Country Partnership Strategy DA Designated Account DO Development Objective EC European Commission EC-DG European Commission - Director General Region EDD Environment Due Diligence EIA Environmental Impact Assessment EMF Environmental Management Framework EMP Environment Management Plan ERDF European Regional Development Fund ERR Economic Rate of Return EU European Union FMIS Financial Management Information System ha hectares IBRD International Bank for Reconstruction and Development IDA International Development Association IFA International Fiduciary Assessment IF1 International Financial Institutions IFR Interim Financial Reports ISPA Instrument for Structural Policies for Pre-Accession Km Kilometers 11s litershecond LA Loan Agreement LAPF Land Acquisition Policy Framework LEGEN Environmentally and Socially Sustainable Development and International Law Unit MDE Maximum Design Earthquake MIDP Municipal Infrastructure Development Project MoEW Ministry of Environment and Water MoF Ministry of Finance MoH Ministry of Health MoU Memorandum ofUnderstanding MRDPW Ministry of Regional Development and Public Works NCB National Competitive Bidding O&M Operations and Maintenance OBE Operating Basis Earthquake OPCQC Operational Policy Committee Quality Assurance and Compliance Unit PA Protected Area PFM Public Financial Management PHARE Poland Hungary Assistance for the Reconstruction ofthe Economy PHRD Population and Human Resource Development PIU Project ImplementationUnit PMF Portable Maximum Flood PPIAF Public Private Infrastructure Advisory Facility ROP EU Regional Operating Program SDD Social Due Diligence SEWRC State Energy and Water Regulatory Commission FOR OFFICIAL USE ONLY

SOE Statement of Expenditures SOP EU Sector Operational Program SSA Sanitary and Security Area TSA Treasury Single Account UFW Unaccounted for Water VAT Value Added Tax ViK Vodosnabdiavane i Kanalizacia (water and wastewater utility) WCRMP Water Companies Restructuringand Modernization Project

Vice President: Philippe Le Houerou, ECAVP Acting Country Director: Theodore 0.Ahlers, ECCUS Country Manager Florian Fichtl, ECCBG Sector Manager: Wael Zakout, ECSSD Task Team Leader: Gabriel Ionita, ECSSD

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

BULGARIA MUNICIPAL INFRASTRUCTURE DEVELOPMENT

CONTENTS Page

I. STRATEGIC CONTEXT AND RATIONALE ...... 1 A . Country and sector issues ...... 1 B. Rationale for Bank involvement ...... 2 C . Higher level objectives to which the project contributes ...... 2 I1. PROJECT DESCRIPTION...... 2 A . Lending instrument...... 2 B. Program objective and phases ...... 3 C . Project development objective and key indicators ...... 3 D. Project components., ...... -3 E. Lessons learned and reflected in project design ...... 4 F. Alternatives considered and reasons for rejection...... 4 I11. IMPLEMENTATION ...... 5 A . Partnership arrangements (if applicable) ...... 5 B. Institutional and implementation arrangements ...... 5 C . Monitoring and evaluation ofoutcomeshesults ...... 6 D. Sustainability ...... 6 E. Critical risks and possible controversial aspects ...... 6 .. F. Loan conditions and covenants ...... 8 IV. APPRAISAL SUMMARY ...... 9 A . Economic and financial analysis ...... 9 B. Technical ...... 10 C . Fiduciary ...... 11 D. Social ...... 12 E. Environment ...... 15 F. Safeguard policies ...... 17 G . Policy exceptions and readiness ...... 19 Annex 1: Country and Sector Background...... 20 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ...... 24 Annex 3: Results Framework and Monitoring...... 25 Annex 4: Detailed Project Description ...... 28

Annex 4.1: List of Regional and Urban Water and Wastewater Utilities covered by the Master Plans...... 35 Annex 5: Project Costs ...... 38 Annex 6: Implementation Arrangements...... 39 Annex 7: Financial Management and Disbursement Arrangements ...... 40 Annex 8: Procurement Arrangements...... 47 Annex 9: Economic and Financial Analysis ...... 56 Annex 10: Safeguard Policy Issues ...... 58 Annex 11: Project Preparation and Supervision ...... 68 Annex 12: Documents in the Project File ...... 69 Annex 13: Statement of Loans and Credits...... 70 Annex 14: Country at a Glance ...... 71 Annex 15: Maps ...... 73 BULGARIA

MUNICIPAL INFRASTRUCTURE DEVELOPMENT

PROJECT APPRAISAL DOCUMENT

EUROPE AND CENTRAL ASIA

ECSSD

Date: November 2,2009 Team Leader: Gabriel Ionita Acting Country Director: Theodore 0.Ahlers Sectors: General water, sanitation and flood Sector Director: Peter D. Thomson protection sector (1 00%) Sector Manager: Wael Zakout Themes: Other urban development (P) Project ID: PO99895 Environmental screening category: Full Assessment

_.. Lendinn" Instrument: SDecific1 Investment Loan

[XI Loan [ ] Credit [ ] Grant [ 3 Guarantee [ ] Other:

For Loans/Credits/Others: IBRD Total Bank financing (US$m.): 118.70 (equivalent). The loan will be denominated in Euros for an amount of €8 1 million.

Development Total: 108.30 40.00 148.30 Borrower: Republic of Bulgaria The Ministry of Finance 102 Rakovski Street Sofia; Bulgaria Fax: 359 2 9806863 Responsible Agency: Ministry of Regional Development and Public Works Kiril and Methodius Street 17-19 Sofia 1202; Bulgaria Tel: 359 2 9405 455 Fax: 359 2 987 2517

i :Y 10 11 12 13 14 15 16 innual 2.00 6.00 15.00 25.00 25.00 25.00 20.70 hmulative 2.00 8.00 23.00 48.00 73.00 98.00 118.70

Expected closing date: December 3 1,201 5

Does the project depart from the CPS in content or other significant respects? No ReJ PAD I.B.5

Does the project require any exceptions from Bank policies? []Yes [XINO Re$ PAD IK G. 62 Have these been approved by Bank management? []Yes [ IN0 Is approval for any policy exception sought from the Board? []Yes [XINO

Does the project include any critical risks rated “substantial” or “high”? [x]Yes [ ]No Re$ PAD III.E.26

Does the project meet the Regional criteria for readiness for implementation? [x]Yes [ ]No Re$ PAD IK G. 63

Project development objective Re$ PAD II.C.10, Technical Annex 3

The project objectives are to: (a) Improve the reliability and quality of water provision to the communities in selected settlements in the project area, and (b) Assist municipalities to improve investment-planning capacity. These objectives are in line with Bulgaria’s National Strategy on Environment (2005-2014) which has a goal to ‘provide good quality and sufficient quantity of water for various purposes.

Project description Re$ PAD 11.0.12, Technical Annex 4

The project has three components:

0 Component 1 (Total Cost €5.12 million): Project Implementation Support to carry out activities under Component 3 of the project and other consultant services for project support.

0 Component 2 (Total Cost €20.88 million): Preparation of forty-eight (48) regional Master Plans for Water Supply and Sewerage systems (ViK systems), including forty (40) Master Plans for urban settlements, within the six (6) economic development regions.

0 Component 3 (Total Cost €75.00 million): Completion ofthree water supply dams and

*. 11 rehabilitation of a fourth dam that is currently operational. This component will also support the completion of water treatment plants preparation work included in the dam investments.

Which safeguard policies are triggered, if any? ReJPAD IIKF. 61, Technical Annex 10

OP/BP 4.0 1 on Environmental Assessment; OP/BP 4.12 on Involuntary Resettlement; OP/BP 4.37 on Safety of Dams; OP/BP 7.50 Projects on International Waterways; OP/BP 4.04 on Natural Habitats, and OP 17.50 on Disclosure Policy.

Significant, non-standard conditions, if any, for:

Board presentation: None

Loan effectiveness: None

Covenants applicable to project implementation: Key loan conditions and covenants are: Overall Implementation

0 Ministry of Regional Development and Public Works (MRDPW) will submit to the Bank semestrial Project Reports, including environmental monitoring results, no later than one month after year end.

0 MRDPW will prepare and submit quarterly reports on environmental monitoring and implementation of Environmental Management Plans (EMP) for each dam.

0 The MRDPW will undertake all measures necessary to provide resources needed to complete all project activities. This provision addresses the risk that the costs may be higher than anticipated.

0 The MRDPW will ensure effective implementation by maintaining a Project Implementation Unit (PIU) comprising of competent staff in adequate numbers for the duration of the project.

0 The MRDPW will maintain a financial management system acceptable to the Bank. It will prepare and furnish to the Bank quarterly interim un-audited financial reports (IFRs) for the Project covering the calendar quarter, in form and substance satisfactory to the Bank. The project financial statements, withdrawal applications, and designated accounts will be audited by independent auditors acceptable to the Bank under terms of reference acceptable to the Bank. The annual audited financial statements and audit reports will be provided to the Bank within six months of the end of each fiscal year. Dam Investments These steps would be followed for works in the Luda Yana, Neikovtsi, Plovdivtsi, and Studena dams: a. Complete feasibility studies in a manner satisfactory to the Bank to determine costs and benefits and confirm the viability of the proposed dam investments; b. Complete site investigations to review the integrity of existing construction and the current hydrogeology ofthe area; c. If necessary, update the Environment Impact Assessment and Environmental Management Plan, based on updated feasibility study findings relevant to each dam; d. Obtain Bank ‘no objection’ prior to its financing, based on satisfactory appraisal of technical, economic, financial, environmental, social, and dam safety issues according to Bank policies; and e. Review and update designs and costs for the most viable option. For completion ofwater supply dams, two additional conditions apply. Government will relocate the cemetery in the Neikovtsi dam site, prior to tendering for works for the Neikovtsi dam. e Government shall retain the ownership of the dams and the water treatment plants constructed under the Project and shall constitute, after the completion of works, a right of use, for operation purposes, in the benefit of the operators defined by the Borrower’s Water Act. To that extent, the above mentioned operators shall be involved in the review ofdesign and supervision ofworks.

iv I. STRATEGIC CONTEXT AND RATIONALE

A. Country and sector issues

1. Water shortages in internal river basins have become critical over the last 15 years due to increased incidence of dry years - 1993, 1997, 2000, 2003, 2007 were very dry years, and extreme drought was recorded in 2000 and 2007. As a result, water supply delivery has been unreliable and there have been many days of water supply rationing and restrictions due to long dry summers and lack of sufficient rainfall. Given the frequency and geographic distribution of long droughts and high temperatures, the Government of Bulgaria has declared that securing a water source to supply domestic and non-domestic users is a priority. This will require dams that facilitate management and regulation of annual and multi-annual water runoff, and provide a safe water supply. For example, in 2008, after more than 30 days without rainfall, residents of Panagyurishte town located near Luda Yana dam, had to secure their water supply from another town, and had water for two hours twice a week, through water tanks, for about one month. 2. Securing the water source to supply domestic and non-domestic users is of paramount importance given the frequency and territorial distribution of long periods of drought and high temperatures. These periods also fit the pattern ofa larger process ofclimate change that requires both adaptation and mitigation actions, including reliable water management infrastructure such as dams to manage and regulate annual and multi-annual runoff and provide a safe source for water supply. 3. The Government of Bulgaria prepared and endorsed the Strategy for Water Supply and Sewerage Management and Development (March 2004) during preparation for EU accession to meet requirements for the EU Directive on Environment. Therefore, as an EU member since January 1, 2007, rehabilitation and construction of water supply and sewerage networks to improve service delivery and reduce health risks, and wastewater treatment are in line with the EU directives and are Government priorities. Issues

4. Key sector issues are summarized below; see also Annex 1: Investment needs are high. Overcoming water shortages by securing the water source for Bulgaria's domestic and non-domestic needs is a key driver for the Government Strategy for Water Supply and Sewerage Management and Development. Strategy estimates for total sector investment needs are about €6.9 billion for water supply, improved water efficiency, sewerage, and wastewater treatment. Investments include completing eight water supply dams that were under construction but stopped due to lack of funds. Three of the eight dams-Luda Yana, Neikovtsi, and Plovdivtsi-are included in this project. The Strategy outlines plans to replace about 70 percent of Bulgaria's existing water transmission and distribution networks to reduce the Unaccounted for Water (UFW),' estimated to be around 60 percent. In addition, Government plans to increase coverage ofsewerage connections from 50 percent to 85 percent and wastewater treatment coverage from 35 percent to 85 percent.

' UFW is expressed as (water volume produced - volume billed)/ water volume produced, as a percentage.

1 a Improvements are needed in water and wastewater to meet EU Directives. Bulgaria’s water and wastewater utilities, Vodosnabdiavane i Kanalizacia, (ViKs) must improve operational efficiency and Bulgaria must prepare sector-related investment programs to meet EU commitments. To reduce pressure to increase tariffs, the ViKs, with government support, are making targeted efficiency improvements such as decreasing administrative water losses to reduce the overall levels ofUFW; increasing bill collection rates, which are now between 65-95 percent; implementing a comprehensive leak detection program; and implementing a financial management program that would enable the ViKs to evaluate economic options for operations and investments. In addition, MRDPW is preparing investment Master Plans for all Bulgarian water utilities. The Master Plans, supported under this project, will help identify needs in each utility and provide recommendations for meeting EU directives.

B. Rationale for Bank involvement

5. The 2006-09 Country Partnership Strategy (CPS) between the Bank and the Government of Bulgaria outlines the role of Bank support for EU integration. Project activities are fully consistent with this CPS objective. 6. The project draws upon Bank water sector knowledge in Bulgaria and other countries in the region. The Government and the Bank, in consultation with the EU, worked together to prepare an April 2005 paper, ‘Bulgaria-Financing the Water and Wastewater Sector,’ that outlined sector issues and reviewed the government financing plan to meet EU directives. During 2000-01 , the Bank, through a grant from Public Private Infrastructure Advisory Facility (PPIAF), provided advice to the Government on drafting legislation to establish the water regulatory framework and include the water regulator in the State Energy and Water Regulatory Commission (SEWRC). Further, between October 1995 and December 2002, the Bank supported the development of 2 1 ViKs through the Water Companies Restructuring and Modernization Project (WCRMP, see Annex 2). The proposed activities related to preparing Master Plans in ViKs under the Municipal Infrastructure Development Project are similar to this earlier project. In all prior activities mentioned above, the MRDPW was the Bank’s primary sector partner. This long-standing partnership, Bank familiarity with the sector, and MRDPW familiarity with Bank procedures will facilitate project implementation.

C. Higher level objectives to which the project contributes 7. Apart from meeting the project objectives, the preparation of Master Plans in the ViKs will lead to investments (funded by the EU and other sources) that will help Bulgaria meet EU directives in the water and wastewater sector and facilitate Bulgaria’s economic and social integration with the EU. Thus, the project will significantly assist Bulgaria in meeting its commitments made under the aquis on environment and also meet the Millennium Development Goals.

11. PROJECT DESCRIPTION

A. Lending instrument

8. This project will be processed as a Specific Investment Loan.

2 B. Program objective and phases

9. Not applicable.

C. Project development objective and key indicators

10. The long-term development objective of the project is to provide uninterrupted supply of water to the communities in the project area. However, because this objective would not be possibly met during implementation, the specific project objectives are to: (a) Improve the reliability and quality of water provision to the communities in selected settlements in the project area; and (b) Assist municipalities to improve investment-planning capacity. These objectives are in line with Bulgaria’s National Strategy on Environment (2005-2014), which has a goal to “provide good quality and sufficient quantity of water for various purposes.” These objectives would be met through the key indicators listed below. Details are provided in Annex 3.

0 Water intakes completed in Luda Yana, Plovdivtsi, Neikovtsi dams and refurbished in Studena dam, and operational in all project sites;

0 Quality of water delivered to population towards meeting the EU and Bulgarian standards, whichever is higher; Completion of Master Plans for 48 water and wastewater utilities, of satisfactory quality for acceptance by Bulgaria and EC, to support investments for improvement of service delivery. 11. Mechanisms to measure the satisfaction of benefitting population with the reliability and quality of water provided by the water utilities in the project area and provide feedback to the respective utilities through SEWRC will be put in place during project implementation but would become operational after project completion.

D. Project components 12. The components of the project, their costs and the financing plan are summarized below. The total cost is €101,199,375, which includes a project cost of €100,996,875 (with value added tax (VAT)) and the Front-end Fee due to the Bank loan of €202,500. The Government (€20,199,375) and the Bank (€81,000,000) will finance the total cost. The project has the following three components and additional details are provided in Annex 4.

0 Component 1 (Total Cost €5.12 million): Project Implementation Support to carry out activities under Component 3 of the project and consultant services associated with project implementation. These would include preparation of feasibility studies, updates of design and Environmental Management Plans, preparation of bidding documents, construction supervision and other consulting assignments needed for project support, including audit, development and implementation of the communication plan to help ensure people are aware of the status of project-related land issues, training of PIU and MRDPW staff. Component 2 (Total Cost €20.88 million): Preparation of forty eight (48) regional Master Plans for Water Supply and Sewerage systems (ViK systems), including forty

3 (40) Master Plans for urban settlements, within the six (6) economic development regions, as described in the Operational Manual, in order to support the Borrower, through MRDPW, to: (i)identify investment needs for rehabilitation of water supply networks and construction of sewerage networks and wastewater treatment plants and (ii) meet the applicable EU water and wastewater directives commitments. The Master Plans will also include corporate development plans and any other related documents and activities promoting improved service delivery and greater efficiency. Component 3 (Total Cost €75.00 million): Completion and rehabilitation of water supply dams will include completion of Luda Yana, Neikovtsi, and Plovdivtsi dams and rehabilitation of the Studena dam that is currently operational and supplies water to the town of Pernik. This component will also support the completion of water treatment plants. The feasibility studies for the dams will be completed during project implementation so cost estimates are based on an earlier assessment and physical contingencies. 13. The current project design differs from the design finalized in February 2008, for which the Bank issued a negotiations package in March 2008. The earlier proposed project included a component to rehabilitate water supply networks in six regional water utilities, and Technical Assistance to utilities to implement the project and increase operational efficiency. Negotiations for the above-mentioned project did not take place and in December 2008, the Government requested changes to project design that are reflected in the current project.

E. Lessons learned and reflected in project design

14. The following lessons have been incorporated in project design: e A project should limit the number of objectives and success factors should be defined during preparation: The objectives under the Municipal Infrastructure Development Project (MIDP) are streamlined and linked to activities carried out by a single entity-the MRDPW, which facilitates implementation. Further, the Results Matrix (Annex 39 outlines expected project outputs and outcomes that will facilitate a goal-oriented approach during project implementation. e To ensure sustainability, it is important to support institutions that will implement the project: The project could have been prepared and implemented through consultants hired by the MRDPW. However, project design emphasizes working with the MRDPW staff that will prepare and implement the project, to underpin project sustainability by developing the institutional capacity needed to monitor project progress and ensure that the objectives are being met. To this end, project implementation support is being provided to MRDPW (Component 1).

F. Alternatives considered and reasons for rejection 15. The investments supported under the project could have been supported through commercial financing sources. However, commercial financing for the investments would cost more than Bank financing. The project investments are important public services and in line with the Government strategy to improve water and wastewater services. Thus, the Council of Ministers decided to finance the project through its public expenditure program, with Bank

4 support. Bank participation also supports MRDPW institutional strengthening, which is relevant to EU integration. 16. The possibility of using a two-phased Adaptable Program Loan was considered; the first phase would have included a feasibility study for the dam construction and the second phase Bank loan would have supported the investments. However, the Government declined this option as the Council of Ministers had approved the project concept with an understanding that project preparation and implementation would be carried out under a single (non-phased) Bank project.

111. IMPLEMENTATION A. Partnership arrangements (if applicable) 17. Both the Government of Bulgaria and the Bank have held discussions ofthe project with the European Commission (EC) because the project aims to help Bulgaria meet EU directives in water and wastewater. The EC supports the project and especially the preparation of the Master Plans, which would identify specific needs in each utility. The interaction among the Government, EC, and the Bank will continue during project implementation. B. Institutional and implementation arrangements 18. The Borrower will be the Republic of Bulgaria; on behalf of Government, MRDPW, will implement the project and be responsible for all aspects, including managing Bank loan funds under all the components. To this end, the Government has created a Project Implementation Unit (PIU) within the Water and Sewerage Department, headed by the Director of the Department. The PIU comprises nine other staff members-a technical coordinator, a chief accountant, an accountant, a financial management specialist, three technical experts, a procurement expert, and a safeguards specialist to ensure proper implementation ofthe EMP for dams and Land Acquisition Policy Framework (LAPF). Prior to negotiations, MRDPW has updated the Operational Manual that outlines the roles and responsibilities of all parties involved in project implementation. The Manual was approved by the management ofMRDPW. 19. The State Commission of Dams Safety, established under the MRDPW, supervises implementation of legislation on dam safety, reviews periodic reports on dam inspections, licenses dam operation, and authorizes impoundment when construction works are complete, including installing instrumentation, early warning systems, and enacting the emergency preparedness plan. 20. After completion of works, the dams will be handed over for management, operation and maintenance to specialized operators defined by the Borrower’s Water Act. To that extent, the above mentioned operators shall be involved in the review of design and supervision ofworks. 21. The Ministry of Environment and Waters (MoEW) sets policies, manages water resources and water quality, and implements the Environment Sector Operational Program for which EU Cohesion grants would be made available to finance the investment projects in water supply and sewerage identified through the Master Plans developed under the project. 22. The Ministry of Health (MoH) monitors the quality of potable water provided by the ViKs. When the dams are completed, local MoH units will test the quality of water to be supplied to the population and issue the license for distribution.

5 C. Monitoring and evaluation of outcomeshesults 23. The Results Framework and Monitoring Arrangements (Annex 3) presents' the intermediate and final outcomes of the project. MRDPW will work towards timely achievement of these outcomes and will submit to the Bank annual Project Progress Reports no later than one month after the end of each year. The Project Progress report will provide the status of project implementation and recommend any measures necessary to meet project objectives, including the status ofEMP implementation. Annual work programs will be prepared and submitted to the Bank together with Project Progress Reports, and included in the Operational Manual as a revised basis for project monitoring. D. Sustainability 24. Sustainability of the investments under the project is likely as the project supports basic service provision of water. Project activities aim to meet the critical basic demand for water supply, thereby meeting EU directives, so support from policy makers has been strong and is expected to continue during the operational phase. 25. The operation and maintenance (O&M) of the dams will be funded from water tariffs charged to users. The operators (currently ViK utilities) responsible for O&M of the dams will enhance the existing collection rates, not only by improving the quality and reliability of service provision, but also by enforcing mandatory payment of water charges. Since some ViKs in the project area are owned by local administrations (exclusively or together with MRDPW), municipal authorities will undertake to raise awareness of project benefits among local people with the aim ofimproving willingness to pay for water services. E. Critical risks and possible controversial aspects 26. Project risks and mitigation measures are summarized below. The average risk is rated as significant (S).

Risk

There is a risk that, under the current M economic and financial conditions, the issues will be satisfactorily addressed through the updated studies would not confm the updated feasibility studies before the Bank confirms (technical and/or economic) feasibility of financing for each dam. Site investigations will be completion of any dam included in the conducted to confm the integrity of constructions project. The construction will resume after carried out so far. Technical Assistance will provide a gap of more than 10 years in all three technical support to MRDPW before, during, and after dam sites, under substantially changed construction. A dam safety panel of experts was economic and financial conditions. Hence, established to advise on the quality of designs, dam the risk that not all dams will be completed construction and operations. The Bank will carry out under the'project. independent review of the feasibility studies and designs. There is an implementation risk for The Government is aware of the risk and if the costs S Component 3 that the updated costs for under component 3 will exceed the financial resources, completion and rehabilitation of the dams, additional hnding will be provided or activities scaled which will be available only after the down from the project. updated feasibility studies, will exceed the current financing plan.

6 S attention is not paid to strengthening and implementation by maintaining a PIU comprising maintaining the PIU team that will competent staff and in adequate numbers throughout implement the project in MRDPW. the duration of the project. In addition, the Operational Manual and the Project Progress Reports would be used as tools to support effective implementation. The overall financial management risk of Fund flows will be streamlined with the MRDPW M the project is moderate. There are no managing all the funds. Project funds would be significant weaknesses in the project separately accounted for and an independent audit of financial management system but there are the use of the project funds would be conducted on an risks in Bulgaria’s public financial annual basis. To mitigate risks against misuse of funds, management system. adequate measures are incorporated in the project through financial management covenants that would be monitored during project implementation. Details of risk migration measures are in FM Annex 7 of the PAD The procurement risk is rated as high since MRDPW will retain adequate and qualified it is difficult to retain qualified people in procurement staff in the PIU. Further, an Operational MRDPW. Significant staff turnover is Manual will be prepared prior to negotiations that will expected and staff may lack procurement define MRDPW roles and responsibilities. Training on knowledge and skills, which could delay Bank procurement procedures was provided in preparation or update of designs and February 2009 to MRDPW ahd will be repeated during eventually delay contracting and project implementation completion of works under component 3. Most land required for the dams and 4 number of steps were taken during preparation to reservoirs was acquired by Government :larify the process and outcomes of the past between 1978-2000. The Land Acquisition :xpropriations including: “Social Due Diligence” Policy Framework for the project does not *eports prepared by a local legal fm, repeated local apply to these actions, which were not iublic consultations, site visits by the project team to carried out for, or in anticipation of, a )bserve current land use, and written confirmation from Bank-financed project, There is a risk of LlRDPW that the deadline for land restitution claims people challenging the proposition that the ias passed and that there are no challenges or past actions are not linked to the project, iutstanding claims. No specific unresolved cases or and trying to bring new claims for land lissatisfied parties were identified. A communication restitution or to seek additional ,Ian will be prepared and put in place before project compensation for past expropriations. Such mplementation starts to provide information, reduce the challenges or claims could bring negative iotential for misperception regarding linkage with the publicity to the project and/or cause delays iroject, and provide a channel for communication. If in implementation :laims or complaints emerge regarding past land :xpropriation and/or restitution, the Government will nform and discuss with the Bank the measures to find in equitable resolution to such potential claims or :omplaints. However, the residual risk is rated as Substantial because of some remaining information ;aps regarding past restitution and :xpropriation/compensation process, and in part due to :xperience in similar situations elsewhere. Construction of dams of this height The Environmental Management Framework prepared inevitably carry risks of substantial for the project sets out the general principles and environmental damage including processes to be followed for environmental assessment, inundation of habitat upstream and changes mitigation, management and monitoring. While they in ‘quantity and timing of water flows will be updated based on final detailed designs, the downstream. There is also the risk of EIAs with EMPs prepared for the completion of the disastrous flooding resulting from dam three incomplete dams have been reviewed and

7 Mitigation Measures

approved by the Bank and found to provide sufficient Environmental Impact Assessments/ information to indicate that completion of the dams Environmental Management Plans have will not cause serious or irreversible environmental been prepared to identify, quantify and damage. The dam sites are already substantially mitigate environmental risks, they are altered by the previous construction and other based to some extent on outdated or anthropogenic influences, and the EIAs indicate no inexact information and do not fully reflect protected areas, critical habitats or the details of the dam designs which will endangeredthreatened species will be adversely be determined through updated feasibility affected. The EMPs provide adequate measures to studies after project effectiveness. mitigate negative impacts. The amount of environmental flow to be maintained through the dams at all times has been determined through detailed modeling to be sufficient to maintain environmental quality downstream, and the EMP includes provisions for good construction practices, site restoration following construction and environmental protection and monitoring during operation, consistent with EU Water Framework Directives and Bulgarian legislation. The WB will review and approve the updated EIAsEMPs prior to commencement of procurement of works for completion of each of the three dams. The Government’s provisions for dam safety are in accordance with WB policy. H - High; S - Substantial; M - Moderate; a1 1.-I nw

F. Loan conditions and covenants Conditions 27. Board Presentation: None 28. Loan Effectiveness: None

Legal Covenants 29. Key legal covenants in the Loan Agreement are presented below.

Overall Implementation

MRDPW will submit to the Bank semestrial Project Reports, including environmental monitoring results, no later than one month after year end. MRDPW will prepare and submit quarterly reports on environmental monitoring and implementation ofEMPs for each dam. The MRDPW will undertake all measures necessary to provide resources needed to complete all project activities. This provision addresses the risk that the costs may be higher than anticipated. The MRDPW will ensure effective implementation by maintaining a PIU comprising competent staff in adequate numbers for the duration ofthe project.

8 e The MRDPW will maintain a financial management system acceptable to the Bank. It will prepare and furnish to the Bank quarterly interim un-audited financial reports (IFRs) for the Project covering the calendar quarter, in form and substance satisfactory to the Bank. The project financial statements, withdrawal applications, and designated accounts will be audited by independent auditors acceptable to the Bank under terms of reference acceptable to the Bank. The annual audited financial statements and audit reports will be provided to the Bank within six months ofthe end of each fiscal year.

Dam Investments 30. These steps would be followed for works in the Luda Yana, Neikovtsi, Plovdivtsi, and Studena dams: a. Complete feasibility studies in a manner satisfactory to the Bank to determine costs and benefits and confirm the viability ofthe proposed dam investments; b. Complete site investigations to review the integrity of existing construction and the current hydrogeology ofthe area; c. Update the Environment Impact Assessment and Environmental Management Plan, as necessary, based on updated feasibility study findings relevant to each dam; d. Obtain Bank ‘no objection’ prior to its financing, based on satisfactory appraisal of technical, economic, financial, environmental, social, and dam safety issues according to Bank policies; and e. Review and update designs and costs for the most viable option. 3 1. For the completion ofwater supply dams, two additional conditions apply. e Government will relocate the cemetery in the Neikovtsi dam site, prior to tendering for works for the Neikovtsi dam. e Government shall retain the ownership of the dams and the water treatment plants constructed under the Project and shall constitute, after the completion of works, a right of use, for operation purposes, in the benefit of the operators defined by the Borrower’s Water Act. To that extent, the above mentioned operators shall be involved in the review of design and supervision ofworks.

IV. APPRAISAL SUMMARY

A. Economic and financial analysis 32. Economic Analysis: For the Master Plans, economic benefits are difficult to quantify and therefore were not estimated. However, through these Master Plans, investments would be prepared that will allow Bulgaria to meet EU directives, which will result in significant positive external benefits from environmental improvements. For the dams, prior to updating designs for the works, feasibility studies would have to be completed, in a manner satisfactory to the Bank, to analyze investment viability against economic, financial, and technical criteria. Benefits accruing from the dams and associated water treatment plants include an uninterrupted adequate

9 supply of quality water, which is now lacking. Due to water scarcity, demand is low in these areas and there are coping costs related to low water quality and inadequate supply. Existing intermittent water supply reduces system pressure, increasing the risk of infiltration from contaminated groundwater; and associated large pressure fluctuations increase system deterioration and maintenance costs. 33. Financial Analysis: All project costs will be borne by the Government of Bulgaria through the MRDPW budget (including the Loan) for the duration of the project. Thus, the financial viability of the components has not been assessed. After completion, the dams and water treatment plants will be handed over to the utilities that provide water and wastewater services in the region-ViK Panagiurishte for Luda Yana, ViK Gabrovo for Neikovtsi, and ViK Smolian for Plovdivtsi. The dam and water treatment plant operational costs will be supported through tariffs. The State Electricity and Water Regulatory Commission (SEWRC) will ensure that the tariffs meet the operating costs, in line with applicable Bulgarian legislation.

B. Technical 34. Preparation of designs and bidding documents will have two phases: in Phase 1, designs and bidding documents will be prepared for Luda Yana and Plovdivtsi dams, which are in a more advanced stage of construction; in Phase 2, designs and bidding documents will be prepared for Neikovtsi and Studena dams. The Government chose to fund the preparation of feasibility studies for the two dams included in Phase 1 before project approval, to advance preparation activities towards an early start of construction works. However, preparation of designs and bidding documents for Phase 1 dams will remain funded under the project. Preparation of feasibility studies, update of detailed designs and preparation of technical sections of bidding documents will be contracted based on Terms of Reference reviewed by the Panel of Experts on Dam Safety and the World Bank. The project will finance dam construction works only if feasibility studies confirm viability of completing these dams. 35. The quality control systems applicable to designing and construction of dams in Bulgaria were found in line with international standards. Therefore, all quality control systems provided for by the Bulgarian legislation and regulations on constructions safety will be applied. Under the project, the feasibility studies and detailed designs will be reviewed and endorsed by the POE. The World Bank will also conduct independent review of the feasibility studies and detailed designs, including the results of the filed investigations carried-out for each dam. 36. Construction permits for all dams will be issued or renewed when detailed designs are finalized, in accordance with the Bulgarian legislation and regulations applicable. Supervision of works on site will be assigned to qualified, independent site supervisors experienced in dam construction and instrumentation, in compliance also with the requirements of the Bulgarian legislation applicable. 37. Proposed activities under the project have been well tested in other projects in the Region and were considered before construction had started in the three dams. Further, prior to updating the designs, the planned feasibility studies would review and address technical issues as needed. Further, in Luda Yana, water demand may be reduced if the irrigation of 6,200 hectares of land is not considered. In the original design, water demand for irrigation was considered but is now uncertain; therefore, the dam should be designed for water supply only. In addition, the water

10 treatment plant in Neikovtsi may require redesign to meet existing reduced demand. These issues will be reviewed during the preparation of feasibility studies. 38. The Master Plans to be prepared under the project will assess the needs for water supply, sewerage, and treatment, and technical options to address these needs in a planning horizon year of 2030. The Plans will allow and then initiate preparation of feasibility studies for individual investment projects decided by the local administrative bodies in charge with decision making on investment in public utilities, in accordance with the EU directives. The new Water Act, as amended and complemented on June 23, 2009, sets the stage to implement a new water sector policy framework in general, and a framework for water supply and sanitation, in particular. 39. To support institutional strengthening in the water sector, the Master Plans will include preparation of corporate development plans that will comprise review and recommendations for improvement of practices of the water utilities covered under the Master Plans. Implementation of the recommendations will be further monitored by the European Commission as part of the sector alignment to EC standards. 40. Construction of the Luda Yana dam started with funds from the Municipality of Panagyurishte and State Enterprise Mine Dressing Plant Asarel-Medet. When the mining company was privatized, its contribution to dam construction was included on the books of the newly privatized company with a pro-rata estimate of 70 percent of total past costs. Once completed, the dam will be a state-owned asset ex lege. Although the Municipality of Panagyurishte and Asarel-Medet AD could claim monetary compensation for the past financial means only if they can provide evidence oftheir investment in dam construction, the two entities confirmed in writing that they have no claims for property rights over the construction works performed so far.

C. Fiduciary 4 1. Procurement: Procurement for the Municipal Infrastructure Development Project will follow World Bank's "Guidelines: Procurement under International Bank for Reconstruction and Development (IBRD) Loans and International Development Association (IDA) Credits" dated May 2004 and revised in October 2006 (Procurement Guidelines); and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 and revised in October 2006 (Consultant Guidelines) and the provisions stipulated in the Loan Agreement (LA). Procurement activities will be carried out by the PIU under Water and Sewerage Department of MRDPW. The major risks related to procurement are associated with staffing the PIU, and its capacity to implement the project. To mitigate this risk, the Loan Agreement includes a covenant that MRDPW will retain adequate and competent staff in the PIU. The following additional measures are to be adopted: (a) all project procurement activities will be carried out following Bank procurement procedures, including the related ex ante or ex post reviews; (b) further procurement training will be provided; and (c) Bank good governance and anticorruption guidelines will be implemented. See Annex 8 for project procurement arrangements. 42. Financial Management: The MRDPW has established a satisfactory financial management system for the project. Overall project financial management risk is moderate and details are presented in Annex 7. There are no significant weaknesses in the project financial management system, and fund flows are streamlined with the MRDPW department responsible

11 for the management of EU funds. The MRDPW would disburse funds from the Designated Account (DA), or request that the Bank make direct payments to suppliers. Project funds would be separately accounted for and an independent audit of the use of project funds would be conducted on an annual basis. To mitigate risks against misuse of funds, adequate measures are incorporated in the project through financial management covenants that would be monitored during project implementation. These mitigation measures include: (a) the project will establish a tight internal control framework, including appropriate internal control over the management of project funds; and (b) procurement of works and goods, accounting for a large part of the loan proceeds, would be subject to Bank prior review, following Bank procurement guidelines, and post review of procurement processes would also be carried out during supervision; (c) audits will be performed by independent auditors, selected from a list of firms that have been approved by the Bank, working under Terms of Reference acceptable to the Bank. The formats of the agreed Interim Financial Reports (IFRs) and the audit Terms of Reference will be attached to the minutes of negotiations; (d) overall supervision, including financial management aspects of the project, will be undertaken periodically by the Bank; and (e) an appropriate complaints handling mechanism will be in place. All complaints from bidders, observers, or other parties will be forwarded to the MRDPW for consideration and follow-up action.

D. Social 43. The project will result in social benefits due to the provision of adequate good quality water where the dams would be completed. The construction activities planned under the project will benefit the local economy and new jobs are expected to be created due to the operations and maintenance ofthe three dams and the associated water treatment plants. 44. Local and national consultations - where the three dams will be completed - were carried out in October and December 2007, respectively. In these local consultations, the population in all three sites mentioned that they are aware of the plans of the Government to complete the construction and would like the dams to be functional so that the much awaited benefits of adequate and good quality water materialize. A new round of consultations was carried out, at the national and local level in February 2009 in the context of presentation of the new Environmental Impact Assessments (EIAs). 45. As construction ofthe dams had started in the past, the Government had acquired land for where the dam construction would take place and where water would be retained. The bulk of the land required for the main dam wall, dam lakes and corresponding submerged area, ancillary structures and adjacent infrastructure has previously been acquired by the Government of Bulgaria in the years 1978-1982, 1986, and 1998-2000. According to OP 4.12, the policy is triggered when activities resulting in involuntary resettlement are (a) directly and significantly related to the Bank-assisted Project, (b) necessary to achieve its objectives and (c) carried out, or planned to be carried out, contemporaneously with the Project. In this project, the land acquisition was completed between 1978-2000, before initial discussions between Government and the Bank about financing completion of the dams. Therefore while the previous land acquisition is linked to construction of the dams, it is not linked to the project. On this basis, the Operational Policy Committee Quality Assurance and Compliance Unit (OPCQC), Environmentally and Socially Sustainable Development and International Law Unit (LEGEN) and the Region concluded that the past land acquisition is a legacy issue and not a current issue, and OP 4.12 does not apply to past land acquisition.

12 46. However, as good practice for social risk management, during preparation the Bank sought information on these past land acquisitions including the legal framework for land restitution and expropriation, the parcels and total areas of land acquired, the number of people affected, the type and amount of compensation provided, etc., and whether there were any disputes or legal challenges brought by the affected parties. A Social Due Diligence (SDD) report for each of the three dam locations was prepared by a local legal firm under the PHRD grant to clarify these issues. A summary of these reports can be found in Annex 10. The SDD reports were publicly disclosed and local consultations were held in October-December 2007 (and the consultations on the EIAs in February 2009 also touched on these issues). The Government (Ministry ofRegional Development) has confirmed that there have been no appeals contesting the land restitution or expropriation procedures at the dam sites. The project team visited each of the sites on several occasions and did not see any evidence of settlements or agricultural use ofthe land other than occasional grazing. 47. However, there inevitably remains a risk that land owners whose land was expropriated in the past might seek retroactive application of OP 4.12, claiming that there is a direct linkage between past expropriations and the project. There is also a risk that people whose lands were acquired during the Communist period when individuals’ rights were limited could perceive an opportunity to re-open past cases and seek higher compensation. In either case, people could raise protests, which could affect implementation or create negative publicity for the project. An additional potential issue is that many of the landowners to whom the court awarded restitution rights received compensatory notes rather than cash payments. These compensatory notes are tradable financial instruments, regulated by the Transactions in Compensation Instruments Act, and have a monetary value but cannot be directly exchanged for cash from the government. It has not been possible to determine to what extent people who received these notes have been able to realize their financial value (as the notes have no term limit, some may still be held by the recipients). However, during the repeated local public consultations no complaints were raised concerning the use or value ofthese compensatory notes. 48. Land that has been or may in future need to be acquired includes the site of the dams, their respective reservoir areas, and the area ofthe Sanitary and Security Area Belt I(SSA-Belt 1) sanitary zones. In SSA Belts 2 and 3, some land use restrictions may apply but land would not need to be acquired. An LAPF has been prepared to address these issues. For civil works associated with MIDP, it is likely that limited acquisition may result in the loss of land or the loss ofsources of income. People are not expected to lose their residences or other structures. 49. According to the Agricultural Land Ownership and Use Act 1991 , and the Act Restoring Ownership on Forests and Forest Stock Land Tracts from the Forestry Fund, 1997, the last date for people to initiate claims for restitution of agricultural or forest land was May 14, 2007. Therefore, this LAPF does not include provisions for addressing new claims of restitution/ ownership of land, which may be required for construction or operation of the three dams or is otherwise linked with the project. However, although the situation is not expected to arise, the LAPF does cover any cases in which the initial claim was made prior to this deadline and in accordance with the law, but which have not yet been resolved. 50. Component 2 will support preparation of Master Plans to help identify investment priorities for water supply and wastewater management. The outputs of Component 2 are expected to be only at a pre-feasibility level of detail, with feasibility studies, detailed designs and investment to follow later and be financed separately, possibly with assistance from EU.

13 However, the Master Plans prepared under Component 2 involve preparation of site assessments including specific recommendations for situating of facilities which if implemented could involve expropriation of land. The Master Plans will, therefore, provide all information needed to apply the processes outlined in LAPF to the acquisition ofany such land. The World Bank has reviewed the Terms of Reference for preparation of Master Plans under Component 2 to ensure that this aspect is appropriately addressed. Based on this understanding, the LAPF applies to Component 2 ofthe project. 51. Based on the SDD reports, the following potential resettlement issues have been identified. These would be addressed in accordance with the LAPF developed for the project and which will ensure that Bulgarian laws and Bank policies are met.

a. Luda Yana: additional land may need to be acquired for the water treatment plant as its location has not been determined and two options will be considered during the feasibility study. The options include placing the treatment plant on land owned by the Panagyurishte municipality or a private entity. If the latter is chosen, land would have to be acquired following the process outlined in the LAPF. It is not expected that any additional land will be required for the reservoir or the sanitary zones. b. Neikovtsi: Most of the land for the water treatment plant, dam site, reservoir, and Belt 1 sanitary zone has been previously acquired. The final design could result in the need for a small amount of additional land acquisition, which would be done in accordance with the LAPF. An old graveyard with about 15 burial sites (based on visual inspection) has to be removed, as it would fall in the area that would be flooded. This issue was discussed in the public meeting and the central and local authorities agreed to relocate the graveyard, following appropriate Bulgarian laws, as part of site preparation and prior to the start ofthe construction for the site. This will be addressed appropriately through the EMP; and c. Plovdivtsi: Most of the land for the water treatment plant, dam site, reservoir and Belt 1 sanitary zone has been previously acquired. The final design could result in the need for a small amount of additional land acquisition, which would be done in accordance with the LAPF. There is one known case in which some land parcels were restituted to claimants under a court judgment and an expropriation process was initiated in 1998, but because the State failed to provide the details of the dam project to be added to the map ofrestored properties, it was not possible to determine whether the land fell within the area required for the dam. If the detailed design indicates that, any of this land falls within the reservoir or within SSA belts, any expropriation that is required will be carried out in accordance with this LAPF. 52. Based on the information available it is not expected that people might (in the context of this project) seek to revive previously rejected restitution claims or seek additional compensation for past expropriation. A communication plan will be put in place under Component 1 to clarify that the LAPF is applicable to future land acquisition, not to past actions, and thereby to reduce the risk of perception of linkage between past expropriations and the project, and provide a channel of communication. The Government and Bank agreed to inform each other on any claim or complaint regarding past land expropriation and/or restitution that may arise in relation to the

14 Project sites. While such claims will not be subject to the provisions ofLAPF, the Government will inform and discuss with the Bank the measures to be taken to find an equitable resolution to such potential claims or complaints in accordance with the Bulgarian laws and regulations. 53. The Government of Bulgaria has also undertaken supplementary measures under the Project to ensure that all affected people are notified in a timely way regarding their lands that are expected to be expropriated. Furthermore, under the Project, the Government of Bulgaria will allow appeals by interested owners to be submitted to the Supreme Administrative Court within 30 days (rather than the usual 14 days) after the Council of Ministers decrees a decision on the proposal for expropriation. 54. In all three dams, there is informal use of the land that will likely be flooded and in the expected Sanitary and Security zones (Belts I,I1 and 111) that would be designated after the dam designs are updated. The informal land use is primarily for grazing animals and the local authorities have agreed - evidenced through letters included in the LAPF - that alternative land for grazing purposes would be provided to the affected people. However, the government wants to prevent false claims for assistance appearing after disclosure of project plans. Therefore, October 26, 2007 [the last date ofthe survey] has been chosen as a cut-off date after which any person carrying out illegal informal activities in the area is not eligible to receive any assistance as a result of project activities. This cut-off date is the date the consultants carried out the land- use survey to examine public lands allocated for the project for evidence of private use. Additionally, the Government has also a photographic file showing the current conditions in all three dams, The Bank and MRDPW will closely monitor implementation of LAPF and the communication plan.

E. Environment 55. The project will bring about environmental benefits due to the proposed improvements in water supply services. The preparation of Master Plans in utilities (Component 2) will lead to investments in the water and wastewater sector that will improve services and increase operational efficiency in service delivery. The completion of the three dams and the associated water treatment plants (Component 3) will also lead to environmental benefits because people will have access to an unintempted supply of safe treated water. Furthermore, the risk of contamination that occurs in the networks when intermittent water supply reduces water pressure will be reduced by securing water supply through dam completions. 56. In line with Bank policies, the overall project has been rated as environmental assessment category A due to the works related to completion of the dams and the possible environmental effects during dam construction and operation. As requested by the Bank’s OP/BP 4.01, and as par? of preparatory activities, an Environmental Management Framework (EMF) was developed in September 2007 to outline procedures to be undertaken during project implementation when the feasibility studies and detail designs for the respective dams are updated. Additionally, Environmental Due Diligence (EDD) reports were prepared in October 2007 for Luda Yana, Neikovtsi, and Plovdivtsi dams to describe the existing environmental situation at the partially constructed sites. First-round consultations on the EMF and EDDs were held at national level, and three local-level locations earlier in December 2007 and October 2007, respectively and the documents were disclosed in the Bank Infoshop in January 2008. Earlier consultations and the EDDs indicate that environmental risks will not be high and are manageable. In September 2008, draft EIA were prepared for the Luda Yana and Neikovtsi

15 dams based on information collected in the EDDs and on-site observations, in line with existing designs. For the Plovdivtsi dam, in 2000, the Borrower prepared an EIA in accordance with Bulgarian EIA legislation that was approved by the Ministry of Environment and a construction permit was issued at that time. Based on national legislation, this EIA does not require an update in case the revised detail design proposes any changes. However, to comply with the OP/BP 4.01 , this EIA was supplemented with more detailed information and analysis regarding aspects such as possible environmental risk for downstream ecosystems and the nature of environmental flows, which need to be maintained to protect them. The environmental mitigation and monitoring plans were also consolidated and strengthened. The Client prepared the draft EIAs for Luda Yana and Neikovtsi dams and the supplemental information for the Plovdivtsi EIA as a condition for project appraisal. Public consultations were carried out on the EIAs on February 2, 2009 (national level) and during February 11-13, 2009 at each project site based on the draft EIAs prepared in January 2009 Luda Yana and Neikovtsi EIAs, and on the EIA of 2000 for Plovdivtsi dam. An Environmental Management Plan (EMP) was completed for the rehabilitation works proposed for the Studena dam, and publicly disclosed in December 2007. The three draft EIAs were finalized by the Borrower in accordance with World Bank’s comments during April-May 2009 and publicly disclosed in Bulgaria and at the World Bank Infoshop before project appraisal. Furthermore, letters to riparian countries including information from these final EIAs have been submitted by the Bank to Turkey, Greece and Danube Commission by appraisal. The riparian countries have been requested to reply to the information provided in the letter by June 15, 2009. The EIAs (including EMPs) for Luda Yana, Neikovtsi and Plovdivtsi dams will be updated as needed based on the feasibility studies and detailed designs to be carried out at the beginning of project implementation, and the updated versions will be reviewed and receive No Objection from the Bank prior to tendering for construction to complete the dams. 57. Activities financed by Component 2 have no environmental impacts since they include only preparation of Master Plans documentation and do not involve civil works or engineering designs proposed by these Plans. Potential environmental impacts are associated with Component 3 investments; most impacts are temporary and related to construction works, but potential long-term impacts could result from the reservoir and dam and their overall operations. Construction-related environmental impacts are likely to be localized, temporary, and efficiently mitigated by applying good international construction practice and planning: (a) air pollutioddust, noise, vibration, and access restriction; (b) improper disposal of construction related waste; (c) temporary pollution of soil and surface waters due to accidental spillage offuel and oil from construction activities; (d) safety hazards including worker safety; (e) damage to trees and existing vegetation; and (f) chance finds ofphysical cultural resources. All impacts will be properly managed during the construction phase by the contractor and closely supervised by PIU and designated supervisor engineer. 58. Potential environmental effects due to dams and reservoirs may be related to: (a) changes in downstream morphology of riverbeds and banks due to altered river sediment loads that could increase local erosion; (b) changes in downstream hydrology (total flows, seasonal flows, short- term fluctuations); (c) changes in downstream water quality (e.g., nutrient load, heavy metal concentration, temperature); (d) reduced biodiversity in river ecosystems due to blocked movement of local species (e.g., fish), and flood elimination; and (e) impacts on existing infrastructure, such as roads and bridges. These potential impacts during construction and

16 operation are addressed through mitigation measures set out, together with impact monitoring requirements, in the Environmental Management Plans. 59. The downstream ecosystems will be maintained in acceptable condition through environmental flows, which represent between 10-20% of the original flow, increased seasonally to reflect natural seasonal variations. This minimum flow will be maintained during summer months, when the streams previously experienced little or no flow, likely resulting in increased fish and other aquatic populations immediately downstream of the dams. The upstream areas that would be flooded are Luda Yana 142 hectares (ha); Neikovtsi 32 ha; and Plovdivtsi 16 ha. There are no critical natural habitats or endangeredkhreatened species within the inundation areas, which have already been significantly impacted during the earlier construction phase (removal of most trees and of topsoil in some areas; quarries opened). Completion of the dams with associated site restoration and water regulation will result in a significant improvement over existing environmental conditions. 60. To ensure that environmental issues are properly handled, a Loan Agreement covenant stipulates that prior to tendering for works and goods contracts, for each dam, the MRDPW will carry out the following steps: (a) complete feasibility studies, satisfactory to the Bank, that would justify the investments on economic, financial, and technical grounds; (b) if necessary, based on the completed feasibility studies, update the EMP and EIA, satisfactory to the Bank.

F. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [XI [I Natural Habitats (OP/BP 4.04) [XI [I Pest Management (OP 4.09) [I [XI Physical Cultural Resources (OP/BP 4.1 1) [I [XI Involuntary Resettlement (OP/BP 4.12) [XI [I Indigenous Peoples (OP/BP 4.10) [I [XI Forests (OP/BP 4.36) [I [XI Safety of Dams (OP/BP 4.37) [XI [I Projects in Disputed Areas (OP/BP 7.60)* [I [XI Projects on International Waterways (OP/BP 7.50) 1x3 [I

6 1. The constructions of the three dams will trigger the following Bank policies:

8 OPBP 4.01 Environmental Assessment: because of activities carried out for the completion of the dams, the project is rated as Category A. For Luda Yana and Neikovtsi dams, EIAs were not required under Bulgarian law but were prepared in compliance with OP/BP 4.01. For Plovdivtsi dam, an EIA was approved by MoEW in 2000, and a supplemental document was prepared by the Client with some additional information and analysis in order to meet the requirements of OP/BP 4.01. These EIA documents were disclosed in draft form for public consultations, finalized, and disclosed prior to appraisal. Furthermore, these documents will be updated as part of the feasibility studies to be completed at the beginning of project implementation. For the Studena dam, a

' By supporting the proposedproject, the Bank does not intend to prejudice thefinal determination of the parties' claims on the disputed areas

17 stand-alone EMP has been prepared, discussed and disclosed. Overall, the environmental risks ofthe project are not considered high and are manageable (Annex 10). OP/BP 4.12 Involuntary Resettlement: is triggered due to land acquisition that may be needed to complete the dams and restriction on the use of land in sanitary zones for the dams. The bulk ofthe land required for the main dam wall, dam lakes and corresponding submerged area, ancillary structures and adjacent infrastructure has previously been acquired by the Government of Bulgaria in the years between 1982 and 2000, before initial discussions between Government and the Bank about financing completion of the dams. Therefore, while the previous land acquisition is linked to construction ofthe dam, it is not linked to the project. On this basis, the past land acquisition is regarded as a legacy issue and not a current issue, and therefore OP 4.12 does not apply. Land that has been or may in future need to be expropriated includes the site of the dams, their respective reservoir areas, and the area ofthe Sanitary and Security Area Belt I(SSA-Belt 1) sanitary zones. A Land Acquisition Policy Framework (LAPF) has been prepared to address these issues. For civil works associated with MIDP, it is likely that limited acquisition may result in the loss of land or the loss of sources of income. People are not expected to lose their residences or other structures. In all three dam areas, there is informal use of the land, primarily for grazing animals, and the local authorities have agreed that alternative land for grazing purposes would be provided to the affected people. The Component 2 will support identification of investment priorities for water utilities including specific recommendations for location of facilities which if implemented could involve expropriation of land. The Master Plans will, therefore, provide all information needed to apply the processes outlined in the Policy Framework to the acquisition of any such land. The World Bank has reviewed the Terms of Reference for preparation of the Master Plans under Component 2 to ensure that this aspect is appropriately addressed. Based on this understanding, the LAPF applies to Component 2 of the project. The SDD and the LAPF were publicly discussed at the national and local levels in October-December 2007 and February 2009 and have been publicly disclosed on March 24 2009.

0 OP/BP 4.37 Safety of Dams: due to the completion of the Luda Yana, Neikovtsi, and Plovdivtsi dams, and the rehabilitation of the Studena dam, the policy will be triggered. Bulgarian dam safety requirements are in line with those of the Bank (Annex 1) and for the project design, construction, and operation, the Bulgarian legislation and Bank policies will be followed. Government appointed a panel ofthree national experts on dam safety to comment on the Terms of Reference for feasibility studies related to the dams; the panel will review the feasibility studies and engineering designs and provide guidance during implementation of works.

0 OP/BP 7.50 Projects on International Waterways: due to the completion ofthe four dams included in the project because they are located on streams that eventually discharge to riparian countries or international waterways, the policy is triggered. The works financed under the Project would cause no adverse downstream effects to international waterways given the relatively small volume ofthe water retained in the dams compared to the flow of the rivers that exit Bulgaria. However, at the request of the Government of Bulgaria, the World Bank notified the riparian countries, Turkey and Greece, and the International Commission on Danube River Protection, about the project, in accordance with the

18 Bank’s OP 7.50, on March 19, 2008. Updated information on project design and impact on international waterways was sent to the riparian’s following finalization and public disclosure of the EIAs on the websites of the Ministry of Regional Development and Public Works and the World Bank’s Infoshop, on May 13, 2009. The riparian countries have been requested to reply to the information provided in the letter by June 15, 2009. On June 15, the Government of Greece informed that the EIAs were not found on the websites indicated and requested more time to review the documents. Therefore, the deadline for response was extended until July 15, 2009. On July 2 1, the Government of Greece requested additional information on the project; the information was sent on July 22,2009 and a new deadline for response was on August 27,2009. No further comments were received by the deadline or since then. Details are provided in Annex 10. Further, the Borrower and the riparian countries will coordinate their actions through the early warning systems and data communication channels agreed. e OP/BP 4.04 Natural Habitats will apply since small areas of one or more of the dam sites may fall within Protected Areas (also Natura 2000 sites). Based on existing information it is expected that only the protective sanitary zones of the dams will overlap with Protected Areas (PAS), and the management regime for such protection zones are compatible with PA management. This will be confirmed during preparation of the feasibility studies and detailed designs, and the updated EMPs will include any required mitigation measures to ensure that local biodiversity is not adversely affected. a OP/BP 4.36 Forestry is not triggered, although a few trees must be removed from the future reservoir basins once civil works begin, these trees are sparse and scattered, left over from vegetation clearing years ago during the initial dam construction, and do not constitute a forest. Near the crest of Luda Yana dam, about 0.6 ha of trees will be removed when dam construction resumes. e OP/BP 4.11 Physical Cultural Resources Policy is not triggered because the investigations conducted during EDD and EIA preparation process raised no concerns regarding potential chance finds of cultural properties at the proposed dam sites. However, the EMPs include provisions for cultural heritage and archeology if chance finds occur during construction works.

G. Policy exceptions and readiness 62. No policy exceptions are being sought. 63. Project readiness is demonstrated by the following: (a) the Borrower’s Council of Ministers approved the previous project concept and design. The revised, simplified project scope, confirmed by Government in December 2008, does not conflict with the previous design; (b) Government committed to use its own financial resources to hire consultants to prepare updated feasibility studies for Luda Yana and Plovdivtsi dams; the Consultant delivered the feasibility studies for the two dams before the project Board date; (c) the process of recruiting consultants to prepare Master Plans is under way and a request for Expressions of Interests was advertized during pre-appraisal and the Terms of Reference have been drafted; (d) the project fiduciary and safeguard arrangements were clarified and agreed to by the Borrower.

19 Annex 1: Country and Sector Background BULGARIA: MUNICIPAL INFRASTRUCTURE DEVELOPMENT

1. Strategy: Water shortages in internal river basins have become critical over the last 15 years due to increased incidence of dry years-1993, 1997, 2000, 2003, 2007-were very dry years, and extreme drought was recorded in 2000 and 2007. As a result, water supply delivery has been unreliable and there have been many days of water supply rationing and restrictions due to long dry summers and lack of sufficient rainfall. Given the frequency and geographic distribution of long droughts and high temperatures, the Government has declared that securing a water source to supply domestic and non-domestic users is a priority. This will require dams that facilitate management and regulation of annual and multi-annual of water runoff, and provide a safe water supply. For example, in 2008, after more than 30 days without rainfall, residents of Panagyurishte town located near Luda Yana dam, had to secure their water supply from another town, and had water for two hours twice a week, through water tanks, for about one month.

2. Securing the water source to supply domestic and non-domestic users is of paramount importance given the frequency and territorial distribution of long periods of drought and high temperatures. These periods also fit the pattern of a larger process of climate change that requires both adaptation and mitigation actions, including reliable water management infrastructure such as dams to manage and regulate annual and multi-annual runoff and provide a safe source for water supply.

3. The Government of Bulgaria prepared and endorsed the Strategy for Water Supply and Sewerage Management and Development (March 2004) during preparation for EU accession to meet requirements for the EU Directive on Environment. Therefore, as an EU member since January 1, 2007, rehabilitation and construction of water supply and sewerage networks to improve service delivery and reduce health risks, and wastewater treatment in line with the EU directives are Government priorities.

4. Cost and Financing: Government’s March 2004 Strategy for Water Supply and Sewerage Management and Development presents a comprehensive cost and financing plan for the sector. Further Government and Bank analysis completed jointly and presented in an April 2005 Financing the Water and Wastewater Sector Report analyzed sector investment and operating costs between 2004 and 2014 and outlined a corresponding financing plan that would include grants from the EU and financing from the budget, International Financial Institutions, and commercial banks. Projected tariffs would also support investments and operating costs. Cost estimates for rehabilitating the sector and meeting EU directives by the end of the compliance period in 2014 are about €6.9 billion, which includes €2.8 billion for rehabilitation.

5. To help Bulgaria comply with sector legislative requirements and support municipal investments, the EU will provide grants through the Cohesion Fund and European Regional Development Fund (ERDF). For the planned use of EU grants, Bulgaria has prepared an Environment Sector Operational Program and a Regional Operational Program, both endorsed by the EU in 2007. However, the EU grants-xpected to be around €3.3 billion-would be inadequate to cover all costs so Government plans to raise funds from all possible sources, including the International Financial Institutions (IFIs) and commercial banks, if feasible.

20 6. Central-level institutional structure: Four ministries are responsible for setting policy and financing the sector: e Ministry of Finance (MoF) plans and manages the public investment framework for the sector, including the use ofbudget and external funds; e Ministry of Regional Development and Public Works (MRDPW) supervises the water and wastewater utility Vodosnabdiavane i Kanalizacia (ViK). MRDPW coordinates the use ofwater resources, including the operations of dams, and discharge and treatment of wastewater, and develops and implements the EU Regional Operational Program; e Ministry of Environment and Waters (MoEW) sets policies and manages water resources and quality; it implements the Environment Sector Operational Program for which EU Cohesion grants would be made available; e Ministry of Health (MoH) monitors the quality of ViK-provided potable water.

7. Set-up for the utilities: About 98 percent of people are served by 50 ViKs, which are commercial utilities providing water supply, wastewater collection, and wastewater treatment (if applicable) services. Water supply coverage is very high in Bulgaria due to the existence of regional ViKs that serve multiple municipalities, covering about 75 percent of the population. The ownership structure of the ViKs varies. There are 13 regional ViKs, fully owned by the central government and serving multiple municipalities; another 16 regional ViKs are owned jointly by the central government (51 percent share) and multiple municipalities where the remaining shares are distributed based on population; another 20 municipal ViKs are owned by the single municipality that they serve. A privately owned concessionaire and the municipality serve the city of Sofia. In fully or partially central government-owned ViKs, the MRDPW represents government. Under the project, 48 regional and 40 urban ViKs are expected to benefit from preparing Master Plans, and four ViKs associated with the dams will benefit from improved water supply.

8. Regulatory set-up: The Bulgarian water sector is well positioned to make significant institutional reforms and improve services: commercial utilities serve most ofthe population and are regulated by the State Energy and Water Regulatory Commission (SEWRC), created in January 2005; the entire sector is metered, which promotes economic water consumption and leads to economic investment decisions; the SEWRC regulates all ViK operations and reports to the Council of Ministers (CoM); the SEWRC approves tariffs adequate to cover operating and investment costs; and tariff proposals are made by ViKs through their annual business plans that include operations costs and consider investment needs. Apart from setting tariffs, the SEWRC also helps establish service standards, benchmarks ViK performance, approves terms and conditions of contracts between the utilities and the customers, and provides information on the ViKs to the public and the policy makers. As a national regulator is involved through established methodologies, SEWRC creates uniform application of cost recovery tariffs and service standards and reduces local influence in tariff setting.

21 Issues

9. The key issues ofthe sector are summarized below: 10. Investment needs are high: The Strategy for Water Supply and Sewerage Management and Development estimated sector investment needs at €6.9 billion, in the following four major categories: e Water Supply (€1.1 billion): to establish a secure water supply from surface and ground water sources, Government plans to upgrade 42 water treatment plants and about 3,500 pumping stations. Investments specify completing eight water supply dams for which construction had ceased earlier. Three of the eight dams, Luda Yana, Neikovtsi, and Plovdivtsi, are included in this project, and the fourth (Studena) is included for rehabilitation needed to ensure security of supply. e Water Efficiency (€2.8 billion): to prevent physical leakages of water due to deteriorated network pipes. Routine network section replacements have been deferred over the last 15-20 years due to funding shortages, leading to high physical losses-Unaccounted for Water (UFW)2 in Bulgaria is estimated to be around 60 percent. The Strategy plans to replace about 70 percent of existing ViKs water transmission and distribution networks, about 70,620 kilometers (km). e Sewerage (€2.0 billion): to increase sewerage connection coverage and upgrade deteriorated sections of sewerage networks. About 50 percent of the population is connected to the 9,000 km sewerage system. Government plans to upgrade the existing system and build an additional 16,000 km ofsewers to connect another 2.4 million people and increase sewerage coverage to 85 percent. e Wastewater Treatment (€ 1.O billion): to construct wastewater treatment plants and upgrade existing plants. Wastewater collected from 35 percent of the population is now treated through 6 1 treatment plants. Government intends to extend wastewater treatment coverage to about 85 percent ofthe population. 11. Operational efficiency needs to be improved: ViKs must focus on operational efficiency--equally important as investment needs. Optimally efficient operations would reduce pressure to increase tariffs needed to support the non-grant portions of sector financing. Further, operations and maintenance (O&M) costs are expected to increase to meet requirements of the EU directives, especially for wastewater treatment. Given the paucity of funds over the last fifteen years, the ViKs were unable to allocate sufficient resources towards O&M of the assets, which now run around €0.35/m3 of water, a cost that is expected to double by 2014. Consequently increased efficiency is crucial and the ViKs are taking the following measures with support from Government and the SEWRC: decreasing administrative water losses (to reduce the overall levels of UFW); increasing bill collection rates; implementing a comprehensive network leak detection program including pressure management; and implementing a financial management program that would allow the ViKs to make economic decisions on operations and investments.

* UFW is expressed as (volume of water produced - volume of water billed)/volume of water produced, in percentage terms.

22 12. Preparation of investment programs is critical to meet EU directives: Government intends to meet its EU commitment by improving the Bulgarian water and wastewater sector, which requires effective planning, and strengthening institutions that prepare and implement projects, to maximize the benefit of EU grants and meet EU directives. To this end, Government is elaborating detailed utility investment needs. The MRDPW intends to prepare 48 regional Master Plans for water supply and sewage systems, including 40 Master Plans for urban settlements within the six economic development regions, to define priority investments in the water and wastewater sector. The Master Plans will be discussed among other ministries and institutions to facilitate preparing utilities investments and financing arrangements, including those from the EU. The project will help prepare Master Plans, which will be developed in co- ordination with the EC, and help define improvements necessary for efficient operation of water and wastewater utilities.

23 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies BULGARIA: MUNICIPAL INFRASTRUCTURE DEVELOPMENT

Project Amount FY Sector Issues Addressed IEG Rating for in USD Bank Projects Bank Financed Water Companies 1 98 million I FY94 To increase the corporate Implementation Restructuring and equivalent autonomy and commercial Completion Modernization Project orientation of VIKs and Report (ICR) (WCRMP) (Closed 2002) make their management rated DO accountable to local satisfactory.

I I I

24 Annex 3: Results Framework and Monitoring BULGARIA: MUNICIPAL INFRASTRUCTURE DEVELOPMENT

Results Framework

PDO Project Outcome Indicators Use of Project Outcome Information Water intakes completed in The process used to complete Luda Yana, Plovdivtsi, and operationalize the water Neikovtsi dams and intakes and dams would be Improve the reliability and refurbished in Studena dam, followed for other dams that quality of water provision to and operational in all project need to be completed in the communities in selected sites. Bulgaria. settlements in the project area Quality of water supplied by Monitoring of selected water the water treatment plants quality parameters versus the EU and Bulgarian standards, whichever is higher, and feedback to water utilities Assist Municipalities to Completion of 48 regional Information from the Master improve investment planning Master Plans for water supply Plans will be used by Bulgaria capacity and sewage systems including for investment planning 40 urban Master Plans, of (including with EC financial satisfactory quality for support) acceptance by Bulgaria and EC, to support investments in service delivery Intermediate Outcomes Intermediate Outcome Use of Intermediate Indicators Outcome Monitoring Component 2; Investment Diagnosis of the present Information will be used to needs for rehabilitation of the situation and requirements develop possible technical water supply and construction completed in all six regions solutions for water systems. of sewerage network and under the Master Plans and wastewater treatment plants submitted to the MRDPW for have been identified in the review. Master Plans.

i) Preparatory work3 for dams Ensure that project is being and water treatment plants implemented satisfactorily to water treatment plants completed in a timely manner meet its objectives ii)Construction works for water treatment plants completed and equipment installed iii)Construction works for dams completed timely

3Completionof Preparatory Work includes : Feasibility studies completed, Designs updated, EMPs updated, Bidding documents prepared

25 ho

.IEl L 0 .IY

v) IYs a

LE & c,VI El i %J El E 2 2 I Annex 4: Detailed Project Description BULGARIA: MUNICIPAL INFRASTRUCTURE DEVELOPMENT

1. The project has three components, which are summarized below. The Bank reviewed dam safety procedures carried out in Bulgaria and findings are presented below.

COMPONENT 1: Project Implementation Support (Cost €5.12 million) 2. This component comprises Project implementation support to carry out activities under Component 3 of the project and consultant services associated with project implementation. These would include preparation of feasibility studies, updates of design and Environmental Management Plans, preparation of bidding documents, construction supervision and other consulting assignments needed for project support, including a communications plan to help ensure people are aware of the status of land issues. The preparation of feasibility studies will include an assessment of site conditions-the existing unfinished structure and the geology and hydrogeology of the area. Preparation of updated feasibility studies, detailed designs and preparation of bidding documents for Luda Yana and Plovdivtsi dams will not be financed from the project; the Government of Bulgaria decided to finance these activities from its own resources, prior to project approval.

COMPONENT 2: Preparation of Master Plans (Cost €20.88 million) 3. This component comprises preparation of forty eight (48) regional Master Plans for Water Supply and Sewerage systems (ViK systems), including forty (40) Master Plans for urban settlements, within the six (6) economic development regions, as described in the Operational Manual, Information from the Master Plans would be used to prepare investments to help Bulgaria meet the relevant EU water and wastewater directives. The list of the regional and urban water supply and sewage utilities to be covered by the Master Plans is attached as Annex 4.1. 4. Master Plans will be developed for each of the six economic development regions, as agreed with the EC and the Bank, and will include two main sections: the first section will comprise the investment planning while the second section will include the corporate development plan. 5. The Master Plan for investment will include a diagnosis ofthe current situation, diagnosis of management practices, general planning criteria for both water supply and sanitation, assessment ofwater demand and sanitation requirements, identification and definition ofpossible technical solutions for water supply and sanitation, comparison of options, development of medium and long-term investment programs. 6. The corporate development plans will promote improved service delivery and greater efficiency in the water utilities covered under the Master Plans. These corporate development plans will include organizational and institutional arrangements, assets control and management, budgeting, accounting and cost control, tariff setting methodologies, revenue collection procedures, operational performances. The Borrower should also develop and implement a public information campaign to increase public awareness of the development programs envisaged for water supply and sanitation, possibly building upon the previous campaign designed and implemented in 2007-2008.

28 7. MRDPW launched the consultant selection process to seek candidates to perform the services for all six regions under the draft Terms of Reference prepared by the Borrower and submitted for review and comments to the EC-DG Region And the Bank. Based on the comments received, MRDPW finalized the TORStogether with the short list of consultants for each region / contract.

COMPONENT 3 - Dam Investments (Cost €75.0 million) 8. The Water Strategy of Bulgaria defines a need to complete and rehabilitate water supply dams to reduce or eliminate water rationing where water is not available 24 hours a day for the entire year. The Strategy lists dams requiring this work and from the list the MRDPW has proposed that the Bank finance the rehabilitation ofthe existing Studena dam and the completion ofthe Luda Yana, Neikovtsi, and Plovditsi dams, which were included in project documentation approved by the Council ofMinisters. 9. Eligible activities under this component would comprise completion of three water supply dams and associated water treatment plants-Luda Yana, Neikovtsi, and Plovdivtsi-and rehabilitation of the Studena dam, which is operational and supplies water to the town of Pernik. The proposed completion of the dams is based on priorities established in Government Strategy for Water Supply and Sewerage Management and Development, because local resident around these three dams have inadequate water supply and their services are often interrupted. Construction of the dams had begun but was stopped due to lack of funds. This project aims to restart construction after a feasibility study confirms viability of investments on economic, financial, and technical grounds. This component also supports completion of water treatment plants preparation work needed for the dam investments and construction supervision. The project will also support the rehabilitation of the 50-year old Studena dam. Feasibility studies for the dams will be completed during project implementation.

Rehabilitation of Studena Dam Description 10. Studena Dam is a 50-year old, concrete buttress, hollow gravity dam.’ The lake created by the dam provides water to seven settlements, including the town of Pernik with 91,000 people. The dam structure is 53m high; the reservoir has a maximum operating capacity of 25.2 million m3; the foundations are in massive bedded limestone. Maximum global movements of the concrete structure have been in the order of lmm, both vertically and horizontally; maximum joint openings vary from 0.4 to 3.4 mm; instrumentation is in good operating condition; drain holes show uplift pressures within design limits; piezometers indicate seepage patterns comparable with design assumptions. Maximum observed leakage flows are low and stable, totaling less than 3 l/s8. 11. The spillway is on the crest of the dam, and controlled by three vertical sliding gates, which were added in 1992 to increase storage capacity from 20.7 to 25.2 million m3.Maximum discharge capacity is 400m3/s, which corresponds to a 1:1,000 year event. Spillway gates are well maintained and regularly operated to ensure rapid response in case of flooding. Flood

7 Also known as “Noetzli” named after the engineer who first developed this type of structure in 1927-28. 8 Details as follows: a) 0.6 I/s from drainage gallery; b) 0.7 from downstream drains; c) 1 Vs from right dam side, through some construction joints when reservoir is at maximum level.

29 warnings are issued by the national weather forecast center as the catchment area is too small’ to establish an effective, dedicated, flood warning system. 12. A bottom outlet, with a maximum discharge capacity of 18m3/s, allows lake level management. The system comprises two parallel steel conduits controlled by Johnson type valves (installed in 1992). Needle-type valves are located upstream of the Johnson valves to allow maintenance of the latter. The needle valves can no longer be serviced due to upstream sliding gates at the intake of the conduits, which are out of service. 13. There is a hydroelectric plant at the toe of the dam, consisting of two horizontal-axis Francis turbine-generators of 350 kW each. The plant, built in 1953, is very well maintained but debris is entering from the intakes at the lake and may have damaged the rotating turbines parts, significantly impairing their performance. 14. Local staff operates the facilities in accordance with well-established procedures covering surveillance, annual safety assessment, and periodic independent safety review of performance at three-year intervals. An Emergency Preparedness Plan and communication arrangements are in place that involve relevant authorities, including those responsible for managing natural disasters. 15. Deterioration is evident, the concrete surfaces have been significantly affected by freezing and thawing, and the hydro-mechanical and electrical equipment is showing signs of wear and tear, especially in the intake tower. The operators are concerned about on-going leaching of salts from the upstream wall of the foundation gallery, which is reported to have increased in the last seven years. Their concern is related to potential suffusion and or dissolution of calcareous rocks from the foundation rock-mass, which is common in limestone formations and generally progress slowly. Nevertheless, good practice would suggest investigating and quantifying the progression of this phenomenon. Next Steps The feasibility study that defines investments should consider the following:

0 Hydrological safety should be re-appraised based on updated hydrological data, to update the design of the flood handling facilities. The dam should be capable of passing the PMF (Probable Maximum Flood) without breaching. A flood level that peaks at the nominal crest level is acceptable (that is, zero freeboard during the passing of the PMF is tolerable), provided the crest resistance to erosion is satisfactory and the structure is stable for the increased hydraulic loading. a Seismic safety of the dam and ancillary works should be re-appraised. The dam and its outlet works should be checked for two earthquake events, the Operating Basis Earthquake (OBE) and the Maximum Design Earthquake (MDE). The dam and its outlet works should suffer only minor damage during the OBE and remain operational. Extensive damage to the dam and its outlet works may occur during an MDE, but uncontrolled release of water from the reservoir is not expected.

0 The project should cover the following: (a) site investigations from inside the drainage gallery (geophysical surveys, some boreholes, laboratory testing); (b) treatment of foundations based on site investigation results; (c) surface treatment of concrete

Concentration time is around 30 minutes.

30 structures where they are eroded by freezing and thawing; and (d) rehabilitation of hydro mechanical works, including upstream gates to bottom outlets, and installation of screens at the intake tower. 16. Feasibility studies will also assess needs and investment costs for rehabilitating the deteriorated dam wall; rehabilitating and upgrading the intake tower hydro-mechanical equipment; and preventing salt leaching in the foundation gallery.

Completion of Luda Yana, Neikovtsi, and Plovdivtsi dams 17. The project proposes to complete construction of these partially constructed dams. Thorough feasibility studies and site investigations must be carried out before construction resumes, particularly to review the integrity of the existing structures that have been exposed to wear and tear, and the site conditions (including groundwater flow), which may have changed since the original design was completed. Also, for a non-operational partially completed dam, the water control facilities are designed to handle low to medium flood events" and the flood risks during construction should be reviewed. The following table summarizes the essential elements ofthe three dams in terms ofsafety and operational reliability ofthe assets.

Parameter I Luda Yana Dam I Neikovtzi Dam I Plovdivtsi Dam

movements in all h different areas

Net water storage 17.70 4.30 1.80 volume (mln. i3) Flood handling Free-crest ogee spillway with Free-crest ogee spillway with Orifice spillway, morning facilities chute and ski jump chute and ski jump glory typeI2 Design flood, return 10,000 10,000 10,000 period, years Reservoir level control Steel pipe inside concrete Steel pipe inside concrete Steel pipe inside concrete loThe return period used for design of river diversion works is in the order of 25 years; that of the operating dams ranges from 1,000 to 10,000 years. I' A granite rock, in which hornblende replaces the mica. I' The hydraulic performance of this type of spillway features a discontinuity when the flow regime in the tunnel transits from free to pressure conditions; dam crest elevation must be checked for adequate freeboard under those conditions.

31 conduit conduit conduit People at risk in case Panagiurishte (>28,000 Tryavna (>11,000 people) 3 villages (>5000 people) of dam failure people) Reservoir Some logging activities in Forested catchment area, very Forested catchment area, very conservation the catchment, must be little erosion expected little erosion expected regulated before impounding

Luda Yana dam and water treatment plant 18. Dam construction began in 1986 and stopped in 1990, restarted in 1995 but stopped again in 2000 due to lack of funds. Key features include the following: Spillway capacity is 280m3/s; flood return period is 1:10,000; energy dissipater will be a ski jump type and design should check its appropriateness. Foundation permeability from drainage gallery should be checked to see if additional grouting is necessary. Footbridge is foreseen to access intake tower. Design features cylindrical gate inside intake tower. Currently two intakes are planned.

0 Location of bottom outlet is inside a tunnel in a rock. This design is appropriate as the dam features a clay core. 19. The dam would provide water to the ViK Panagiurishte, which currently needs to produce water at about 105 literdsecond for the population it serves (30,000), and for estimated unaccounted for water of 40 percent. The ViK could serve another 15,000 people if water production was 160 l/s. Existing water sources yield about 68 l/s, which explains water shortages in the region. Since current water sources are inadequate for 30,000 people, many households have their own wells but water quality is not assured. Thus, apart from completing the dam to secure the water supply, authorities also plan to build a water treatment plant to ensure water quality. The original planned dam net water storage volume was 17.7 million m3,calculated with the assumption that the reservoir would also supply irrigation water for 6,200 ha. Views regarding the need for irrigation differ and agreement on water use is needed to complete the economic analysis and viability of the investments. The original dam was planned to be 51 m high from foundation level - the existing construction is at 30 m; concrete works for the water intake towers are partially completed, and the dam spillway has been cut into the rocks but concrete needs to be poured. However, there may be no need to build another 21 m. The feasibility study will determine the optimal height required to make the dam operational for water supply; ensure that completing the dam is the least-cost option to provide water. The water treatment plant is an addition to the original design, which would have to be included under this project. Neikovtsi dam and water treatment plant 20. Construction began in 1986 and ceased in 2001 due to lack of funds. Key features of the dam include the following:

0 Drainage and inspection gallery are at the base of the core, an appropriate choice given the complex foundation conditions.

0 Water pressure tests must be carried out inside the gallery to check permeability and carry out any necessary grouting operations.

32 0 A geophysical survey must be carried out inside the conduit, holes drilled to check the concrete and foundation contact, and necessary grouting carried out.

0 Three intakes at different elevations will have self-cleaning screens. 21. Authorities plan for ViK Gabrovo to use Neikovtsi dam water to serve the 14,000 people of Tryavna soon after the dam and water treatment plant are completed. Later it is anticipated that Neikovtsi dam will also serve the 10,000 people of Dryanovo. Existing regional water sources yield 25-90 l/s, depending on the season, but this is inadequate as the demand for Tryavna is about 50 l/s, which creates water shortages in drier months. The combined water demand for Tryavna and Dryanovo is around 90 l/s, which could be met by the completed Neikovtsi dam, because it has a planned net water storage volume of 4.3 million m3 and a height of 42 m. So far, about 16 m of the dam wall has been built and concrete works for the water intake tower were begun but not completed; the water treatment plant is about 80 percent complete and can treat water at 200 Us, a capacity that is not required given the current water demand in Tryavna and Dryanovo. Feasibility studies will determine if completing the dam is the least-cost option to provide water for Tryavna and Dryanovo; recommend measures to reduce water treatment plant capacity to correspond to demand. Plovdivtsi dam and water treatment plant 22. Construction began in 1998 but ceased in 2001 due to lack of funds. The key features of the dam include the following:

0 A morning glory spillway tower was built; the horizontal seismic coefficient is 0.15; the dam is designed to handle a 1: 1000 year flood or flow of 167 m3/s; downstream conduit is also used for river diversion and intake works.

0 Three intakes at different elevations with self-cleaning screens have been built.

0 Concrete box conduit founded on sound rock, detail of core crossing is critical when reviewing the design.

0 Emergency preparedness training is essential for downstream populations. The project scope will include an automatic warning system; the final design should incorporate features to increase dam resistance to overtopping. 23. Authorities plan ViK Smolyan to use Plovdivtsi dam water to serve 21,000 people in Rudozem and Madan, and later to serve 30,000 more people in Smolyan town. Madan and Rudozem combined water demand is about 75 l/s, which cannot be met by local springs because water shortages occur during June to September. Supplying, water for part of Smolyan will require around 200 l/s, which Plovdivtsi dam can supply. The planned net water storage volume of Plovdivtsi dam was 1.8 million m3 and the height was 47 m. About 17 m of the dam wall has been built and the concrete work for the intake and spillway tower is completed; the water treatment plant site was cleared but construction had not started. Feasibility studies will determine whether completion of the dam and treatment plant represent the least-cost option for providing water to Rudozem, Madan, and parts of Smolyan. Next Steps 24. These steps would be followed for works in Luda Yana, Neikovtsi, Plovdivtsi, and Studena dams:

33 Complete feasibility studies (details provided below) to determine cost/ benefit and viability of proposed dam investments and assess updated costs; complete site investigations to review integrity of existing construction, and area hydrogeology. Review and update designs and costs for the most viable option. Update Environmental Management Plan and Environment Impact Assessment based on feasibility studies. Ensure that any land acquired for dam construction and operations conforms to the process outlined in the Land Acquisition Policy Framework. Seek Bank ‘no objection’ to financing upon satisfactory appraisal of economic, technical, environmental, social, and dam safety related to Bank policies. Prepare bidding documents. Select a contractor for the construction.

25, Feasibility studies to define investments will include the following:

0 Carry out baseline surveys of existing works condition, including site investigations on which design of completion works should be based.

0 Carry out static stability analysis of embankments on actual soil parameters measured from representative samples of existing works.

0 Evaluate condition of drainage galleries and the bottom outlet conduits, which may need additional foundation treatment.

0 Rehabilitate, recalibrate, and integrate instrumentation as necessary.

0 Re-appraise hydrological safety based on updated hydrological data, and perform corresponding updates to design of flood-handling facilities. All three dams should pass the PMF (Probable Maximum Flood) without breaching; a flood level that peaks at the nominal crest level is acceptable (that is, zero freeboard during the passing of the PMF is tolerable), provided the crest has satisfactory resistance to erosion, and the embankment is stable for the increased hydraulic loading.

0 Re-appraise seismic safety of dams and ancillary works by checking for the Operating Basis Earthquake (OBE) and the Maximum Design Earthquake (MDE). Dams and outlet works should suffer only minor damage during the OBE and remain operational; extensive and possibly irreparable damage to the dam and its outlet works is permissible during the MDE, provided this does not lead to uncontrolled release of reservoir water.

0 Carry out site investigations, additional studies, and final design in parallel with pre- qualification of firms for construction works.

34 Annex 4.1: List of Regional and Urban Water and Wastewater Utilities covered by the Master Plans

458 392 I 158

35 36 2. I ViK Petrich 57 307 I57 3. 1 ViK Kresna 5 918 I10

1 TOTAL REGIONAL ViK MASTER PLANS - 48 6 515 744 I5463 ---- I I TOTAL URBAN ViK MASTER PLANS - 40

--_I

TOTAL FOR THE SIX REGIONS 6 5157441 5483

37 Annex 5: Project Costs BULGARIA: MUNICIPAL INFMSTRUCTURE DEVELOPMENT

38 Annex 6: Implementation Arrangements BULGARIA: MUNICIPAL INFRASTRUCTURE DEVELOPMENT

IMPLEMENTATION ARRANGEMENTS

1. A Loan Agreement will be signed between the Bank and the Republic of Bulgaria, represented by the Ministry of Finance. The Ministry of Regional Development and Public Works (MRDPW), on behalf of Government, will implement the project. The MRDPW will be responsible for all aspects of the project, including management of Bank loan funds under all components. To this end, Government has created a Project Implementation Unit (PIU) within the Department for Water and Sewerage of MRDPW, headed by the Department Director and comprising nine other staff members. A technical coordinator, a chief accountant, an accountant, a financial management specialist, three technical experts, procurement specialist, and safeguards specialist to ensure proper implementation of the EMPs for dams and LAPF were formally appointed by the Minister of Regional Development and Public Works. Among the staff, the technical co-coordinator, technical experts, procurement expert, and safeguards specialist are full-time PIU staff and the other staff will work on the project as needed.

2. The applicable Bulgarian legislation will be followed through the SEWRC to ensure that tariffs will include operating costs for the dams and water treatment plants.

3. The State Commission of Dams Safety established under the MRDPW, is responsible for supervising implementation oflegislation on dam safety, review ofperiodic reports on inspection of dams, licensing the operation of dams and authorizing the impoundment after completion of construction works, including installation of instrumentation, early warning systems, and enactment of emergency preparedness plans.

4. After completion of works, the dams will be handed over for management, operation and maintenance to the operators (currently ViKs) defined by the Borrower’s Water Act. To that extent, the above mentioned operators shall be involved in the review of design and supervision of works.

5. The Ministry of Environment and Waters (MoEW) is responsible for setting the policies and management of water resources and water quality, and implementing the Environment Sector Operational Program for which EU Cohesion Fund grants would be made available to finance investment projects in water supply and sewerage identified in the Master Plans developed under the project.

6. The Ministry of Health (MoH) is responsible for monitoring the quality of ViK-provided potable water; and when the dam are completed, the local MoHunits will sample and test water quality supplied by ViKs and issue the distribution license.

39 Annex 7: Financial Management and Disbursement Arrangements BULGARIA: MUNICIPAL INFRASTRUCTURE DEVELOPMENT

Country Issues 1. The Bank has extensive knowledge of the country’s Public Financial Management (PFM) system. A 2003 Country Financial Management Assessment (CFAA) highlighted Bulgaria’s significant achievements in PFM, including: (a) a well developed PFM system relying heavily on IT, (b) sound legislation and well functioning external oversight institutions such as the National Audit Office and the Parliament; (c) comprehensive budget process covering several previously extra-budgetary funds; (d) well-developed Treasury Single Account (TSA) to service all budgetary institutions; (e) adequate realism of budget estimates; (f) closely monitored cash management system; (8) and an adequate internal control framework. 2. While the overall financial management risk to Bank funds was deemed low, the CFAA made recommendations that the Government implemented, including under PAL-2 and PAL-3, and with continued technical assistance from other development partners. An update of recent reform activities and their impact was carried out in 2007 as part of the Bank’s continuous dialogue with Bulgaria. Progress and challenges since the 2003 CFAA are detailed below. 3. Bulgaria’s financial control and oversight have improved substantially. The country has made steady progress in developing PFM systems and institutions, and the medium-term budget framework; program budgeting has been progressively rolled out in line ministries. Budgetary control has improved and all major budget institutions and agencies are now incorporated within the treasury system. Government has implemented a modem financial management information system (FMIS). The initial project design was scaled back and the successfully implemented system now ensures adequate resources and staff. In addition, continuing changes to the legal framework during strategy implementation led the Government to introduce FMIS into the whole system of the Ministry of Finance and line ministries related to accounting information linked to managing EU financial instruments. As a result, an internet-based FMIS system was introduced across MoF, all MoF second-level spending units, all EU PHARE and Instrument for Structural Policies for Pre-Accession (ISPA) Implementing Agencies, all Managing Authorities of the Operational Programs under the EU Structural Funds and Cohesion Fund, and all territorial offices of the National Revenue Agency. Elements of a modem public sector audit function (both internal and external audit) have developed in accordance with best EU and international practice and coordination between inspection and audit agencies has improved. 4. Some public financial management challenges remain. Program budgeting still has to be rolled out across all first-line spending ministries and municipalities. When this work is completed and fully embedded in the budgeting system the full impact on policy planning and prioritization across Government will be achieved. Government also needs to build a more comprehensive picture of fiscal risks into budget documents. Finally, while the main building blocks of an internal control and internal audit function are in place, considerable work is needed to ensure managers understand the basic concepts and that sufficient certified internal auditors are in place to implement these reforms.

40 Risk Assessment and Mitigation Measures 5. The overall financial management risk for the project is moderate. Adequate mitigation measures are in place to ensure that the residual risk is acceptable. The table below summarizes the financial management assessment and risk ratings.

RISKS RISK MITIGATION MEASURES I RESIDUAL

Well developed PFM structures L Borrower to maintain independent financial L (additional information included in management system, use of private auditors country issues section) and use of BNB for designated account.

Independence of entity management, S The MRDPW will ensure that the PIU is M appropriateness ofthe organizational staffed with adequate and capable personnel structure, impact of civil service that will be able to implement the project. PIU rules staff will be trained to become fully familiar with Bank financial management, procurement and disbursement procedures.

Proiect is medium-sized, but not I M I Implementationactivities will be monitored M

41 Strengths and Weaknesses 6. Significant strengths provide a basis for relying on the project financial management system including the simple funds flow and good internal controls developed for the project; no significant weaknesses exist in the project FM system.

Implementing Entity 7. The Government has established a Project Implementation Unit (PIU) under the existing Department for Water and Sewerage within the Ministry of Regional Development and Public Works (MRDPW); the PIU is responsible for project financial management. The Loan Agreement would be signed between the World Bank (IBRD) and Republic of Bulgaria, represented by the Ministry of Finance (MoF), who will transfer the implementation responsibilities to MRDPW.

Budgeting and Planning 8. The MRDPW staff under the department for water and sewerage has experience preparing annual budgets for EU funded projects. Project budget estimates were prepared and will form the basis for including project annual expenditures in the MRDPW budget. Annual budgets are prepared according to Bulgarian economic classifications, and the project budget will follow the same procedures as line ministries for approval, reporting of budget execution, approval of variances, and budget rectification. The approved annual budget is entered into the project accounting system and periodically compared with actual results as part of interim reporting. Budget data compilation and approval will continue accordingly, with the annual detailed project implementation budget broken down by quarters. Risk associated with planning and budgeting is assessed as moderate.

Accounting Staffing 9. The PIU includes three financial management (FM) experts. While the staff has extensive experience with Bulgarian regulations and managing EU-funded projects, the MRDPW staff assigned to the project has insufficient experience with Bank-financed projects. However, the proposed PIU staff has some experience with Bank disbursement and financial management procedures through implementation of the previous PHRD grant, and training will be provided during project implementation. The risk associated with staffing is assessed as moderate.

Accounting Policies and Procedures 10. Project accounting books and records will be maintained on an accrual basis and denominated in Bulgarian Levs (BGN) except for the DA books and records, which will be maintained in the currency ofthe Bank loan (Euro). The project unit will build upon the existing accounting procedures and internal control framework to ensure that all project procedures and controls are adequately documented, contract monitoring and invoice payment procedures are consistently adhered to and documented. The main controls relate to existing standard checklists that have to be filled out for each budget engagement and payment, and approved by MRDPW financial controllers. The PIU has instituted appropriate accounting procedures and internal controls, including authorization and segregation of duties. Project accounting policies and procedures are specified in the draft financial manual, which will be updated regularly. The

42 existing draft financial manual will be updated prior to negotiations to reflect changes in project structure, PIU and staffing, and implementation arrangements. Risk associated with accounting policies is assessed as moderate. 11. Additional accounting policies that will be applied for the project (besides standard accounting policies used for Budget entities) will include the following major assumptions: Accrual accounting will be the basis for recording transactions. Reporting will be done in BGN and in Euro (Designated Account). Consolidated IFRs will be prepared for all components. All counterpart funds will be reflected in the financial reports.

Information Systems 12. Existing software used for ISPA projects is designed only for EU grant funds and cannot be used for the new project, so initially, MRDPW will use an Excel-based financial management, accounting and reporting system, with adequate password protection and restricted access, until an appropriate project software system can be put in place. Additional software procedures include timely archiving of the monthly files and weekly information back up. Specific ledgers will allow the project unit to distinguish records for new project operations using the existing chart of accounts. The risk associated with information systems is assessed as moderate. To strengthen further the financial management arrangements, an appropriate project financial management software system would be developed by end-2009 and MRDPW committed to provide the source of funding for the new software system to be developed.

Internal Controls and Internal Audit 13. The PIU has documented in its draft financial management manual internal control mechanisms for the application and use of funds and project implementation. The main internal controls are for contract approval mechanisms and invoice verification procedures, including obtaining appropriate evidence that the goods delivered, works completed and services rendered adhere to technical specifications. The project will use checklists to ensure that procedures are performed and data are recorded during invoice processing, including checking invoices for mathematical accuracy, legal conformity, agreement with the corresponding contract, matching goods received notes or other evidence of completion of work, debit account no., credit account no., etc. The project will require that the goods received notes, works completion certificates, consultant reports and outputs, or other evidence of satisfactory completion be attached to the invoice and signed by the officials responsible. In addition to MRDPW project officers, the project site inspectors would certify confirmation of satisfactory receipt of the goods, works, or services. Each invoice will be entered in a contract monitoring sheet and recorded in the accounting system as an accounts payable liability. The project requires a contract monitoring sheet to be kept for each contract, initially Excel-based, but later combined with the accounting system. The financial management manual specifies procedures for financial management and administration, accounting, record-keeping, flow of funds, reporting, and auditing; and reflects the structure of the entity, administrative arrangements, internal control procedures, including procedures for authorization of expenditures, maintenance of records, safeguard of assets (including cash), segregation of duties to avoid conflicts of interest, regular reconciliation of bank account statements, signing rights (authorized signatories), regular reporting to ensure close

43 monitoring of project activities, and flow of funds to support project activities. The manual will be updated regularly and included in the operational manual. The risk associated with internal controls and internal audit is considered as moderate. 14. Key internal controls for the project include the following:

e Restricted access to accounting software with clear responsibility and approval process for adjusting journal entries and correcting errors. e Involvement ofmunicipalities and other relevant entities, as appropriate. e Approval of payments done by the deputy minister or his authorized representative and the project director. e Accounting data will be backed up regularly. e IFRs will be prepared based on outputs from software developed for the project. e Bank account will be reconciled regularly with the Bank Client Connection system.

Funds Flow 15. Project funds will flow according to the sources ofproject financing as follows: (a) The Bank loan, by direct payments or via the Designated Account (DA), which will be replenished on transactional methods using full documentation Statements of Expenditure (SOE). (b) Government counterpart contribution, via the single Treasury account. 16. A Designated Account (DA) will be opened at the Bulgarian National Bank (BNB) and foreign currency amounts will be exchanged as needed in local currency (BGN), to cover payments in local currency to suppliers for eligible expenditures. The DA ceiling would be EUR 2,000,000 at the initial stage of the Project implementation; when the total disbursed and committed amount shall reach EUR 9,000,000 the ceiling may be increased to EUR 4,000,000. Government counterpart contribution payments will be made via the single Treasury account, based on regular budget allocations in accordance with standard budget procedures. 17. Disbursement from the IBRD Loan Account will follow the transaction-based method, Le., traditional Bank procedures: Advances, Direct Payments, Special Commitments and Reimbursement (with full documentation and against Statement of Expenditures). Withdrawal Applications documenting funds utilized from the Designated Account will be sent to the Bank on a monthly basis. Disbursements will be made on the basis of full documentation for (a) contracts for works costing more than the equivalent of Euro 3,500,000 each; (b) contracts for goods costing more than the equivalent of Euro 650,000 each; and (c) services under contracts of more than the equivalent of Euro 135,000 for each consulting firm and more than the equivalent of Euro 30,000 each for individual consultants. Disbursements below these thresholds will be made according to certified SOEs. Full documentation in support of SOEs would be retained by the PIU and made available to the Bank during project supervision and for annual audits, which will be required to comment specifically on the propriety of SOE disbursements and the quality of associated record-keeping. Risk associated with funds flow and disbursement is considered as moderate. The following disbursement categories will be followed for the project.

44 Expenditure Amount of Loan Bank Financing Category Allocated (€) Percentage 1. Consulting services for component 1 4,093,500 80 2. Preparation of Master Plans under 16,704,000 80 comnonent 2 3. Works for Studena, Luda Yana, 60,000,000 80 Neikovtsi and Plovdivtsi dams Amount payable pursuant to Section 2.03 of the Loan 4. Front-end Fee 202,500 Agreement in accordance with Section 2.07 (b) ofthe

Reporting and Monitoring 18. Project management-oriented un-audited Interim Financial Reports (IFRs) will be used for project monitoring and supervision. The quarterly IFR reports will cover the entire project and will be submitted to the Bank within 45 days after the calendar quarter end. The IFRs format has been agreed between the Bank and the MRDPW. The risk associated with reporting and monitoring is considered as moderate. External Audit 19. Currently, the Borrower is in compliance with the audit covenants of all existing Bank- financed projects. The project will be audited annually by independent auditors acceptable to the Bank. The format ofthe Terms of Reference for the audit been agreed between the Bank and the MRDPW. The audit scope will include the project books and records maintained by the PIU, all withdrawal applications, and the Designated Account. The audited project financial statements together with the auditor’s opinion thereon will be provided to the Bank within six months after the closure of the reporting period that ends in December. The cost ofthe audit will be financed from loan proceeds. The PHRD grant associated with the project has a permanent audit waiver, based on the alternative assurance procedures performed by the Bank FMS. The procedures performed did not reveal any issues. The risk associated with external audit is considered moderate. The following table identifies the audit reports to be submitted and their due dates.

Audit Report Due Date Entity financial statements N/A Project financial statements (PFS). The PFS include sources and Within six months after the closure of the uses of funds by category, by components and by financing fiscal year which is at the end of December source; SOE statements; Statement of Designated Account; each year; and also upon the closure of the notes to financial statements; and reconciliation statement. project

Supervision Plan

45 As part of project supervision missions, the Bank will conduct risk-based financial management supervisions at appropriate intervals. During project implementation, the Bank will supervise project financial management arrangements in the following ways: (a) review projects quarterly interim financial reports, annual audited financial statements, auditor’s management letter and recommended remedial actions therein; and (b) during Bank on-site supervision missions, review the following key areas: project accounting and internal control systems; budgeting and financial planning arrangements; disbursement management and financial flows, including applicable counterpart funds; and any incidences of corrupt practices involving project resources. As required, a Bank-accredited Financial Management Specialist will assist in supervision.

46 Annex 8: Procurement Arrangements BULGARIA: MUNICIPAL INFRASTRUCTURE DEVELOPMENT

A. General 1. Procurement for the Municipal Infrastructure Development Project will be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004, and revised in October 2006 (Procurement Guidelines); and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers'' dated May 2004 and revised in October 2006 (Consultant Guidelines) and the provisions stipulated in the Financing Agreement (FA). Procurement actions under different expenditure categories are described below. For each contract to be financed under the FA, the procurement or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame have been agreed between the Borrower and the Bank in the Procurement Plan (PP). The PP will be updated at least annually or as required to reflect actual project implementation needs and improvements in institutional capacity. A General Procurement Notice (GPN) published on 10 February 2008 in UNDB and dgMarket on-line and on the web-site of Ministry of the Regional Development http://www.mrrb.aovernment.bg, Specific Procurement Notices (SPN) will be published for all ICB procurement and Consulting contracts as per Guidelines as corresponding bidding documents and RFPs become ready and available.

B. Assessment of the Agency's capacity to implement procurement 2. A Country Procurement Assessment Report (CPAR) was prepared in December 2004 and no update has been made. However, Government of Bulgaria has implemented most CPAR recommendations and current Bulgarian legislation is in line with EU legal frameworks. In 2006, the Bank undertook an Institutional Fiduciary Assessment (IFA) of the Road Executive Agency within the Ministry of Regional Development and Public Works (MRDPW), which identified major procurement issues including inconsistent practices in procurement and project record maintenance among MRDPW departments. 3. The Bank's assessment of the Project Implementation Unit (PIU) under Water and Sewerage Department of MRDPW, charged with overall responsibility for project implementation and coordination, is included in the project file. The assessment is based on meetings with MRDPW representatives of the Water and Sewerage Directorate and the Project

Implementation Unit (PIU) members. , 4. The overall procurement risk is rated as high. 5. Summary of the main findings are: a MRDPW is the primary ministry in charge of implementing large infrastructure projects such as public roads, water and sewage utilities, which includes a well-established Directorate dealing with EU funded activities and potentially good capacity to implement projects of complexity and scale. However, so far experienced MRDPW staff has demonstrated little support or cooperation in dealing with newly appointed PIU procurement staff. a The PIU procurement specialist is familiar with Bulgarian Public Procurement Legislation and has some experience implementing EU-financed projects. Her exposure

47 to Bank-funded procurement is limited to selection of consultants under QCBS and interactions with colleagues during a 2008 workshop in Sofia. a Two years after the start of project preparation, remuneration for PIU staff remains unresolved. Regulations that allow payment of a 75 percent premium to the base salary for staff involved in EU funded projects do not apply to other IFIs and this disincentive was identified during assessment.

0 Internal MRDPW procedures, particularly within the department of water supply and sewerage are not streamlined, documentation flow is not well established, and the filing system needs to be improved to ensure access to internal information and back up- arrangements.

Recommendations to address identified risks a Strengthen MRDPW capacity in Bank-financed procurement implementation. The Ministry has agreed to involve experienced staff from the PIU implementing the TTFSE Project to provide immediate assistance on critical procurement tasks. a Ensure that the Project Director has at least basic procurement training in Works, Goods, or Consulting Services, either on the job or through the Bank during the Project Launch Workshop, or both.

0 Ensure that project procurement staff that have had one-hour training during pre- appraisal mission on the Bank Client Connection system, continue to learn through the available on-line tutorials.

0 Carry out improvements to facilities, organization, record keeping, reporting, and planning and monitoring through a system for document archiving to ensure that records are complete and accessible to MRDPW staff. Prepare a matrix of MRDPW staff responsibilities for the Operational Manual. Overall risk assessment and recommendation on prior-review threshold: 6. Key issues and risks in procurement for project implementation include the following: a Capacity to manage large-scale investment projects. The MRDPW has sufficient capacity to manage large contracts but has a procurement skill shortage due to the unresolved issue of remuneration. However, Government is very committed to implementing the project and MRDPW can make a temporary transfer of additional resources located in the Directorate for PHARE project implementation for additional technical support if PIU staff remuneration is resolved. The MRDPW management mobilized two TTFSE PIU senior staff for initial project implementation support. a Risks associated with technical complexity of contracts. The project is rated as medium complex project.

Prior review thresholds. Procurement thresholds are set in the Procurement Plan

C. Procurement risk assessment 7. The overall procurement risk is rated as high.

48 D. Procurement implementation and arrangements 8. Procurement activities will be carried out by the PIU under MRDPW Water and Sewerage Department. The project does not include national competitive bidding (NCB) procurement; however if NCB is needed, the Borrower agreed to use a Bank-provided Regional Sample of NCB documents for goods and works. 9. Procurement of Works. Works contracts procured under this project will include completion of three water supply dams, Luda Yana, Neikovtsi, and Plovdivtsi, and rehabilitation of the operational Studena dam, which supplies water to the town of Pernik. Dam construction had started but was stopped for lack of funds. This project aims to restart construction after feasibility studies confirm the viability of investments on economic, financial, and technical grounds. The Borrower indicated that no outstanding contractual relationships exist related to completion of above construction. Due to the size of investment and specifics of construction works, all contracts will include prequalification. 10. Procurement of Goods. There are no goods contracts under the project. 11. Procurement of Technical Services. There are no technical services contracts under the project. 12. Selection of Consultants. Consultant services contracts procured under this project will include Feasibility Study and Designs Update for the Dams and Preparation of Bidding Documents, Construction Supervision, Audit and Preparation of Regional Master Plans, and Water and Wastewater plans for towns in six Regions across Bulgaria. 13. Shortlists for consultant services for contracts estimated to be less than EURO 150,000 or equivalent may be composed entirely of national consultants. Consulting offices associated with local universities may be included in the shortlists, but university-based consultants will not be given preference over other private consultants. 14. Training. The project would include some training activities for PIU staff to be financed under the project funds. 15. Operating Costs. Operating costs including salaries of implementing agency staff and additional support shall be covered from Government budget. 16. Advance procurement. Procurement related to civil works on Luda Yana and Plovdivtsi dams will be funded by the Ministry from state budget, including the update of technical documentation and design. The same financing arrangement shall apply to selection of the construction supervision company that shall perform Engineer’s role. Given the deadline established jointly by the Bulgarian Government and the EU, the consultant selection process for Preparation of Regional Master Plans and Water and Waste Water plans for the 48 water utility companies started in February 2009. 17. Retroactive Financing. There is no retroactive financing under the project. 18. Technical issues affecting procurement decisions. MRDPW would like to begin with construction of the Luda Yana and Plovdivtsi dams because completed detailed designs already exist, although they need to be up-dated and their construction permits renewed. Before consultants are selected, the Dam Safety Panel and Bank should give priority to reviewing the Terms of Reference for conducting site investigations, economic analysis, and design updates for Luda Yana and Plovdivtsi dams, given their importance for project implementation. The same

49 review process shall apply to the detailed designs and other related documents prior to the start of the bidding process. 19. Filing and records keeping. PIU procurement staff must establish and maintain the filing system; agreed reporting formats will be specified in the Project Operation Manual, which will be completed by negotiations. Procurement Plan 20. At pre-appraisal, the PIU under the Water and Sewerage Department of MRDPW, developed an initial Procurement Plan (PP) for the entire project scope corresponding to the implementation plan that provides information on procurement packages, methods, and Bank reviews. This PP will be agreed between Borrower and Bank project team at negotiations, and will be available from the implementing agency project database and on the Bank external website. The PP will be updated annually in agreement with the Bank project team, or as required to reflect actual project implementation needs and improvements in implementing agency institutional capacity. Frequency of Procurement Supervision 21, The capacity assessment for the Implementing Agency recommends that in addition to Bank team prior review supervision, regular physical inspection of sample contracts should be carried out every six months, including prior-reviewed contracts, which should comprise no less than 3 0 percent contracts physically inspected. Additional Provisions for National Competitive Bidding.

22. The project does not foresee NCB contracts, however if NCB to be used the following additional provisions shall apply:

0 a point system evaluation shall not be used 0 domestic preference shall not be applied e international bidders shall not be excluded from bidding 0 the draft NCB bidding documents shall be prepared and submitted to the Bank for review and no-objection before the first NCB tender is issued 0 no bids shall be rejected at the bid opening. All bids submitted on or before the deadline for submission of bids shall be opened and read out at public bid opening 0 local bidders shall demonstrate ability to obtain securities and access to credit e bid evaluation criteria shall be pre-disclosed to bidders in the bidding documents e technical specifications shall be written to promote the broadest possible competition. 23. Anti Corruption Measures: Corruption risk is rated as average and therefore the anti- corruption measures will be in line with Bank Guidelines.

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3 Definitions: ICB-International Competitive Bidding (Section 2 of the Guidelines). For works contracts valued at or more than EURO 3,800,000. For goods contracts valued at or more than EURO 750,000. NCB-National Competitive Bidding (Section 3.3 of the Guidelines). For works contracts valued less than EURO 3,800,000. For goods contracts valued less than EURO 750,000 DC-Direct Contracting (Section 3.6 of the Guidelines) S-Shopping (Section 3.5 of the Guidelines) for works contracts valued at or less than EURO 75,000. For’goods contracts valued at or less than EURO 75,000

Prior review: For Works contracts: All ICB contracts. All NCB contracts of EURO 1,500,000 equivalents or more including the first two contracts regardless of contract value. Prequalification will apply to works contracts valued at or more than EURO 7,500,000. Domestic preference will not apply.

Definitions. CONSULTANT SERVICES

QCBS-Quality and Cost-based Selection (Sections 2.1 - 2.28 of Consultant’s Guidelines) QBS-Quality Based Selection (Section 3.2 of Consultant’s Guidelines) CQ-Consultants Qualifications (Section 3.7-8 of Consultant’s Guidelines) LCS-Least-Cost Selection (Section 3.6 of Consultant’s Guidelines) SSS-Single Source Selection (Section 3.9- 13 of Consultant’s Guidelines) IC-Individual Consultant (Section V of Consultant’s Guidelines)

Prior Review: For firms: All contracts equal to EURO 150,000 or more. First two contracts regardless of value and all SSS contracts For individual consultants: All contracts equal to EURO 50,000 equivalent or more. First two contracts regardless of value and all SSS contracts

55 Annex 9: Economic and Financial Analysis BULGARIA: MUNICIPAL INFRASTRUCTURE DEVELOPMENT

ECONOMIC ANALYSIS

1. Comprehensive economic analysis for the dams will be carried out when feasibility studies, which require updated cost/ benefit information, are completed. An EU Directive requires Bulgaria to provide good quality water to its citizens; completion of the dams and construction of treatment plants under the project will not only ensure security of water supply but also the will allow ViKs to supply safe treated water to project area residents, who are now suffering summer water shortages and in some cases, an unsafe untreated water supply.

2. Economic analysis for the feasibility study will take the following into account:

Increase in domestic consumption: The security of continuous water supply will allow water consumption to increase, first in project dam areas and later in nearby settlements. Per capita consumption is expected to gradually increase to EU norms (around 130 Ipcd). Based on the information provided, the following assumptions are made:

The Ludu Yunu durn will serve 30,000 people in Panagiurishte, and in the future, another 15,000 people around Lesitsevo and Pazardzhik. Technically, this service can be extended with additional investments not considered under the project. Consumption is 70 1pcdl3, which is assumed to increase gradually to EU norms of around 130 lpcd. The Neikovtsi dum water supply will connect to 14,000 people in Tryavna, and in the future, to another 10,000 people in Dryanovo through a gravity pipeline. Water consumption is 74 lpcd and expected to increase gradually. The Plovdivtsi dum will supply 2 1,000 people in the towns of Madan and Rudozem and provide a secure water supply to another 5 1, 000 people, and two-thirds of the population of Smolyan, through a gravity flow pipeline from Srednogortsi to Taran. Water demand is 91 Ipcd, which is expected to increase gradually.

Increase in non-domestic consumption: Non-domestic consumption can be assumed using availability of water and expected population growth in the region to arrive at conservative estimates. In Luda Yana, non-domestic consumption in population equivalent (total non-domestic consumption divided by the population) is currently 36 lpcd, and in Plovdivtsi, it is 14 Ipcd, both of which are expected to double in the medium- to long-term. In Neikovtsi, non-domestic consumption in population equivalent is 123 lpcd, which is expected to remain unchanged.

Savings in coping costs: During summer, consumers in the three project areas experience weeks without adequate water supply resulting in consumers and ViK incurring significant costs for tankers, wells, or temporary piping from nearby sources to supplement the ViK supply. International studies have quantified similar coping costs; for

j3 lpcd means liters per capita per day

56 example, in Peru, water from alternate sources such as tankers, or small-scale providers cost customers up to 50 percent more per m3 than municipal-supplied water.14 The analysis to be completed for the feasibility study would include coping costs.

3. In addition to quantifiable benefits, qualitative benefits include improved human health and safety due to the reliable and secure supply oftreated water. Intermittent water supply causes water pressure inside the pipes to drop, creating a risk that water supplied to consumers can be infiltrated by contaminated groundwater. Another benefit of secure water supply is the reduced wear and tear on pipes that occurs when water supply is intermittent and water pressure fluctuates. Such system deterioration increases ViKs' repair and rehabilitation costs. These qualitative benefits should also be considered in the feasibility studies.

FINANCIAL ANALYSIS

4. Financial analysis of the investments was not performed because preparation of the Master Plans and dam investments are part of Government public expenditure programs, and after the dams are constructed, they would be operated by the local water utilities. The national water regulator SEWRC will ensure that the operating costs are covered through the tariffs.

l4World Bank (2007) Evaluation of Small-scale Providers of Water Supply and Sanitation Services in Peru

57 Annex 10: Safeguard Policy Issues BULGARIA: MUNICIPAL INFRASTRUCTURE DEVELOPMENT

ENVIRONMENT AND SOCIAL

1. Environmental safeguard documents. The proposed project is rated as environmental assessment category A because the completion of the three dams could potentially have adverse impacts on the upstream or downstream environment. To study the potential impacts of construction and operation ofthe dams and propose mitigation measures for them, the Borrower prepared the following environmental safeguard documents to meet the OP/BP 4.01 requirements: (a) an Environmental Management Framework (EMF) developed in September 2007 to outline procedures to be undertaken during project implementation once the feasibility studies and detail designs are updated for the dams; (b) three Environmental Due Diligence (EDD) Reports were prepared reflecting the current environmental situation at the three incomplete dam sites where works stopped some years ago due to lack of finance; (c) Environmental Impact Assessments (EIAs) were prepared for Luda Yana and Neikovtsi, dams, including Environmental Management Plans (EMP); (d) Supplemental Update to the EIA for Plovdivtsi Dam was prepared to fill the gaps between the initial EIA prepared in accordance with the national legislation and approved by the Ministry of Environment in 2000, and the requirements of OP 4.01 (the initial EIA included an Environmental Management Plan (EMP) and was the basis on which construction permit was issued); and (e) a freestanding EMP for the rehabilitation works proposed at Studena dam. The three final EIAs, EDDs and Environment Framework were publicly disclosed in Bulgaria (on the website of MRDPW) and at the World Bank (Infoshop) before project appraisal. 2. These environmental safeguard documents were developed based on information from existing feasibility studies and designs and visual assessments of existing sites. The documents summarize dam history, including options analysis; identify legislative and organizational structures for environmental management; describe existing environmental and social conditions and anticipated environmental impacts during dam construction and operations; outline environmental impact mitigation and monitoring plans; and describe the public consultation process. Once the feasibility studies and detail designs are updated during project implementation, the EMPs and EIAs will be revised to incorporate any new engineering documentation or works details needed for construction ofthe dams and their possible affiliated impacts. 3. Social safeguards documents. The social safeguard documents were prepared in order to have a better understanding for and disclosure of the social safeguard and social risk issues. The social safeguard documents prepared include a) Social Due Diligence (SDD) Reports and b) Land Acquisition Policy Framework (LAPF). Since construction on the dams had begun earlier, the Government had acquired most of the land that will be required for completing the proposed investments. The SDD Reports for the three dam sites describe the process used in the past by the Government to acquire land. The SDD Reports provide an assessment of the total amount of land that was acquired previously for infrastructure construction; identify the number of people affected; summarize the legal framework under which land was expropriated; and describe the restitution claims on the expropriated land. The LAPF outlines the legal processes required for

58 future land expropriation in compliance with the provisions of national legislation and Bank Operational Policy 4.12. The LAPF has been prepared in the event additional land is required for the completion ofthe dams. 4. Public consultation process. A national-level consultation on the project took place on December 12, 2007. During the three local-level consultations carried out in October 2007 in the municipalities where the project dams are located, local people requested a prompt start for dam construction so that their long-awaited benefit will materialize-an adequate supply of good quality water. The SDD Reports, and the LAPF, were disclosed in the country in December 2007 and available in the Bank Infoshop in January 2008. The updated LAPF was also disclosed on March 24,2009. National and local-level public meetings took place in February 2009 to discuss the draft EIA reports for Luda Yana, Neikovtsi, and Plovdivtsi dams, and discussions addressed social impact aspects as well. Final EIAs were disclosed in country and at Infoshop on May 12, 2009. All public meetings were well attended by NGOs, affected people, scientists, and government representatives. 5. Overall environmental impacts related to proposed dam construction. Most potential environmental impacts are temporary and related to aspects of construction works; and a few impacts related to the reservoir and dam existence and operation could be longer-term. 6. As the dam sites and reservoir basins have already been significantly impacted by the previous construction, completing the dams will have a relatively minor incremental impact on the local environment. In fact, the site restoration to be done after completion of construction is expected to improve the local conditions. Potential construction-related impacts are likely to be temporary, localized, and can be effectively mitigated by applying international good practice for construction and planning. The anticipated construction stage impacts may be related to (a) air pollutioddust, noise, vibration, and access restriction, (b) improper disposal of construction- related waste; (c) temporary pollution of soil and surface waters due to accidental spillage offuel and oil from construction activities; (d) safety hazards including worker safety; (e) damage to trees and existing vegetation; and (f) chance finds of physical cultural resources. However, the contractor will manage these impacts properly during the construction phase, closely supervised by the PIU and designated engineer. 7. Potential environmental effects due to the existence and operation ofthe dams and reservoirs may be related to: (a) changes in downstream morphology of riverbeds and banks due to altered sediment loads of the rivers that could result in increased local erosion; (b) changes in downstream hydrology (total flows, seasonal flows, short-term fluctuations); (c) changes in downstream water quality (e.g., nutrient load, heavy metals concentration, temperature); (d) reduced biodiversity and river ecosystems due to blocked movement of local species (e.g. fish) and elimination of floods; and (v) impacts on existing infrastructure such as roads and bridges. The EDD and SDD reports and the EIAs identified and analyzed these potential impacts and indicated measures to eliminate, reduce or mitigate them.

Summary of findings from EIA, EDD and SDD Reports 8. The findings on the environmental and social aspects appear below. Neikovtsi Dam

59 9. Current environmental status. The dam is located in the valley of the Neykovska river above Neykovtsi residential estate of the town of Plachkovtsi and at about 7.5 km south of the town of Tryavna. The run-off of the river is uneven in seasonal terms and naturally has a very low or even zero flow for part ofthe year, especially during summer time. Currently, the natural flow of the river is unimpeded because its flow is maintained through an outlet constructed beneath the partially completed dam. Upstream of the dam is almost dry during the summer low-water season with little ichthyofauna. Ichthyofauna appears only near Plachkovtsi. Herpetofauna is represented only by one species of high conservation status, which might be impacted by the reservoir. There are no species of high conservation significance; species found in the area are widely distributed throughout the territory on the northern slopes of Central Stara Planina. The ligneous forest vegetation (6.0-7.0 ha) was cleared when construction began in the 1980s. The humus soil layer has not been stripped. The current soil pollution at the dam site is not known but it will be analyzed during the update of the dam feasibility study and design. Based on land use and topography there is no reason to expect significant pollution of soil at the site will be found. Once completed, the upstream river ecosystem will be transformed into a reservoir ecosystem as 32.5 ha will be covered by water permanently. According to latest information from the MoEW, only the sanitary-protected zones will be within PA Bulgarka. Complete details of the size and extent of the reservoir will only be known when the detailed designs are completed. Another Natura 2000 site located in the proximity of the dam area is the Protected Area Dryanovska reka (code BG 000282) but the dam and reservoir will be located outside this protected area. The purpose of the sanitary-protected zone of the dam is to maintain natural vegetation cover to prevent erosion and sedimentation or pollution of the reservoir water. According to MoEW, the management regime of the sanitary-protected zone of the dam is consistent with the goals ofthe Natura 2000 and favorable to the management of protected area. The updated EMP that will be prepared in conjunction with the feasibility study will identify any measures that may be required to ensure that local biodiversity is not affected. A sustainable ichtiocenosis community will develop in the reservoir following inundation. The lower reaches of the Neykovska River, downstream of the dam and upstream from the Plachkovtsi will stabilize some water in the system at all times due to the release of environmental flows as part of the dam operation, and larger releases during the spring. The continuous flow is likely to increase populations of river-dependent species compared with the present situation of very low water levels during the summer. 10. The Neykovska River is a small tributary ofthe Yantra river which flows into Danube at the border of Bulgaria. The mean flow at the Neykovski dam site is 73 l/sec, compared with a mean flow of 49,800 I/sec for the Yantra River at the border where it exits Bulgaria. During the construction period there will be no interruption or reduction in flow of the river and measures will be taken to avoid pollution of the water. During the impoundment period there will be a reduction in the river flow downstream ofthe dam site as part of the flow will be captured to fill the reservoir. The amount of the reduction will depend on the reservoir size, filling period and precipitation levels but even with rapid dam filling (less than one year) the impact on the flow of the Yantra river at the border would be less than 0.2%. 11. Social elements. The acquisition of lands designated for Neikovtsi Dam was carried out in the period 1978-1982, in accordance with the existing policies and decrees. For dam construction, state-owned land was allocated and private properties were expropriated for which 23 owners received compensations under the terms provided by law. State-owned lands were granted from the following: State Agriculture Fund (4,194 dekares); State Forestry Fund (23,100 60 dekares) for the water purification plant; and State Forestry Fund (160 dekares) for service roads. In 1982, the Gabrovo District Municipal Council expropriated land within the area of security, Sanitary and Security Area (SSA) Belt I.Eleven parcels and a few residential buildings were expropriated. Based on the archive documentation available, there are no data on the exact measurements and description of the private properties expropriated. By Order N 549 of 30.07.1982 of the Gabrovo District Municipal Council, it appears the total amount of compensation paid was BGN 105 224.30. Only two of the persons entitled were compensated with apartments while the rest received monetary compensation. According to data from the Tryavna Municipal Agriculture and Forestry Office, 48 former owners requested restoration of property on 270.348 dekares of lands and forests in the territory of the village of Plachkovtzi, following the adoption of the Constitution of 199 1 and the introduction of the restitution laws. The owners were denied restoration of ownership due to the activities related to the dam construction and were compensated with lands or registered compensatory notes, and the owners of forests were compensated with other forests in areas established by the Plachkovtzi State Forestry. No appeals have been lodged in court against decisions on compensation with land and registered compensatory notes. Currently the properties for the dam site, its reservoir, and the water treatment plant are owned by the State. The completion ofNeikovtsi Dtim will most likely not require subsequent acquisition and expropriation of other lands nor displacement of population. However if any land is determined to be required, this acquisition will be addressed by the provisions of the LAPF. The suspension of dam construction has left the towns of Tryavna and Plachkovtsi, and part of the villages in their municipalities with inadequate and unreliable water supply. Luda Yana Dam 12. Environmental status. In 1982, preliminary studies performed by ED1 Vodproekt considered Luda Yana dam an integrated waterpower works designed for potable water supply, irrigation, power generation, water sports, and fishing. In 1989, preliminary studies were developed for the water treatment plant. In addition to environmental procedures to be carried out for this dam, an old cemetery (with 15 burial sites based on visual inspection) will have to be removed prior to Bank financing of this investment. The partially constructed Luda Yana dam is located downstream the confluence ofthree tributaries of Luda Yana River (namely Okoshka, Muleiska, and Garmidol). The river eco-system is negatively affected from incomplete dam construction and due to strong fluctuations of the natural river runoff, which are significant in spring and almost missing during summer months. Currently, the river flow passes entirely through the diversion tunnel constructed in the past. The ichthyofauna is limited at the dam site. A substantial part of the forest has been cut and a considerable part of the humic soils has been cleared and deposited away from the site. This contributed to an accelerated erosion process especially on the right bank after construction suspension in 2000. The herpetofauna, the mammals, and the ornitofauna have been affected by eroded terrains, removal of forest vegetation, and humus layer stripping. No critical habitat or species of high conservation importance have been identified so no special protective measures are proposed. In addition, the reservoir area is not considered part of Natura 2000 and as such, the Luda Yana dam construction and future operation will not affect significant ecological resources, flora and fauna in this dam area. According to MoEW, a part of the sanitary-protected zone is the only part ofthe dam site that falls within the scope of Sredna Gora Protected Area (code BG 0002054); yet, the regime of the sanitary-protected zone of the dam is in line with the goals of the Natura 2000 and favorable to the management of protected area. The river eco system upstream of the dam will be

61 transformed into a water reservoir eco system, as 142 ha will be covered by water permanently. At the same time, the seasonally variable run-off regime of the river Luda Yana will be stabilized by ecological releases during dam operations. The erosion processes that currently exist will be stabilized by implementing an erosion control project. 13. The partially constructed Luda Yana dam is located downstream the confluence of three tributaries of Luda Yana River (namely Okoshka, Muleiska, and Garmidol). The Luda Yana River is a small tributary of the Maritsa River which enters Turkey and Greece downstream of Bulgaria. The mean flow at the Luda Yana dam site is 790 l/sec, compared with a mean flow of 107,908 hec for the Maritsa River at the border where it exits Bulgaria. During the construction period, there will be no interruption or reduction in flow of the river and measures will be taken to avoid pollution of the water. During the impoundment period there will be a reduction in the river flow downstream of the dam site as part of the flow will be captured to fill the reservoir. The amount of the reduction will depend on the reservoir size, filling period and precipitation levels but even with rapid dam filling (less than one year) the impact on the flow of the Maritsa river at the border would be less than 1%. 14. . Social elements: The designation of lands for the construction of Luda Yana Dam was carried out in the period 1986- 1987 in accordance with legislation. During 1986- 1987, state- owned lands were designated for the Luda Yana Lake reservoir. For dam construction, land was provided from the State Forestry and Farm Fund with a total area of 1,753,600 m2 allocated as follows: 1,592,000 m2 for the main dam wall; 62,400 m2 for clay quarries; 52,200 m2 adjacent infrastructure sites; and 46,000 m2 for a temporary holding area. The land designated for dam construction did not result in any displacement of population; however, approximately 46,000 m2, were “expropriated” from 20 private citizens. These lands were in fact State-owned real estates where citizens had been granted rights to carry out agriculture production. The 4,261 Bulgarian lev (BGN) paid to the 20 persons was generally referred to as compensation for the improvements performed by them, investments in perennial plants and crops (but not for losing the ownership, a legal right they did not actually possess). According to data from the Municipal Farming and Forestry Office of Panaguyrishte, after 1991 and with the start of the restitution procedures, 106 owners presented claims for restitution on a total of 132 farming lands totaling 423,92 000 sq.m., located in the area of Luda Yana Dam. Restitution rights was denied due to the designation of these lands for the construction of the dam; the owners were however, awarded compensation in the form of registered compensatory notes. No claims were lodged against the State concerning the allocation of land for the dam construction. No future claims for restoration of property and payment of compensation for the lands are expected by the Government. It is possible that some additional land will be needed for the construction of the water treatment plant that will be within the SSA Belt I. If there is a determination that additional land is required, this acquisition will be addressed by the provisions of the project’s LAPF. Plovdivtsi Dam 15. Environmental status. An Environmental Assessment was developed for Plovdivtsi Dam, and accepted by the Regional Inspectorate of Environment and Water (RIEW) of the town of Smolian, which issued a decision to implement the project in 2000. Detailed technical designs for the water treatment plant, and an EA were developed for Plovdivtsi dam in compliance with Bulgarian regulations. A supplementary document was prepared in 2009 to fill gaps between the existing EA and the requirements of OP 4.01. The dam is situated in the southern part of the Rhodopi Mountain and in Smolyan District (South central of Bulgaria) close to the border with

62 Greece. The partially constructed dam is located on the river Iskrets, which is a right hand tributary of river Elhovska that further falls into Arda River. The partially completed dam construction has separated the upper course of the river from its lower zones but the natural flow of the river is unimpeded because its flow is maintained through an outlet constructed beneath. The herpetofauna is scarce; mammals and the ornitofauna are more abundant in the area but the species present are widely distributed along the entire territory of the east and west Rhodopi Mountains. In the vicinity of the dam reservoir and downstream the Iskrets River, there are no endangered or protected species affected by the works performed until 2000. The “Tsigansko gradishte” Natura 2000 Protected Area (PA) (code BG 0000372) is situated near the border with Greece on Bulgarian territory; since complete details of the size and extent of the reservoir will be known when the designs are updated, the location of Plovdivtsi dam site versus the “Tsigansko gradishte” PA will be confirmed during project implementation. The ligneous forest vegetation was cleared at the beginning of construction. The humus soil layer was stripped and stored. The river eco system upstream of the dam will be transformed into a water reservoir eco system, as 16.1 ha will be covered by water permanently. At the same time, appropriate seasonal dam operations will maintain sustainable ichtiocenosis community to establish in the reservoir while the ecosystem conditions in the downstream reaches of the Iskrets River will stabilize through constant release ofrequired minimum environmental flow. 16. The Iskrets River is a small tributary of the Arda river which enters Greece and then Turkey downstream of Bulgaria. The mean flow at the Plovdivtsi dam site is 500 l/sec, compared with a mean flow of 72,600 l/sec for the Arda River at the border where it exits Bulgaria. During the construction period, there will be no interruption or reduction in flow ofthe river and measures will be taken to avoid pollution of the water. During the impoundment period there will be a reduction in the river flow downstream ofthe dam site as part of the flow will be captured to fill the reservoir. The amount of the reduction will depend on the reservoir size, filling period and precipitation levels but even with rapid dam filling (less than one year) the impact on the flow of the Arda river at the border with Greece would be less than 0.2%. During the operational period there will be little or no impact because the great majority of water taken from the reservoir returns to the same watershed. 17. Social elements. Land needed for the construction of Plovdivtsi Dam was acquired by the State under the relevant procedures provided for by law from 1998 to 2000. For the project site, state-owned lands from the State Forestry Fund were allocated and private properties were expropriated for which the owners received compensation. At the time of expropriation, from 1998 to 2000, specifically within the dam reservoir SSA Belt I: 3,74591 m2 of land was expropriated from 3 1 “groups of people” comprising the landowner or heirs of the landowner to whom 70,135.40 Bulgarian lev (BGN) was paid (62,091.40 BGN for the land, 8,044.0 BGN for perennial crops); and 3,962 m2 of land was expropriated from 8 “groups of people” comprising the land owner or heirs for service roads and they were paid 5,888.80 BGN (3,259.80 BGN for the land, 2,629 BGN for perennial crops). The compensation for expropriation was calculated as per the Ordinance on the Rules for Determining the Price of Agricultural Lands (adopted by the Council of Ministers in 1998). Prior to the expropriation process, the private lands acquired for the construction of Plovdivtzi Dam had been restituted to their owners in accordance with the restitution laws. Following restoration of ownership, the lands were expropriated for the construction of Plovdivtzi Dam. The Social Due Diligence report noted that there was one claim for land restitution (by the heirs of Arif Reshidof Sinapov as regards land plot N 033023 with a surface of 752 sq.m.; land plot N 034010 with a surface of 1,193 sq,m., and land plot N 034018 63 with a surface of 199 sq.m) which was originally rejected by Government on the basis of insufficient documentation, but this judgment was successfully appealed in court and the individuals’ ownership of the land was confirmed. It was not possible at the time to determine whether the land in question would fall within the area needing to be acquired for the project. This will be determined based on the final design, including the definition of the Sanitary Zone. If any ofthe land will need to be expropriated, the provisions ofthe LAPF will apply. 18. Summary of known issues and data gaps related to prior land expropriation: It is clear that the bulk of the land required for the main dam wall, dam lakes and corresponding submerged area, ancillary structures and adjacent infrastructure has previously been acquired by the Government of Bulgaria in the years 1978, 1986, and 1998-2000. In summary, the SDDs and additional communication from the Government clarify the following: the degree of impact of past expropriations, the number of applicants claiming restitution rights”, the legal framework used for expropriation and restitution, approach used to calculating compensation amounts paid for expropriation and restitution16, the basis on which claims were approved or denied, the deadline for filing restitution claim” etc,. The Government has specified that there were no outstanding challenges or unresolved issues arising from these actions, either in terms of claims of land ownership or the compensation process or amounts. The restitution claims were approved or rejected by the respective Municipal Agriculture and Forests Office or by the court depending on whether the interested persons have managed to prove their rights of ownership over the lands. The ownership could be proven by eligible evidences such as notary deeds, deeds of partition, protocols of the labor co-operative farms using the lands, land registers, applications for membership in co-operatives, rent ledgers protocols, etc. The Government has also clarified that while Bulgarian law (State Property Act) provides for the right ofthe owners of expropriated lands to claim them back if construction has not commenced or the land is not used for its intended purpose within three years, the fact that construction of the dams has already begun prevents the former owners in the project areas from claiming back the land. It has not been possible to confirm some details regarding the past land restitutions and expropriations, such as: (i)how the deadlines for expropriation and restitution were publicized, (ii)the calculation procedures for Neikovtzi Dam under the old legal regime (effective in 1982), (iii)whether there is any other legal avenue still available for people who missed the deadlines for restitution applications, and (iv) to what extent the Compensatory Notes provided as compensation have been translated into cash by the recipients. It is also not clear whether there was any selectivity in expropriation or restitution decisions. However, during the repeated local public consultations no complaints were raised concerning past expropriation or the use or value of the compensatory notes.

DAM SAFETY ASSESSMENT

I’ The information regarding the restitution claims for land located at the dam sites are provided by the respective Municipal Agriculture and Forests Offices and are attached as appendices to the SDDs. l6 The basis for calculating the value ofthe compensatory notes is set forth in the Ordinance on the Rules for Determining the Price of Agricultural Lands. l7The deadlines for filing of restitution claims are set forth in Article 22 of the Final and Transitional Provisions of the Act on Amendin and Supplementing the Agricultural Land Ownership and Use Act (promulgated in State Gazette No 13 on 9 i! February, 2007) and in Article 5b of the Final and Transitional Provisions ofthe Act Restoring Ownership on Forests and Forest Stock Land Tracts from the Forestry find (the amendment is promulgated in State Gazette No 13 on 9* February, 2007). 64 19. A Bank team that included dam specialists reviewed dam safety issues and technical matters and the findings are outlined below. Bulgarian procedures to ensure dam safety are in line with international practices and the dam safety policies of the Bank (OP 4.37). The assessment was based on field observations, discussions with dam owners and operators, and clarifications on regulatory framework provided by Government officials. An important project safety feature is the independent panel of experts that will review design and implementation of rehabilitation and completion activities to ensure that dam safety practices are aligned with Bulgarian and Bank policies. Key features ofthe Bulgarian system are summarized below: e According to the International Commission of Large Dams (ICOLD) definition, there are 215 large dams in Bulgaria-200 are embankment-t pe dams, and 15 are concrete structures; total water storage in the country is 7.6 kmY . The three dams that would be completed under the project will be constructed by the Ministry of Regional Development and Public Works, which is responsible for developing water supply dams. After construction, dam ownership and operations will be transferred to the local water utility. Under the Bulgarian system, there is a clear separation among the following roles: (a) the dam owner and operator, Le., the water utility; (b) dam regulator - MRDPW; and (c) panel of experts who are academics and practitioners, which allows independent review ofconstruction and operations. e In Bulgaria, dams are classified, in line with ICOLD classifications, according to the potential hazard they represent but safety procedures are the same for all dams, irrespective of their hazard classification. Each dam has a permanent monitoring staff responsible for instrumentation readings, periodic geodetic survey work, visual inspections, and routine maintenance. e An operation manual specifies regular observations and measurements to be carried out, and include steps to be taken following extraordinary events such as floods and earthquakes. Each dam has a program of technical control that includes measurements, frequency, and locations of measurements for types of phenomena occurring during operation. A procedure exists for interpreting observations and measurements, and corresponding actions to be taken. Control and measuring systems data are measured and analyzed the same day they are collected. e If abnormal parameters and deviations are observed, additional measurements are carried out. Staff prepares periodic reports on dam technical performance, typically every 12 months, and an expert council and leading specialists review the report and recommend measures to maintain, repair, improve, or modify the program oftechnical control. e Every dam in Bulgaria has an emergency plan, which is strictly inspected by the MRDPW. Permanent communication connections exist between the dams and the offices of local government, civil defense, and MRDPW. The Department of Civil Defense is responsible for establishing emergency preparedness plans, including evacuation. In an emergency, the dam owner immediately informs the Department of Civil Defense about the type of risk or occurrence, and every dam site has stockpiles of materials necessary for handling emergencies. 20. A Bulgarian dam safety panel was established for this project to recommend any additional studies, investments, or design changes necessary to complete and rehabilitate the dams. Panel members were drawn from an existing Bulgarian dam safety panel, and their advice 65 will be based on site visits and review of existing documents, and reflected in the Terms of Reference for consultants hired to prepare the feasibility studies for all four dams.

Dam Annual water Annual water Water flow to Ratio of water demand (mill. retained for water riparians (mill. retained to m3/year) supply (mill. m3/year) water flow to m3/year) riparians Luda Yana 6.0 1.2 3,403 0.03 5 Yo Plovdivtsi 4.0 0.81 2,290 0.035% Neikovtsi 5.6 1.,12 1,573 0.07%

23. During impoundment, there would be a very small increase in the volume of water retained (see table below). The time needed for filling each ofthe three reservoirs is estimated to vary from 2 months for Plovdivtsi, to 1 year for Luda Yana, and to 2.5 years for Neikovtsi. However, more accurate durations will be determined through the upcoming updates of the feasibility studies. The amount ofwater volume retained per year would depend on the retention period but the impact on other riparians is expected to be negligible (table below). For illustration purposes, assuming the impoundment period calculated based on the average multi annual flow rates, the ratio of water to be retained in the dams compared to the flow of water to the riparians is very low as shown below.

Average flow Water retained Water flow Ratio of Gross rate retained annually water Dam storage Impoundment to riparians during during retained to volume impoundment time (months) impoundment water flow (mill m3) m3/year) (m3/sec) (mill. m3/year) to riparians Luda Yana 19.94* 0.62 12.4 19.55 3,403 0.57%

66 Plovdivtsi I 2.45 0.47 2.0 2.45 I 2,290 I 0.11% Neikovtsi I 4.80 0.063 29.4 1.99 1,573 I 0.13%

24. On March 19, 2008, the Government of Bulgaria authorized the Bank to inform riparians about the project. Letters dated March 21, 2008, sent by the Bank on behalf of Government, informed Turkey, Greece, and the International Commission for the Protection of the Danube River about the earlier version of the project in which the dam component is identical to the existing version. Since then there has been an exchange of letters between the Governments of Turkey and Bulgaria, as shown below.

8 Turkey sought additional project information in a letter of May 30,2008. 8 Bank provided sources for publicly available documents on Environmental, Due Diligence, and Social Due Diligence documents, plus hard copies, in a letter of June 19,2008, and requested that Turkey provide comments by July 21 , 2008. 8 Turkey requested additional time to review documents in a letter of July 8, 2008. 8 Bank requested comments by September 5,2008, in a letter of July 15,2008. 25. A letter of September 2, 2008, from the Government of Turkey to the Bulgarian authorities raised several concerns that are addressed in the EIAs. The letter included a general concern regarding potential adverse project impacts related to water quality and quantity, and biocapacity for cropland, grazing land, and forest. Turkey also commented that the design should consider adequate dam capacity to absorb flooding; dam management should take into account river basin capacity and downstream water demand in various months; and that the Bulgarian authorities should supply regular hydraulic and meteorological data to Turkey. Further, any flow irregularities should be reported through the Center of Early Warning Mechanism formed between the two countries. 26. In March 2009, the Borrower and World Bank agreed that the World Bank will maintain communication with the riparian countries and will update them on the revised project design and findings the final EIAs, once publicly disclosed. Further, the Borrower will agree with the riparian countries on a process for establishing an early warning system and data communication. 27. The final EIAs for the three dams were publicly disclosed on the website of MRDPW and at the World Bank’s Infoshop, on May 12, 2009. The World Bank sent the updated information on the project, including the final EIAs, to riparian countries and the International Commission on Danube River Protection on May 13,2009. The riparian countries were asked to reply on any aspects related to the information provided by June 15, 2009. Within the deadline for response, no response was received from the Government of Turkey or the International Commission for Protection of Danube River. However, on Junel5, 2009, the Government of Greece informed that the Ministry of Environment, Physical Planning and Public Works could not trace the websites where the EIAs were posted and requested that the EIA or Executive Summaries be provided. The three EIAs, on hard copy and electronic format, were submitted to the Embassy of Greece to Bulgaria and the deadline for response was extended until July 15, 2009. On July 2 1, the Government of Greece requested additional information on the project; the information was sent on July 22, 2009 and a new deadline for response was set for August 27, 2009. No further comments were received by the deadline nor since then.

67 Annex 11: Project Preparation and Supervision BULGARIA: MUNICIPAL INFRASTRUCTURE DEVELOPMENT

Planned Actual Initial Design PCN review June 2 1,2006 June 2 1,2006 Initial PID to PIC July 18,2006 July 18, 2006 Initial ISDS to PIC July 19,2006 July 19,2006 Appraisal February 15,2008 February21,2008 Negotiations April 17, 2008 Revised Design of Project Initial PID to PIC March 2,2009 Initial ISDS to PIC March 2,2009 Appraisal March 12,2009 May 15,2009 Negotiations June 17,2009 October 13-15,2009 Board/RVP approval November 24,2009 Planned date of effectiveness March 10,20 10 Planned date of mid-term review October 2012 Planned closing date December 3 1,20 15

Key institutions responsible for preparation ofthe project: The Ministry ofFinance and The Ministry of Regional Development and Public Works. Bank staff and consultants who worked on the project included:

Name Title Unit Gabriel Ionita Team Leader ECSSD Orlin Dikov Operations Officer ECSSD Sudipto Sarkar Lead Specialist EASUR Michael Webster Sr. Water and Sanitation Specialist ECSSD Alessandro Palmieri Lead Dam Specialist OPCQC Kishore Nadkarni Financial Analyst, consultant ECSSD Vladislav Krasikov Sr. Procurement Specialist ECSPS Blaga Djourdjin Procurement Analyst ECSPS Bogdan Constantinescu Sr. Financial Management Specialist ECSPS Ruxandra Floroiu Environmental Engineer ECSSD Natasa Vetma Operations Officer ECSSD Radhika Srinivasan Sr. Social Scientist ECSSD Ruxandra Costache Counsel LEGEM Anarkan Akerova Counsel LEGEM Nicholay Chistyakov Sr. Finance Officer LOAFC Yarissa Lyngdoh Sommer Urban Specialist, consultant ECSSD Martha Jarosewich-Holder Environment consultant ECSSD Fritz Schwaiger Engineer, consultant Eolina Petrova Milova Operations Officer ECSSD Milane Reyes Program Assistant ECSSD Teresa Lim Program Assistant ECSSD Adelina Dotzinska Program Assistant ECCBG Bank funds expended to date on project preparation: Bank resources: $391,3 11 as of October 10,2009 1, Trust funds: $ 40,000 (PHRD Grant implemented by MRDPW) 2. Total: $ 431,311 Estimated Approval and Supervision costs: Remaining costs to approval: $ 20,000 Estimated annual supervision cost: $130,000 68 Annex 12: Documents in the Project File BULGARIA: MUNICIPAL INFRASTRUCTURE DEVELOPMENT

1. Project description and rationale, endorsed by the Council of Ministers.

2. Environmental Due Diligence Documents prepared for the Luda Yana, Neikovtsi, and Plovdivtsi dams.

3. Social Due Diligence Documents prepared for the Luda Yana, Neikovtsi, and Plovdivtsi dams.

4. Environmental Management Plan for Studena dam.

5. Land Acquisition Policy Framework.

6. Environment Framework.

7. Minutes of public meeting held in October 2007 in the project sites of Luda Yana, Neikovtsi, and Plovdivtsi dams.

8. Minutes of national public meeting held on December 12,2007 on the project where the environmental and social documents were disclosed and discussed.

9. Environmental Impact Assessments (EIAs) for Luda Yana, Neikovtsi, and Plovdivtsi dams, including Environmental Management Plan.

69 Annex 13: Statement of Loans and Credits BULGARIA: MUNICIPAL INFRASTRUCTURE DEVELOPMENT Difference between expected and actual Original Amount in US$ Millions disbursements FY Project Name IBRD IDA SF Grant Canc Undisb. Orig. Frm. el. Rev’d PO8483 1 2005 Energy Efficiency (GEF) 0.00 0.00 10.0 1.3 1.3 -0.2 PO99894 2007 Road Infrastructure Rehabilitation 122.5 0.00 0.00 119.6 44.3 PO69532 2003 SIEP 69.3 0.00 0.00 0.1 1.5 -35.5 -1.7 PI00657 2009 Social Inclusion Project 59.0 0.00 0.00 58.9 8.7 PO940 18 2007 TTFSE2 52.8 0.00 0.00 49.4 24.2 Total: 303.6 0.00 0.00 10.0 0.1 230.6 43.0 -1.9

BULGARIA STATEMENT OF IFC’s Held and Disbursed Portfolio In Millions of US Dollars Committed Disbursed

IFC IFC

FY Quasi Quasi AoEval Comoany Loan Eauity Eauity Partic. Loan Eauity Eauity Partic.

2009 Aes geo energy 58.65 0 0 46.92 40.56 0 0 32.45 2008 Atera 0 22.17 0 0 0 22.17 0 0 200 1 Bulbank 0 17.06 0 0 0 17.06 0 0 0/04 Drujba a.d 8.07 0 0 0 8.07 0 0 0 2006 Epiq nv 0 0.93 3.12 0 0 0.93 3.12 0 2000/01 Kronospan eood 10.24 0 0 0.4 10.24 0 0 0.4 0 Schwarz group 40.32 0 0 0 40.32 0 0 0 2004/06 Stomana 34.16 0 0 0 34.16 0 0 0 0/04 Trakya bulgaria 33.75 7.5 0 19.77 21.29 0 0 19.77 2005 Unionbank ad 4.64 0 0 0 4.64 0 0 0

Total Portfolio: 189.83 47.66 3.12 67.09 159.28 40.16 3.12 52.62

70 Annex 14: Country at a Glance BULGARIA: MUNICIPAL INFRASTRUCTURE DEVELOPMENT

Bulgaria at a dance 9/24/08

Europe h Upper- POVERTY and SOCIAL Central middle- B ulgarla Asla Income 5007 Population, mid-year (millions) 7.6 445 823 Life expectancy GNipercapita(Afiasmefhod, US$) 4,590 6,052 6,987 GNI (Aflas method, US$ billions) 35.1 2,694 5,750 Average annual growth, 2001-07 Population (w -0.6 0.0 0.7 Laborforce (O%J -2.3 0.5 13 Most recent estlmate (latest year avallable, 2001-07) Poverty (%of populafion below nafio nalpo vertyline) 13 Urban population (%of fofalpopulafion) 71 64 75 Lfe eqectancy at birth (ParsJ 73 69 71 Infant mortality (per t0001ive births) P 23 22 Child malnutrition (%ofchiidrenunder5) 2 hoessto improved watersource Access to an improved water source (%ofpopulation) 99 95 95 Literacy (%ofpopulafion age rS+j 98 97 93 Gross primary enrollment (96ofschool-agepopulafion) w 97 in -- Bulgaria M aie 01 98 1P -UpperMk~om gmup Female 99 96 m KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1987 1997 2006 2007 ' ' Economic ratios* GDP (US$ biiiions) 28.4 0.4 317 395 Gross capital formationlGDP 32.9 9.9 317 349 Tnde Eqorts of goods andservices/GDP 40.8 58.3 637 705 Gross domestic savings/GDP 311 Y.5 P9 P9 Gross national savingslGDP 30.2 13.4 134 158 Current account balance/GDP -2.5 0.1 -157 -71 Interest payments/GDP 14 4.4 15 Total debt/GDP 29.1 07.1 661 Total debt sewice/exports v.2 14.0 PO Present valueofdebt/GDP 649 Present value of debtleqorts 90 0 1987.97 1997-07 2006 ' 2007 2007-11 (average annualgrowth) GDP -3.7 5.1 6.3 62 53 GDP percapita -2.9 6.0 7.0 69 61 Exports of goods andservices -8.6 8.7 9.0 00 ne

STRUCTURE of the ECONOMY 1987 1997 2006 2007 (%of GDP) Agnculture 114 268 8.5 81 industry 595 286 312 32 7 M anufactunng 80 8.5 80 Services 291 446 60.3 59 2 Household final consumption expenditure 521 730 69.8 75 4 General gov't final consumption eqenditure 89 P6 7.3 n7 imports of goods and services 426 537 82.5 92 5

1987-97 1997-07 2006 2007 (average annualgrowth) Agncuiture -20 -14 -19 -2.1 Industry -70 52 83 0.0 M anufactunng 56 n3 no SeNlCeS -60 57 61 9.0 Household final consumption expenditure -55 58 41 P.8 General gov't final consumption ewenditure -98 49 10 -0.3 Gross capitaiformation 4-72 I74 81 imports of goods and services -211 134 152

Note 2007 data are preliminary estimates This tabiewas producedfrom the Development Economics LDB database 'Thediamonds showfour keyindicators in thecountry(in bo1d)comparedwithits income-groupaverage If data are missing thediamondmll be incomplete

71 Bulgaria

PRICES and GOVERNMENT FINANCE 1987 1997 2006 2007 Domestic prices (%changeJ Consumer pnces 1058.4 55 21 Implicit GDP deflator 0.1 948 5 85 78 Government finance (%of GDP, includes current grants) Current revenue 34.9 39 8 38 3 Current budget balance 22 72 78 Overall surplusldeficit 2.1 35 31

TRADE 1987 1997 2006 2007 (US$ millions) Total egorts (fob) D.287 4,809 0,987 15 258 Consumer goods 1801 1354 4,675 lnvestm ent goods 1479 706 0,952 Manufactures 554 5,642 6 '81 Total imports (cif) n298 4.854 8,265 20 781 Food 409 P3 Fuel and energy 1565 16'8 Capital goods 5,PB 822 4.398 6 DO Evort price index(2000=00) PO m 62 171 Import pnce index(2000=00) 79 m 66 e4 Terms of trade (2OOO=WO) 152 96 m 04

BALANCE of PAYMENTS 1987 1997 2006 2007 (US$ millions) EqOrtS Of goods and SeNlCBS 11443 7.011 20,338 30 334 Imports of goods and services 11959 5,645 26,m 38 067 Resource balance -515 166 -5,780 -8 552 Net income -314 -357 -14 214 Net current transfers D6 237 834 1571 Current account balance -721 1046 -4.960 8 767 Financing items (net) 389 594 6,58 7 917 Changes in net reserves 332 -1640 -1558 -1150 Memo: Reserves including gold (US$ millions) 2,402 D,253 11403 Conversion rate (DEC local/US$) 128E-3 17 18 14

EXTERNAL DEBT and RESOURCE FLOWS 1987 b97 2006 2007 (US$ millions) Total debt outstanding and disbursed a 268 nu0 20,925 IBRD 0 501 1331 1604 IDA 0 0 0 0 Total debt sewice 1989 1014 2,743 IBRD 0 47 320 727 IDA 0 0 0 0 Compositionof net resourceflows Official grants 0 141 0 Official creditors 651 -76 -320 Pnvate creditors 779 -65 2.228 Foreign direct investment (net inflows) 505 5,172 Portfolio equity(net inflows) 0 52 95 World Bank program Commitments 0 140 0 345 Disbursements 0 D1 38 201 Pnncipal repayments 0 6 276 65 Net flows 0 65 -237 '(37 Interest payments 0 31 44 62 Net transfers 0 54 -281 74

Note This tablewas producedfrom the Development Economics LDB database 9/24/08

72 22°E 24°E 25°E 26°E 27°E 28°E This map was produced by BULGARIA the Map Design Unit of The To World Bank. The boundaries, Negotin colors, denominations and MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT Danube To any other information shown Calarasi on this map do not imply, on To Bucharest the part of The World Bank To Silistra To ° Group, any judgment on the To Bucharest Tutrakan 44 N Vindin Calafat legal status of any territory, Zajecar To or any endorsement or Kula Alfatar Constanta acceptance of such Danube ROMANIA SILISTRA boundaries. Ruse VIDIN Lom To DOBRICH Zimnicea RUSE ur RAZGRAD MONTANA Isk Dobrich PLEVEN Razgrad SERBIA Montana VRATSA SHUMEN Pleven Levski Popovo Kamenets Berkovitsa VELIKO Shumen Turgovishte Vratsa TURNOVO Varna To Zlatna Lovec TURGOVISHTE VARNA Pirot a Panega ntr Zlataritsa 43°N a Y Veliko 43°N LOVECH GABROVO Turnovo Gabrovo Tryavna SOFIYA SOFIYA Neikovtsi Dam SLIVEN PERNIK SOFIYA To Karlovo Sliven Surdulika Luda Yana Dam GRAD STARA Pomorie Pernik zha Tund BURGAS Black Studena Dam Panagyurishte Khisarya ZAGORA Burgas Nova Yambol Sea Zagora Bobov Dol Stara To Gyushevo PLOVDIV Zagora Kreva Kyustendil YAMBOL Primorsko Palanka KYUSTENDIL PAZARDZHIK Michurin Pazardzhik Plovdiv Maritsa 42°N To Dimitrovgrad Malko Blagoevgrad 42°N Kocani Asenovgrad Turnovo FYR Khaskovo To KHASKOVO Kirklareli MACEDONIA Dobrinishta To BLAGOEVGRAD Edirne TURKEY Dospat SMOLYAN S Kurdzhali t r u Smolyan m Ivaylovgrad M a e To st a KURDZHALI Edirne Kulata DAM COMPLETION SITES (3) Plovdivtsi DAM REHABILITATION SITE (1) To Dam Kerkini To SELECTED CITIES AND TOWNS Serrai GREECE To Komotini BULGARIA PROVINCE (OBLAST) CAPITALS 0 20 40 60 80 Kilometers NATIONAL CAPITAL RIVERS

0 10 20 30 40 50 Miles IBRD 35957R FEBRUARY 2009 MAIN ROADS Aegean Sea RAILROADS PROVINCE (OBLAST) BOUNDARIES 23°E 24°E 25°E 26°E INTERNATIONAL BOUNDARIES