Document of The World Bank Public Disclosure Authorized
Report No. 13429-LV
STAFF APPRAISAL REPORT
REPUBLIC OF LATVIA Public Disclosure Authorized
LIEPAJA ENVIRONMENTPROJECT
NOVEMBER 8, 1994 Public Disclosure Authorized
Natural Resources Management Division Public Disclosure Authorized Country Department IV Europe and Central Asia Region CURRENCY EQUIVALENTS as of August 1, 1994 Currency Unit = Latvian Lats (Ls.) I Lats = US $1.75 US $1 = Ls. 0.57
WEIGHTS AND MEASURES
I metric ton = 1,000 kilograms = 2,205 pounds (Ibs) I kilometer (km) = 1,000 meters (m) = 3,281 feet (ft) 1 meter (m) = 3,281 feet (ft) 1 centimeter (cm) = 10 millimeters (mm) I millimeter (mm) = 0.1 centimeter (cm) I cubic meter (m3) = 35.3 cubic feet (cu ft)
ABBREVIATIONS AND ACRONYMS BITS = Swedish Board for Investment and Technical Support BOD = Biological Oxygen Demand CEM = Country Economic Memorandum, published in an expanded form as: "Latvia: The Transition to a Market Economy" EMC = Environmental Management Component EU PHARE = European Union assistance program for Eastern Europe FRR = Financial Rate of Return FSU = Former Soviet Union GDP = Gross Domestic Product GOL = Government of Latvia HELCOM = Baltic Marine Environment Protection Commission (Helsinki Commission) IBRD = International Bank for Reconstruction and Development (World Bank) ICB = International Competitive Bidding ICZM = Integrated Coastal Zone Management IDA = International Development Association IS = International Shopping JCP = Baltic Sea Joint Comprehensive Environmental Action Programme LS = Local Shopping LWWE = Liepaja Water and Wastewater Enterprise MIS = Management Information System MOE = Ministry of Environment and Regional Development MOL = Municipality of Liepaja NEFCO = Nordic Environment Finance Corporation PIP = Project Implementation Plan PIU = Project Implementation Unit PPF = Project Preparation Facility WWF = World Wide Fund for Nature WWIC = Water and Wastewater Improvement Component
LATVIAN FISCAL YEAR January I - December 31 REPUBLIC OF LATVIA LIEPAJA ENVIRONMENT PROJECT STAFF APPRAISAL REPORT
Contents
LOAN AND PROJECT SUMMARY ...... i
I. BACKGROUND
A. Country Context ...... 1 B. Sectoral Context ...... 1 C. The Project Area ...... 5 D. Bank Environment Strategy in Latvia, Past Experience and Rationale ...... 8
II. THE PROJECT
A. Project Origin and Formulation ...... 11 B. Project Objectives ...... 12 C. Participation by Other Organizations in Project Activities ...... 13 D. Project Components and Description ...... 14 E. Cost Estimates ...... 15 F. Project Financing Arrangements ...... 16 G. Procurement ...... 17 H. Disbursements ...... 19 l. Environmental Aspects ...... 20
III. PROJECT IMPLEMENTATION
A. Organization and Management ...... 21 B. Project Implementation Agencies ...... 21 C. Project Supervision ...... 23 D. Accounts and Audits ...... 24
IV. MANAGEMENT OF FINANCIAL ASPECTS OF LIEPAJA WATER AND WASTEWATER ENTERPRISE
A. Past Performance and Present Position ...... 25 B. Tariff Levels and Revenues ...... 26 C. Billing and Collection ...... 26 D. Accounting Policies and Audits ...... 27 E. Future Financial Performance ...... 28 F. Tariff Affordability ...... 29 G. Financial Rate of Return ...... 29
V. PROJECT BENEFITS AND RISKS
A. Project Benefits ...... 31 B. Project Risks ...... 32 VI. AGREEMENTS REACHED AND RECOMMENDATION
A. Agreements Reached During Negotiations ...... 34 B. Conditions of Effectiveness ...... 34 D. Recommendation ...... 35
LIST OF TABLES
Table 1. Project Cost Summary by Project Comnponent Table 2. Disbursements by Year Table 2.1 Project Cost Summary by Project Component Table 2.2 Summarized Financing Plan Table 2.3 Procurement Arrangements Table 2.4 Disbursement by Year Table 4.1 Tariff Increases
LIST OF ANNEXES
Annex 1 Project Implementation Plan Annex 2 Action Plan Annex 3 Terms of Reference 3A Twinning Arrangements 3B Tariff Study Annex 4 Water and Wastewater Improvement Component - Environmental Aspects Annex 5 Environmental Data Sheet Annex 6 Review of Affordability
MAP IBRD Map of Latvia no. 26165
This report is based on the findings of an Appraisal Mission in June 1994. Members of the Appraisal team included: Mr. Stephen F. Lintner (Task Manager), Ms. Sari Soderstrom (Deputy Task Manager/Economist), Mr. Hans Bergman (Economist, Swedish Ministry of Environment), Ms. Camilla Brown (Operations Analyst), Mr. Lars Eklund (Environmental Engineer, Swedish Environmental Protection Agency), Mr. Anders Halldin (Senior Environmental Specialist), Mr. Frederick Hasselback (Financial Economist), Mr. Jaakko Henttonen (Program Director, Finnish Ministry of Environment), Mr. Kari Homanen (Regional Environmental Specialist), Mr. Peter lanachkov (Legal Advisor), Mr. Inesis Kiskis (Regional Environmental Specialist), Ms. Solveig Nordstrom (Investment Officer, Nordic Environment Finance Corporation - NEFCO), Mr. Arturo Roa (Procurement Consultant), and Mr. Peteris Zilgalvis (Regional Environmental Specialist). Ms. Katherin Golitzen (ENVLW) served as the editor for the document. Technical assistance for preparation was provided by the World Bank, European Union PHARE Program and the World Wide Fund for Nature (WWF). Peer reviewers were Bernardo Gomez (ECIIN) and Carl Gustaf Lundin (ENVLW). The economic and financial analysis was reviewed by Brian Berman (EC4NR). The Division Chief is Geoffrey Fox (EC4NR) and the Deparment Director is Basil Kavalsky (EC4DR). REPUBLIC OF LATVIA
LIEPAJA ENVIRONMENT PROJECT
Loan and Project Summary
Borrower: Republic of Latvia
Beneficiaries: The Ministry of the Environment and Regional Development and the Liepaja Water and Wastewater Enterprise.
IBRD Loan Amount: US $4.0 million equivalent.
Financing Plan: Local Foreign Total ------US $ million ------
IBRD, (loan) 0.72 3.28 4.00 NEFCO, (loan) 0.86 1.14 2.00 BITS, Sweden (grant) 0.12 6.38 6.50 Min. of Environment, Finland (grant) 2.00 2.00 Min. of Environment, Denmark (grant) 0.50 0.50 EU PHARE Program (grant) 0.12 0.12 Other Donors (grants) 0.80 0.80 Govermnent of Latvia 3.50 3.50 Municipality of Liepaja 1.75 1.75
TOTAL PROJECT COSTS 6.95 14.22 21.17
Terms: Seventeen years, including five years grace, at standard IBRD variable interest rate.
Onlending Tenrs: The Ministry of Finance would provide the funds directly to the Liepaja Water and Wastewater Enterprises (LWWE).
Project Objectives: The Project would: (a) reduce discharge of partially treated and untreated wastewater to the Baltic Sea; (b) restore and enhance the water quality in Liepaja, the northern portion of Lake Liepaja and adjacent recreational beaches on the Baltic Sea; (c) improve water supply and sanitation services in Liepaja; (d) improve the operational efficiency and management systems of the Liepaja Water and Wastewater Enterprise; and (e) promote environmentally sustainable management and development of the coastal zone and protected areas in and around the Liepaja, Ventspils and Talsi regions, including management of tourism development. ii
Project Description: The proposed Project would be developed as an environmental management project for the Baltic coast of Latvia and would include funding for: (a) rehabilitation and expansion of the Liepaja water and wastewater system; (b) training and other institutional support, including twinning arrangements, to assist in establishing an autonomous and financially independent water and wastewater utility in Liepaja; (c) technical and financial support for the development and implementation of a comprehensive management plan for adjacent coastal areas and wetlands; and (d) support in the development of recreational and nature- based tourism in the Liepaja, Ventspils and Talsi regions.
Project Benefits: The benefits of the WWIC would be derived from: (a) improved water quality through reduction of leakage of wastewater into the groundwater and reductions in discharges of untreated and partially treated wastewater, tiereby improving the status of the City Channel, Lake Liepaja and the Baltic Sea; (b) reductions in operating costs and maintenance requirements in the water and wastewater systems; and (c) improvement in the quality and reliability of the services through establishment of an autonomous water and wastewater utility. The benefits of the Environmental Management Component (EMC) would be derived from: (a) environmentally sound development of coastal and recreational areas in the Liepaja, Ventspils and Talsi regions; (b) enhanced management and improved public access for protected areas; and (c) demonstration of planning and implementation methods for regional coastal zone and tourism development programs.
Environmental Aspects: An environmental review has been prepared, consistent with the provisions of the World Bank's Operational Directive 4.01, "Environmental Assessment" and the applicable environmental procedures of the Government of Latvia. The proposed Project has been placed in environmental screening category "B" since most of the potential impacts are expected to be beneficial and negative impacts limited. It should be noted that support for improved municipal water and wastewater infrastructure would focus on the completion or rehabilitation of existing facilities. In the case of activities for improved management of the coastal zone and protected areas, these activities would largely occur in areas which are presently designated as recreational or natural areas and they would not involve resettlement of any current residents.
Project Risks: The main risks are: (a) the sustained political commitment of the Liepaja City Council to support an independently managed water and wastewater utility; (b) political or macroeconomic factors which may interfere with the commitment of the Liepaja City Council to raise tariffs sufficiently to adequately fund the costs of the utility, including repayment of the Bank loan; (c) a longer implementation period due to limited implementation capacity; (d) continued difficulties in the effective collection of water bills; and (e) possible resistance from local governments and private land owners to land use controls recommended under coastal zone, tourism and protected areas management plans. iii
These risks would be reduced by: (a) implementation of a time-bound schedule for corporatization of the LWWE; (b) carefully monitoring the requirements for tariff increases and providing significant institutional development support to the utility to improve its financial management, billing and collection practices; (c) ensuring appropriate project management arrangements are in place in a timely manner; (d) providing procurement assistance; and (e) incorporating an active local participation process into the development and implementation of the proposed land use management systems. iv
Table 1: PROJECT COST SUMMARY BY PROJECT COMPONENT*
------US $ Million ------Local Foreign Total
A. Water and Wastewater Improvement Component
Project Implementation Unit 0.23 0.37 0.60 Water Supply and Distribution 0.42 1.37 1.79 Sewerage and Wastewater Treatment 2.81 8.67 11.48 Contract Coordination and Supervision 0.27 0.30 0.57 Technical Assistance and Training 0.07 0.44 0.51
Base Cost for Water and Wastewater Component 3.80 11.15 14.95
B. Environmental Management Component 0.20 ** 1.30 1.50
Physical Contingencies 0.38 1.11 1.49 Price Contingencies 2.57 0.66 3.23
Total for Water and Wastewater Component 6.75 12.92 19.67 Total for Environmental Management Component 0.20 1.30 1.50
TOTAL PROJECT COSTS: 6.95 14.22 21.17
* Additions may not be fully consistent due to rounding up. ** ILocal contributions for this compnoent would include land and services in kind. The total amount would be established after completion and review by GOL of management plans to be prepared under this component.
Table 2: DISBURSEMENTBY YEAR (US$ Million)
1995 1996 1997 1998 1999 2000
Bank Fiscal Year Annual 1.86 7.09 6.12 4.46 1.30 0.34 Cumulative 1.86 8.95 15.07 19.53 20.83 21.17 Cumulative% Total 8.79 42.28 71.19 92.25 98.39 100.00
EstimatedClosing Date: March 31, 2000 PovertyCategory: Not applicable Maps: IBRD No. 26165 I. BACKGROUND
A. Country Context
1.1 Latvia is a country covering 65,600 km2 with a population of 2.6 million located on the eastern edge of the Baltic Sea. During the Soviet period, Latvia had a strong economy based on specialized industries and agriculture which was fully integrated into the larger Soviet system. Since the restoration of Latvian independence in 1991, the country has undertaken a major program of political and economic reforms, which has brought it from a centrally planned economy to a transitional market economy. In this process, it has experienced adjustmenitshocks common to many economies in transition, characterized by a significant decline in economic productivity and high inflation rates, with the gross domestic product (GDP) declining sharply as a result of the collapse of trading relations with Russia and other former Soviet Republics.
1.2 The Government of Latvia (GOL) has been pursuing economic reform and stabilization, including price and trade liberalization. A formal macro-econiomic program was launched in July 1992, supported by an International Monetary Fund standby arrangement. Since then, Latvia has been successful in containing monetary expansion and fiscal deficits. It also has successfully introduced its new currency, the Lats, in 1993. Inflation has been reduced from an annual rate of over 1,000 percent in 1992 to an expected rate of about 30 percent in 1994. The estimated per capita income level was US $2,030 in 1993. The Bank expects the Latvian economy is expected to recover from its current economic recession with a GDP growth rate of about 4 percent per year between 1995 and 1997 and 5 percent per year thereafter.
1.3 The Bank's overall strategy in Latvia is to support the country's efforts to accelerate structural reforms leading to a full transition to a market-based economy and, concurrently, to support efficient investments in high priority sectors to facilitate return to economic growth. To date the Bank has provided the GOL with a Rehabilitation Loan of US $45 million in October 1992 (No. 3525-LV), and an Agricultural Development Loan of US $25 million in January 1994 (No. 3645-LV), both of which are being successfully implemented.
1.4 Infrastructure rehabilitation and development is considered one of the Bank's priorities in Latvia. The recently completed Public Expenditure Review, jointly prepared by the GOL and the Bank, highlighted the need to support priority investments in energy, transport and environmental services, including improved water supply and wastewater treatment. The priority given to investments for environmental services was justified by the need to improve the quality and reliability of drinking water and to address the water quality problems and health risks created by the discharge of partially treated and untreated wastewater to water courses and the marine environment. The proposed Project would support the improvement of water and wastewater services in the important port city of Liepaja and demonstrate the application of a variety of management methods to support environmentally sound development in the coastal area surrounding Liepaja.
B. Sectoral Context
1.5 Institutional Setting. The central environmental protection authority in Latvia is the Ministry of Environment and Regional Development (MOE) which is the successor to the former Environmental Protection Committee. The MOE is responsible for: formulating and implementing Latvia's policy for environmental protection and natural resource use; making state environmental impact assessments; establishing environmental standards; and, administering and enforcing environmental protection and natural resource use throughout Latvia, the continental shelf, and the nation's Baltic Sea economic zone. The MOE is also responsible for management of protected areas and tourism development. The responsibilities of the MOE in this sphere include regulation of construction, supervision of approved land-use programs, and regulation of agricultural run-off.
1.6 Under the overall guidance of the MOE, nine regional environmental protection committees are responsible for enforcing environmental regulations, issuing permits for projects and providing public information services to the twenty six regional administrative governments. The principal functions of the regional environmental protection committees are: (a) determination of pollution charges; (b) pollution monitoring; (c) inspection for compliance with requirements; (d) imposition of penalties for non-compliance; and (e) negotiation of steps toward compliance. Responsibility for development, zoning and management of the coastal area and wetlands is delegated to local governments; they issue permits and licenses with co-approval of other agencies depending on the nature of the proposed activity.
1.7 While the MOE has a policy and coordination role, operational level responsibilities for municipal water and wastewater services have been passed to local governments as part of the process of decentralization. Under the Law of Local Government, the municipality is empowered to issue statutes which grant municipal enterprises the rights, duties, and obligations necessary to enable them to carry out their functions. Such statutes generally follow a single pro-forma, which is applied across the country, but which varies according to individual circumstances.
1.8 Legislative Framework. The Law on Environmental Protection (August 1991) is an omnibus environmental protection law, which (a) delegates responsibility regarding environmental protection, natural resource use, environmental impact assessment procedures, standards, permits and public information, and (b) sets out goals for the protection of the environment and the rational utilization of natural resources. The protection of coastal zones and protected areas is regulated in detailed resolutions and guidelines on the utilization and construction of the Latvian sea coast and nature reserves issued by MOE and a number of other national and regional level organizations. Problems in enforcing these guidelines are increasingly difficult as land is being returned to its former owners and development pressures arise between environmental institutions and the reinstated landowners, who are in need of immediate income during this difficult economic period.
1.9 "Environmental Standards In Latvia," the regulatory legislation for water and air pollution, is based on USSR environmental quality standards which were in force at Latvia's independence in September 1991. There were almost 4,000 water quality indicators applied in the forner Soviet Union (FSU) which defined water quality requirements. Currently, Latvia uses these standards and has added a limited number of its own national standards. In the aggregate, these water quality standards are more stringent than those of the European Union or United States, are seen as being too strict, too large in number, and impossible to monitor and analyze. The Law on Natural Resource and Pollution Charges (December 1990) established charges for the use of natural resources and the release of effluents within standards and it establishes sanctions against users who exceed permitted levels. Normal tax revenues are divided, with 25 percent going to the state budget and 75 percent being paid into the local government budget. Tax revenues for discharges in excess of the prescribed limits are paid into the Environmental Protection Fund which collects fines that are used by the national and local governments to fund a wide range of activities. The monitoring of pollution and natural resource use for assessing fees and fines is hampered by lack of equipment and personnel in the regional environmental protection committees. 1.10 Latvia is a party to a number of international environmental conventions and treaties. It has signed and ratified the "Convention on the Protection of the Marine Environment of the Baltic Sea Area" (Helsinki Convention), which obligates it to undertake concrete actions to reduce marine pollution from land based sources and to implement a wide range of recommendations on various environmental matters which are developed by the Helsinki Commission (HELCOM) through a process of active input, review and approval by the signatory parties to the Convention. In this context, Latvia has been an active participant in many programs of HELCOM, including the Programme Implementation Task Force which is responsible for coordinating implementation of the Baltic Sea Joint Comprehensive Environmental Action Program (JCP) which was adopted in 1992. In addition, Latvia has signed and ratified, or is in the process of doing so, the Bern, Ramsar and other Conventions concerning the conservation of animal and plant species, including their critical habitats, and wetlands. It is also active in the Environmental Action Program for Central and Eastern Europe and the environmental working groups of the United Nations Economic Commission for Europe.
1.11 Water Supply Service Coverage. Groundwater resources are increasingly being exploited in the major urban and industrial areas in Latvia due to widespread pollution of surface and shallow groundwater from point and non-point sources. Overextraction of groundwater has caused a drop in the water table, and the possibility of seawater intrusion is a risk in many locations. Shortages of water treatment chemicals are common, resulting in sporadic outbursts of waterborne diseases due to contaminated drinking water.
1.12 About 92 percent of Latvian households receive piped water, although in some rural conmmunitiesthis ratio is as low as 60 percent. The average water consumption per capita in Latvia on average is relatively high, over 200 liters/day, compared to an average of 150 liters/day in Western European countries. This high consumption is partially encouraged by the absence of metering, but can also be explained by severe leakages in the water distribution system which is in generally poor condition. Leakage rates of drinking water are estimated at approximately 25-35 percent and can be as high as 50 percent in some water supply systems.
1.13 Sewerage Service Coverage. More than 90 percent of urban households are connected to piped sewerage systems. Separate systems for sewerage and storm water were introduced in the 1960s, but in some older sections of towns stormwater systems are lacking, putting an additional burden on the sewerage system. The annual discharge of wastewater in Latvia is 367 million m3 , of which 65 percent is treated. The existing wastewater treatment plants are moderately to severely overloaded, resulting in large portions of their flow being discharged after partial treatment or being bypassed with no treatment. Approximately 50 percent of the municipal discharge is from industries connected to the municipal sewers, of which it is estimated that only 10 percent receives pre-treatment, itself often inadequate.
1.14 Existing sewerage systems are in poor condition resulting in groundwater contamination and an imminent risk of contaminating the water supply system through pipes built close together. In addition, infiltration of groundwater and surface run off into the sewer system increases wastewater flows, causing additional overloading of the treatment plants
1.15 Sector Investments and Financing. User charges for water and sewerage are now the responsibility of the municipalities but have to be approved by the city councils. Although water and sewerage tariffs have generally been increased, they are still inadequate to permit full cost recovery of operations, maintenance and capital charges or for new investments. In general, most water and sewerage - 4 - enterprises cover their operating expenses and maintenance costs in theory, but investment costs are financed by transfers from state and/or city budgets. Consumer non-payment has and continues to be a serious default problem for all cities (sometimes adding up to 50 percent of the billed amount); real cost recovery is therefore not taking place.
1.16 In order to implement sound managemiienitpractices, tariffs would need to be increased by the majority of the country's water and wastewater utilities and collection performance would need to be improved. Strategies for financing the replacement and rehabilitation of old equipment and distribution system rehabilitation would have to be explored, along with improved tariff collection methods.
1.17 Privatizationt Issues. Privatization of state-owned property in Latvia is proceeding, but there remain difficult issues to address. Now that the Privatization Agency and the most important related legislation are in place, the GOL has stated its intenition to move rapidly with large scale privatization. A list of large state enterprises to be privatized was published recently. There are no imminent plans for large scale privatization of water supply enterprises in Latvia. It is not excluded, however, that municipalities may enter into different kinds of joint ventures or concessional agreements with foreign private companies for the operation of the water and wastewater utilities.
1.18 Sector Objectives and Priority Needls. Environmental issues are a central concern for the GOL which takes its international environmenital commllitmentsseriously. The GOL is committed to improving water resources management in the country and has stated its clear intent to develop new and more effective mechanisms for water pollution control. This is hampered, however, by the current overall economic situation of the country, which makes it unlikely that the GOL can undertake any major public infrastructure investments in the water sector without external funding support.
1.19 Country Environment Policv anid Strategy. Latvia's environmental problems are concentrated in the urban areas, water and wastewater issues being one of the priorities. An environmental action plan is niow being prepared by a joint Latvian and Dutch consultant team with financing from the Government of the Netherlands. It will be complemented by a natural resources strategy supported by the Government of Sweden. These strategies hopefully would support a shift in approach from one of reactive control to one of proactive management, with a balanced focus on preventive and curative actions.
1.20 Coastal Zone and ProtectedAreas. Latvia has protected areas covering approximately 6.4 percent of the total land area. Wetlands occupy approximately 10 percent of the total area of the country. The protected areas are separated into the following categories: (a) nature reserves; (b) national parks; (c) nature parks; (d) natural monuments; (e) restricted use natural areas; and (f) protected landscapes. All are under the jurisdiction of the MOE.
1.21 The maintenance of enviromnental values in the coastal and protected areas is becoming increasingly complex due to the ongoing process of restoring land to pre-1940 owners and their heirs and subsequent development and speculative pressures. In a number of cases, the returned property is part of nature reserves established during the USSR/Latvian SSR period. In addition, farmers' strong interests in obtaining additional agricultural land through drainage improvements is a potential threat to the remaining Latvian wetlands. Historically, large-scale investments for agricultural drainage and the clearance of flood plain forests have had a major influence on the status and distribution of natural areas - 5 -
of wetland habitat. Wetlands in Latvia and elsewhere in the Baltic Sea region have become the focus of major conservation efforts given their increasingly recognized importance in regulating of hydrological conditions, acting as traps and natural treatment systems for nutrients and other organic pollutants, providing spawning and feeding areas for fish, and functioning as critical habitat for a wide variety of plant species in addition to resident and migratory birds. As a result of this increased awareness of their importance, greater efforts have been made to conserve the remaining wetlands, with many areas being placed under various forms of protection.
1.22 Tourism Development. Latvia, including its Baltic coast, is viewed by the MOE and a number of foreign tourism specialists as having a strong potential to attract tourists from the greater Baltic region who wish to take vacations that increasingly include nature oriented recreational and leisure activities in a relatively undeveloped coastal setting. These visitors would be attracted by the lack of development of the region, the relatively low population densities and the large sections of undeveloped and accessible coastal beaches. Potential also exists for specialized tourism associated with observation of seasonal bird migrations, viewing wildlife species rare in other parts of Europe and visits to traditional villages characterized by strong vernacular architectural traditions. From an economic viewpoint, the development of tourism in the region is important for a "post-military economy" diversification, creation of employment to replace jobs lost by closure of industrial facilities and creation of income generation opportunities in rural settlements which have suffered serious economic dislocations during the restructuring process.
1.23 Latvian tourism has been dominated by visitors to Riga, and its nearby attractions such as Jurmala and Sigulda (Gaujas National Park). However, the MOE, which is responsible for tourism, plans to stimulate visits in the outlying regions by emphasizing tourism which is friendly to the environment and which would utilize private homes, farm houses and small inns for accommodation. This concept of tourist development emphasizes the natural and cultural/historical aspects of Latvia's countryside. The Courland coast, which reaches from Kolka Point north of Ventspils to the Latvian- Lithuanian border, is one of the areas that is being promoted as such a tourist destination. Currently, local and foreign visitors are traveling seasonally to the Liepaja region on bird watching trips in large organized groups in buses. Individual tourists are visiting from Riga and from Lithuania and staying at a variety of local accommodations.
C. The ProjectArea
1.24 With its population of 105,000, Liepaja is Latvia's third largest city. It is surrounded by recreational beaches and has a naval base (a former Soviet submarine base), commercial port, and a fishing harbor. Two thousand hectares of the town are taken up by the former Soviet military base. Several industrial enterprises are situated in Liepaja, including food processors, metalworks, and one brewery.
1.25 The coastal waters outside Liepaja, as well as Lake Liepaja and the City Channel connecting the lake with the Baltic Sea, are severely polluted and contaminated by insufficiently treated and untreated sewage water discharges. The lake and the channel are also polluted with heavy metals. This situation is of particular concern to the MOE and municipal authorities, who have ambitions to develop tourism in Liepaja, which is well-endowed with natural areas, wildlife, scenic landscapes, beaches and cultural attractions. - 6 -
1.26 In their efforts to restructure the economy of Liepaja and comply with national environmental standards and Latvia's international commitments, the GOL and the municipal government are seeking to enhance water quality to improve the environmental conditions of the city and recreational beaches. In addition, there is a sincere interest to develop and implement an effective program for management of the coastal zone and adjoining wetlands for a successful long-term development of tourism in the area.
1.27 Liepaja Water and Wastewater Enterprise (LWWE). The Liepaja Water and Wastewater Enterprise serves a population of 85,000 and associated industry. Water and wastewater services in the "military zone," an area formerly occupied by the Soviet military, were recently handed over to LWWE. Incorporating this extensive area into LWWE's system would be a major challenge, as little is known about the network except that it is probably in far worse shape than LWWE's existing systems. In addition, wastewater produced in the former military base, both domestic and industrial, is discharged directly into the former military harbor.
1.28 LWWE has characteristics common to many water and wastewater utilities in Central and Eastern Europe. It has a small core staff of committed managers who are seeking to change their utility to make it function better, gain greater access to resources for investment and raise employee salaries. In working with the MOE, Bank and consultants, LWWE has demonstrated a willingness to examine new approaches to management, develop a balanced investment program and to place increased priority on operation and maintenance issues. LWWE also recognized the need to raise tariffs and improve tariff collection if service and system performance are to be improved.
1.29 Nonetheless, the enterprise is understaffed at the managerial level, since it is not able to attract qualified labor due to wage limits, while lower level staff are excessive in number. However, given the problems of staffing, chronic underfunding, and the deteriorated state of many of the assets, the routine operational performance of the water and wastewater system is surprisingly good and is a strong indicator of the commitment of the utility to provide services under current constraints. The financial resources needed to bring Liepaja's water supply, sewerage and wastewater treatment systems up to normally acceptable standards of service and efficiency are substantial, as are a number of key investments to stop the continued deterioration of key elements of the system.
1.30 Water Supply and Levels of Service. Water supply services in Liepaja are currentlyrelatively good, safe and generally available without interruption. However, the main supply line to the part of the city close to the lake and the distribution network are reported to be in critical condition. Failure of the main supply line has thus far been avoided by frequent repairs. The reported 25-30 percent distribution leakage may be low, and needs to be confirmed.
1.31 The water supply, which serves approximately 90 percent of the population of Liepaja, is based on groundwater extraction. In addition there are a number of "private" water supply systems serving the former Soviet military area and several industrial sites. Water consumption in Liepaja appears to be surprisingly low even by Western standards, even though low tariffs and the virtual absence of consumption metering (there are only 500 meters in the system, dedicated to larger individual users) traditionally do not stimulate water conservation. Major areas of concern are: (a) leakage and inefficient hydraulic performance of the pipe network, (b) lack of metering; and (c) lack of disinfection of drinking water which can be polluted by infiltration from sewage into distribution pipes. - 7 -
1.32 SanitationFacilities and Levels of Service.The city's seweragesystem consistsof about 177 km of sewers with 10 pumping stations serving 90 percent of the city's inhabitants. Approximately 60 percent of the wastewater is discharged via a sewer system to a treatment works and then to the sea outfall; the rest is dischargeduntreated directly into the military harbor, Lake Liepaja or throughthe City Channel into the Baltic Sea. This includesdornestic, industrial, and surface water run-off. Of a total of 46 industries, 23 are connectedto the treatmentplant via the sewer. The remaining industries discharge directly into the Lake or Channel. An additional ten industries are connectedto other sewers, which discharge untreated wastewaterto the Lake and Channel. Total average wastewaterproduced in Liepaja in 1993 was 55,000 m3/day (including28,000 m3/day infiltration) of which 13,000 m3 are discharged untreated directly to the Baltic Sea. In addition, about 11,000 m3/day of clean industrial wastewater, mainly cooling water, are discharged to the Baltic Sea through various outlets.
1.33 The sewerage pipe system dates to the turn of the century and has seriously deteriorated in some areas. Sulfide corrosion of pipes is reportedly responsible for large scale system collapse in some areas. Infiltration is a serious concern and is estimated at about 28,000 m3/day. There have been three major collapses in the past three years during which the streets were widely flooded with untreated sewage and water supplies had to be cut off due to contamination risks. In each case, sewer lengths of 50 to 120 m had to be replaced on an emergency basis at high cost and significant disruption of the city, all of which resulted in serious health and social concerns over the reliability and safety of the system. In the last fifteen months, there were twenty less serious collapses requiring short length repairs of the system. An estimated 12 km out of the total of 177 km are in urgent need of replacement.
1.34 The rising main pipe from the final pumping station to the treatment plant is in a precarious state as well and requires significant improvement to remain operational. On occasion, the final pumping station has failed completely, causing the city's sewage to be pumped via a temporary pipe into an area of wetland close to the final pumping station. The treatment works, which were designed for a flow of 32,000 m3 per day, or about 60 percent of total municipal wastewater including infiltration, are in very poor condition, and there is concern that further deterioration could result in a total loss of its operational capacity. It is also operating at the limit of its hydraulic capacity. Nevertheless, it is producing a reasonably good quality effluent, thanks to the efforts of diligent operational staff. The major concern is, however, that only about one third of the flow receives rudimentary mechanical treatment prior to discharge. As a result, overall treatment results fall short of those recommended by HELCOM. The average discharge of biological oxygen demand (BOD) is currently 4.0 ton/day and should be below 0.9 ton/day to comply with HELCOM recommendations. The sludge produced by the plant is currently discharged into shallow lagoons without any form of treatment. The lagoons are situated near the plant.
1.35 To summarize, the principal areas of concern for the system as a whole are: (a) large infiltration of groundwater to the sewerage system, raising the collected volume of municipal wastewater to be treated from 28,000 to 56,000 m3 per day; (b) the direct discharge of 13,000 m3 per day of untreatedwater to Lake Liepaja, the City Channel and the Military Harbor; (c) 10,000 m3 of wastewater arriving per day to the treatment works which bypass the biological step and are discharged after only primary treatment; and (d) the extremely poor condition of the wastewater works and the quite limited operational time remaining unless it is rehabilitated.
1.36 Coastal Zone and Protected Areas. Liepaja is a picturesque town, endowed with long white beaches which are approached through a large seaside park that boasts over a hundred species of trees and shrubs. The ecological interest in the area is centered around Lake Liepaja, an ornithological - 8 - reserve with several rare species of plants, and the coastalzone where there are herring breedinggrounds and sand dunes. Southof Liepaja is Lake Pape, a large coastal wetland which occupiesmuch of the area between Liepaja and the Lithuanianborder. Lake Pape is a major "bottleneck"or "restrictedstopping area" on the Baltic portion of the East African-European-Arcticflyway for migratory birds and is a critical part of a system of coastal wildlife habitats which includes the Kursiu Lagoon to the south in Lithuania and Matsalu Bay to the north in Estonia. These areas are being addressed by a regional program for coastal lagoon and wetland conservationbeing funded by the World Wide Fund for Nature (WWF), the European Union LIFE Program, the Governmentof Sweden and cooperatingnational and local governments.Lake Pape is under considerationfor inclusionas a site of internationalsignificance for migratory birds following Latvia's ratificationof the Ramsar Convention.To the north of Liepaja, in the VentspilsDistrict, is Jurkalne, an area of high sand cliffs, coastal forests, undevelopedcoastline with interestingcultural and historical features.
1.37 The Liepaja, Talsi and Ventspilsdistricts are responsiblefor zoning, development,and managementof their adjacent coastalarea and wetlands.There is significantconcern regardingthe coastal lakes, wetlandsand beaches. Lake Liepaja, traditionallya recreational,sporting and aestheticamenity of regional importance,is alreadyvery contaminated,partly as a result of direct discharges from industries and the LWWE, and partly as a result of the accumulationof contaminateddeposits originating in the Liepaja metallurgyworks at the north end of the lake.
1.38 Tourism and the Demand for Tourism Facilities in the Project Area. The MOE, Municipalityof Liepaja (MOL)and other local authoritiesbelieve that there is potential for development of tourism, particularlyeco-tourism, for the nationaland internationalmarkets, provided there is proper planning, marketing and appropriate infrastructure. However, they feel that coastal tourism should be expandedin an environmentallysustainable manner.' To promote tourism on the Courland coast, it is necessaryto identify the existing infrastructure, includingaccommodation, and to estimate the demand for further development.Since the local strategy is to promote small scale, environmentallysustainable tourism, accommodation development should be directed toward small inns, bed and breakfast accommodationsand camping sites. Recreationalfacilities at the beaches near the city of Liepaja would need upgrading, including tennis courts, horseback riding, bicycling, and wind surfing. In addition, infrastructurefor nature tourism in the coastal and protected areas is needed, including access roads, parking lots, toilets, observation towers, and multi-lingualinformation boards.
D. Bank Environment Strategy in Latvia, Past Experienceand Rationale
1.39 The Bank's environmentalstrategy in Latvia, consistentwith the recommendationsof the Country Economic Memorandum(CEM) and the recently completedPublic Expenditure Review, is to support implementationof a limitednumber of priority environmentalinvestments which have significant impact and are complementedby support for institutionalstrengthening activities. These activitiesshould be consistentwith the objectivesand recommendationsof the EnvironmentalAction Programfor Central and Eastern Europe, the JCP and nationalpriorities as establishedby MOE. The Bankstrategy recognizes the need to support: (a) preventivemeasures to avoid adverse environmentalimpacts, through the use of policy and regulatory measures, environmental assessments, environmental planning methods and economic instruments; and (b) curative measures to address existing problems of air, water and soil pollutionin a cost effectivemanner. The Bankalso seeks to develop projects which can provide the basis
I This has been confirmedby a small scale tourism study prepared with Germanassistance; similar conclusionswere reached by a Danish-supportedstudy of the adjacent Klaipeda-Palangaregion of Lithuania. -9- for the effective mobilization of resources from other international financial institutions, bilateral donors and nongovernmental sources.
1.40 In the water and wastewater area the strategy for Central and Eastern Europe has been integrated into the Bank's environmental programs and presented in a number of forums, including the Workshop on Water and Wastewater Utilities held in Riga (1993) and the Resource Mobilization Conference for the Baltic Sea Environment Program held in Gdansk (1993). The key elements of the strategy are:
(a) establishing strong water supply and wastewater utilities to support sustainable investments in municipal water and wastewater treatment through the development of autonomous self-financing municipal/regional public or private water and wastewater utilities;
(b) supporting least cost planning and investment selections for municipal/industrial water supply and wastewater systems, which are properly sized and designed;
(c) promoting water demand management to maximize investment resources and reduce operating costs;
(d) supporting actions for rehabilitation of existing systems, improvements in operational efficiency, phasing and utilization of cost-effective technologies to reduce investment and operating costs significantly; and
(e) promoting the careful analysis of the impact of industries and taking into consideration actions to reduce industrial water consumption and wastewater discharges.
1.41 Bank experience in the implementation of environmental management projects in Central and Eastern Europe to date centers on the lessons learned from the US $27.3 million Environment Management Project in Poland which is in its final year. This Project demonstrated the importance of:
(a) establishing locally staffed project implementation units which have personnel well trained in project supervision, financial management and competitive procurement procedures, further supported with proper independent auditing; and
(b) careful monitoring of the availability of local counterpart funds.
It also demonstrated the high potential of a well designed and managed project to attract donor support for priority activities. These lessons have been considered in the design of the proposed project.
1.42 Previous regional experience in water and wastewater projects is limited; Bank experience worldwide in the water and wastewater sector is extensive, however. Important lessons learned include:
(a) justifying investments in municipal wastewater treatment plants within the context of a basin-wide, least-cost strategy for improving ambient water quality, in accordance with a phased plan for water quality improvements; - 10 -
(b) making investment decisions that are guided by a medium-term, prioritized least-cost investment plan covering all of a utility's needs. The definition of this investment program requires the preparation of comprehensive master plans and feasibility studies; and
(c) validating investment decisions by careful financial plans (including financial projections), complemented by institutional strengthening action plans, to ensure that the proposed investment program is financially viable and that the utility is prepared to assume the responsibility for effective management of systems and facilities.
1.43 At the operational level, the strategy is to support projects that have a high demonstration and replication value at the national and regional level. The investment components should focus on the rehabilitation of critical infrastructure and/or support well justified and phased expansion of facilities at priority locations. In this context the Bank has included, at the request of MOE, a series of environmental management activities which would be demonstrated in Project areas with the specific objective of their being replicated elsewhere in Latvia in the future. This Project is complementary to the Municipal Services Development Project now under preparation, which aims to strengthen local governments and support the development of municipal services in the context of Latvia's decentralization and intergovernmental fiscal reform programs.
1.44 The support of the Bank for the proposed Project would provide an opportunity to support Latvian efforts to improve national environmental quality, protect the Baltic Sea and demonstrate environmental management techniques. In the absence of Bank involvement, it is unlikely that the country would be able to mobilize the technical assistance and financial resources required to implement an environmental project for this environmentally and economically important area of the country. The Project would provide a mechanism for the Bank to test the feasibility of the rapid preparation and implementation of small projects for priority environmental investment activities in the FSU. It would also expand the range of Bank experience in supporting the planning and implementation of eco-tourism related management activities and investments in coFstal zone and protected areas, which is a rapidly growing type of activity given the increased emphasis on "environmentally sustainable development." II. THIE PROJECT
A. Project Origin and Formulation
2.1 In 1974, the countries of the Baltic Sea region signed the "Convention on the Protection of the Marine Environment of the Baltic Sea Area" in Helsinki. This convention, commonly referred to as the Helsinki Convention, was the first international regional seas agreement and created a framework for regional environmental cooperation. To accelerate the rate of progress in improving national and regional environmental conditions, the Prime Ministers of Sweden and Poland jointly hosted the "Baltic Sea Environment Conference" held in September 1990 in Ronneby, Sweden with participation at the Prime Minister level. The conference included senior level participqtion by the Bank and resulted in the establishment of the Baltic Sea Environment Task Force, comprised of representatives of the riparian states of the Baltic Sea drainage basin, European Commission and international financial institutions, with selected technical organizations and nongovernmental organizations participating as observers. The task force, working under the coordination of the Baltic Marine Environment Protection Commission (HELCOM), based in Helsinki, and with significant participation from the Bank, prepared the JCP. This program, which was adopted by the Ministers of Environment of the Baltic Sea region in April 1992, identified a series of priority actions concerning policies and legislation, actions for the control of point and non-point source pollution, measures for the management of coastal lagoons and wetlands, institutional strengthening and human resources development which should be undertaken as elements of a long-term regional environmental program.
2.2 The city of Liepaja was ranked by the Task Force as a priority "hot spot" and subsequently by Latvian authorities as their first priority for national and foreign investment in environmental protection. This position has been repeatedly taken by the GOL in a variety of international forums, most recently by the MOE at the May 1994 Bank-sponsored "Public Investment Conference" held in Paris. The Task Force also identified the need to undertake actions for coastal zone management and the conservation of coastal lagoons and wetlands as key elements of the long-term program. Conducting such activities in the Liepaja region has been strongly supported by the MOE, given its interest in promoting the political and economic reintegration of Liepaja into Latvia and in recognition of the high ecological and recreational values of the area.
2.3 The proposed Project would be the first internationally supported investment project for improvement of environmental quality undertaken by the GOL. This Project is considered the highest priority in terms of domestic environmental investments actions by the GOL and in the context of Latvian legal obligations to protect the Baltic Sea. It supports the GOL's objectives to: promote the decentralization of responsibility for environmental services to municipal governments; reduce the State's role in the economy by strengthening local authorities; and to restructure and modernize the water and wastewater sector. In addition, the GOL has committed itself to take all measures necessary to re-integrate Liepaja and its region into the Latvian national fabric after more than 40 years as a closed military city under Soviet occupation ringed by countryside full of high security installations, and to develop a diversified economy in the region to replace the former "military economy."
2.4 On the basis of a series of visits made to various priority sites in Latvia by Bank staff, during preparation of the JCP and CEM, the environmental significance of the Liepaja region in a national and regional context was confirmed, the general feasibility of a project reviewed and the commitment of the national and local governments to undertake the proposed Project assessed. In the context of GOL and Bank discussions concerning follow-up to the CEM, the GOL assigned the Latvian - 12 -
Environmental Protection Committee, later succeeded by the MOE, to serve as the lead agency for coordination of the proposed Project. The Projects Department of the Committee was given specific responsibility for supporting project development at the national level and the MOL at the local level. With Bank support, terms of reference for the required feasibility, engineering and environmental studies were prepared. The GOL subsequently obtained funding for preparation of the feasibility study for water and wastewater improvements in Liepaja from the Latvian national environmental element of the EU PHARE Program. Following a competitive procurement process, international consultants were retained to conduct the study. Concurrently, personnel from MOE, local governments and the WWF, with support of regionally based Bank environment staff, identified and reviewed potential environmental management activities.
2.5 Preparation of the proposed Project included an identification mission in September 1993, a pre-appraisal mission in April 1994 and an appraisal mission in June 1994. In between, a number of preparatory field visits were made by Bank headquarters and regional staff to review specific issues and to participate in the steering committee meetings for oversight of the feasibility study. These missions and visits have also included the participation of representatives of the Swedish Ministry of Environment, Finnish Ministry of Environment, Nordic Environment Finance Corporation (NEFCO) and the WWF. Currently, technical specification and draft bidding documents for goods and works contracts are under preparation, so that bidding should be able to commence on a timely basis. It is anticipated that a number of contracts would he ready for award by the time of the Loan signing.
2.6 An implementation schedule and performance indicators consisting of a Project Implementation Plan (PIP) and an Action Plan for the WWIC were prepared during appraisal and agreed upon with the Borrower during negotiations. The PIP appears as Annex 1, and the Action Plan as Annex 2 to this appraisal report. This chapter, therefore, provides only a summary description of the Project objectives, components, costs, financing, implementation arrangements, procurement, disbursement, environmental aspects and supervision. A detailed description of each of these elements, including the performance indicators can be found in the PIP. The Action Plan was finalized by LWWE prior to negotations. The Action Plan states the LWWE's operational, organizational and financial goals in the short- and medium-term. The Action Plan also includes proposed additional steps for achievieng the Project objectives and enabling efficient project implementation of the WWIC. During negotiations, the Borrowverand the LWWE agreed that the project would be carried out according to an inmplemlenitation schedule and performance indicators agreed with the Bank.
B. Project Objectives
2.7 ProjectObjectives. The Project, the first internationally financed environmental investment Project in Latvia, would have the following main objectives:
* reduce discharge of partially treated and untreated wastewater into the Baltic Sea;
* restore and enhance the surface and groundwater quality in Liepaja, the northern portion of Lake Liepaja, the City Channel and adjacent recreational beaches on the Baltic Sea;
* improve quality, reliability and cost efficiency of water supply and sanitation services in Liepaja; - 13 -
* improve the operational efficiency and management system of the LWWE; and
* promote environmentally sustainable management and development of the coastal zone, tourism and protected areas in and around Liepaja and Ventspils.
C. Participation by Other Organizations in Project Activities
2.8 The GOL would provide US $3.50 million equivalent and the MOL would provide US $1.75 million equivalent for financing of Project activities. The following organizations are participating in a number a different forms under the umbrella of this proposed Project:
(a) Nordic Environment Finance Corporation (NEFCO). NEFCO, a special environmental investment organization funded with support from the Nordic Countries, is providing a loan of US $2.0 million equivalent to support the proposed Project. This loan will be provided under terms which are generally similar to those of the World Bank;
(b) The Swedish Board for Investment and Technical Support (BITS). The Government of Sweden, acting through BITS, is providing a grant of SEK 50.0 million (approximately US $6.5 million equivalent) to support investments in the wastewater collection and treatment elements of the proposed Project. This funding is being provided in the context of Swedish support for the Baltic Sea Environment Program according to a ratified parliamentary decision;
(c) Ministry of Environment of Finland. The Government of Finland, acting through the Ministry of Environment, is providing a grant of up to FIM 12.0 million (approximately US $2.0 million equivalent) to support investments in the wastewater collection and treatment elements of the proposed Project. This funding is being provided in the context of Finnish support for the Baltic Sea Environment Program;
(d) Ministry of Environment of Denmark. The Government of Denmark, acting through the Ministry of Environment, is providing a grant of US $500,000 equivalent to support the World Wide Fund for Nature of Denmark (WWF - Denmark) to undertake the joint Latvian and WWF implementation of environmental management activities at Lake Pape and Jurkalne. This funding is being provided in the context of Danish Support for the Baltic Sea Environment Program;
(e) European Union PHARE Program. The EU PHARE Program has supported preparation of the proposed Project through provision of ECU 400,000 (approximately US $480,000) from the environmental element of its Latvian national program for preparation of the feasibility study for improvement of water and wastewater services in Liepaja. In addition, it would support activities in Liepaja equal to approximately ECU 100,000 (approximately US $120,000) under the "Leakage Detection and Control in Water Supply and Wastewater Systems in the Three Baltic States" component of the Baltic Sea Environment Program element of the EU PHARE regional program; - 14 -
(f) World Wide Fund for Nature (WWF). WWF activities are being supported under the EU LIFE and Government of Sweden funded program for development of management plans for coastal lagoons and wetlands in the Baltic Sea; this program has activities in Estonia, Latvia, Lithuania, Poland and Russia; and
(g) Other Potential Donors. The GOL and the Bank are currently consulting with the European Union, Government of the Netherlands and other selected bilateral donors and private foundations concerning possible additional funding for both components of the proposed Project.
D. Project Components and Description
2.9 Project Description. The proposed Project would be developed as a regional environmental management project. The Project has two complementary components:
(a) Waterand WastewaterImprovementComponent (WWIC- US $19.67million). This would include:
* rehabilitation and expansion of the Liepaja water and wastewater system, including equipment and works, engineering services, measures to reduce water demand and actions to control industrial discharges; and
* training to support institutional strengthening to assist in establishing an autonomous and financially independent water and wastewater utility in Liepaja. This would include twinning arrangements that incorporate consultancy and advisory services, training, equipment and software (Annex 5 presents the terms- of reference for the twinning arrangement);
(b) Environmental Management Component (US $1.5 million). This would include:
* technical and financial support for the development and implementation of a management plan for adjacent coastal and protected areas, including equipment and small scale works, consultancy and advisory services; and
support for the development of a management plan for recreational and nature- based tourism in the Liepaja region, including equipment and small scale works, consultancy and advisory services.
Details of the components are provided in Annex I (the PIP). - 15 -
E. Cost Estimates
2.10 The total cost of the Project is estimated to be US $21.17 million or approximately Ls. 12.0 million equivalent, including contingencies. The estimated cost distributed among project components is summarized in Table 2.1 below and shown in greater detail in Annex 1, Tables la and lb.
Table 2.1: PROJECT COST SUMMARY BY PROJECT COMPONENT*
- In Lat Million** ------In US$ Million ------% % of Local Foreign Total Local Foreign Total Foreign Base Cost
A. Water and Wastewater Improvement Component Project Implementation Unit 0.13 0.21 0.34 0.23 0.37 0.60 62% 4%
Water Supply and Distribution 0.24 0.78 1.02 0.42 1.37 1.79 77% 12%
Sewerage and Wastewater Treatment 1.60 4.94 6.54 2.81 8.67 11.48 76% 77%
Contract Coordination/ Supervision 0.15 0.17 0.32 0.27 0.30 0.57 53% 4%
Technical Assistance & Training 0.04 0.25 0.29 0.07 0.44 0.51 86% 3%
Base Cost for Water& Wastewater Component 2.17 6.36 8.52 3.80 11.15 14.95 75% 100%
B. Enviromrental Management Component*** 0.11 0.74 0.85 0.20 1.30 1.50 87%
Physical Contingencies 0.22 0.63 0.85 0.38 1.11 1.49 Price Contingencies 1.46 0.38 1.84 2.57 0.66 3.23
Total for Water & Wastewater Component 3.85 7.36 11.21 6.75 12.92 19.67 66%
Total for Environmental Management Component 0.11 0.74 0.86 0.20 1.30 1.50 87%
TOTAL PROJECT COSTS: 3.96 8.10 12.06 6.95 14.22 21.17 67%
Additionsmay not be fully consistentdue to roundingup Exchangerate US $l = Ls.0.57 Localcontributions for thiscomponent would include land and services in kind. Thetotal amnount would be established after conpletion and review by GOIt of managemcntplans to be prepared under this component.
2.11 The cost for the WWIC is estimated at about US $19.67 million or approximately Ls. 11.21 million equivalent, including contingencies. The total base cost is estimated at US $14.95 million. Physical contingencies are estimated at US $1.49 million. Price contingencies between appraisal conducted in June 1994 and March 2000 would amount to approximately US $3.23 million or 19 percent of base cost plus physical contingencies. Total contingencies represent 32 percent of the base cost. These figures provide generous contingency factors and have been adapted for use in the Project given the limited experience with construction cost estimates and prices in Latvia. The foreign exchange component is estimated at approximately US $12.92 million including contingencies, or about 66 percent of total component cost. Taxes and duties are estimated at 0.5-1.0 percent on imported equipment.
2.12 The cost for the EMC is estimated at about US $1.5 million or Ls. 0.86 million equivalent. - 16 -
F. Project Financing Arrangements
2.13 The proposed IBRD and NEFCO loans, totalling US $6.0 million would finance about 28 percent of total Project costs. The Bank loan would be repaid by the GOL over 17 years including 5 years grace with repayments calculated on an annuity basis at the Bank's standard variable rate of interest. An advance of US $300,000 has been requested from the Project Preparation Facility (PPF) and would be used to support the establishment of the PIU, preparation of bidding documents and to conduct a tariff study. The terms of the NEFCO loan are similar to those of the Bank. Additionally, NEFCO loans require Nordic participation in the form of a twinning arrangement with the LWWE and a corporatization plan, which was included in the Action Plan.
2.14 WWIC. Parallel grant cofinancing by the Governments of Sweden (US $6.5 million equivalent) and Finland (US $2.0 million equivalent) and the European Union (US $120,000 equivalent) comprises about 44 percent of component costs. A local counterpart contribution of Ls. 2.0 million or US $3.5 million equivalent would be provided by the GOL and Ls. 1.0 million or US $1.75 million equivalent would be provided by the MOL. The Project has been collaboratively designed with the direct participation of representatives of the Governments of Finland and Sweden and NEFCO. Extensive discussions have been held concerning the respective responsibilities of the cofinancers in implementation of the Project. Satisfactory evidence that all conditions precedent to the effectiveness of the Loan from NEFCO and grants from Sweden and Finland have been fulfilled would have to be submitted prior to the effectiveness of the Bank Loan. The MOE and the MOL advised that they would annually identify their counterpart contribution in their annual budgets to be presented to the Bank.
2.15 EMC. This component would be financed mainly through grants. The proposed IBRD loan would finance US $200,000 for procurement of works, goods and services for smaller infrastructure improvements. Grant financing will be provided by the Government of Denmark (US $500,000 equivalent), and is under discussion with the Netherlands and other donors.
2.16 The summarized financing plan presented in Table 2.2 includes the proceeds of the Bank loan, the GOL's contribution and cofinancing. More detailed financing plans can be found in Tables 2 and 3 of Annex 1.
Table 2.2: SUMMARIZED FINANCING PLAN
A. WWIC B. EMC US $ Million US $ Million Local Foreign Total Local Foreign Total Financiers IBRD (loan) 0.52 3.28 3.80 0.20 0.20 NEFCO (loan) 0.86 1.14 2.00 BITS, Sweden (grant) 0.12 6.38 6.50 Ministry of Environment, Finland (grant) 2.00 2.00 Ministry of Environment, Denmark (grant) 0.50 0.50 EU PHARE Program (grant) 0.12 0.12 Other Donors (grants) 0.80 0.80 Government of Latvia 3.50 3.50 Municipality of Liepaja 1.75 1.75
Total 6.75 12.92 19.67 0.20 1.30 1.50 - 17 -
2.17 Onlending Arrangements. The Ministry of Finance would provide the funds directly to LWWE on behalf of the MOL. As a condition of effectiveness of the Bank Loani, subsidiary loan agreements would have to have been executed between the GOL atnd LWWE.
G. Procurement
2.18 During negotiations, it ivas agreed that procuremetnt wouldfollowt the Baik 's "Guidelines for Procurement under IBRD and IDA Credits " (1992) and "Use of Consiultanttsbv World Bank Borrowers and by the World Bank as an Executing Agency" (August 1981). Procurement under parallel cofinancing arrangements (approximately US $10.60 million) would be carried out through tied procurement in accordance with procurement regulations of NEFCO, Finland and Sweden. Procurement would be undertaken in the following manner:
(a) All Bank funded contracts which are estimated to cost more than US $250,000 equivalent per contract would be procured following International Competitive Bidding (ICB). The Borrower would use the Bank's Standard Bidding Documents for Supply and Erect Contracts. Five contracts totalling US $3.79 million for: (i) water main; (ii) water conservation; (iii) sewer reconstruction; (iv) water rehabilitation; and (v) laboratory equipment, would be awarded under ICB. Such contracts would include all goods and civil works necessary for component implementation ("Supply and Erect Contracts"). Packages procured through ICB would account for approximately 59 percent of the total value of the Bank financed procurement of the Bank's loan. Invitations for bids would be grouped in sizeable bid packages to enhance competition and benefit from economies of scale in bid prices;
(b) Procedures for International Shopping (IS - about US$ 0.37 million) and Local Shopping (LS - about US$0.20 million) would be used for procurement of smaller contracts up to US $250,000 and US $50,000, respectively, because the cost of ICB would clearly outweigh possible price advantages. It is expected that some small components such as chlorination equipment and office equipment could be procured through IS. LS procedures would be used for procurement of goods for small infrastructure improvements for the EMC (such as upgrading of access roads, establishment of parking facilities, a sluice gate, information signs and observation towers). Contracts awarded under IS procedures would be based on comparing price quotations obtained from at least three suppliers from three eligible countries in accordance with Bank guidelines. Contracts awarded under LS procedures would be based on comparing price quotations from at least three local suppliers; and
(c) Consultant services would be requested for three contracts: (i) the implementation surveys for water supply (US $240,000); (ii) contract coordination and supervision of the WWIC (US $840,000); and (iii) consultant support for the Project Implementation Unit (PIU) (US $730,000) would be shortlisted and selected on a competitive basis according to Bank Guidelines (August 1981), and hiring would be on terms and conditicns acceptable to the Bank. - 18 -
Table 2.3 gives a summary presentation of procurement arrangements. A detailed presentation of all procurementarrangements can be found in Tables 4 and 5 in Annex 1.
Table 2.3: PROCUREMENT ARRANGEMENTS
Total ICB Other N.B.F. Cost
A. Water and Wastewater ImprovementComponent
WaterSupply System 1.71 0.26 * 1.97 (1.17) (0.20) (1.37)
Sewerage 2.08 13.09 15.17 (1.49) (1.49)
ProjectImplementation Unit 0.84 ** 0.84 (0.41) (0.41)
OtherConsultant Services 1.08 *** 0.61 1.69 (0.53) (0.53)
B. EnvironmentalManagement Component
Small Civil Works and Equipment 0.20 **** 1.30 1.50 (0.20) (0.20)
Total 3.79 2.38 15.00 21.17 The Bank (2.66) (1.34) (4.00)
( = loan financed N.B.F. = Not Bank Financed * InternationalShopping US $0.26 million
5* InternationalShopping -US $0.11 million + US $0.73 million according to Bank ConsultantGuidelines (August 1981) * US $1.08 million accordingto BankConsultant Guidelines **** Local shopping - US $0.20 million.
2.19 Informal introductory training was provided during the appraisal mission by the Bank's ProcurementSpecialist for representativesof the MOE, MOL and LWWE.In addition,relevant personnel from the Projects Departmentwithin MOE and the PIU have participatedin more extensiveprocurement training courses organizedby the Bank in Latvia. The efficiencyand capabilityof the Borrower to carry out the Bank's procurementprocedures would be strengthenedthrough ongoing training and the use of standard bidding documents. Provision of internationaltechnical assistance for the PIU should ensure adequateadministration of procurement. - 19 -
2.20 Procurement Review. All ICB procurement packages would be subject to the Bank's prior review and approval, in accordance with paragraphs 2 and 4 of Appendix 1 of the Bank's Procurement Guidelines. All prior review items would cover 80 percent of the total amount of the loan. Other loan- funded activities would be subject to the Bank's post review during the supervision of the project, in accordance with paragraphs 3 and 4 of Appendix 1 of the Guidelines.
2.21 ProcurementMonitoring. Procurementdata would be collected and recorded for: (i) prompt reporting of contract award informationby the Borrower; (ii) comprehensivequarterly reports to the Bank by the Borrower; and (iii) revised timing of procurement actions, including advertising, bidding, contract award, and completiontime for individualcontracts.
H. Disbursements
2.22 The proposed Project is expectedto be disbursed over a period of five fiscal years (1995- 2000) with an estimated closing date on March 31, 2000. Annualdisbursements are presented in Table 2.4. Descriptionsof the Bank loan proceeds and forecasts of expenditure and disbursements for the proposed Project are shown in Annex 1, Table 6. The disbursement schedule is shown in Annex 1, Table 7.
Table 2.4: DISBURSEMENTBY YEAR US$ million
1995 1996 1997 1998 1999 2000
BankFiscal Year Annal 1.86 7.09 6.12 4.46 1.30 0.34 Cumulative 1.86 8.95 15.07 19.53 20.83 21.17 Cumulative% Total 8.79 42.28 71.19 92.25 98.39 100.00
2.23 The proceeds of the Bank loan would be disbursed against:
(a) For goods: 100 percent of foreign expenditures, 100 percent of local ex-factory expendituresand 80 percent of local expendituresfor other items procured locally;
(b) For works: 100 percentof foreign expendituresand 60 percentof local expenditures;and
(c) 100 percent of expendituresfor consultancyservices and training.
All cofinancerswould managetheir own disbursements.
2.24 Disbursementrequests would be prepared and submittedto the Bank by the PIU on behalf of the MOE. It is expected that the members of the PIU as well as the Projects Department would participate in disbursementtraining organizedby the Bank. - 20 -
2.25 Disbursement would be made against standard Bank documentation. The documentation to support these expenditures would be retained by the PIU for review by Bank supervision missions and verification by external audits. Disbursement requests would be fully documented except for expenditures under contracts for goods and equipment valued at less than US $100,000 equivalent, where statements of expenditure would be used. Applications for direct payment and special commitment may be submitted provided they are for amounts equivalent to at least US $50,000. The Bank would not honor direct payment requests below US $50,000.
2.26 To facilitate Project implementation, the Borrower would establish a Special Account in one of the major foreign commercial banks on terms and conditions satisfactory to the Bank to cover the Bank's share of eligible expenditures. The authorized allocation would be US $200,000, representing about four months of average expenditures. At the request of the Borrower, and based on project needs, the Bank would make an initial deposit or deposits into the special account up to the amount of the authorized allocation. Applications for replenishment of the special account would be submitted monthly or when one-third of the amount has been withdrawn, whichever occurs earlier. Documentation requirements for replenishment would follow the standard procedure. In addition, monthly bank statements of the special account which have been reconciled by the Borrower would accompany all replenishment requests. The termnsand conditions of the establishment and operation of the Special Accounit *twereset forthl during tnegotiations.
1. Environmental Aspects
2.27 Preparation of the proposed Project has included environmental studies consistent with the applicable procedures of the GOL and the provisions of World Bank Operational Directive 4.01, "Environmental Assessment." In accordance with these procedures the consultant has prepared an environmental review, complying with the requirements for a category "B" project for the WWIC. Implementation of the WWIC would improve water quality through reduction of wastewater leakage into the groundwater and reductions in discharges of untreated and partially treated wastewater, thereby improving the water quality and ecological conditions in the City Channel, northern portion of Lake Liepaja and the adjoining area of the Baltic Sea. The findings of the review, which have been used to support the design of the component, are summarized in Annex 4. Attached as Annex 5 is the Bank's Environmental Data Sheet.
2.28 The environmental management component has also been placed in category "B." The EMC would result in: (a) environmentally sound development of coastal and recreational areas in the Liepaja, Ventspils and Talsi regions; (b) enhanced management and improved public access for protected areas, and (c) demonstration of planning and implementation methods for regional coastal zone and tourism development programs. Environmental reviews will be prepared as elements of the studies and plans to ensure that their objectives and small-scale works are environmentally acceptable. These environmental reviews would be subject to evaluation and approval by the MOE, the concerned Regional Environmental Protection Committees and Bank environmental specialists assigned to the Regional Mission. Given the types of environmental and protected areas management activities to be supported, it is not anticipated that any involuntary resettlement would occur. III. PROJECT IMPLEMENTATION
A. Organization and Management
3.1 Project Coordination. The lead agency for the proposed Project would be the MOE which would provide overall supervision of the Project, coordinate the actions of funding organizations and local implementing agencies and manage the interactions with the Bank. The MOE has appointed the Projects Department to serve as the coordinator for implementation. The Director of the Department has taken an active role in coordination and technical aspects related to preparation of the Project.
3.2 Project Steering Committee. To facilitate implementation of the proposed Project, the MOE has: (a) established a Project Steering Committee chaired by the Director of the Projects Department; and (b) appointed a Project Coordinator for the proposed Project. The committee has representatives of key departments from within MOE, Liepaja and Ventspils Regional Environmental Protection Conmnittees, MOL, LWWE, Liepaja, Ventspils and Talsi District Governments, and representatives of local government authorities where environmental management activities would be undertaken. A representative from the World Bank Office in Riga would serve as an ex-officio member for purposes of coordination. The role of the Project Coordinator would be to represent the MOE in dealings with the cooperating funding agencies, facilitate coordination between national and local government authorities in Latvia, provide specialized technical support and serve as the secretary for the project implementation committee.
3.3 WWIC. The LWWE would be responsible for implementation of the water and wastewater improvement component. To facilitate implementation of this component, including institutional strengthening, a Latvian staffed PIU would be established within LWWE. The PIU would be assisted, as required, by international consultants to support the preparation of technical specifications, bidding documents, tendering, bid evaluation, contract awards, supervision of civil works and equipment installation and follow-up activities. An advance has been requested from the PPF to enable the initiation of the activities of the PIU. The appointment of all appropriate staff for the PIU would be a condition for Loan effectiveness. Although the PIU is already operating with local staff, it is expected that the PIU become fully operationally effective in January 1995.
3.4 EMC. This component would be managed by the Environment Department of the MOE with the participation of the Tourism Department, Regional Environmental Protection Committees, District and Parish Governments and the World Wide Fund for Nature. Each of the four small-scale activities under the component would have its own management structure in order to allow for a flexible approach to implementation of these demonstration activities. During negotiations, it was advised by the MOE, that they would formalize their cooperation with the WWF. The appointment of all appropriate stafffor the implementation of the component would be a condition for Loan effectiveness.
3.5 Project implementation would be expected to begin in April 1995 and would be carried out over a five-year period. The Project implementation schedule is included in Annex 1, Table 8. A summary of implementation responsibilities for the proposed Project is provided in Annex 1, Chart 2.
B. Project Implementation Agencies
3.6 Ministry of Environment and Regional Development. The MOE is the successor organization to the Latvian Environmental Protection Committee. The ministry has a diverse range of - 22 - responsibilities including environmental protection, natural resources management, parks and protected areas management, physical planning and tourism. The Minister of Environment and Regional Development is supported by a State Minister for Environment who has responsibility for environmental protection and the management of natural resources and protected areas. The MOE has adopted a decentralized approach to environmental management and has an established network of Regional Environmental Protection Committees, including one in Liepaja and Ventspils, which provide local level support for the implementation of its policies and programs.
3.7 A Projects Department has been established within the MOE which is responsible for the preparation and supervision of all major locally and internationally funded projects. This unit has been directly involved in the preparation of the proposed Project, including the review and approval of terms of reference, selection and supervision of consultants and review of their studies. The MOE also has an Ecological Expertise Board (Environmental Assessment) which has participated in the preparation and evaluation of the environmental review for the proposed Project. While the Projects Department has developed significant skill in the management of technical assistance activities, the proposed Project would be the first internationally funded investment project to be prepared by the MOE. Based on previous Bank experience in working with the MOE and Projects Department in the context of the Baltic Sea Environment Program and on Project preparation to date, it is anticipated that the staff would be capable of successfully supporting supervision of the proposed Project.
3.8 Liepaja Water and Wastewater Enterprise. The MOE has appointed the LWWE to undertake implementation of the WWIC of the proposed Project. This approach is fully consistent with the policy of the MOE to support the decentralization of environmental management responsibilities to local municipalities and to have those parties which would be responsible for operation and maintenance of facilities take an active role in their design and construction.
3.9 The LWWE is set up in accordance with the Law on Municipal Enterprises (1991) which makes clear that the enterprise is subject to the City Council of Liepaja which is ultimately responsible for the actions of LWWE. In this context, the municipal authorities in Liepaja are ultimately responsible for the provision of water and wastewater services to the residents and have established a municipal enterprise to fulfill this responsibility. The powers and duties of the enterprise are set out in a municipal statute. The statute's main provisions are that the utility is an independent legal entity, required to provide water and sewerage services to the population of Liepaja according to the national standards. The utility should have a long term plan for the development of the services in Liepaja and maintain and renew the infrastructure accordingly, although this has yet to be done. The utility has its own bank accounts and its managers have authority to make a number of financial decisions. Tariffs are to be agreed with the City Council, but if the tariffs set would result in a financial loss, the municipality must fund the deficit from its general budget.
3.10 Although the MOL is responsible for water and wastewater services, LWWE has a relatively high level of autonomy in the management of the company, including the right to hire and fire employees and to reward performance with bonuses. The current director is eager to improve the performance of his company although management is dominated by technical/engineering concerns. Management practices in other spheres (planning, accounting, customer services etc.) are rudimentary at best. Except for printing water use bills on a computer, all other systems of the company are recorded manually. Rate setting is the prerogative of the municipal government which attempts to strike a balance between the political concerns of affordability and the financial needs of the company. Traditionally, all - 23 -
major investmentdecisions were planned, financed,and carried out with little direct involvementof the company. LWWE has not prepared a formal strategic plan, capital expenditure or formal budget since 1992. However, there appears to be a consensusamong the City Councilthat LWWE should becomean independentutility regulated by the local government.This would include the authority to select, plan and implementits own investmentdecisions. The timetablefor establishingthe LWWEas an independent entity operatingunder the oversightof the MOL (the City Council) was discussedand agreed upon during negotiations.
3.11 The LWWE employs220 staff, of which approximatelytwo thirds work on the sewerage side. The Director has a staff of 14 at his headquarters, of whom 5 carry out financial accounting functions, under the auspices of the Chief Bookkeeper. Fourteen staff are employed full time at the wastewatertreatment plant. The utility has 2.2 employeesper 1,000 customers. It lacks suitable qualified staff for senior posts as it cannot offer sufficientremuneration. An implicitceiling for economicrewards to staff, the salary of the Director, is determined by the City Board.
3.12 Other Implementing Agencies. Implementationof the EMC would be managed and implementedby the EnvironmentDepartment of the MOE which has had experience in the preparation of a wide variety of technicalstudies and managementplans by joint Latvian and internationalteams. The activity concerning tourism development would be overseen by the recently established Tourism Departmentwhose personnel may require sometraining in studymanagement to adequatelysupervise this activity. The WWF - Denmark working in cooperation with its International and Baltic Regional Programs would participatein the implementationof the protectedareas managementactivities for Lake Pape and Jurkalne. WWF has a Latvian staffed office in Riga which has successfullyprepared a Nature ConservationStrategy for Latvia as well as undertakena numberof field basedactivities. Concerned local level environmental,infrastructure, planning and tourism organizationshave a limited numberof skilled personnel; however, with proper design and supervisionof the proposed activities, they should be able to have a significantrole in implementationand benefit from componentsupported training activities.
C. Project Supervision
3.13 The proposed Project would be supervisedby Bankpersonnel from both headquartersand the RegionalMission for the BalticCountries. In addition,technical specialists from the SwedishMinistry of Environment and Finnish Ministry of Environment would also participate in supervisionmissions. Personnelfrom NEFCOand WWFwould also participatein selectedmissions. The proposedsupervision plan is summarizedin Annex 1, Chart 3.
3.14 Recognizingthat the proposedProject wouldbe the first Bankproject in Latvia involving large scale construction of civil works and installation of sophisticated mechanical and electrical equipment,it is anticipatedthat it would require significantsupervision. This supervisionwould focus on the first two years when considerableinput would be required for engineeringand procurementaspects of the water and wastewater improvement component. In addition, supervision by environmental specialistswould be required for the complexissues of preparationand initial implementationof activities under the environmentalmanagement component.
3.15 A mid-term review would be conductedto evaluateproject progress and assess the status of actions to be undertakento establish an autonomousutility, to develop and implementan amended - 24 - tariff structure and to strengthen the management capacity of LWWE. The loan agreement would include provisions which allow the Bank, in consultation with the Borrower to make adjustments in the details of these items and the schedule for their implementation. It is anticipated that the findings of the tariff study would be reviewed during the mid-term review and that long-term tariff rates would be then agreed upon.
3.16 At the request of the MOE, it is planned that Project supported training activities would be open to personnel from other locations in Latvia to support the dissemination of knowledge and to prepare them for participation in other priority projects proposed for implementation in the short and medium-term. In this regard special emphasis would be given to providing support for training of Latvian personnel in competitive procurement procedures for consultant services, construction contracts and equipment. Benefits would also accrue through training in construction supervision to improve the quality of civil works and equipment installation, thus avoiding many types of operational problems. Given the importance of these activities to the Project and the valuable "lessons learned" they may provide, Bank supervision missions would review activities and progress in these areas on a routine basis.
D. Accounts and Audits
3.17 It was agreed during negotiations that the ProjectAccounts and the Special Account would be audited in accordance with the Bank's "Guidelinesfor Financial Reporting and Auditing of Projects Financed by the World Bank" (March 1982).
3.18 The Project Coordinator, with the support of the PIU and coordinators for activities under the EMC, would prepare semi-annual descriptive and financial reports on each project component, objective and activity (beginning from the date of Loan Effectiveness). To monitor the financial performance of LWWE, its financial statements (income statements, balance sheets), in addition to Project accounts, an auditor acceptable to the Bank would be appointed, and the audit reports would be submitted to the Bank within six months of the end of the fiscal year. The audit reports would contain a separate opinion on compliance by implementing agencies with all financial covenants under the Bank loan. It is expected that a local branch of a private, international, commercial auditor, in association with a local auditing firm if available, would carry out the audits, and this arrangement is considered acceptable. During negotiations, it was agreed that periodical reporting and preparation of the Project Completion Report be carried out according to Bank Guidelines.
3.19 To gauge progress during the implementation of the Project, a series of project monitoring indicators have been identified during appraisal. These criteria would form the basis of the evolving sector dialogue and give signals as to whether the Bank should remain actively engaged in the sector. These project indicators are discussed in Section IV of Annex 1. IV. MANAGEMENT OF FINANCIAL ASPECTS OF LIEPAJA WATER AND WASTEWATER ENTERPRISE
A. Past Performance and Present Position
4. 1 Overview. The LWWE has been identified by the MOE as being among the more progressive and technically capable water and wastewater utilities in Latvia. It is the intention of the MOE to have Liepaja serve as a "model utility" for secondary cities and provide: (a) an example of a sound water and wastewater utility which may be applied elsewhere; and (b) a facility which could be used for in-country training on "software" and "hardware" issues. To this end, despite the administrative, financial and technical constraints which may exist, the MOE, in cooperation with the MOL, intends to focus its efforts on making LWWE an autonomous and effective utility by mobilizing local and foreign resources to support complementary investment and institutional strengthening activities. However, the LWWE advised that they shall seek prior approval to any change in the management or the execution of the operation and maintenance aspects of water and wastewater services
4.2 Central to the approach of institutional strengthening is the development of a formal "twinning arrangement," on a contractual basis, with another water and wastewater utility. This twinning arrangement would include specific activities, which would be defined as a component of the Action Plan for LWWE, to include support for: utility management; system investment planning; rehabilitation program design; construction supervision; operation and maintenance; monitoring and use of laboratory data; tariff setting; billing and collection; accounting and auditing; human resources development and public information programs.
4.3 Past Performance. Analysis of LWWE financial statements3 for the years 1991 -1993 shows that revenue was adequate to cover cash charges, but the accounts lacked proper charges for non- cash items; these include: provision for planned maintenance, provision for bad and doubtful debts (which are considerable), proper asset depreciation reflecting replacement costs and provision for future investment needs. Because proper non-cash charges were not reflected in the formal accounts, there were no deficits reported during 1991-1993 and therefore no subsidy was required on the part of the Municipality during these years.
4.4 To date LWWE has not received external financing for capital investments, consequently no long term external debt exists. Most of the short term debt, reflected largely in accounts payable, is money owed for electricity supply. The financial viability of LWWE is seriously impaired by current poor budgeting practices which have indirectly induced relatively low tariff levels. Previous unrealistic debt collection capability have deprived LWWE of cash to properly run its day-to-day operations and maintenance. Consequently, LWWE is under considerable financial strain and is in debt to a number of creditors. The budget is prepared on the assumption of 100% revenue collection on a current basis. On the basis of budgets thus constructed, the City Council determines the tariff rates and tax liability. The enterprise's financial position is further aggravated by (a) the fact that it depends on the local public housing enterprise to collect its charges; (b) the failure to levy a charge for emptying cess pits; and (c) the fact that it does not receive a portion of the environmental fees and fines for the collection and treatment of highly polluted wastewater. LWWE's past financial performance is shown in Table 9, Annex 1.
3 The first external audit of the accounts is underway for 1993. - 26 -
B. Tariff Levels and Revenues
4.5 Water tariffs are currently inadequate to cover full costs, particularly the non-cash items discussed in paragraph 4.3 above. Additionally, the structure of the tariffs does not include standing charges (connection fees) nor incremental charges for higher levels of consumption. All tariffs are either of a simple volumetric form or, as is the case for industrial discharges, of a weighted volumetric form. Industrial customers are metered, but most domestic customers are not. Wastewater tariffs are generally applied on the basis of consumed (metered or estimated) water, rather than accurate sewerage metering. The only exceptions are those for large industrial customers which use considerable volumes of water in the production process, for which a revised "return rate" is agreed, or for those who possess their own water supply, in which case the private supply is metered and a "reduced" charge calculated. In the institutional strengthening component, assistance for tariff planning and financial operations would be provided. The tariff structure would be reviewed in accordance with the Action Plan in order to incorporate flat charges and a progressive tariff scale.
4.6 No provision has been made for bad or doubtful debts in the operating accounts nor interest charges for late receipts when determining tariff increases. Proper provisions for these debts would justify higher tariffs, allowing LWWE to make proper accounting provisions. In practice, the Liepaja City Council has been reluctant to raise tariffs as high as the LWWE would like, given the political pressure to keep utility prices low. On the other hand, if the municipality suppresses tariffs below the level at which costs would be recovered, it would, in theory, be obliged to finance the deficit. However, no deficit-funding has been made as the subsequent years' tariffs have been based on budgeted costs without taking into account the previous year's losses.
4.7 Despite several tariff increases in 1991,1992, and 1993 (1993 reflected tax increases only), tariffs have not keep pace with the high (and erratic) periods of inflation and thus have failed to adjust properly to real cost increases. In March 1994, the GOL agreed to a 50 percent combined tariff increase for water and wastewater of approximately 2 santimi per unit charged (effective April 1, 1994 for industry and July 1, 1994 for domestic consumers); the combined residential tariff currently stands at the level of Ls. 0.11 or US $0.19 equivalent.
4.8 The GOL has imposed financial constraints on LWWE's operational revenue by requiring 25 percent of its wastewater revenues be passed on to the state (reflected on operating expenses in Table 1). However, LWWE has full operational and financial responsibility for handling the discharges. Additionally, penalty charges collected for excess wastewater discharges are directly passed on to the National and Regional Environmental Protection Funds, although LWWE also has the responsibility for handling these excess discharges.
C. Billing and Collection
4.9 LWWE billing is computerized; consumers are divided into: (a) residential customers; (b) budget customers (including schools, hospitals, offices and shops); and (c) industrial customers. At present, industrial customers pay the highest tariffs and residential customers the lowest. This reflects a deliberate policy of cross subsidy to residential customers. However, it is now the LWWE's intention that tariffs should converge. - 27 -
4.10 Collection is a major problem for LWWE. Accounts receivable have increased dramatically since 1991, from traditionally 0.1 percent, to 24 percent of total receivables in 1994, representingapproximately three monthsof income.Collection from institutionaland industrialconsumers is handled by the utility. For domestic consumers,collection is carried out by the Housing Enterprise; in this case it is clear that collection is hamperedby LWWE's lack of direct contact with its customers as well as lack of individualmetering. Approximately80 percentof Liepaja's housingis municipalstock, of which approximately90 percent are in "blocks" of flats of five or more stories, none of which is currentlymetered. The water bill is attributed to each buildingaccording to estimatedconsumption of the buildingand, in the case of apartmentbuildings, divided among households.The billing is then carried out on a monthly basis, and added to householdcharges for rent and other utilities. Many residents do not pay their block enterprises which, in turn, are unable to pay their bill to the LWWE.
4.11 While LWWEhas made arrangementsto followup outstandingdebts of its major metered industrialcustomers, it has no correspondingprocedures for initiating action with individualdomestic customers. Although LWWE has the right to disconnectcustomers for non-payment,it cannot isolate individual customersin a block and is therefore unable to implementthe main deterrent at its disposal. It is understoodthat residentswho do not pay their rent to the block enterprise are rarely evicted, so there are reported to be a large number of customers who are able to pay but refuse, as well as a large number of customers who cannot pay. It is hoped that the planned privatizationof the "block enterprises"would enable the LWWE to reduce the level of non-paymentfrom these customers.
4.12 Other means to improve collections include: (a) administrativemeasures; (b) technical measures; (c) legal measures; and (d) well targeted programsto create social pressure on parties to pay their tariffs. Administrativemeasures include discounts on bills paid promptlyand penaltiesfor late bills. In addition, housing directors' salaries could be linked to the amount of revenue collected. Technical measures include installing block meters. Legal measures include monthly deduction from defaulters' earnings, which has been tried before with success, although discontinueddue to political pressure. It shouldbe reconsideredwith provisions includedto protect low income familiesand retirees. These and other measures will be discussed further at negotiations.
D. Accounting Policies and Audits
4.13 Prior to the collapseof the FSU, Latvian companieswere integrated into the command system of five-yearplans; financialstatements were prepared largelyto facilitatethis process. Currently, the westernaccrual accountingsystem is replacingthe former Soviet cash basis accounting,and LWWE has revalued its assets in accordancewith the new requirements.However, historical statementsare not readily comparable with present financial performance, and despite a major asset revaluation in December, 1992 and tariff increases, proper chargesare not made against revenue for depreciation.This emphasizesthe need in periods of high or erratic inflation for regular adjustmentsto tariff and asset values to ensure proper funding for asset replacement. Additionally, a more comprehensiveasset revaluationshould be carried out in the next three years in order to provide an acceptableestimate of LWWE'sassets based on current replacementcosts and an assessmentof their physical conditionin order to make proper provisions in light of inflation. Given that a proper asset revaluation is an expensive exercise, warranted only with an intent to privatize LWWE's assets, immediateasset revaluation is not required; LWWE's priorities are to sustain a positive and adequate cash flow. An interim and less expensive solution to establishingproper depreciationcharges is for LWWE, with legal authority, to - 28 - revalueits assets based on a limited (and less costly) physical inventory to assess replacementvalue and thus adjusting, as necessary, the past inflation indexed revaluation approach.
4.14 To facilitate improved control of LWWE's finances, the project proposes to implement automated accountingsystems linked to various ManagementInformation System (MIS) components includingbilling, generalaccounts, accounts receivable,accounts payable, and all other major accounting functions. Additionally,the proposed MIS systemwould be linked with both operationalbudget planning and a strategicplanning system. An automatedfixed assetportion would provide all pertinent information on depreciationand easily readablemeans of handling revaluationsas the economy experiencesinflation. It is understoodthat the implementationof an MIS system has to be phased over time due to investment requirements, not only in terms of hardware and software but also with regard to human expertise. Phasing should thus begin with the highest priorities in managing and controlling the accounts.
E. FutureFinancial Performance
4.15 Projections of LWWE's financial performance assume that LWWE would introduce substantialwater and sewerage tariff increases as presented below in Table 4.1. These proposed tariffs would allow LWWE to be financiallyself-sustaining by 1997, assumingthese tariffs are maintainedat appropriatelevels and increasedregularly. LWWE's profit margin (before tax) should improve from an estimated 1 percent in 1994 to 16 percent in 1997; and the operating ratio (operatingcost, depreciation, interestexpense divided by revenue) from 91 percent in 1994to 67 percent in 1997. LWWE is expected to maintain or improve these performnancelevels from 1997 onwards. During negotiations, the LWWE commited itself to preparing a tariff study by January 1, 1996. It is expected that long-term tariff rates would be agreed upon during the mid-term review, after completionof the tariff study. An advancehas been requested from the PPF to enable the initiation of the tariff study. The Borrowerand the LWWE agreed that the LWWE would produce total revenues equivalent to not less than the sum of its; (i) total operating expenses; (ii) debt service requirements; (iii) provisions for maintenance and bad and doubtful debts; and (iv) asset depreciation reflecting replacement costs.
Table 4.1 - ExpectedTariff Increases
WaterSupply Sewerage Domestic Instit. Ind. Domestic Instit. Ind. AnnualReal Increases(pa) 1995 16% 4% 0% 30% 17% 11% 1996 14% 5% 0% 31% 13% 5% 1997 11% 1% 0% 30% 6% 7% - 29 -
4.16 In preparing the projections,the financialobjective was to achieve a profit margin of at least 15 percent (before paymentof profit tax) by 1997 in real terms. This objective was prescribed by the Liepaja City Council in order to sustain the financialperformance of LWWE and avoid the risk of municipal subsidies.
4.17 The projections show that the water and sewerage operations will be financially sustaining, provided: (a) the revenueprojections are fulfilled;(b) water and seweragetariffs are periodicallyadjusted to maintain the objective of full debt service cost recovery; (c) accounts receivableare brought under control (from 3 months outstanding of payments due to 2 months); (d) adequate levels of sustained maintenanceare provided; and (e) the reorganization,training and technical assistance proposals are implementedto promote operating efficiency and cost reductions. The projections show that with the prescribed tariff increasespresented above, the utility generates sufficientfunds to cover the debt service obligations(it exceeds 2.0 from year 1994 through2003). Financialprojections for the water supply and sewerage system are presented in Table 11, Annex 1. Detailed financial projections, the underlying assumptionsand notes on tariff adjustmentscan be found in Appendix2 of Annex 1.
F. Tariff Affordability
4.18 Current combined tariffs correspond to Ls. 0.11/md for domestic customers, which represents approximately2.3 percent of the monthly income of an average income family. Given an estimated real tariff increase of 149 percent and real income growth, water services tariffs would correspondto an averageof 3.10 percent of the averagehousehold income. 4 This is higher than today's level, but within the range of acceptabilityby Bank standards.5
4.19 It shouldbe noted that householdsin Latvia often have a number of non-cashbenefits and undeclaredincome that are not reflected in the income level used in our affordabilitycalculations. It can also be noted that the combinedtariff levels in Riga are about US $0.15/13, which is about 35 percent higher than the current rate for Liepaja, corresponding to approximately5.5 percent of an average householdincome. Assumptionsunderlying the affordabilityestimates are presented in Annex 6.
G. FinancialRate of Return
4.20 The viability of the project is driven by a selected tariff level that will allow Liepaja to generate a cash flow sufficient enough to generate at least a 15 percent profit margin by 1997 (see paragraph 4.15), to service debt and to provide proper provisions for planned maintenance, bad and doubtfuldebts, replacementcost depreciationand future investmentneeds. The project is not consequently driven by a financialrate of return (FRR). Nonetheless,cash flow generationmust be sufficientenough to generate a FRR that exceeds the average weighted cost of capital to LWWE.
4 This tariff level then sets total revenue potential, and from this the serviceabledebt level is derived.
5 Three percent of average householdincome or five percent of the average incomeof the thirtiethpercentile of total incomedistribution. - 30 -
4.21 The FRR was calculated by the incremental costs and benefit streams to the capital investment. The tangible, financial benefits comprise the higher tariff levels justified by the capital expenditureprogram as well as the operationsand maintenancecost efficiencies(reductions) established with the investmentprogram. The proposed investmenton the water supply and sewerage systems of Liepaja has a combinedFRR of 13.7 percent which indicatesthat the project is financiallyviable 6. The individualFRRs are 23.5 percent for the water supply component(which accounts for 13 percent of the capital investment)and 11.6 percent for the seweragecomponent (87 percent of the capital investment).
4.22 Sensitivitytest of +/- 10% for the water supplycomponent, range from resulting FRR's of 18.0 percent to 26.2 percent and indicate that investment is unlikely to be adversely affected by normal-rangevariations in costs and revenues. For the wastewatercomponent, the resulting FRRs are lower at 8.9 percent to 13.3 percent which indicate the need for tight cost control and rigorous enforcement of regular tariff increases in line with the main financial projections. The results of the sensitivity tests are summarizedin Table 12, Annex 1.
6 These rates well exceed 2.9 percent, the weightedcost of borrowing to the utility, reflectingthe 71 percent grant element in the project investment. V. PROJECT BENEFITS AND RISKS
A. Project Benefits
5. 1 Supply Improvenmentand Environmental Enhancement. The WWIC of the proposed Project would provide benefits to the residents of Liepaja and its surrounding region by improving water and wastewater services and strengthening environmental management capacities. These benefits would include improvements to maintain a high quality and more reliable drinking water supply, reduced wastewater discharges to the Baltic Sea, reduced wastewater pollution of groundwater and the surface waters of the northern portion of Lake Liepaja, the City Channel and adjacent Baltic beaches. This would reduce health risks and frequency of beach closures, improve aesthetic conditions and increase recreational and tourism opportunities in the area.
5.2 The proposed Project would also support the commitments of the GOL, as a party to the Helsinki Convention, to fulfill the recommendations of the JCP by reducing land-based pollution of the Baltic Sea from a priority "hot spot" and taking action to effectively manage its coastal zone and coastal wetlands. The measures included in the Project would reduce the current BOD emissions from 3.96 ton/day to 1.67 ton/day. The hydraulic capacity in the completed wastewater treatment plant would also accommodate treatment of remaining discharges of municipal wastewater not included in the Project.
5.3 Employment Impact and Human Skills Improvement. The proposed Project would also provide for direct short-term employment benefits for Latvian technical experts, skilled workers and laborers during the construction period for improvements to be supported under the Project. It is expected that organizational restructuring, technical assistance and investment would strengthen LWWE's managerial efficiency, financial viability, service quality and capacity to plan and implement investments. This should eventually result in cost containment and well structured tariffs. Moreover, the concept of managerial accountability would be introduced to local industrial and domestic consumers. Consumers would potentially benefit from the efficiency gains generated by the restructuring process in terms of better water and wastewater services. At the technical level, the proposed component would provide opportunities for Latvian experts to gain direct practical experience in the design, construction, operation and maintenance of the modern water and wastewater system.
5.4 Financial Efficiency. The proposed Project would support the transformation of the LWWE into an autonomous water and wastewater utility. This would facilitate meeting the long-term water and wastewater service needs of Liepaja more cost effectively. A major benefit would come from institutional strengthening and human resources development activities, undertaken through both "twinning arrangements" and "hands-on" experience in developing new skills required for administrative, financial, technical and environmental aspects of water and wastewater utility operation. Implementation of the proposed Project would also provide for real cost data for investment activities in the water and wastewater area which would be of significant importance in development of reliable cost-estimates for other proposed projects to be implemented in the post-Soviet period in Latvia.
5.5 The combined internal financial rate of return of the water and wastewater component of the Project is 13.7 percent, using the projected tariff and corresponding revenue as a best proxy of the benefits attributable to the incremental investments.
5.6 Demonstration Activities. The EMC would support a series of demonstration activities to prevent future adverse environmental impacts through coastal zone management and tourism development - 32 - planning. It would also support the planning and development of protected areas at Lake Pape and Jurkalne so they could be more effectively accessed and enjoyed by Latvian and foreign visitors. The MOE expects that the coastal zone management and tourism development planning activities would provide a critical base of local experience and allow for training of Latvian experts in order for this type of work to be conducted in other areas of the country. In the case of the planning and implementation actions for protected areas, it is anticipated by the MOE and local authorities that these would provide demonstrations which could be replicated in other areas of the Courland coast and extend to priority conservation areas on the Gulf of Riga.
5.7 In addition, the Lake Pape case study of the economic evaluation of protected areas which is planned to be cooperatively prepared by the MOE, WWF and the Bank would provide important information concerning the economic importance of providing proper management and access to these areas. This study would review both direct and indirect revenues from local and international tourism and assess their benefit to the local economy; it would also assess measures which could be taken to access a portion of the receipts to finance environmental management activities.
5.8 Community Participation. The community participation emphasis in the environmental management component would provide local governmental, nongovernmental organizations and individual citizens the opportunity to directly participate in environmental protection and natural resources management activities. These actions, especially the management 'plans for Lake Pape and Jurkalne, would be prepared and implemented with input from locally based community organizations and seek to provide local residents an opportunity to directly benefit economically from these interventions. The proposed activities would serve to better take into account community natural values for the aesthetic and economic interests of the local community. The local community is to be integrated into decision making processes through the introduction of integrated coastal zone (ICZM) management and the pilot projects would serve as models of how to balance nature conservation with sustainable economic development (eco-tourism, reed harvesting, fishing etc.).
5.9 Replication of EMC Activities. The activities supported by the EMC would provide both governmental and nongovernmental organizations with an important learning experience which could be replicated elsewhere in Latvia and the Baltic region. In addition to the strictly local environmental benefits, the Project would have regional benefits for the Baltic Sea and would benefit global biodiversity through the conservation of some of the least spoiled areas of the eastern Baltic Sea coastline and support the protection of critical habitat for native and migratory bird species.
B. Project Risks
5.10 Slippage. The proposed Project faces a number of politicaland technicalrisks due to the fact that it is the initial project of this type in Latvia. With regard to the WW7C,there is a risk that the Project implementationcould be delayed due to the limited experience of the MOE and the LWWE in these types of activities. There is also a risk that, given the very limited experiencewith actual costs for implementationof water and wastewaterimprovements in post-SovietLatvia, the volatilityof local price changes,and previouslack of constructionactivities to internationalstandards in this sector, construction costs may be underestimated.In order to minimize these risks, the Project provides for significant supervisionby staff from Bank headquarters and the regional office, establishmentof a PIU, and the adoptionof conservativeapproaches to cost estimationcombined with the use of appropriatephysical and price contingencies. - 33 -
5.11 On the basis of previous Bank experience in Eastern Europe, there is also a risk that the GOL and cooperating local governments may have problems with the timely provision of local currency support and that the availability of adequately qualified personnel for Project management positions may be constrained by government imposed limits on salaries paid to civil servants. It should be noted, however, that these constraints were overcome by the Borrower and the Bank being closely engaged in Project supervision and quickly taking actions to address these types of implementation problems as they occurred.
5.12 Institutional and Financial. On the institutional and financial side the main risks concern: (a) the political commitment of the Liepaja City Council to support the transformation of LWWE into an independently managed water and wastewater utility; (b) political or macro-economic factors which may interfere with the commitment of the Liepaja City Council to authorize the LWWE to raise tariffs sufficiently to cover the repayment of the Bank loan; and (c) continued problems with the capacity of LWWE to effectively collect water bills.
5.13 These risks would be reduced by carefully monitoring the requirements for tariff increases and providing significant institutional development support to the utility to improve its financial management, billing and collection practices. The acceptability and the ability of maintaining high and increasing tariff levels should also be considered. Provisions to ensure that the authorities promptly take the necessary actions to increase tariffs and improve efficiency are included in the Action Plan and the Project Implementation Plan of the impelementation schedule. It is expected that the Action Plan, with a plan for tariff increases, would be formally endorsed by the City Council, to ensure that the necessary tariff increases would be realized.
5.14 Technology. The technology of the proposed Project is standard and involves no unusual risks. The main risk is the utility's financial and institutional capability to carry out the proposed Project, as it would require substantial strengthening of its ability to carry out an investment program in general. Experience with other municipal water and wastewater authorities in transitional economies demonstrates that close Project supervision and adequate technical assistance mitigate these risks.
5.15 Environmental Management Component Risks. The principal risks for the EMC of the Project concern: (a) difficulties in coordination of activities between various national, local, nongovernmental and consultant organizations; (b) resistance from local authorities and residents to proposed land use control measures to be included in the ICZM, tourism development and protected areas management plans; and (c) unanticipated problems associated with the complex issues of restitution of lands confiscated by the State during the Soviet period to their pre-1940 owners.
5.16 Coordination issues can be effectively addressed by the establishment of implementation teams for each of the activities with the support of the Project Coordinator and various Activity Coordinators, complemented by close Bank supervision. Resistance to implementation due to land use constraints and conflicts with pre-1940 land owners can only be addressed by having the direct participation of these parties, as proposed, in the planning and implementation of these activities. It should be noted that the demonstration activities by their very nature are intended to test the application of these approaches in the Latvian context and to provide lessons which can be transferred elsewhere within the country and the Baltic Sea region. - 34 -
VI. AGREEMENTS REACHED AND RECOMMENDATION
A. AgreementsReached During Negotiations
6.1 The following agreementswere reached during Loan negotiations:
(a) It was agreed that the Project would be carried out according to an implementation schedule and performanceindicators agreed with the Bank. This scheduleconsists of the PIP and the Action Plan for the WWIC (para 2.6);
(b) The terms and conditionsof the establishmentand operation of the Special Account for the Project were set forth; (para. 2.26); and
(c) The Borrower and the LWWE agreed to produce total revenuesequivalent to not leass than the sum of LWWE"s; (i) total operatingexpenses; (ii) debt service requirements; (iii) provisionsfor maintenanceand bad and doubtful debts; and (iv) asset depreciation reflecting replacementcosts (para 4.15); and
(d) The LWWE committed itself to preparing a tariff study by January 1, 1996 and that following completion of the tariff study, long-term tariff rates would be adjusted accordingto an agreed timetable (para 4.15).
6.2 In addition, agreementson the followingstandard Bank requirementswere obtainedfrom the Borrower, the MOE, the MOL and the LWWE:
a) The use of the World Bank's Guidelines on procurement and use of consultants (para. 2.18);
(b) Annualaudits of financialaccounts and Special Accounts, and financial reporting to the Bank (para. 3.17); and
(c) Periodicalreporting and preparationof a Project CompletionReport accordingto Bank Guidelines(para. 3.18).
B. Conditions of Effectiveness
6.3 Conditionsof effectivenesswould include:
(a) Submissionof satisfactoryevidence that all conditionsprecedent to the effectivenessof the loan from NEFCO and grants from Sweden and Finland have been fulfilled (para. 2.14);
(b) Subsidiaryloan agreementshad been executedbetween the GOL and the LWWE (para. 2.17); and - 35 -
(c) The LWWE would have appointedall personnel, includinginternational consultants for the PIU and that the MOE would have appointedall personnel for the implementationof the EMC (paras. 3.3 and 3.4).
C. Recommendation
6.4 With the above agreementsand conditions,the proposed Project would be suitable for a Bank loan of US $4.0 million equivalent at the standard variable interest rate with a maturity of 17 years, includingfive years grace period. The Borrower would be the Republicof Latvia.
ANNEXES 1-6
LIEPAJA ENVIRONMENT PROJECT
Annex 1. Project Implementation Plan
Annex 2. Action Plan
Annex 3. Terms of Reference 3A.Twinning Arrangement 3B.Water and Sewerage Tariff Study
Annex 4. Water and Wastewater Improvement Component - Environmental Aspects
Annex 5. Environmental Data Sheet
Annex 6. Review of Affordability
Annex 1
LIEPAJA ENVIRONMENT PROJECT PROJECT IMPLEMENTATION PLAN
PROJECT IMPLEMENTATION PLAN
Table of Contents
I. THE PROJECT
A. Introduction ...... 1 B. Project Scope and Objectives ...... 1 C. Project Description ...... 1 D. Project Costs ...... 8 E. Financing Plan ...... 12
II. IMPLEMENTATION ARRANGEMENTS
A. Organizations Responsible for the Project and Interagency Coordination ...... 14 B. Agreements between Borrower and Implementing Agencies ...... 15 C. Responsibilities of Implementing Agencies ...... 16 D. Role of the World Bank during Supervision ...... 19
III. IMPLEMENTATION ACTIVITIES
A. Time-Bound Schedule ...... 21 B. Procurement Arrangements and Schedule ...... 21 C. Disbursements ...... 25 D. Finance ...... 29 E. Project Risks ...... 36 F. Loan Covenants for Implementation ...... 37
IV. MONITORING AND EVALUATION
A. Actions to Monitor Development Objectives ...... 38 B. Project Indicators .38
LIST OF CHARTS
Chart 1: Project Overview Chart 2: Project Implementation Responsibilities Chart 3: Supervision Plan LIST OF TABLES
Table la: Project Cost Summaryby Project Component Table lb: Water and WastewaterImprovement Component: Detailed Presentationof Project Costs, Procurementand Financing Table 2: Financing Plan by Year Table 3: Financing Plan by Financer Table 4: ProcurementArrangements Table 5: Summary of ProcurementPackages Table 6: Financing Plan by DisbursementCategory Table 7: Estimated Scheduleof Disbursements Table 8: ImplementationSchedule - ComponentA Table 9: LWWE's Financial Performance Table 10: Tariff Increases Table 11: LWWE Projected FinancialPerformance Table 12: Financial Rates of Return
LIST OF APPENDICES
Appendix 1 Milestonesin Project Implementation Appendix2 Financial Projectionsand Notes on Tariff Adjustments PROJECT IMPLEMENTATION PLAN
I. THE PROJECT
A. Introduction
1. This Project ImplementationPlan (PIP) was prepared during appraisal and was agreed with the Borrower in accordancewith proceduresset out in the OP/BP/GB 10.00.' The completeproject design is presented as an overview in Chart 1.
B. Project Scope and Objectives
2. The Liepaja EnvironmentProject (the Project), which would be the first internationally funded environmentalinvestment project in Latvia, would have the followingmain objectives:
* reduce discharge of partially treated and untreated wastewater into the Baltic Sea;
* restore and enhancethe surface and groundwaterquality in Liepaja, the northern portion of Lake Liepaja, the City Channel, and adjacent recreationalbeaches on the Baltic Sea;
e improve quality, reliability and cost efficiencyof water supply and sanitationservices in Liepaja;
* improve the operational efficiency and managementsystem in the Liepaja Water and WastewaterEnterprise (LWWE);and
-- promote environmentallysustainable management and developmentof the coastal zone, tourism and protected areas in and around Liepaja and Ventspils.
C. Project Description
3. The proposedProject will be implementedas an environrnentalmanagement project for the Baltic coast of Latvia. The main componentsof the Project are:
* rehabilitation and expansion of the Liepaja water and wastewater system, including equipmentand works, along with engineeringservices;
* trainingto support institutionalstrengthening to assist in establishingan autonomousand financially independentwater and wastewater utility in Liepaja. This would include
OPR issued new procedures on September17, 1993 requiringthat an ImplementationPlan be prepared and included in the StaffAppraisal Report. These procedureswill be incorporatedand issued in the OP/BP/GB10.00, 'Investnent Lending:Identification to Board Approval." ANNEXI Page2
twinning arrangements that incorporate consultancy and advisory services, training, equipmentand software;
* technical and financial support for the development and implementation of an environmental management plan for adjacent coastal areas and wetlands, including equipmentand works, consultancyand advisory services; and
* support for the development of a managementplan for recreational and nature-based tourism in the Liepaja region.
4. Water and WastewaterImprovement Component (WWIC). The component would address the following water and wastewatersystem improvementsin Liepaja:
* Water Supply and Distribution
(a) completion of the New Otanki Transmission Main to reduce leakages and maintenancecosts and to provide an acceptablelevel of supply security; (b) limitedextension of the existing supply networkto cover areas now suppliedby standpipes; (c) rehabilitationof most leaking parts of the network and introduction of water metering to promote water conservation; (d) provision of chlorination and some laboratory facilities and emergency spare parts to improve the quality of supplied water and operation efficiency;and (e) surveys to identifyareas of heaviest leakage the water supply network;
* Sewerageand WastewaterTreatment
(a) reconstructionof sewers in danger of imminent collapse (estimated at 2,000 meters) and initiation of rolling program of sewer rehabilitationby reliningand reconstruction to ensure the long term operating capacity of the underground assets; (b) rehabilitation of the terminal pumping station and partial reconstructionof the terminal main to the treatment works to ensure continuous treatment of the current and future wastewater flows; (c) constructionof two new interceptorsto convey an additionalflow of 16,000m 3/d currentlydischarged directly to Lake Liepajaor the City Channelto the treatment works; (d) completionof the constructionworks currently under way at the treatmentplant and supplyand installationof electro-mechanicalequipment. The completedplant will be able to treat current and increased flows to an acceptablelevel; (e) provision of emergency spare parts to improve operation efficiency;and (f) surveys to identify the parts of the network with the most severe leaks. ANNEX I Page 3
Consulting Services for
(a) technical assistance in Project implementation for detailed design and construction supervision of above works;
(b) technical assistance in institutional development for strengthening the organizational arrangements through a Twinning Arrangement. The main objective of this sub-component is to improve the LWWE's overall performance through changes in operational and financial management in accordance with the Action Plan. The twinning partner would support and assist LWWE in implementing the Plan with regard to institutional strengthening and human resources development for the first two years of the Project implementation period. Assistance would include support for:
(i) implementing a system rehabilitation and optimization program; (ii) developing and initiating implementation of a consumer interaction program; (iii) implementing the proposed recording and information system; and (iv) supporting implementation of the leakage detection program to be initiated with support from the regional EU PHARE program.
5. Total average wastewater generated in Liepaja in 1993 was 55,000 m3/d (including infiltration of about 28,000 m3/d). An additional 11,000 m3/d of industrial cooling and other adequately treated water were directly discharged to the Baltic Sea. Of the 55,000 m3/d, 32,000 m3/d is pumped to the existing overloaded wastewater treatment plant, located 8 km north of Liepaja, where only about 22,000 m3/d are treated mechanically and biologically. About 10,000 m3/d is discharged directly to the Sea outfall after the primary step. As can be seen, this results in 24,000 m3/d being discharged without any treatment at all, severely polluting the City Channel and the northern part of Lake Liepaja before reaching the outflow into the Baltic Sea. Total discharge of BOD from municipal wastewater is about 3.9 tons/day, of which 2.4 tons/day is discharged into the City Channel and Lake Liepaja, 0.9 tons/day from the wastewater treatment plant to the Baltic Sea and 0.4 tons/day into the military harbor and the Baltic Sea.
6. The proposed Project would reduce the total BOD emission from Liepaja to 1.7 tons/day and limit the BOD-load on the City Channel and Lake Liepaja to 0.5 tons/day. When the new wastewater treatment plant, currently under construction, has been completed, wastewater discharges not currently included under the Project will be able to be treated without increasing the size of the plant.
7. Enviromnental Management Component (EMC). The Ministry of Environment and Regional Development (MOE) and local authorities reviewed and endorsed a program of environmental management activities to be undertaken in the Liepaja, Ventspils and Talsi regions to complement the proposed improvements in the municipal water and wastewater system. The component would include activities to address environmental management issues in the greater Liepaja region and provide for demonstration activities which could be considered for replication in other areas of Latvia in the future. Given the strong interest in the demonstration aspect of the proposed component, its management would include specialists from the headquarters of the Ministry as well as local authorities. It is anticipated that the component would provide a structured and well managed framework for the effective use of grants ANNEX I Page 4 for environmental activities from the European Union, bilateral donors and a variety of private foundations. Several of the activities proposed for inclusion under the component have been identified by the Ministry for implementation by non-governmental organizations working in close cooperation with local experts and residents. The component would consist of the following demonstration activities:
* Demonstration Activity No. 1. Integrated Coastal Zone Management Plan.
On the basis of Terms of Reference prepared by the MOE, an integrated coastal zone management (ICZM) plan would be developed for the area between Kolka Point in the north and the Latvian-Lithuanian border in the south. The study area would include the Municipality of Liepaja, Municipality of Ventspils and Liepaja, Ventspils and Talsi Districts. The objective of this activity would be to demonstrate the use of integrated coastal zone management in the context of regional planning and development. The study area was selected given the plans of the Government of Latvia (GOL) to promote environmentally sound development in this previously "closed" area of the country which, outside the areas previously dominated by military activities, remains undeveloped and has high scenic ecological value and eco-tourism potential. Preparation of this study would be coordinated closely with development of the proposed Eco-Tourism Development Plan;
* Demonstration Activity No. 2. Eco-Tourism Development Plan.
The MOE is responsible for the management and development of tourism in Latvia. The Ministry plans to implement an eco-tourism development plan for the area between Kolka Point and the Latvian-Lithuanian border which would serve as a model for other areas of Latvia. This area currently has a low level of nature-based tourism with local and foreign visitors visiting the area either through specialized tours organized through Riga or traveling northward from the Klaipeda region of Lithuania. Recent years have also shown a start in yacht based visits to the proposed study area in Pavilosta. Draft terms of reference have been prepared for the proposed activity which would include opportunities for the training of Latvian personnel from both the national and concerned local governments in the preparation of this type of study. The study would incorporate the findings and recommendations of the "farm based tourism" study prepared with the assistance of Germany. Preparation of this study would be coordinated closely with development of the proposed Integrated Coastal Zone Management Plan;
* Demonstration Activity No. 3. Management Plan and Program for Lake Pape.
The proposed demonstration activity would be implemented by the World Wide Fund for Nature (WWF) in cooperation with the Parish Governments of Nica and Rucava and the Liepaja District Government. The MOE and the Liepaja Regional Environment Protection Committee would provide technical support as necessary. The objective of the activity would be to develop and implement a community based, ecologically sustainable environmental management plan for Lake Pape, a large coastal wetland which occupies much of the area between Liepaja and the Lithuanian border. It is a major "bottleneck" on the Baltic portion of the East African-European-Arctic flyway and is a critical part of a system of coastal wildlife habitats which includes the Kursiu Lagoon to the south in ANNEX I Page 5
Lithuania and Matsalu Bay to the north in Estonia. Lake Pape is currently proposed to be submitted for inclusion as a site of international significance for migratory birds following Latvia's ratification of the Ramsar Convention.
The proposed activity would support development of a management plan for the Lake Pape area, survey and posting of the protected area, development of a zoning plan for management of important areas outside the protected zone, preparation of a hydrological management plan, restoration of the sluice gates and other water regulation structures, upgrading of access roads and establishment of parking facilities, posting of traffic and multilingual information signs, development of viewing platforms and access points to the lake, and development of an effective community participation program to assure that the local population benefits from the local and foreign visitors to the area; and
* DemonstrationActivity No. 4. ManagementPlan and Programfor Jurkalne.
The proposed demonstration activity would be implemented by the WWF in cooperation with the Parish Government of Jurkalne and the Ventspils District Government. The objective of the activity would be to develop and implement a community based, ecologically sustainable environmental management plan for the Jurkalne sand sea cliffs which are the highest coastal cliffs on the eastern Baltic Sea. The local commnunityhas already taken action to make the area more accessible to visitors and wishes to cooperate with a variety of parties to develop the area into an attraction to regional visitors.
The proposed activity would support development of a management plan for the Jurkalne area, survey and posting of the conservation management area, development of a zoning plan for management of important areas outside the main conservation management area, preparation of a plan for protection of the coastal forest which serves to stabilize the large sand sea cliff complex, upgrading of access roads and establishment of parking facilities, posting of traffic and multilingual information signs, development of additional viewing points from the cliffs and access points to the beach, and development of an effective community participation program to assure that the local population benefits from the local and foreign visitors to the area. Chart 1. LATVIA LIEPAJA ENVIRONMENT PROJECT Part A. Water and Wastewater Improvement Component in US $ millions
Local Loan Grant Total Element Benefits Contributlon 5.25 World Sweden: 19.67 Water: Improved reliability of main water supply to city, Bank 6.5 Otanki main and extension of services 1.03 reduction in demands for repairs, reduced water 3.8 Fin.and: System rehabilitation and operational 0.50 loss in distribution system. Secured and expanded NEFCO 1.5 imrvmnswater distribution. Promotionof water 2.0' EU-PHARE:2 Improvements conservation and provision of improved water 0.12 CNorination and laboratory equipment 0.26 1.79 quality.
Wastewater: Expansion of interceptor network to reduce N&S Interceptors 3.25 pollution of Lake Liepaja, channel and harbor area. Sewer reconstruction/rehabilitation and leakage Reduction of pollution to the Baltic Sea by 980 detection program 1.55 tons BODyr. New terminal main (Phase I) and rehabilitation of terminal pump station 3.50,. Completion of new WWTP (civil works partially completed) and Spare Parts 3.18 11 .48 Water and Wastewater Subtotal 13.27 Contract coordination and supervision 0.57 Project would provide opportunity for Latvian experts to develop new skills in project planning, implementation and construction supervision. Institutional Strengthening and Human Project would provide model training facility for Resources Development 0.51 1.08 secondary cities in Latvia. A twinning arrangement would be used to strengthen institutional capacity.
Project Implementation Unit 0.60 BASE COST 14.95 Physical contingencies 10% 1.49 The Project would provide accurate cost data for both physical and price contingencies for projects implemented in Latvia and thus support financial, Price contingencies 3.23 4.72 economic and technical planning of similar Iprojects in the future, COST FOR COMPONENT A 19.67 Chart 1. LATVIA LIEPAJA ENVIRONMENT PROJECT Part B. Environmental Management Component in US $ millions Local Loan Grant Total Element Benefits Contribution
Provision of 0.2 Denmark: 1.5 Activity No. 1: Integrated Coastal Zone 0.50 Would demonstrate use of integrated coastal zone land, 0.5 Management Plan management in the context of regional planning and personnel Discussions development. The study area would include the costs and are currently coastal zone from Kolka Point to the Latvian- contributions being held Lithuanian border. Activity would focus on training in kind. with the Latvian personnel who could conduct similar work Government in other areas of the country and small scale priority of the activities. Netherlands and other Activity No. 2: Eco-Tourism Development Plan 0.50 Would examine potential opportunities and support donors selected priority actions to implement an eco- concerning tourism developmnentplan for the areabetween additional Kolka Point and the Lithuanian border. Activity funding. would include training of Latvian personnel in tourism planning and implementation of small scale activities to support eco-tourism. Activity No. 3: Management Plan and Program The objective of the activity would be to develop for Lake Pape 0.40 and implement a community based environmental managementplan for Lake Pape, a site of national and regional ecological significance. The activity would include development of a management plan and implementation of selected improvements to make the site more readily accessible for domestic and foreign visitors. Activity No. 4: Management Plan and Program The objective of the activity would be to develop for Jurkalne 0.10 and implement a community based environmental management plan for the Jurkalne coastal area. The activity would include development of a management plan and implementation of selected improvements to make the site more readily accessible for domestic and foreign visitors.
SUBTOTAL 1.50
TOTAL PROJECT COST 21.17
1 The Nordic EnvironmentFinance Corporation INEFCO)would provide a loan at near World Bank terms for US $2.0million equivalent to support the proposedproject in collaborationwith the World Bank and the Governmentsof Sweden and Finland.NEFCO is a special regional environmentalfinancing organization capitalizedby the Governmentsof the Nordic Council members. 2 PHAREwould provide funding for leak detection activities from its Baltic RegionalEnvironmental Program. ANNEX I Page 8
D. ProjectCosts
8. The total cost of the Liepaja Environment Project is estimated at US $21.17 million or Ls. 12.0 million equivalent, including contingencies.
9. The cost for the Water and Wastewater Component is estimated at about US $19.67 million or approximately Ls. 11.21 million equivalent, including contingencies. The total base cost is estimated at US $14.95 million. Physical contingencies are estimated at US $1.49 million. Price contingencies between the appraisal in June 1994 and March 2000 would amount to approximately US $3.23 million or 19 percent of base cost plus physical contingencies. Total contingencies represent 32 percent of the base cost. The foreign exchange component is estimated at approximately US $12.92 million including contingencies, or about 70 percent of total component cost. Taxes and duties are estimated at 0.5-1.0 percent on imported equipment.
10. The cost for the Environmental Management Component is estimated at about US $1.5 million or Ls. 0.86 million equivalent.
11. The estimated cost distribution among Project components is shown in Tables la and lb below.
12. Bases of Cost Estimates for Water and Wastewater Improvement Component. Project costs were estimated as follows:
(a) Base Costs. Cost estimates are based on: preliminary estimates prepared by the consultants for the Water and Wastewater Improvement Component following review by the Bank. Cost estimates for the Environmental Management Component have been jointly developed by the MOE, WWF and the Bank on the basis of previous experience with similar activities;
(b) Contingency Allowances. Project costs include a contingency for unforeseen physical variations (US $1.49 million) equivalent to 10 percent of the base. Price contingencies on base costs and physical contingencies are estimated at about US $3.23 million, equivalent to 19 percent of base costs and physical contingencies, and reflect Bank estimates of local and international price increases.2 In estimating the price contingencies, it is assumed that any differentials between domestic and international inflation rates would be offset by appropriate adjustments in exchange rates; and
(c) Foreign Exchange Component. The foreign exchange component is estimated at about US $12.92 million including contingencies, or 66 percent of total component costs.
2 Foreigninflation rates: 3.3% in 1995and 2.5% thereafter;percent per year for the life of the Project. Local inflation rates: 20 percent in FY95; 15 percent in FY96; 10 percent in FY97; 8 percent in FY98; 6 percent in FY99; 6 percent in FY2000. ANNEX I Page 9
Table la: PROJECT COST SUMMARY BY PROJECT COMPONENT* (exchange rate US $1.00 = Lat 0.57)
-- Lat Million ------US $ Million ------Local Foreign Total Local Foreign Total
A. Water and Wastewater Improvement Component Project Implementation Unit 0.13 0.21 0.34 0.23 0.37 0.60
Water Supply and Distribution Otanki Main 0.14 0.38 0.52 0.25 0.67 0.92 Service Extenson 0.01 0 05 0.06 0.02 0.09 0.11 Water Conservation 0.05 0 12 0 17 0.09 0.21 0.30 Chlorination Equipment etc 0.01 0.05 0.06 0.01 0.09 0.10 Laboratory Equipment 0.00 0.09 0.09 0.16 0.16 Implementation Surveys 0.03 0.09 0.11 0.05 0.15 0.20 Sub Total 0.24 0.78 1.02 0.42 1.37 1.79
Sewerageand Wastewater Treatment Sewer Reconstruction 0.14 0.14 0.28 0.24 0.25 0.49 Sewer Rehabilitation 0.22 0.33 0.55 0.38 0.58 0.96 Northern Interceptor 0 14 0.97 1.11 0.25 1.70 1.95 Southern Interceptor 0.11 0 63 0.74 0.20 1.10 1.30
Partly New Term Main (Phase I) and Rehabilitation of Main Pumping Station 0.72 1.28 2.00 1.26 2.24 3.50 Leakage Detection Program 0.06 0.06 0.10 0.10 Completion of Water and Wastewater Plant 0.27 1.48 1.76 0.48 2.60 3.08 Spare Parts 0.06 0.06 0.10 0.10 Sub Total 1 60 4,94 6.54 2.81 8.67 11.48
Contract Coordination / Supervision 0 15 0 17 0.32 0.27 0.30 0.57
Technical Assistance and Training 0.04 0 25 0.29 0.07 0.44 0.51
Base Cost for Water & Wastewater Component 2.17 6.36 8.52 3.80 11.15 14.95
Physical Contingencies 0.22 0.63 0.85 0.38 1.11 1.49 Price Contingencies 1.46 0.38 1.84 2.57 0.66 3.23
Total for Water and Wastewater Component 3.85 7.36 11.21 6.75 12.92 19.67
B. Environmental Management Component* Integrated Coastal Zone Management Plan 0.29 0.29 0.50 0.50 and Priority Actions Eco-Tourism Development Plan and 0.29 0.29 0.50 0.50 Priority Actions Management Program for Lake Pape/Jurkalne 0.29 0.29 0.50 0.50
Total for Environmental Mgmt Component 0.11 0.74 0.86 0.20 1.30 1.50
TOTAL PROJECT COSTS: 3.96 8.10 12.07 6.95 14.22 21.17
* Addaiti maymt th fully c-orv de to rotunigupt thetoco-u frantthe thirddr.intl
Localcontribw.ion for tha campon,pracood ondadeland, agnrenitn on restrictionton land -n .nd orscwesin kind The [otl faunt woad th e5.iteNWdIkr c-.npkltonand -eaea by GOL or nanagentocn plantto he preprted uuker -cnponrnr. PROJECT COSTS. PROCUREMENT AND FINANCING T_bl I h. __I__ _ WATER AND WASTEWATER IMPROVEMENT COMPoNENT: DETAILE PRESENTATION OF .o P m. r59. 19 7 139 TOTAL FIhANCING C9 9 F T L F T L F T L F T L F T L IF T 9 08 GL,L6CFCOEON7LN OA
Pn,iaIIw4ase.4.UR0071 0257 0323 0040 01W 015 00030 0 003 0039 0039 0 039 023 037 006 PbyscIComngn t 00l 00 003 005 00! 002 0073 O007 M3 007O 007 003 002' 004 006 S.b TOT t o0 0 2, 0 00O 0 04 04 ______0~~~~~~~o04 00o 2 4 6 PINC.fi e Is b-07I7 30 0 I37 27 0 8 20 t 6 + 004 03 11 0iu 003 003il 0 03 0 04 0 04 004 050 03 0* 0 TOTAL 0 0 4 007 o 00 00' 0
96TOal.M.2P&E.- Comnq+eOTHERe* 3% C 0003 23 00674T 0F 0040 0030 23 000 74 0090 0!l 4 - 7 °t
S., e ¶ S = 0 2607 Io7 _ 307_20 300 270 20 67 2 0 t P3°_ 0 2 034 0 ' 03 0 032 0 2 0 0 03 - ,_ _ _ __6______2 S.e . oMso footo ~~~~~7. _ O _ _ _ _txt0 OODE _ 2~ 00 0-.- 03 30 -. t'---- _ ='
007 03 003 O _ r - 7- 00- 003 _2___ P6ysl C3 c0- l1 1 .1060 I 3 __ 00 00705200 007 00275 0 9 SihTd :h-5>X n C--.o | 0.3. 1.0 _ 002' 030 O3 002 00 0 3 _2 TOTAL 'OTHER 03it 0°0 03 0 0 007 3 1 07w,a CotE 0 00 0'
tiss 2 _ 00T
PlzyuacaiCmmnptr.es- - - ' lot 0.07 0.03 0.03 3~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 2 03 333___0 TO3TAL 0.38 073 333 01t38 07'1 |3|33 073 098 PraCosqewe,PnccCcrarqcmnI% ~~~~~~~1307 20207 ~~~~07037,072507 207F2.30 0 3 310710 270 873 60 26 _ _
030~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
4 Oi230 607 260- ; : ~~ ~ ~ ~ ~ ~~PcC,zereUSS 2007° 2.07 33!070O 230 0707l 270 PRywcCm .q -es 0% 03 0.2 0.02
__ __ PnccCI cs 1q" OTHER 2.0 3.0 3070 100 20 07 30 6.7060
BASECC10 03 38 02 038 033 O 00 S. acICcqen30T03 03 03 0.01 0.04 0091 - ______
PnaC~zcsmap S 20707 2.07 33071 2 07 30.07 00 0 3 .7 20__ us$ 3 0 3 0.04 0.0 0.3o______~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0o 0 1 Pw=-Co--o TcjWsaC.~~~~~~~~~~~~~~~~~..a0.40 330 333 823 lio,043 066 3 1 200 o SuhT.., l1061 07 011 055 066 00332 Ot,6I 1 rO' 117 2I5i| _0_02 TlyciOTAL 0100 07 0 0 03 0.320330032 3 0 0.07 0.20 033 StwkToBa & - 03 3 0o3 3 4 2 0 3 _ _ 033 28 33is_
03$ C- - %0.04 0.03 0.3 08 00 33 02i 0.o -2 2 0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~am~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~2~_ _ _~
PnoeCotmt~n.1 1307 2070817 3307 230 31107 270 230 607260 TOTAL - _ . 1 3 N 3otcrre~~~~~~~~~~~or ~030 033 063 5030 03 0 0 003 063 07 Pbynolconqcoca0% 003 ~~~~~~~~~00170074 03007 00 03 00 0
SubToWalC03 o0I 072603 033 062 0725012 023782 2321 TAk lb. _____ WATER AND WASTlEWATIERD.IMOVEMENT COM4PONENT:DETAILED PREFSINTATIONOf PROJECTCOIl, FEOCLY11tEMENTAND FINANCING C y.P-.f P...-., 90 IWO 1997 IWO 109" TOITAL FINANCING LI. F IT L F T L F T L1 F T L F T L F IT 0 WO GO0EUJ-h4-ISNEFCO SWEDE FKLAND OTAL m6. Co6.im . I 20051 2-W0 7150 2.50 70.05 2.70 -- 6.05 2.50 6.COD 160 1______us$0 0041 0.011 0.05 0.06 0.03 0 09 0.04 6000 01o0 0.10 0.09 0.24 TOrrAL 0.15 0621 0.77 0.17 03 O750. 0.710 0.7 0.06 ___0.42 1.96 2 30 __A02 096 2.3 4.0S.Im I6I0 05 0 40 045 0.10 0.60 0.70 0.05 0.70 0.70 0.30 1.10 7.30 _ _ Pby-dI Coiqo- 701 0 07 0.04 005 0.07 0.06 0.07 0.07 0.07 0.02 .02 0.77 0.73 ___ S., T.W 0 06 04 0.O~50 0.17 0.66 0.77 0.06 0.77 077 022 727 743 __ S~ip6 20.00 2.0D 13.051 2501 700 Z702. 8.00, 2.50 605D 2.60 7us$ 0.04 0.03 0.07 0.70 0.07 0.76 005 0 07 0.07 0719 0771 0 31 TOTAL 0.70 0.47 0.57 0 27 07 0 93 0.77 0712 0.231 0.471 373 7.74 0,41 0.52 06a.74
Rd.bP-p ( S~~M.. 0.37 0 47 0~78 0.06 0.551 0 97 0.48 0.10 7.06 0.77 0.34 0.45 7 26 2.26 3.50 Pbyin.7C-Wa. - 701 0.05 005 0 08 0.04 0 06 0.05 0.05 0.05 0.74 0 07 0.03 0.05 0.73 0.22 0.35 ___ Sd, T,. 0 341 0052 0 86 0.AD 0.67 7.05, 0.03 0,97 7.50 0.12 0.37 0.50 7.3 2.46 3.835___ Ph. CCim,,i, S 2005 2.05 73.0) 2.50 70.05 2.70 8.05 2.50 6.05 2.60 US0, 0713O0.0 0.714 0.3 0.03 0_26 _039 0 07 0.47 0771 0 04 0714 0.46 0.7 7s.07 __ ___ TOrrAL 0-47 0.33 7.0D 0.63 0__.63 7.26 0.921 7.04 7.96 0 23 0.471 0.661 2.23 2.67 4.66 2.23 0.67 2 4.86 6.0nSR- ,Ica 0.26 0.23 0.491 __ 0.26 0.23 0.49 fty8 7 CinqV. 7010 0,02 0.03 0.05 0.02 0 05 0.05 I
S.______T 4 005 60 66W.7 .00.2 0.0.04023 70 .32.46.9 0 0.76 2.0 0.26 3.2 1. 2 .224. 970
TOTAL_____ 0.36L 646. .7 4 .0 0. .0 * 4.9 L 6.4 .64 02.081 7.78 0.4 0.723 06
Phy.wC- d 74lo%0941 O. 3.93 0.1.6~0 03 0 01. jjI2 0.0 0.1 j0 0.02 0.p 0Ll6 74.08 ANNEX I Page 12
E. Financing Plan
13. The proposed Bank loan of US $4.0 million will finance about 19 percent of Project costs. The Bank loan will be repaid by the GOL over 17 years including 5 years of grace with repayments calculated on an annuity basis at the Bank's standard variable rate of interest.
* Water and Wastewater Improvement Component. Grant-financing corresponds to approximately 44 percent of total component costs. Parallel grant cofinancing would be provided by: (a) the European Union, in the amount of ECU 100,000 (US $120,000 equivalent) for funding of leakage detection equipment and training for the LWWE under the European Union PHARE Baltic Regional Program; (b) the Government of Finland, acting through the Ministry of Environment, would provide up to FIM 12.0 million (US $2.0 million equivalent) to support investments in the wastewater collection and treatment elements of the proposed Project; and (c) the Government of Sweden, acting through BITS, would provide up to SEK 50.0 million (US $6.5 million equivalent) to support investments in the wastewater collection and treatment elements of the proposed Project. The funding is being provided by Finland and Sweden in the context of their support for the Baltic Sea Environment Program.
The Nordic Environment Finance Corporation would provide a loan of US $2.0 million equivalent to support the proposed Project. This loan could be provided under terms which are similar to those of the World Bank.
Local counterpart contribution of Ls. 2.0 million or US $3.5 million equivalent would be provided by the GOL; Ls. 1.0 million or US $1.75 million equivalent would be provided by the MOL.
An advance of US $300,000 has been requested from the Project Preparation Facility (PPF) and would be used to support the establishment of the PIU, preparation of bidding documents and to conduct a tariff study.
* Environmental Management Component: This component would be financed mainly through grants. The proposed IBRD loan would finance US $200,000 for procurement of goods and services for small infrastructure improvements.Grant financing is to be provided by the Governmnentof Denmark and is anticipatedfrom the Netherlands and other potential donors. The Governmentof Denmarkacting through the Danish Ministry of Environment,has approved a grant of US $500,000 equivalent to WWF - Derunark to support the environmentalmanagement activities for Lake Pape and Jurkalne. The Government of the Netherlands, acting through the Ministry of Physical Planning, Housingand Environment,is currentlyconsidering a request from the MOE for support for preparation of the Integrated Coastal Zone Management(ICZM) activity to be includedunder the proposed Project.
14. Tables2 and 3 show the required financingby year and financer. ANNEX I Page 13
Table 2: FINANCING PLAN BY YEAR (US$ million)
1995 1996 1997 1998 1999 2000 Total
Bank Fiscal Year IBRD, (loan) 0.68 1.64 0.73 0.32 0.44 0.19 4.00 NEFCO, (loan) 0.04 0.62 0.70 0.64 2.00 BITS, Sweden (grant) 0.33 2.17 2.34 1.21 0.39 0.06 6.50 Min. of Environment, Finland (grant) 0.13 0.33 0.79 0.65 0.10 2.00 Min. of Environment, Denmark (grant) 0.10 0.20 0.20 0.50 EU PHARE Program (grant) 0.06 0.06 0.12 Other Donors (grants) 0.20 0.20 0.20 0.20 0.80 Local Contribution 0.32 1.97 1.26 1.24 0.37 0.09 5.25
Total 1.86 7.09 6.12 4.46 1.30 0.34 21.17
i
Table 3: FINANCING PLAN BY FINANCER (US$ million)
--- Local --- -- Foreign -- --- Total --- US$ % US$ % US$ %
Financers IBRD, (loan) 0.72 10% 3.28 23% 4.00 19% NEFCO, (loan) 0.86 12% 1.14 8% 2.00 9% BITS, Sweden (grant) 0.12 2% 6.38 45% 6.50 31% Ministry of Environment, Finland (grant) 2.00 14% 2.00 9% Ministry of Environment, Denmark (grant) 0.50 4% 0.50 2% EU PHARE Program (grant) 0.12 1% 0.12 1% Other donors (grants) 0.80 6% 0.80 4% Government of Latvia 3.50 50% 0% 3.50 17% Municipality of Liepaja 1.75 25% 0% 1.75 8%
Total 6.95 100% 14.22 100% 21.17 100%
II. IMPLEMENTATION ARRANGEMENTS
A. Organizations Responsible for the Project and Interagency Coordination
15. Ministry of Environment and Regional Development. The MOE is the successor organization to the Latvian Environmental Protection Committee. The ministry has a diverse range of responsibilities including environmental protection, natural resources management, parks and protected areas management, physical planning and tourism. The Minister of Environment and Regional Development is supported by a State Minister for Environment who has responsibility for environmental protection and the management of natural resources and protected areas. The MOE has adopted a decentralized approach to environmental management and has an established network of Regional Environmental Protection Committees, including ones in Liepaja and Ventspils, which provide local level support for the implementation of its policies and programs.
16. A Projects Department has been established within the MOE which is responsible for the preparation and supervision of all major locally and internationally funded projects. This unit has been directly involved in the preparation of the proposed Project, including the review and approval of terms of reference, selection and supervision of consultants and review of their studies. The MOE also has an Ecological Expertise Board which has participated in the preparation and evaluation of the environmental review for the proposed Project. While the Projects Department has developed significant skill in the management of technical assistance activities, the proposed Project would be the first internationally funded investment project to be prepared by the MOE. Based on previous Bank experience in working with the MOE and Projects Department in the context of the Baltic Sea Environment Program and on Project preparation to date, it is anticipated that the staff would be capable of successfully supporting supervision of the proposed Project.
17. Liepaja Water and Wastewater Enterprise. The MOE has appointed the Liepaja Water and Wastewater Enterprise to undertake implementation of the Water and Wastewater Improvement Component of the proposed project. This approach is fully consistent with the policy of the MOE to support the decentralization of environmental management responsibilities to local municipalities and to have those parties which would be responsible for operation and maintenance of facilities take an active role in their design and construction.
18. The LWWE is set up in accordance with the Law on Municipal Enterprises (1991) which makes clear that the enterprise is subject to the City Council of Liepaja which is ultimately responsible for the actions of LWWE. In this context, the municipal authorities in Liepaja are ultimately responsible for the provision of water and wastewater services to the residents and have established a municipal enterprise to fulfill this responsibility. The powers and duties of the enterprise are set out in a municipal statute. The statute's main provisions are that the utility is an independent legal entity, required to provide water and sewerage services to the population of Liepaja according to the national standards. The utility should have a long term plan for the development of the services in Liepaja and maintain and renew the infrastructure accordingly, although this has yet to be done. The utility is financially independent, and has its own bank accounts. Tariffs are to be agreed with the City Board, but if the tariffs set would result in a financial loss, the municipality must fund the deficit from its general budget.
19. Other Implementing Agencies. Implementation of the Environmental Management Component would be managed and implemented by the Environment Department of the MOE which has ANNEXI Page 15 had experience in the preparation of a wide variety of technicalstudies and managementplans by joint Latvian and internationalteams. The activity concerningtourism developmentwould be overseenby the recently established Tourism Department whose personnel may require some training in study managementto adequatelysupervise this activity. The WWF working through its European and Baltic RegionalPrograms would participate in the implementationof the protected areas managementactivities for Lake Pape and Jurkalne. WWF has a Latvian staffed office in Riga which has successfullyprepared a Nature Conservation Strategy for Latvia as well as undertaken a number of field based activities. Concernedlocal level environmental,infrastructure, planning and tourism organizationshave a limited numberof skilledpersonnel; however, with proper design and supervisionof the proposed activities,they shouldbe able to have a significantrole in implementationand benefitfrom componentsupported training activities.
B. Agreements between Borrower and Implementing Agencies
20. The followingagreements were be reachedbetween the Borrower and the Implementing Agenciesduring negotiations:
(a) The Borrower would identifyhow their counterpartcontributions would be provided and specify the procedures to be used for on-lendingto the MOL on behalf of the LWWE;
(b) The PIU for the WWIC would become fully operational in January 1995;
(c) The MOL would continue to approve regular tariff increases sufficient to allow the LWWEto cover water productionand treatmentcosts, wastewatertreatment and disposal costs, operation and maintenance, depreciation, interest and make a contribution to reserves;
(d) The MOE would formalize its cooperation with the WWF concerning its role in implementationof nature conservationactivities under the EnvironmentalManagement Component.
(e) A Detailed ImplementationPlan has been prepared for the WWIC and the EMC;
(f) The LWWE is in the process of finalizinga contractualarrangement in order carry out the planned Twinning Arrangementwith a utility acceptableto the Bank; and
(g) The MOE has appointed staff required for coordination of the EMC and facilitate the appointmentof personnel from local level governmentorganizations.
In addition, during negotiationsit was advised that:
(a) The MOE has establisheda Project Steering Committee(PSC);
(b) The MOE has appointeda Project Coordinator; ANNEX I Page 16
(c) The MOL and LWWE have nominated the personnel for carrying out the Water and WastewaterImprovement Component, including the appointmentof key personnel to a Project ImplementationUnit (PIU); and
(d) The PIU is already operational with local staff.
C. Responsibilitiesof Implementing Agencies
21. ProjectCoordination. The lead agency for the proposedProject would be the MOE which would provide overallsupervision of the Project, coordinatethe actionsof fundingorganizations and local implementingagencies and communicatewith the Bank.The MOE has appointedthe ProjectsDepartment to serve as the coordinator for implementationof the proposed Project. To date this has been the responsibilityof the director of the Department, who has taken an active role in coordination and technical aspects related to preparationof the Project.
22. Project Steering Committee (PSC). In order to facilitate implementationof the proposed Project, the MOE plans to: (a) establish a PSC chaired by the Director of the Projects Department; and (b) appoint a Project Coordinator for the proposed Project. The committee would include, but not be limitedto, the following:representatives of key departmentsfrom within the Ministry, Liepaja Regional EnvironmentalProtection Committee, Municipalityof Liepaja, LWWE, Liepaja, Talsi and Ventspils District Governments, and representatives of local government authorities where environmental managementactivities would be undertaken.A representativefrom the World BankOffice in Riga would serve as an ex-officiomember for purposes of coordination.The role of the Project Coordinator would be to represent the MOE in dealings with the cooperating funding agencies, facilitate coordination between national and local governmentauthorities in Latvia, provide specializedtechnical support and serve as the secretary for the PSC. The scheduling,planning and reporting on the meetings of the PSC would be the responsibilityof the MOE. The PSC would be expected to meet at least twice a year to review the progress of the proposed Project.
23. The PSC would provide overall guidancefor the proposed Project and facilitatenational and local government coordinationissues. It would ensure that financial resources required under the Project are made available to the implementing agencies in a timely manner and monitor Project expendituresand costs. The PSC would monitor the movement of official documents and contracts through the usual approval processes and undertake measures to expedite their release. It would also monitor compliance with Bank ProcurementGuidelines in the acquisition of equipment and technical assistance contracts.
24. Project Coordinator.The project would be implementedunder the general supervision of the MOE. Managementof the proposed project would be the responsibilityof a Project Coordinator (PC) who would be formally appointedby the Minister. The role of the PC would be to represent the MOE in dealingswith the cooperatingfunding agencies, facilitate coordination between national and local governmentauthorities in Latvia, provide specializedtechnical support and serve as the secretaryfor the project implementationcommittee. Currently the Director of the Projects Departmenthas been appointed to undertakethis role during the project preparation period given the significantissues related to project funding.During the implementationphase, this individual would, be supported by a specialist with a scienceor engineeringbackground to address a wide range of technical issues associatedwith effective ANNEXI Page17 implementationof the proposed project. Finally, together with LWWE, the PC would prepare a draft Project CompletionReport (PCR) within six months after the completionof the Project.
25. Waterand WastewaterImprovement Component. The LWWE would be responsible for implementationof the water and wastewaterimprovement component. In order to effectivelyimplement all Project supported activities concerningwater and wastewater, including institutionalstrengthening, a PIU would be establishedwithin the LWWE. During negotiations, agreement was reached as to the necessarystructure, staffing,equipment, and other arrangementsfor the PIU. The PIU would be assisted, as required, by internationalconsultants to support the preparation of technical specifications,bidding documents, tendering, bid evaluation, contract awards, supervision of civil works and equipment installationand follow-upactivities. The PIU would be headed by a full-time Project Coordinator who would report directly to the Director of the LWWE. In addition, the PIU should be staffed with specialists with skills in water and wastewater treatment, environmental planning, accounting, procurement,contract monitoring, informationprocessing and records management.The Director of the Enterprisewould be responsiblefor supervisionof all Project supportedactivities concerning water and wastewater, includinginstitutional strengthening, within the service area of the LWWE.
26. Other specificresponsibilities of the PIU are the following:
(a) improve and finalize TORs, preparation of short-lists, and technical evaluation of TA proposals received;
(b) preparationof detailedspecifications and procurementdocuments for approvedequipment lists, review of bid packages and evaluation of offers received;
(c) prepare and submit disbursements applications to the Bank, NEFCO and bilateral donors;
(d) monitoringof detailed procedures, implementationschedules, and program(s);
(e) review of physical targets and preparation of revised estimates of financial resources needed to support future actions;
(f) liaise with the Bank and other involved agencies for Project administration and supervisionmatters;
(g) prepare and distribute consolidatedperiodic reports to the PSC and other participating institutions, including the Bank, reflecting: (i) the status of implementationprogress, problems encounteredand corrective actions needed;and (ii) current costs of each Project componentand estimated costs of completion;
(h) ensure the timely preparationand submissionto the PSC and the Bank of annual audit reports of Project expenditure,including Statements of Expenditure(SOEs) and accounts; and
(i) togetherwith the PC, prepare a draft Project CompletionReport (PCR)within six months after the completionof the Project. ANNEXI Page 18
27. EnvironmentalManagement Component. This component would be managed by the EnvironmentDepartment of the Ministry with the participation of the Tourism Department, Regional EnvironmentalProtection Committees, District and Parish Governmentsand the World Wide Fund for Nature. Each of the four small-scaleactivities under the componentwould have their own management structure in order to allow for a flexible approach to implementationof these demonstrationactivities. A technicalspecialist from the Environment Departmentwould serve as coordinator for the integrated coastal zone managementand protected areas managementactivities, and a technicalspecialist from the Tourism Departmentwould serve as coordinatorfor the tourism developmentplan. Local coordinators would be designatedby the concernedDistrict and Parish Governmentsfor activities which would be implementedwithin their jurisdictions. Finally, operatingunder a cooperativeagreement with the MOE, the WorldWide Fund for Nature- Denmarkwould be responsiblefor implementationof activitiesat Lake Pape and Jurkalne, in cooperationwith the concernedDistrict and Parish Governments.
28. Chart 2 below shows the departmentresponsible and implementingdepartment for each sub-componentof the Project.
Chart 2: PROJECTIMPLEMENTATION RESPONSIBILITIES
Subcomponentand Activity ResponsibleDepartment ImplementingAgency Water and WastewaterImprovement Component Waterand WastewaterImprovement Projects Department, Liepaja Water and Wastewater MOE Enterpriseon behalf of the Municipality of Liepaja
TwinningArrangement Projects Department, Liepaja Water and Wastewater MOE Enterprise
EnvironmentalManagement Component IntegratedCoastal Zone EnvironmentalProtection MOE and local governments ManagementPlan Department,MOE Eco-TourismDevelopment Plan TourismDepartment, MOE and local governments MOE ManagementPlan and Programfor EnvironmentalProtection World Wide Fund for Nature and local Lake Pape Department,MOE governments
ManagementPlan and Programfor EnvironmentalProtection World Wide Fund for Nature and local Jurkalne Department,MOE governments ANNEXI Page19
D. Role of the World Bank during Supervision
29. The proposedProject would be supervisedby Bankpersonnel fromboth headquartersand the RegionalMission for the BalticCountries. In addition,technical specialists from the SwedishMinistry of Environmentand Finnish Ministry of Environmentwould also participate in supervisionmissions. Personnelfrom NEFCOand WWF would participatein selectedmissions. The proposedsupervision plan is summarizedin Chart 3.
30. Recognizingthat the proposed project would be the first Bank Project in Latvia involving large scale construction of civil works and installation of sophisticated mechanical and electrical equipment, it is anticipatedthat it would require significantsupervision. This supervisionwould focus on the first two years when considerableinput would be requiredfor engineeringand procurementaspects of the water and wastewater improvement component. In addition, supervision by environmental specialistswould be required for the complexissues of preparationand initialimplementation of activities under the environmentalmanagement component. Savings would be realizedby relying on staff from the Bank RegionalMission for supervision. During the first year of implementation,training seminarswill be organized in procurement, disbursement, and accounts/audits.
31. A mid-term review would be conductedto evaluateproject progress and assess the status of actions to be undertaken to establish an autonomousutility, to develop and implementan amended tariff structure and to strengthenthe managementcapacity of LWWE. The loan agreementwould include provisionswhich allow the Bank, in consultationwith the Borrower, to make adjustmentsin the details of these items and the schedule for their implementation.During the mid-term review the findingsof the tariff study would be reviewed long-termtariff rates would be agreed upon.
32. It is planned that about 18 staff-weeksof effort for the first two years and about 15 staff- weeks thereafter would be required for supervision. Following the start-up mission, supervision requirementswould includetwo supervisionmissions and an annual review; in later years one supervision mission and an annual review would be conducted. The final supervisionmission would be to prepare the Project completion report. It is planned that these missions, in order to minimize costs, would be coordinated with those required for the proposed complementaryKlaipeda EnvironmentProject in an immediatelyadjacent area of Lithuania. Ch.t 3 SUPERVISIONPLAN ANLNEX.I E.~~~T.W ~~Page 20
M-.95 Spm.io.. I H.. 2I. 2 I 1 6 (NPj.d- stfltp) R O 08.____ffi ___ 2 I 3 P BITS 23 Y F- M II 9 NEFCO___ 5 WWF I
J1-95 S.. . 2 H.sdq-n.... 26 ______
E~v...nI 011k. 2_____
9 S.p- 5 S.-. 3 H.sdqut.r. 2 I I 4 Rq~gn..IOfi3k. 2 2 4 BITS 2 2 F F-mh ME I I
9 D-c95 1.1 A-,r,. Rm.v. H~. .. I 2 6 R.p~.na offi. 2 4 BITS 2 2 F-~h MEII NEFCO WWFI I
Apr-96 S.p-.rc.. 4 H..d.-t-~ ___
BITS. Off 22
------F-- .h M-E ------
Sep-96 S~.Pec..o 3 H..dquar.~. 2I3 R.g,os.I Offi. 2 2 F BIT Y F-v,h MES
7 De-96 2rn1A-ma R-,c H..d 4 uec.. 2 I I I 35 RqV,oa.Offic. __2 I 3 BIT 22 F-.h ME I I NEFCO WWFI I
Ap.-97 Sp-. 6 H..dq~..Mt.n
R-W...oI Office ____ 2 I 3 BITS ______2 2 ------Fi. hM E ------I I
Dec-97 3,d A-cue Rec-. H..dqe.r.n 2 I I 4 M,d-T.n. R.-vi R.~uIx... Oflic. ___ __ 2__ 2__ 4
F BIT _ __ _I_ I____ Y Fmmh ME I__1 ___ 9 NEFCO f I _ _I 8 WWF ____
Ap,-98 Sup v-e 7 H..dqued.r 4__ R.p ... I Offi 2 1 BI-I' I{ FmihME___"4 t0 i Dec-98 411, A-..]I R.-i H..dquar.n 2...___ 1__ 3_
Y F,uh MEI 9 NEFCO I ______
M.-99 S.p.mueo. S H.adq-H-r ______II
D..-"9 311 A-"ue R.,~. H1..dquefl.. I 3
R.1ona 018i., I
Y F,ham.IMELI1 S NEFCO I S May-OS PrjcI mpl.non Hnadq .nan 22 = NcP.p-ti,on RqponaIO13.fi-II
III. IMPLEMENTATIONACTIVITIES
A. Time-BoundSchedule
33. Terms of referencefor the twinning arrangementhave been prepared and were discussed duringnegotiations. Appendix 1 of this Annex and Table 8 below show a summary of milestones in Projectpreparation, implementationand monitoring activities.
B. ProcurementArrangements and Schedule
34. Like many other Central and Eastern Europeancountries, Latvia does not have a tradition of competitivebidding for the procurement of public goods and services. All procuremen. during the Soviet periodwas done centrally. The GOL is now in the process of preparing legislation instituting publicprocurement rules and regulationsas part of its comprehensiveprogram to transform its economy froma centrallyplanned to a market-orientedsystem based on the developmentof a competitiveprivate sector.The GOL has requestedthe Bankto provide assistancein this area, and work is alreadyunderway. A CountryProcurement Assessment Report (CPAR) is not required at this stage. Since the introduction of procurementlegislation is expectedto take some time, assurance for this proposed Project shouldbe obtainedduring Appraisal that the GOL would apply procurementprocedures which are consistentwith the Bank's"Guidelines for ProcurementUnder IBRD and IDA Credits" (May 1992).
35. Procurementunder parallel cofinancingarrangements (about US $10.62 million) would be carried out through tied procurement in accordance with procurement regulations of EU PHARE, NEFCO, Finland and Sweden. All other procurementwould be undertakenin the following manner:
(a) All Bankfunded contractswhich are estimatedto cost more than US $250,000 equivalent per contractwould be procuredfollowing Intemational Competitive Bidding (ICB). The Borrower would use the Bank's Standard Bidding Documents for Supply and Erect Contracts. Five contracts totalling US $3.79 million for: (i) water main; (ii) water conservation; (iii) sewer reconstruction; (iv) water rehabilitation; and (v) laboratory equipment, would be awarded under ICB. Such contracts would include all goods and civil works necessary for component implementation("Supply and Erect Contracts"). Packagesprocured through ICB wouldaccount for approximately59 percent of the total value of the Bank financed procurement. Invitations for bids would be grouped in sizeablebid packagesto enhancecompetition and benefit from economiesof scale in bid prices;
(b) Procedures for InternationalShopping (IS - about US$ 0.37 million) and Local Shopping (LS - about US$ 0.20 million) would be used for procurement of smaller contractsup to US $250,000 and US $50,000 respectivelybecause the cost of ICB would clearly outweigh possible price advantages. It is expected that some small components such as chlorinationequipment and office equipmentcould be procured through IS. LS procedures would be used for procurement of goods for small infrastructure improvementsfor the EMC (such as upgradingof access roads, establishmentof parking facilities, a sluice gate, informationsigns and observationtowers). Contracts awarded under IS proceduresshould be based on comparingprice quotationsobtained from at least three suppliers from three eligible countries in accordance with Bank guidelines. ANNEX I Page 22
Contracts awarded under LS procedures would be based on comparingprice quotations from at least three local suppliers; and
(c) Three contracts for consultancy services for: (i) the implementation surveys for water supply (US $240,000); (ii) contract coordination and supervision of the water and wastewater component (US $840,000); and (iii) consultant support for the PIU (US $730,000) would be shortlisted and selected on a competitive basis according to Bank Guidelines, "Use of Consultants by World Bank Borrowers and by the World Bank as an Executing Agency" (August 1981), and hired on terms and conditions acceptable to the Bank.
36. Informal introductory training was provided during the appraisal mission by the Bank's Procurement Specialist for representatives of the MOE, MOL and LWWE. In addition, relevant personnel from the Projects Department of the MOE and the PIU participated in more extensive procurement training courses organized by the Bank in September 1994. The efficiency and capability of the Borrower to carry out the Bank's procurement procedures would be strengthened through ongoing training and the use of standard bidding documents. Provision of international technical assistance for the PIU should ensure adequate administration of procurement.
37. Procurement Review. All ICB procurement packages would be subject to the Bank's prior review and approval, in accordance with paragraphs 2 and 4 of Appendix I of the Bank's Procurement Guidelines. All prior review items would cover 80 percent of the total amount of the loan. Other loan- funded activities would be subject to the Bank's post review during the supervision of the project, in accordance with paragraphs 3 and 4 of Appendix 1 of the Guidelines.
38. ProcurementMonitoring. Procurement data would be collected and recorded for: (i) prompt reporting of contract award information by the Borrower; (ii) comprehensive quarterly reports to the Bank by the Borrower; and (iii) revised timing of procurement actions, including advertising, bidding, contract award, and completion time for individual contracts.
39. A summary of procurement packages for works, equipment, and technical assistance, indicating the schedule for tendering, the estimated cost and completion time is shown in Tables 4, 5 and 8. ANNEX I Page 23
Table4: PROCUREMENT ARRANGEMENTS
Total ProjectElement ICH Other N.B.F Cost
Water and Wastewater Improvement CoMponent
Civil Works and LareerEquipment Water SupplySystem NewOtanki Main 1.13 1.13 (0.75) (0.75) ServiceExtension 0.14 * 0.14 (0.10) (0.10) Sewerage SewerReconstruction 0.64 0.64 (0.28) (0.28) SewerRehabilitation 1.44 1.44 (1.21) (1.21) Completionof NewWastewater 3.99 3.99 TreatmentPlant & SpareParts
NorthernInterceptor 2.38 2.38 SouthernInterceptor 1.74 1.74 Partly NewTerminal Main and 4.86 4.86 Rehab.of Main PumpingStation
SmallerEquipment WaterSupply LaboratoryEquipment 0.18 0.18 (0.18) (0.18) ChlorinationEquipment 0.12 ' 0.12 (0.10) (0. 10) Water Conservation 0.40 0.40 (0.24) (0.24)
...... I...... LeakageDetection Program 0.12 0.12
ProjectImp!em~.¢.n..t...o..n..u..t...... Implemen&T~taion.Unit Office Equipment 0.11 0.11 (0.11) (0.11) ConsultantServices Water Supply ImplementationStudies 0.24 0.24 (0.17) (0.17) ProjectImplementation Unit InternationalConsultant and PIU Staffing 0.73 ' 0.73 (0.30) (0.30) Training ...... and TechnicalAssistance 0.61 0.61
ContractCoordination & Supervision 0.84 " 0.84 (0.36) (0.36)
Environmental ManagementConponent
SmallCivil Works and Equipment 0.20 ' 1.30 1.50 (0.20) (0.20)
Total 3.79 2.38 15.00 21.17 TheBank (2.66) (1.34) (4.00)
(l) - bon fiOnned N.B.F- N B.ankFimnced
* tmtnaniontlShopping - US10.37mdlion Aeconuing Btnt GsndeOkiicf.o U. of C.n'( i (Augu 1941)- us 51.81milin * ocalShopping - USS0.20 million Table 5: SUMMARY OF PROCUREMENT PACKAGES
Est. Cost Proc. Preparation Tender Doc Bid Contract Contract Component (US M) Method of Bidding Docs Issued Submitted Signed Completion
Water and WasteW2ter ImprovementComponent Civil Works and Larger Equipment New Otanki Main 1.13 ICB Sep-94 - Dec-94 Jan-95 Feb-95 May-95 Dec-95 Service Extension 0.14 shopping Feb-95 - Apr-95 May-95 Jul-95 Dec-95 Dec-96 Sewer 9 Reconstruction. 0.64 ICB Sep- 4 - Nov-94 Dec-94 Feb-95 May-95 Dec-95 Sewer 9 9 Rehabilitation 1.44 ICB May-95 - Sep-95 Oct-95 Dec-95 Apr-96 Sep- Completion of new WWTP and spare parts 3.99 N.B.F. Sep-94 - Dec-94 Jan-95 Mar-95 Jun-95 Dec-97 North 9 and South Interceptors 4.12 N.B.F. Sep- 4 - Jan-95 Feb-95 May-95 Aug-95 Dec-99 Partly new Terminal Main 4.86 N.B.F. Oct-94 - Feb-95 Mar-95 May-95 Aug-95 Nov-98 & Rehab. of Main Pumping Station
Smaller Eqluipment Laboratory Equipment 0.18 ICB Sep-94 - Nov-94 Dec-94 Feb-95 May-95 Dec-96 Chlorination Equipment 0.12 shopping Apr-95 - Jul-95 Aug-95 Oct-95 Jan-96 Oct-96 Water Conseration 0.40 ICB Dec-94 - Apr-95 May-95 Jul-95 Oct-95 Oct-96 Leakage Detection Program 0.12 N.B.F. Sep-94 - Oct-94 Nov-94 Feb-95 May-95 Dec-95 Office Equipment to PIU 0.11 shopping Sep,-94 Oct-94 Oct-94 Nov-94 Jan-95
Consultancies Implementation Studies 0.24 shortlist of firm Sep-94 - Nov-94 Dec-94 Feb-95 May-95 Dec-95 Contract Coordination and Supervision 0. 84 shortlist of firm Sep-94 - Nov-94 Dec-94 Feb-95 May-95 Mar-99 Training and Technical Assistance 0.61 N.B.F. Sep-94 - Nov-94 Dec-94 Feb-95 May-95 Dec-96 Staffing of PIU 0.73 shortlist of firm Aug-94 Sep-94 Sep-94 Dec-94 Mar-00
Sub Total 19.67
Enviroinnental Management Comnponent Integrated Coastal Zone Management Plan 0.50 N.B.F. Feb-94 - Oct-94 Jan-95 Mar-95 Jun-95 Jun-98 Tourism Development and Management Plan 0.50 N.B.F. Mar-94 -Oct-94 Jan-95 Mar-95 Jun-95 Jun-98 Management Program for Lake Pape/Jurkaln 0.30 N.B.F Apr-94 - Oct-94 n/a n/a Jan-95 Jun-98 Management Program for Lake Pape/Jurkaln 0.20 shopping Apr-94 - Oct-94 n/a n/a Jan-95 Jun-98
Sub Total 1.50
TOTAL 21.17 ANNEXI Page25
C. Disbursements
40. The proposed Project is expectedto be disbursed over a period of five years (1995-2000) on the followingbasis:
41. The proceeds of the Bank loan would be disbursed against:
(a) For good and works: 100% of foreign expenditures, 100% of local ex-factory expendituresand 80% of local expendituresfor other items procured locally; and
(b) 100% of expendituresfor consultancyservices and training.
42. The allocation of the Bank loan proceeds and the corresponding local contribution proceeds are shown in Table 6; Table 7 shows the estimated schedule of disbursements.
43. Disbursementrequests will be prepared and submittedto the Bank by the PIU. It is expectedthat the members of the PIU as well as the Projects Departmentof the Ministryof Environment and RegionalDevelopment will participate in disbursementtraining organizedin Latvia or Washington D.C.
44. Disbursementwould be made against standard Bank documentation.The documentation to support these expenditureswould be retainedby the PIU for review by Bank supervisionmissions and verificationby externalaudits. Disbursementrequests would be fully documentedexcept for expenditures under contractsfor goods and equipmentvalued at less than US $100,000 equivalent, where statements of expenditure(SOE) would be used. Applicationsfor direct payment and special commitmentmay be submittedprovided they are for amounts equivalentto at least US $50,000. The Bank would not honor direct paymentrequests below US $50,000.
45. To facilitateProject implementation,the Borrower would establish a SpecialAccount in one of major foreign conmnercialbanks on terms and conditionssatisfactory to the Bank to cover the Bank's share of eligible expenditures.The authorized allocation would be US $200,000, representing about four monthsof average expenditures.At the requestof the Borrower, and based on project needs, the Bank would make an initial deposit or deposits into the special account up to the amount of the authorizedallocation. Applications for replenishmentof the specialaccount would be submittedmonthly or when one-third of the amount has been withdrawn, whichever occurs earlier. Documentation requirements for replenishment would follow the standard procedure. In addition, monthly bank statements of the special account which have been reconciled by the Borrower would accompanyall replenishmentrequests. ANNEXI Page 26
Table 6: FINANCING PLAN BY DISBURSEMENT CATEGORY US S Million
IBRD Local Contribution Amount % Amount %
Water And Wastewater Improvement Component
Civil Works and Larger Equipment
Water Supply System ...... New Otanki Main 0.75 18.75 0.38 21.50 ServiceExtension 0.10 2.50 0.04 2.00
Sewerage ...... I...... I...... Sewer Reconstruction 0.28 7.00 0.36 35.30 Sewer Rehabilitation 1.21 30.25 0.23
Smaller Equipment
Water Supply ...... Water Conservation 0.24 6.00 0.16 5.20 Laboratory Equipment 0.18 4.50 Chlorination Equipment 0.10 2.50 0.02 3.30
Project Implementation Unit Office Equipment 0.11 2.75
Consultant Services
Water Supply 0.00 ...... Implementation Surveys 0.17 4.25 0.08 4.60
Training and Technical Assistance Contract Coordination and Supervision 0.36 9.00 0.48 28.10
Project Implementation Unit = PPF Refinancing International Consultant and Staffing 0.30 7.50 0.42
Disbursement Component A 3.80 95.00
Environmental Management Component
Equipment and Goods 0.20 5.00
Disbursement Component B 0.20 5.00
Total Disbursement 4.00 100.00 2.17 100.00 ANNEX I Page 27
Table 7: ESTIMATED SCHEDULE OF DISBURSEMENTS
FY Quarter Loan Disbursement Cumulative Disbursement Profile Since Approval This Qtr. Cumulative Total % Sector* Regional *
FY 1995 Jun-95 0.63 0.63 16 FY 1996 Sep-95 0.47 1.10 28 0 0 Dec-95 0.63 1.73 43 Mar-96 0.27 2.00 50 6 3 Jun-96 0.30 2.30 58 FY 1997 Sep-96 0.32 2.62 66 10 6 Dec-96 0.13 2.75 69 Mar-97 0.10 2.85 71 18 6 Jun-97 0.10 2.95 74 FY 1998 Sep-97 0.10 3.05 76 26 14 Dec-97 0.10 3.15 79 Mar-98 0.10 3.25 81 34 18 Jun-98 0.12 3.37 84 FY 1999 Sep-98 0.13 3.50 88 42 26 Dec-98 0.10 3.60 90 Mar-99 0.10 3.70 93 54 30 Jun-99 0.11 3.81 95 FY 2000 Sep-99 0.10 3.91 98 62 50 Dec-99 0.09 4.00 100 20-Mar 4.00 100 70 58
Loan Closing Date: March 31, 2000
All regions- subsectorset.
** Region - sectorset. (ECA) Table 8: IMPLEMENTATION SCHEDULE COMPONENT A. WATER AND WASTEWATER IMPROVEMENT PROGRAM Pre-Project Project Year Total Procurement Project Element Activities 1 2 3 4 5 6 Payment Method 96 97 - 98 _ 99 loan Timing Sign/Eff/Close - April 1, 1995 - March 31, 2000
Civil Works and Larger Equipment New Otanki Main - - - , 1.13 ICB Service Extension 0.14 other Sewer Reconstruction ---- _ 0.64 ICB Sewer Rehabilitation _ . 1.44 ICB Completion of new WWTP &Spare Parts - - _ _ _ _ 3.99 NBF Northem Interceptor ---- _ _ _ 2.38 NBF Southem Interceptor _ _ _ 1.74 NBF
Partly New Tefminal Main ---- - _ _ - 4.86 NBF & Rehab of Main Pumping Station
Smaller Equipment Laboratory Equipment --- _ 0.18 ICB Chlorination Equipment 0.12 other Water Conservation _ _ _ 0.40 ICB Leakage Detection Program ---- _ 0.12 NBF
Consultantancies
Project Implementation Unit ---- _ _ _ _ - 0.84 other Implementation Studies ---- _ 0.24 other Contract Coordination & Supervision ---- ______0.84 other Training and Technical Assistance -- t t 1 0.61 NBF
TOTAL 19.67
Bank Financed Project Elements include USS3.8 millionfrom Bank and USS2.17 millionfrom GOL 5.97 s m ANNEXI Page29
D. Finance
46. Overview. The LWWE has been identified by the MOE as being among the more progressiveand technicallycapable water and wastewaterutilities in Latvia. It is the intentionof the MOE to have Liepaja serve as a "model utility" for secondary cities and provide: (a) an example of a sound water and wastewaterutility whichmay be applied elsewhere;and (b) a facility which could be used for in-countrytraining on "software"and "hardware"issues. To this end, despitethe administrative,financial and technicalconstraints which may exist, the MOE, in cooperationwith the MOL, intends to focus its efforts on making LWWE an autonomousand effective utility by mobilizinglocal and foreign resources to support complementaryinvestment and institutionalstrengthening activities.
47. Central to the approach of institutionalstrengthening is the developmentof a formal "twinningarrangement," on a contractualbasis, with anotherwater and wastewaterutility. This twinning arrangementwould includespecific activities, whichwould be defined as a componentof the Action Plan for LWWE, to include support for: utility management; system investment planning; rehabilitation program design; constructionsupervision; operation and maintenance;monitoring and use of laboratory data; tariff setting; billing and collection; accounting and auditing; human resources developmentand public informationprograms.
48. Past Performance.Analysis of LWWE financial statements3 for the years 1991 -1993 shows that revenue was adequateto cover cash charges, but the accounts lackedproper charges for non- cash items;these include:provision for plannedmaintenance, provision for bad and doubtfuldebts (which are considerable), proper asset depreciation reflecting replacement costs and provision for future investmentneeds. Becauseproper non-cashcharges were not reflectedin the formal accounts, there were no deficits reported during 1991-1993 and therefore no subsidy was required on the part of the Municipalityduring these years.
49. To date LWWEhas not receivedexternal financing for capital investments,consequently no long term external debt exists. Most of the short term debt, reflected largely in accounts payable, is moneyowed for electricitysupply. The financialviability of LWWEis seriously impairedby current poor budgeting practices which have indirectly induced relativelylow tariff levels. Previous unrealistic debt collection capability have deprived LWWE of cash to properly run its day-to-day operations and maintenance.Consequently, LWWE is under considerablefinancial strain and is in debt to a number of creditors. The budget is prepared on the assumptionof 100% revenue collectionon a current basis. On the basis of budgets thus constructed,the City Councildetermines the tariff rates and tax liability. The enterprise's financial position is further aggravatedby (a) the fact that it depends on the local public housing enterprise to collect its charges; (b) the failure to levy a charge for emptying cess pits; and (c) the fact that it does not receive a portion of the environmentalfees and fines for the collection and treatmentof highly polluted wastewater.
50. Table 9 below shows the deteriorationof LWWE's financial performanceover the last three years. It should be noted that the accounts do not reflect the lack of any accumulatedcash from years of non-recoveryof depreciation;consequently the financial position of LWWEis not as promising as presented below:
3 The first external audit of the accounts is underwayfor 1993. ANNEX I Page 30
Table 9. LWWE's Financial Performance -- 1991-1993 (Lats) 1991 1992 1993
3 Sales (thousand m ) 9,964 8,888 7,466 Average tariff (santimes/m3 )* .61 4.09 11.27 Revenues 60,693 363,903 841,108 Operating Expenses 51,718 303,765 719,360 Operating Income 8,975 60,138 121,748 Less: Depreciation 5,147 8,345 66,231 Net Income 3,828 51,793 55,517 Operating Ratio (%) 94% 86% 93% Current Ratio 2.7 1.7 5.0 Receivables (No. months' billings) < 1 3.5 3.0
Source: Companyaccounts and missionadjustments * I santimesequals 1/100th of a lat.
51. Tariff Levels and Revenues. Water tariffs are currently inadequate to cover full costs, particularlythe non-cashitems discussed in paragraph 47 above. Additionally,the structure of the tariffs does not include standing charges (connection fees) nor incremental charges for higher levels of consumption.All tariffs are either of a simplevolumetric form or, as is the case for industrialdischarges, of a weighted volumetricform. Industrial customersare metered, but most domestic customersare not. Seweragetariffs are generally appliedon the basis of consumed(metered or estimated)water, rather than accurate sewerage metering. The only exceptionsare those for large industrial customers which use considerablevolumes of water in the production process, for which a revised "return rate" is agreed, or for those who possess their own water supply, in which case the private supply is metered and a "reduced"charge calculated.
52. No provision has been made for bad or doubtful debts in the operating accounts nor interest charges for late receipts when determining tariff increases. Proper provisions for these debts would justify higher tariffs allowing LWWE to make proper accounting provisions. In practice, the Liepaja City Council has been reluctant to raise tariffs as high as the LWWE would like, given the political pressure to keep utility prices low. On the other hand, if the municipality suppresses tariffs belowthe level at which costs would be recovered,it would, in theory, be obliged to financethe deficit. However, no deficit-fundinghas been made as the subsequentyears tariffs have been based on budgeted costs without taking into accountthe previous year's losses.
53. Despite several tariff increases in 1991,1992, and 1993 (1993 reflected tax increases only), tariffs have not keep pace with the high (and erratic) periods of inflation and thus have failed to adjust properly to real cost increases. In March 1994, the GOL agreed to a 50 percent combinedtariff increasefor water and wastewaterof approximately2 santimi per unit charged (effectiveApril 1, 1994 for industry and July 1, 1994 for domestic consumers);the combined residentialtariff currently stands at the level of Ls. 0.11 or US $0.19 equivalent. ANNEX I Page 31
54. The GOL has imposedfinancial constraints on LWWE's operationalrevenue by requiring 25 percent of its wastewaterrevenues be passed on to the state (reflectedon operating expensesin Table 1). However, LWWE has full operational and financial responsibility for handling the discharges. Additionally,penalty charges collected for excess wastewaterdischarges are directly passed on to the Nationaland RegionalEnvironmental Protection Funds, although LWWE also has the responsibilityfor handling these excess discharges.
55. Billing and Collection.LWWE billing is computerized;consumers are divided into: (a) residential customers, (b) budget customers (including schools, hospitals, offices and shops), and (c) industrialcustomers. At present, industrialcustomers pay the highesttariffs and residentialcustomers the lowest. This reflectsa deliberatepolicy of cross subsidy to residentialcustomers. However, it is now the LWWE's intention that tariffs should converge.
56. Collection is a major problem for LWWE. Accounts receivable have increased dramaticallysince 1991,from traditionally0.1 percent, to 24 percent in 1994, representingapproximately three months of income. Collectionfrom institutionaland industrialconsumers is handledby the utility. For domesticconsumers, collectionis carried out by the Housing Enterprise; in this case it is clear that collectionis hamperedby LWWE's lack of direct contact with its customersas well as lack of individual metering. Approximately80 percent of Liepaja's housingis municipalstock, of whichapproximately 90 percent are in "blocks" of flats of five or more stories, none of which is currently metered. The water bill is attributedto each buildingaccording to estimatedconsumption of the building and, in the case of apartmentbuildings, divided among households. The billing is then carried out on a monthlybasis, and added to householdcharges for rent and other utilities. Many residents do not pay their block enterprises which, in turn, are unable to pay their bill to the LWWE.
57. While LWWEhas made arrangementsto followup outstandingdebts of its major metered industrial customers, it has no correspondingprocedures for initiating action with individualdomestic customers. Although LWWE has the right to disconnectcustomers for non-payment,it cannot isolate individualcustomers in a block and is therefore unable to implementthe main deterrent at its disposal. It is understoodthat residentswho do not pay their rent to the block enterpriseare rarely evicted, so there are reported to be a large number of customerswho are able to pay but refuse, as well as a large number of customerswho cannot pay. It is hoped that the planned privatizationof the "block enterprises" would enable the LWWE to reduce the level of non-paymentfrom these customers.
58. Other means to improve collections include: (a) administrativemeasures; (b) technical measures; (c) legal measures; and (d) well targeted programs to create social pressure on parties to pay their tariffs. Administrativemeasures include discounts on bills paid promptlyand penaltiesfor late bills. In addition, housing directors' salaries could be linked to the amount of revenue collected. Technical measures include installing block meters. Legal measures include monthly deduction from defaulters' earnings, which has been tried before with success, although discontinueddue to political pressure. It shouldbe reconsideredwith provisions includedto protect low income families and retirees. These and other measures will be discussed further at negotiations.
59. AccountingPolicies and Audits. Prior to the collapseof the FSU, Latviancompanies were integrated into the command system of five-year plans; financial statements were prepared largely to facilitate this process. Currently, the western accrual accountingsystem is replacing the former Soviet cash basis accounting, and LWWE has revalued its assets in accordance with the new requirements. ANNEXI Page32
However,historical statements are not readilycomparable with present financialperformance, and despite a major asset revaluation in December, 1992 and tariff increases, proper charges are not made against revenue for depreciation. This emphasizesthe need in periods of high or erratic inflation for regular adjustmentsto tariff and asset valuesto ensureproper fundingfor asset replacement.Additionally, a more comprehensiveasset revaluation should be carried out in the next three years in order to provide an acceptableestimate of LWWE's assets based on current replacementcosts and an assessment of their physical condition, in order to make proper provisions in light of inflation. Given that a proper asset revaluation is an expensive exercise, warranted only with an intent to privatize LWWE's assets, immediateasset revaluationis not required;LWWE's prioritiesare to sustain a positiveand adequatecash flow. An interim and less expensive solution to establishingproper depreciationcharges is for LWWE, with legal authority, to revalue its assets based on a limited and less costly physical inventory to assess replacementvalue and thus adjusting, as necessary, the past inflation indexed revaluationapproach.
60. To facilitate improved control of LWWE's finances, the project proposes to implement automated accounting systems linked to various ManagementInformation System (MIS) components includingbilling, generalaccounts, accountsreceivable, accounts payable,and all other major accounting functions.Additionally, the proposed MISsystem would be linked with both operationalbudget planning and a strategicplanning system. An automatedfixed assetportion would provideall pertinent informnation on depreciationand easily readablemeans of handlingrevaluations as the economyexperiences inflation. It is understoodthat the implementationof an MIS system has to be phased over time due to investment requirements, not only in terms of hardware and software but also with regard to human expertise. Phasingshould thus begin with the highest priorities in managingand controllingthe accounts.
61. FutureFinancial Performance. Projections of LWWE's financialperformance have been prepared by consultants and revised accordingly within the Bank which assume that LWWE would introducesubstantial water and seweragetariff increasesas presented below in Table 10; these proposed tariffs would allow LWWEto be financiallyself-sustaining by 1997assuming these tariffs are maintained at appropriatelevels and increasedregularly. LWWE's profit margin (before tax) should range from 25 to 28 % over the next five years; and the working ratio (operating cost divided by revenue) from 67 percent in 1994 to 48 percent in 1997. LWWE is expected to maintain or improve these performance levels from 1998 onwards.
Table 10 - Tariff Increases (real)
Water Supply Sewerage
Domestic Institutional Industrial Domestic Institutional Industrial
ANNUAL INCREASES (pa) 1995 16% 4% 0% 30% 17% 11% 1996 14% 5% 0% 31% 13% 5% 1997 11% I % 0% 30% 6% 7%
62. In preparing the projections, the financialobjective was to achievea profit margin of at least 15 percent (before payment of profit tax) by 1997 in real terms. This objective was prescribed by the Liepaja Town Board in order to sustain the financialperformance of LWWE and avoid the risk of ANNEX I Page 33
municipal subsidies. Detailed financial projections, the underlying assumptions and notes on tariff adjustments can be found in tables 1-6 in Appendix 2 of this Annex.
63. The projections show that the water and sewerage operations will be financially sustainable, provided: (a) the revenue projections are fulfilled; (b) water and sewerage tariffs are periodically adjusted to maintain the objective of full debt service cost recovery; (c) accounts receivable are brought under control (from 3 months outstanding of payments due to 2 months); (d) adequate levels of sustained maintenance are provided; and (e) the reorganization, training and technical assistance proposals are implemented to promote operating efficiency and cost reductions. The projections show that with the prescribed tariff increases presented above, the utility generates sufficient funds to cover the debt service obligations (it exceeds 2.0 from year 1994 through 2003).
64. The projections for the water supply system and sewerage system are presented below in Table 11, individually and combined. By 1998, operating revenue for the water supply system and sewerage system will increase 150% and 700% in real terms from 1994 level, respectively, due to real tariff adjustments. The working ratio (cash expenses divided by revenue) will similarly improve over the 1994-1998 period, decreasing from 84% to 64% for water supply and for sewerage, from 69% to 42%, over the five-year period. The relatively larger operating margin for sewerage is required in contrast to the water supply system, to accommodate the larger depreciation charges associated with sewerage. As seen in Table 11, the other key efficiency and liquidity indicators show LWWE approaching a healthier financial position by 1998 due to the real tariff increases.
65. Tariff Affordability. Current combined tariffs correspond to Ls. 0.1 1/in3 for domestic customers, which represents approximately 2.3 percent of the monthly income of an average income family. Given the estimated real tariff increase of 149 percent and real income growth, the maximum water services tariffs would correspond to an average of 3.1 percent of the average household income.4 This is higher than today's level, but within the range of acceptability by Bank standards.5
66. It should be noted that households in Latvia often have a number of non-cash benefits and undeclared income that are not reflected in the income level used in our affordability calculations. It can also be noted that the combined tariff levels in Riga are about US $0.15/m3, which is about 35 percent higher than the current rate for Liepaja, corresponding to approximately 5.5 percent of an average household income. Assumptions underlying the affordability estimates are presented in Annex 4.
4 This tariff level then sets total revenue potential,and from this the serviceabledebt level is derived.
5 Three percent of average householdincome or five percent of the average income of the thirtieth percentileof total incomedistribution. ANNEX I Page 34
Table 11 - LWWE Projected Financial Performance 1994 - 1998 (Lats 000 1994 constant) 1994 1995 1996 1997 1998 REVENUE Water Supply
3 Sales (million m ) 7.50 7.60 7.60 7.60 7.60 Average tariff (Lats/m3 )' 6.48 8.11 8.87 9.47 9.56 Revenue 554.40 615.80 680.20 728.20 734.80 Sewage Volume (million m3 ) 9.90 10.00 10.10 10.20 10.30 Average tariff (Lats/m3 ) 8.20 9.79 11.42 13.37 13.69 Revenue 809.60 980.00 1,148.70 1,358.30 1,404.20 Total Revenue 1,364.00 1,595.80 1,828.90 2,086.50 2,139.00 EXPENSES Operating Expenses* Water Supply 409.60 422.70 430.90 447.20 464.00 Sewage 499.80 513.10 532.70 564.10 599.80 Total Expenses 909.40 935.80 963.60 1,011.30 1,063.80 OPERATING INCOME Water Supply 144.80 193.10 249.20 281.00 270.80 Sewerage 309.80 466.90 616.00 794.20 804.40 Total 454.60 660.00 865.20 1,075.20 1,075.20 Less: Interest 64.00 156.40 215.50 247.60 Depreciation 72.5 197.40 245.40 285.90 296.50 NET INCOME 382.1 398.6 463.4 573.8 531.1 Working Ratio % 67 59 53 48 49 Operating Ratio % 72 75 75 72 75 Current Ratio 2.7 3.3 5.5 7.1 9.0 Account Receivable/Collection Period 1.80 1.90 1.80 1.60 1.60 Debt Service Coverage Ratio 4.0 2.7 2.5 2.3
Source:Consultants with internaladjustments. * Excludes resourceand pollutiontaxes and bad debts provision; ratios above includethese expenses. ANNEXI Page35
67. InternalRate of Return. The viabilityof the project is driven by a selectedtariff levelthat will allow Liepaja to generate a cash flow sufficientenough to generateat least a 15 percentprofit margin by 1997, to service debt and to provide proper provisions for planned maintenance,bad and doubtful debts, replacementcost depreciationand future investmentneeds. The project is not consequentlydriven by a financial rate of return (FRR). Nonetheless, cash flow generation must be sufficient enough to generate a FRR that exceeds the average weighted cost of capital to LWWE.
68. The FRR was calculated by the incremental costs and benefit streams to the capital investment. The tangible, financial benefits comprise the higher tariff levels justified by the capital expenditureprogram as well as the operationsand maintenancecost efficiencies(reductions) established with the investment program. The proposed investment on the water supply and sewerage systems of Liepaja has a combined financial rate of return (FRR) of 13.7% which indicates that the project is financiallyviable. 6 The individualFRRs are 23.5% for the water supply component(which accounts for 13% of the capital investment)and 11.6% for the seweragecomponent (87% of the capital investment). The results are summarized in Table 12 below together with a number of sensitivitytests.
69. For the water supplycomponent, the FRRs range from 18.0% to 26.2% and indicatethat investmentis unlikely to be adverselyaffected by normal-rangevariations in costs and revenues. For the seweragecomponent, the FRRs are lower at 8.9% to 13.3% which indicatethe need for tight cost control and rigorous enforcementof regular tariff increases in line with the main financial projections.
Table 12 - Financial Rates of Return
Component WaterSupply Sewerage Combined 1. BaseCase 23.5% 11.6% 13.7% SensitivityTests 2. Costs +10% 21.3% 10.2% 12.1% 3. Costs -10% 26.2% 13.3% 15.5% 4. Revenue +10% 25.9% 13.1% 15.4% 5. Revenue -10% 21.1% 10.0% 12.0% 6. Revenuelagged 1 year 19.6% 10.1% 11.8% 7. Combinationof 2 and 6 18.0% 8.9% 10.6%
E. Project Risks
70. Slippage. The proposed Project faces a number of political and technical risks due to the fact that it is the initial project of this type in Latvia. With regard to the WW7C,there is a risk that the Project implementationcould be delayed due to the limited experienceof the MOE and the LWWE in these types of activities.There is also a risk that, given the very limitedexperience with actual costs for
6 Theserates well exceed 2.9 percent, the weighted average cost of borrowing of the utility, reflecting the 71% grant elementin the project investmnent. ANNEXI Page36 implementationof water and wastewaterimprovements in post-SovietLatvia, the volatilityof local price changes,and previouslack of constructionactivities to intemationalstandards in this sector, construction costs may be underestimated. In order to minimize these risks, the Project provides for significant supervisionby staff from Bank headquarters and the regional office, establishmentof a PIU, and the adoptionof conservativeapproaches to cost estimationcombined with the use of appropriatephysical and price contingencies.
71. On the basis of previous Bankexperience in Poland, there is also a risk that the GOL and cooperatinglocal governmentsmay have problems with the timely provision of local currency support and that the availability of adequately qualified personnel for Project managementpositions may be constrainedby govermnentimposed limits on salaries paid to civil servants. It shouldbe noted, however, that in the Polish situationthese constraintswere overcomeby the Borrower and the Bank being closely engaged in Project supervision and quickly taking actions to address these types of implementation problems as they occurred.
72. Institutionaland Financial.On the institutionaland financialside the main risks concem: (a) the political commitmentof the Liepaja City Councilto support the transformationof LWWEinto an independentlymanaged water and wastewaterutility; (b) political or macro-economicfactors whichmay interfere with the commitment of the Liepaja City Council to authorize the LWWE to raise tariffs sufficientlyto cover the repayment of the Bank loan; and (c) continued problems with the capacity of LWWE to effectivelycollect water bills.
73. These risks would be reducedby carefullymonitoring the requirementsfor tariff increases and providing significant institutional development support to the utility to improve its financial management,billing and collectionpractices. The acceptabilityand the ability of maintaininghigh and increasingtariff levels should also be considered.The Action Plan, with a plan for tariff increases, should be formallyendorsed by the City Council,to ensure that the necessarytariff increaseswould be realized. Progress in compliancewith the Action Plan would be evaluated annually.
74. Technology.The technologyof the proposed Project is standard and involvesno unusual risks. The main risk is the utility's financialand institutionalcapability to carry out the proposed Project, as it would require substantialstrengthening of its ability to carry out an investmentprogram in general. Experiencewith other municipalwater and wastewaterauthorities in transitionaleconomies demonstrates that close Project supervisionand adequatetechnical assistancemitigate these risks.
75. EnvironmentalManagement Component Risks. The principal risks for the EMC of the Project concern: (a) difficulties in coordination of activities between various national, local, nongovernmentaland consultant organizations; (b) resistance from local authorities and residents to proposed land use control measures to be includedin the integrated coastal zone management,tourism developmentand protectedareas managementplans; and (c) unanticipatedproblems associatedwith the complexissues of restitutionof lands confiscatedby the State during the Soviet period to their pre-1940 owners.
76. Coordinationissues can be effectivelyaddressed by the establishmentof implementation teams for each of the activities with the support of the Project Coordinator and various Activity Coordinators,complemented by close Bank supervision. Resistanceto implementationdue to land use constraints and conflicts with pre-1940 land owners can only be addressed by having the direct ANNEXI Page37 participationof these parties, as proposed, in the planning and implementationof these activities. It shouldbe noted that the demonstrationactivities by their very nature are intendedto test the application of these approaches in the Latvian context and to provide lessons which can be transferred elsewhere within the country and the Baltic Sea region.
F. Loan Covenants for Implementation
77. Section VI of the Staff Appraisal Report shows a complete list of loan covenants to be monitored during the Project.
IV. MONITORING AND EVALUATION
A. Actions to Monitor Development Objectives
78. Project monitoringindicators were developedduring appraisalin order to enabletracking of Project inputs on key developmentobjectives throughout the Project cycle. At the mid-term review, the need to fine-tune or restructure the Project design will be based on the data received from these indicators.
B. Project Indicators
79. Giventhe essentialrole programmonitoring and evaluationplay in determiningthe impact of a given interventionon developmentobjectives, a number of indicatorswill be used to monitor and evaluateprogress during the implementationof the Liepaja EnvironmentProject. However, the progress of these indicators would be evaluated in relative, not absolute terms. During supervision, a selected number of commercial, operational, financial and environmental indicators would be monitored in accordancewith Project objectives. An illustrative list of indicatorsfollows for each component:
Waterand WastewaterImprovement Component
(a) Commercialindicators
* Service area is expected to increasewith new connectionsto both water supply and sewerage. The change in number of water subscribers and connections would be estimated; and
* The collection ratio (total collections divided by total billings) is expected to improve in accordancewith the Loan and Project Agreements.
(b) Operationalindicators
* The non-revenuewater percentage(volume of water produced minus volume of water sold, divided by volume of water produced) is expectedto be reduced.
(c) Financial indicators
* The average unit price adjustments for water and sewerage supplied for each consumer category (the tariff schedule) would be monitored in accordancewith the Loan and Project Agreements;and
* The following standard financial indicators, in addition to the internal rate of return, would be monitored:
A Working Ratio (ratio of operating costs to operating revenues, excludingdepreciation, interest payments, and debt servicepayments) not to exceed70%; ANNEX I Page39
An Operating Ratio (ratio of operating costs to operating revenues, including depreciation and interest costs, but excluding debt service payments) not to exceed 85%;
A Debt Service Coverage Ratio (the extent to which internal cash generationcovers total debt services) not to fall below 1.5;
A Current Ratio (current assets divided by current liabilities)not to fall below 2.0.
(d) Environmental Indicators
The following environmentalindicators would be monitored:
Reliability of water supply and distribution system;
Reliabilityof wastewatercollection and conveyancesystem;
Operational performance and level of load reduction achieved by upgraded wastewater treatmentplant; and
Levels of reductionof pollution loads at a selectednumber of locations.
Environmental Management Component
* Activity No. 1. Integrated Coastal Zone Management Plan. The progress of this componentwould be measured against:
establishmentof an activity steering committee with active involvementof the major stakeholdersin the local communities;and
successfuldevelopment of the ManagementPlan and implementationof selected priority small infrastructureimprovements.
* Activity No. 2. Eco-Tourism DevelopmentPlan. The following indicators would be monitored:
- consistencyof tourism investmentsand visitor patterns with the objectivesof the IntegratedCoastal Zone ManagementPlan;
- change in number of tourists visiting the area;
- change in number of tourism-relatedfacilities to accommodatenew visitors; and
- change in tourism-relatedemployment in the region. ANNEXI Page40
* Activities No. 3 and No. 4. Management Plans and Programs for Lake Pape and Jurkalne. The progress of these componentswould be measured against:
establishmentof activity steering committees with involvement of the major stakeholdersin the local communities;
clear delineationof the protected areas and associatedbuffer zones; and
successfuldevelopment of the ManagementPlans and implementationof selected priority small infrastructureimprovements.
Appendix 1 of Annex 1
MILESTONES IN PROJECT IMPLEMENTATION
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YEAR :1994 1995 1996 :1997 1998 QUARTER 3 4 1 2 3 4 I 2 3 4 1 2 3 4 1 2 3 4
PREPARATION Developmentof Standard Equipment List
Developmem of Tender Documents
Procurement Notice in Local Newspapera
Submision of Tender Docs
Bidding Period
Evaluation and Negoustons
Contrac SigningU
IMPLEMENTATION Detaled Design
Supply and InsaLdlation
Commissioning
MONrTORING
Monthly Progress Repoetu Appendix 1- Table E. MILESTONES IN PROJECT IMPLEMENTATION Water Supply: Laboratory Equipment
YEAR 1994 .1995 1996 | 1997 .1998 QUARTER 3 4 I 2 3 4 I 2 3 4 I 2 3 4 1 2 3 4
PREPARATION Development of Standard Equipment List
Developmnentof Tender Documents
Submission of Tender Docs .
Bidding Period
Evaluation and Negotiations
Contract Signng
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Supply and Installation
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.1 1? III I XI I ii X* I Appendix I - Table G. MILESTONES IN PROJECT IMfPLEMENTATION Sewerage: Completion of New Wastewater Treatment Plant Incl. Spare Parts
YEAR :1994 1995 :1996 :1997 :1998* QUARTER 3 4 I 2 3 4 1 2 3 4 1 12 3 4 1 2 13 4
PREPARATION Development of Standard EqWp-a List
DeveJopmenaof Tezder Domments
BWdingPcruod
Evshuaonand Negoiations
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IMPLEMENTATION DelsldWDesign
Supply and Erection comiwnmng
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CSgIlt11} t] 1101 1 X II1 Appendix 1 - Table L. MILESTONES IN PROJECT IMPLEMENTATION SupportTraining and Technical Assistance
YEAR 1994 1995 1996 :1997 :1998 QUARTER 3 4 1 2 3 4 I 2 3 4 1 2 ~ 3 4 1 2 13 4
PREPARATION Developmentof TOR
Developmentof Tender Documentand Shon List
Submissionof TenderDocs U
BiddingPefiod
Evaluationand Negotiations
ContractSigning
IMPLEMENTATION
Twinning Arrangement
MONrrORING
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UU101d uopia2a2 a29e1e7 :AiddnS jaiUM, NOLLLVINi3WIIJI 1.33rOd Nl S3NOiS3am jj aq- I x1puaddV Appodh I - Table N. OMiESTONESIN PROJECT MPLElOENTATION Suppui C.trac Coardbm ad Supevla
YEAR 11994 11995 1996 1998 1 1999 QUARTER 3 4 2 3 1 4 213 4 97I 12 !3 !4 I 12 3 4 1 2 1 3 1 4
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ifii_ -si _ _ _ _ I. _ _ _ _ _ ,_ ff R canm orantU Appendix2 of Annex 1
FINANCIALPROJECTIONS AND NOTES ON TARIFF ADJUSTMENTS
ANNEX 1 Appendix 2 Page 1
FINANCIAL PROJECTIONS AND NOTES ON TARIFF ADJUSTMENTS
I. ASSUMPTIONSFOR FINANCIAL PROJECTIONS
A. General
1. All the financial projectionsare presented in Lats at current prices i.e. includingan allowance for inflation:20% 1994; 15% 1995; 10% 1996; 8% 1997; and 6% p.a. thereafter.
2. The financial year runs from January 1 to December31.
3. The followingfinancial projectionshave been prepared:
(a) Revenue and expenditurestatements - water supply and sewerage separately;
(b) Balancesheet - water supplyand seweragecombined;
(c) Sources and applicationof funds - water supplyand sewerage combined;
(d) Cash Flow statement;
B. Revenueand ExpenditureStatement - Water Supply(Table 1)
4. It is assumedthat LWWE will set water tariffs and other charges which will satisfy the financial objective of achieving a profit margin of at least 15% (before the payment of profit tax) by 1997 and maintain that level thereafter.
5. Revenue will be derived from continualdirect charges on users of LWWE's services based on differentialtariffs between consumercategories. In order to satisfy the financial objective set out in Item 5 above, it is envisagedthat average water tariffs could be increasedin terms of constant prices at the following rates:
Year Domestic Institutional Industrial 1995 16% 4% 0% 1996 14% 5% 0% 1997 11% 1% 0%
6. Operating expenses were prepared based on three sources of information: (a) LWWE's accounts for 1993; (b) indicativeestimates for 1994; and (c) study estimates of the cost savings and ANNEX 1 Appendix 2 Page 2
incrementalcosts attributableto the proposed capital investments. All costs have been adjusted to current prices using the inflation rates specifiedin Item 2 above with the exceptionslisted in some of the items below.
7. Salaries and wages includea pension contributionof 37% and were increasedby 30% in May 1994.
8. Lauma Water - the Lauma textile factory contributedabout 10% of LWWE's estimated water production in 1993. Water production and costs for the last three years follow:
Year Lauma Water Costs to LWWE (m3000) (Lats) (Lats/m3)
1991 1,336 690 0.0005 1992 1,359 19,485 0.0143 1993 1,126 42,211 0.0375
It is assumedthat LWWE will continue to use the Lauma source, with the cost rising at the same rate as projected inflation(see item 2).
9. Natural ResourcesCharges are currently charged at Lats 0.005 per m3 and it is assumedthat these costs will rise in line with inflation.
10. The future impact on electricitycosts has two components:
(a) No savings in energy consumptionwill accrue in Phase 1. The replacementof old and inefficientpumps is programmedfor Phase 2; and
(b) Increasedunit cost of electricity as the pricing of energy in Latvia is adjusted to real resource costs. At present, LWWE pays a subsidizedprice of Lats 0.008 (US$ 0.014) per kWh comparedwith a real market price of Lats 0.0114 (US$ 0.02) per kWh. This value is predicted to increase in real terms as follows:
Value per Kwh (1994 prices) Year Lats US$ 1993 0.0114 0.020 1995 0.0160 0.029 2000 0.0200 0.035 2005 0.0200 0.035 2010 0.0275 0.048 ANNEX 1 ADDendix2 Page 3
In the financial projections, it is assumedthat LWWE's unit cost for electricity will increase steadily from Lats 0.008 (US$ 0.014) per Kwh in 1994 to Lats 0.02 (US$ 0.35) per kWh in 2000 to reflect the real resource costs to the Latvian economy.
11. The projected energy consumptionfor LWWE's water supply system is as follows:
Year Water Production Electricity (in3 million) Consumption (kWh million) Actual 1991 9.580 1992 8.515 1993 10.372 8.178 Projected 1994 10.4 7.965 1995 10.4 7.965 1996 10.4 _7.965 1997 10.4 7.965 1998 10.4 7.965 1999 10.4 7.965 2000 10.4 7.965 2005 10.4 7.965
Based on the stable consumptionof energy, LWWE's electricity costs for the water supply system are determined by the increasein real prices specifiedabove, plus the projected inflation in Item 2 above.
12. Heating
(a) The proposed Phase 1 investmentincludes the supply of more efficient space heaters which will reduce the consumptionof energy by the water supply cost center from approximately245 MWh at present to 80 MWh from 1996 onwards; and ANNEX 1 Appendix 2 Page 4
(b) Similar to electricity, the cost of heating is expected to rise in real terms by 10% per year from 1994 to 1999 (informationprovided "in consultationwith World Bank Specialists");plus the projected inflation in Item 2 above.
13. Materialsand Suppliesare expectedto rise in line with inflation (Item 2 above).
14. Incrementalmaintenance costs will be incurred on all civil works plus the machinery and equipmentproposed in the Phase 1 investmentpackage. These are estimated as a percentageof the capital costs in Tables 2 and 3: 0.05 % for civil works and 1 % for machineryand equipment.
15. Transport is increased at 10% p.a. in real terms for the next five years; plus projected inflation (see Item 2 above).
16. Others - increasedat 10% p.a. in real terms for the next five years; plus projected inflation (see Item 2 above).
17. Bad Debts are set at 10% of total revenue in 1994 and 1995; 5% in 1996and 1997; and 2.5% thereafter.
18. Depreciationallowances were calculatedon the followingbases:
(a) ExistingAssets - accordingto LWWE, as of December31, 1993 the existingfixed assets of the water supplysystem had an estimated gross value of Lats 774,000 (US$ 1.4 million). The annual depreciationallowance used in LWWE's accounts yields a factor of 3.1 % p.a. (equivalentto an average asset life of 32 years). Asset values were last adjusted in December 1992;but, it is recommendedthat a more comprehensiverevaluation should be conductedin the next two to three years in order to provide a more realistic reflectionof the replacementvalue and actual conditionof the assets;
(b) Ongoing Investment- Lats 95,400 were expendedon a booster pumping station in 1993 and a further Lats 50,000 will be spent on pipeline works in 1994. In addition, it is assumed that modest investmentin the distribution network will continue throughout the projection period amountingto Lats 15,000per year. The latter was inflatedat the projected inflationrate (see Item 2 above) to reflect the actual cost in the future. Ongoing investmentin water supply assets is assumedto have an asset life of 30 years; and
(c) Proposed Project - for the new assets, the depreciationallowance was calculatedon a straight-linebasis without annual revaluationand assumingan average asset life of 30 years.
19. Interest Charges reflect the full on-lendingconditions for the repaymentof the World Bank loan: (a) interest rate 10% p.a.; (b) repaymentperiod 17 years; and (c) 4 years grace period. The debt repaymentprofiles for the water supply and seweragecomponents are presented in Table 2. ANNEX 1 Appendix 2 Page 5
20. Turnover Tax is set at 18% of the revenue from institutionaland industrial consumers.
21. Profit Tax is set at 35% of net income after the paymentof turnover tax.
C. Revenue and ExpenditureStatement - Sewerage (Table 3)
22. The total population, populationserved and water consumedby users with connectionsto the sewerage system and industrial wastewaterdischarges (treated and untreated) reflect the projections prepared by team consultants.
23. It is assumed that LWWE will set seweragecharges at levels which will satisfy the financial objective of achievinga profit margin of at least 15% (before the payment of profit tax) by 1997 and maintainingthat level thereafter.
24. Revenue will be derived from continualdirect charges on users of LWWE's services based on differentialtariffs between consumer categories. In order to satisfy the financial objective set out in Item 24 above, it is envisagedthat average seweragetariffs would be increasedin terms of constant prices at the following rates:
Year Domestic Institutional Industrial 1995 30% 17% 11% 1996 31% 13% 5% 1997 30% 6% 7%
25. Operating expenses were prepared based on three sources of information: (a) LWWE accounts for 1993; (b) indicativeestimates for 1994; and (c) study estimates of the cost savings and incrementalcosts attributableto the proposed capital investments. All costs have been adjusted to current prices using the inflation rates specified in Item 2 above, with the exceptionslisted in some of the items below.
26. Salaries and wages include a pension contributionof 37% and were increasedby 30% in May 1994.
27. According to LWWE, natural resources charges for wastewaterin 1994 are as follows: 3 3 (a) domestic- Lats 0.0015 per m ; (b) institutional- Lats 0.01 per in ; and (c) industrial - Lats 0.02 per ni3 for untreated flows and Lats 0.04 per m3 for treated flows. These values were projected in line with projected inflation. ANNEX 1 Appendix 2 Page 6
28. Future impact on electricity costs has two components:
(a) No savings in energy consumption will accrue in Phase 1;
(b) The proposed investments in the sewerage system in Phase 1 will increase energy consumption as follows:
Electricity Consumption (kWh million) Sewage Flow Without Increased Year (m3 million) Project Cons WWTP Other Total Actual 1991 15.803 5.471 5.471 1992 12.557 4.040 4.040 1993 9.950 5.078 5.078 Projected 1994 5.078 5.078 1995 5.078 5.078 1996 5.078 0.162 0.460 5.700 1997 5.078 0.323 0.919 6.320 1998 5.078 0.485 1.379 6.942 1999 5.078 0.646 1.839 7.563 2000 5.078 0.808 2.298 8.184 2005 5.078 0.808 2/298 8.184
Based on the projected consumption of energy, LWWE's electricity costs for the sewerage system are determined by the increase in real prices specified in Item 12(b), plus the projected inflation in Item 2 above.
29. Heating
(a) The proposed Phase 1 investment includes the supply of more efficient space heaters which will reduce the consumption of energy by the sewerage cost center from approximately 100 MWh at present to 60 MWh from 1996 onwards; and ANNEX 1 Appendix 2 Page 7
(b) Similar to electricity, the cost of heating is expectedto rise in real terms by 10% per year from 1994 to 1999 (informationprovided "in consultationwith World Bank Specialists");plus the projected inflation in Item 2 above.
30. Materials and Supplies are expectedto rise in line with inflation.
31. Repairs and Maintenance- incrementalmaintenance costs will be incurred on all civil works plus the machinery and equipmentproposed in the Phase 1 investmentpackage. These are estimated as a percentage of the capital costs in Tables 2 and 3: 0.05% for civil works and 1% for machinery and equipment.
32. Transport is increasedat 10% p.a. in real terms for the next five years; plus projected inflation (see Item 2).
33. Others increasedat 10% p.a. in real terms for the next five years; plus projected inflation (see Item 2).
34. Bad Debts are set at 10% of the total revenue in 1994 and 1995; 5% in 1996 and 1997; and 2.5% thereafter.
35. Depreciationallowances were calculatedon the followingbases:
(a) ExistingAssets - according to LWWE, as of December31, 1993, the existing fixed assets of the seweragesystem had an estimated gross value of Lats 1,363,000 (US$ 2.4 million). The annual depreciationallowance used in LWWE's accounts yields a factor of 3.1% p.a. (equivalentto an average asset life of 32 years). Asset values were last adjusted in December1992; but, it is recommendedthat a more comprehensiverevaluation should be conductedin the next two to three years in order to provide a more realistic reflection of the replacementvalue and actual condition of the assets;
(b) Ongoing Investment- the aerobasin facilitieswhich are under constructionat the WWTP are expectedto come into operation in 1995 with an asset value of Lats 1.09 million (US$ 1.0 million).
In addition, it is assumed that modest investmentin the sewerage network will continue throughoutthe projectionperiod amountingto Lats 30,000 per year. The latter was inflated at the projected inflation rate (see Item 2) to reflect the actual cost in the future. Ongoing investmentin seweragewater supply assets is assumedto have an asset life of 30 years;
(c) ProposedProject - for the new assets, the depreciationallowance was calculatedon a straight-linebasis without annual revaluationand assumingan average asset life of 30 years. ANNEX 1 Appendix 2 Page 8
36. Interest Charges reflect the full on-lendingconditions for the repaymentof the World Bank loan: (a) interest rate 10% p.a.; (b) repaymentperiod 17 years; and (c) 4 years grace period. The debt repaymentprofiles for the water supply and seweragecomponents are presented in Table 2.
37. Turnover Tax is set at 18% of the revenue from institutionaland industrialconsumers.
38. Profit Tax is set at 35% of net income after the paymentof turnover tax.
D. Balance Sheet - CombinedStatement (Table 4)
39. Accounts Receivablehave increasedas a proportion of billed revenue in the last three years from 0.05% in 1991to 29.2% in 1992; and 23.5% in 1993. The following levels have been assumed in the financial projections: 25% in 1994and 1995; 20% in 1996; and 17% (i.e. 2 months of revenue) from 1997 onwards.
40. Inventoriesare set at 1.5% of fixed assets in operation from 1994 onwards.
41. Long term debt consistsof future borrowing less principal repayments. The conditionsfor the World Bank loan are set out in Item 20.
42. AccountsPayable have fluctuatedas a proportion of operatingexpenses in the last three years from 12.6% in 1991 to 18.6% in 1992 and 9.1% in 1993. These are likely to increase again in the short term. The following levels have been assumed: 20% in 1994 and 1995; and 17% (i.e. 2 months of operatingexpenses) from 1996 onwards.
E. Sources and Applicationof Funds- CombinedStatement (Table 5)
43. Loans represent borrowing from the World Bank credit accordingto the proposed financing plan and the requirementsof the proposed investmentschedule.
44. Applicationsof capital expenditurerepresent the planned phasing of the proposed Phase 1 investmentprogram (1995-1999).
45. Debt service representspayment of the principal and interest due on the World Bank loan as presented in Table 2.
46. NEFCO dividendpayments are assumed at 10% p.a. on equity holding. LWOtA WAIM SPLYuYuvsia - EVE?6E ANDEtepon sTAIAEr fA wo asma
Ad -'- Pbudb, Cm w 191 1092 1036 1W04 190 lS 107 19 TOTALPOPLATION 19 2000 201 1U4.S 113.6 1O&3 106. 106.0 10s.0 1Oe.O 106.0 106.0 108.0 106.0 Semi byWSME *FdClnn.cGm 07.2 96.1 90.1 96.1 e 6.0 e .o .9W.0 W0.0 101.5 6_ a0.9 0.0 0.9 0.9 0.4 0.0 0.0 00 0.0 TO.4Sffedbr WUEso 0.0 0.0 9.1 o 9w.0 9w.0 900. W0 900 W 0 -. 113 Pmpom, S.wd 0.0 0.0 90.6 tl.7 91.7 01.7 91.7 01.7 917 91.7 93.6 WATM SLawPLY CONNECTCN
-Fun Cordm (.. 2106 2305 2604 2662 -Shaipipo.(n. Iilu.d 140 142 146 163 hdmm 237 301 360 423 oblaterW Cndons .330 2575242 2 0 DOMAESUC aNUT2 ATiP rC C 160 166 150 160 160 160 160 160 150 AveeHo_ SIe 3..)32 3.2 3.1 3.2 3.2 3.2 34 32 s2 3. S WVAI PR OUAtA.I JN (3MUn 0. I04A1. 1u.4 1.4 1. 104 0. BtLED WATER SALES d keeUc (inS m3mon) 7.5 6.3 5.7 5.7 5.7 5.6 6.6 5.e 5.6 5.6 6.6 hfrAdo,u (m3 nIMo 1.2 1.4 1.2 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 hidutdzal (n3munI 1 2 1.1 0.5 o.5 o 5 0o. 0.6 5 0.5 0.5 0.5 T SW" i 10.Io) 6.9 7.5 7. 7.6 7.6 7.6 7.6 7 i7.6 7.7 NON4tEVEWUE WATER p ^ M(S 2.9 2 6 2.6 2.6 2.8 2. 2.6 2.6 2.7 Pronortbond NRW f%) 27.9 27.4 27.2 20.6 26.6 26.6 26 6 26.6 25.7
(lbnS) 0.04 1.27 3.70 6.00 .00 10.00 11.4 ki.ibdogw 12.70 13.59 14.54 15.65 (Lcbhn3e 0.12 2.79 6.76 s.u 11.30 13.00 1391 1492 1597 17.09 16.26 _~duob.I (Lo 0.01 4.67 14.80 16.75 19.26 21.19 22ne 24.25 25.71 27.25 26.e9 1994 PRICES Onedo 0 _ e 6.00 6.s0 7.91 6.67 6.r7 6.s6 6.94 hwdoios. .902 (Lc 9.44 0.63 10.26 10.16 10 30 10.40 10.50 10.60 _ 4" 16.75 16.75 16.75 16.75 16.75 16.75 16.75 16.75
Donge.* 3,3 80.4 2125 342.0 456s2 5. 64.e 734.3 765.7 640.7 914.7 - kw&" 1.4 40.2 60.7 120.6 144.4 166.1 177.8 190.7 204.1 216.4 *bid. 233.6 7.6 52.7 61.1 91.6 105.6 116.1 125.4 132.9 140. 149.3 156.3
TdlO _ ope Rnwm 12Z4 173. s74.2 6u.4 706.2 o.s -s7.7 l 11S0.7 1206.4 VIPERAT540EXPENSES Isce. sehale TN 20 24.1 60.0 m0 116.0 12a6. 13e.6 144.6 1536 1927 172. LaM, tw 0.7 19.5 42.2 4.0 73.6 61.0 67.4 6.7 96.2 104.1 110.4 mft_. R _.i a_ . Z2 6.4 61.0 szo 59. es.6 71.0 75.3 79. 64.6 El ",-W W9.7 3.3 62.0 70 72.6 95.1 119.2 146.7 177.2 214.1 26.6 Ne- 274.1 0.1 3.7 7.7 U 1.7 4.2 5. 7.1 7. 6o 6S M_mhhuNWpUee 0.1 0.6 7.6 10 1.4 20.2 21.6 23.2 24.6 26o 21. _ _em _eao 06 19.6 s9.4 76.0 67.4 96.7 104.4 110.7 117.3 124.3 131.6 T _ea 0M0 1.3 62 6 o 10.6 12.6 14.7 15.6 16S 171 om. 0.7 3.7 10.3 1 17.2 20.6 24.8 26.3 27.6 2s.5 31.3 0.4 O 66.4 70.6 43.0 40.4 26.4 2.3 30.2 32.7 TW C'h E'pi OQ 9.9 143.3 315.5 46.1 568.9 56ea1 660.4 9064 706.7 644.6 - 93 C) Deare_m 1.6 3.0 23.7 29.0 61.5 71.4 74o0 75.2 76.5 77.3 76.1 \ P qpeasingh,omnae P.&Q o0.7 27.0 S5.0 e6s3 0.0 200.s 253.3 24.4 2675. 266.6 3s32. hilled 01mg.. ~~~~~~~~~~~~~~48.2 56.0 ~~~~57.4 ~~~~56.0 ~~~~562 ~~~20.655.0 0.7 27.0 35 0 603 90.1 152.7 107.3 227.0 220.6 Tw,wTm 226.3 276. 7.3 21.9 26 34.2 39.0 41.6 44.7 47.7 51.0 64.4 Pll Tm 122 3.0 54.4 63.6 63.6 62.1 77 6 Not iwonia ~ T sitar s 07 19.7 13.i 31.4 27 73.0 101. 118.5 16i.2 115.S3 44. Woah Rdb Ni 6o.1 62.7 64.3 63.9 7e.6 6.3 e6.0 66.0 67.6 es.0 68.6 Opb9 Ra () 94.7 84.4 0o.6 69.1 67.3 76.6 74.4 73.1 74.6 76.3 74.5 PaMilMMegh (le. P.O ( 5.3 11.4 3.5 5.7 4.9 13.2 15.7 17.2 U1 14.7 17.0 Av. MM Fond A ob InO _wd g Pale d Reuman A R _ pe Unit Bald m 0.125 1.950 5.002 7.36a 9.375 1'.10 12.983 13.W6 14Te.2 is.eu 1-.95 AvelagCoed prd Ur eOW 09b" 0.116 1.64 4.536 6.565 8.461 9.302 10.300 10.923 11.644 1z.a6 1s.36 Ass Cod VW Lin Pauced S2 71 4.7e5 &'s 6.25 7.622 8.014 6.e90 9.451 0932 LIEPAA SEWERAGE SYSTEM - REVENUE AND EXPENDITURESTATEMENT (Lat 000)
Actual Est. ProctdknS 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 TOTA L ATION (000) 114.9 113.8 108.3 108.0 108.0 108.0 108.0 108.0 108.0 108.0 108.0 Served by Sewerge (000) 97.0 97.0 97.0 97.0 97.0 97.0 97.0 97.0 97.0 97.0 98.1 Pmportion Served (%) 84.4 S5.2 89.6 89.8 89.6 89.8 69.8 89.8 89.8 69.8 90.8
SEWER CONNECTIONS Domeic (n.) 2509 2711 3115 3163 1titutine (no.) 140 142 146 153 Inlustry (.) 251 315 394 437 Total Sevvsr Conneclionts (nos.)-- 2900 3168 3655 3753 0 0 0 0 0 0 0 TEWXGEVAThR V0LURES- Donwmeic (m3 millon) 8.8 6.5 6.0 5.7 5.7 5.8 5.8 5.8 5.J 58 5.9 husliulkn (m3 million) 1.2 1.5 1.2 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 Indudry - flowsnot to WWTW (m3 million) 1.2 0.6 0.3 0.3 0.3 0.2 0.2 0.1 0.1 0.0 0.0 -flows to WWTW (m3 million) 4.7 4.0 2.5 2.6 2.7 2.8 2.9 3.1 3.2 3.3 3.4
[SEWERAkGECltAGEf CURRENT PRICES Oonmeic (LWs/m3) 0.03 0.86 2.54 5.15 7.70 11.15 15.60 17.32 1922 21.34 22.62 hsltutknm (Lcts/m3) 0.62 1.55 4.10 9.26 12.50 15.60 17.90 19.87 22.05 24.48 25.86 kndu*y.flovsnottoWWTW (Lctsm3) 0.75 1.75 7.37 11.23 15.20 17.50 20.10 22.31 24.77 27.49 29.14 -Ibwlo WWTW (Ictd/m3) 0.63 2.54 9.79 14.00 17.80 20.50 23.60 2620 29.08 3228 3421 1994 PRICES Domestic (Ltsm3) 5.15 6.70 8.81 11.42 11.96 12.52 13.11 13.11 Istuions (Lcsim3) 9.26 10.87 12.33 13.10 13.72 14.37 15.04 15.04 Indutiry- flovs not to WWTW (Lchtm3) 11.23 1322 13.83 14.71 15.41 16.13 16.89 16.89 - lows to WWTW (Lcsnm3) 14.00 15.48 16.21 1727 18.09 18.94 19A4 19.4
IOPERATING REVENUI Billed Sewag Charge * DomeiW 2.4 55.4 151.7 293.6 441.1 644.7 902.0 10012 1111.3 1233.6 1329.5 - stIuions 7.2 22.7 48.7 118.3 159.8 199.4 228.8 253.8 281A 3129 331.6 Idusty - nowshto WWTW 9.1 11.0 22.6 33.7 45.6 35.0 40.2 22.3 24.8 0.0 0.0 -fkwnhtoWWTW 29.6 101.5 244.0 364.0 480.6 574.0 684.4 812.1 930.5 1065.1 1163.2 Sewer Connections Others Tota Operating Revenue 48.3 190.6 466.9 809.6 1127.0 1453.1 1855.4 2089.5 2348.4 2611.6 2824.4 IOPERATNG EXPENSES Saries and Wages 5.4 56.8 134.3 186.4 214.4 235. 254.7 2699 286.1 303.3 321.S Nahal Resouroe Charges 31.6 18.0 80.7 105.3 124.6 138.5 153.6 168.6 183.4 196.0 2132 Electricity 1.7 35.1 41.1 46.3 60.7 85.3 116.4 154.5 2033 265.7 281.6 Heatln 02 5.6 11. 13.0 16S 12.0 15.7 20.1 21.3 22.6 239 matrl end Supplbe 0.1 0.6 3.1 8.0 92 10.1 10.9 11.6 123 13.0 13.8 Repairs d Maintenne 12 36.0 114.0 116.0 133.4 154.3 174.4 1932 208.7 2255 239.0 Tmnspodt 0.3 52 11.7 15.4 195 23.6 28.0 32.7 34.6 36.7 389 Cownnetonsn Othr 1.2 3.2 7.1 9.3 11. 14.3 17.0 18.0 19.0 202 21A Bad Debts 81.0 112.7 72.7 92.8 52.2 58.7 65.3 70.6 (IQ Z Total Cash Exqpn 41.8 160.5 4039 580.8 702.7 7465 863.5 920.8 10275 1148.2 1223.9 C Z DeprecIaion 3.3 5.4 42.5 43.5 165.5 239.0 316.6 366.0 417.8 419.7 421.8 Operating hIcome (Derc) 3.2 24. 20.5 185.4 258.6 467.6 675.3 802.7 9032 1043.6 1178.7 kdae chag 52A 149.7 2383 311.0 368.4 397.8a 8. Net him, (Defici) 32 24.6 20.5 185.4 2051 317.1 437.0 491.7 534.8 6451 7972 1 TurfoW TaM 6s 29.6 731 101.0 120.6 144.0 165.5 189.7 212.6 230.7 PromlTaX 38.0 36.7 69.1 102.5 114.1 120.6 151.6 198.3 Not ncofmsIWelcsair Taxes 3.2 15.8 -9.1 72.4 68.2 128.2 104 2.0 2.3 281.5 368.2 1FWNACIALINDICATOR5T Woddn Ratio () g6s 42 88. 71.7 62.4 61.4 46.5 44.1 43.a 44.0 433 Opering Ratio (%) 93.4 87.0 95.6 77.1 77.0 67. 63.6 61.A 61.5 60.0 583 PflMargln(bom Pnf1tT (%) 6.8 6.3 -119 13a 9.3 13.6 15.8 15.6 14.7 16.6 20.1 Av. NetFbtd Asets in Opeaion (Lifs) Rateo( Return (%) LIEPAJA WATER SUPPLYAND SEWERAGE SYSTEMS - COMBINEDREVENUE AND EXPENDITURE STATEMENT (Lats 000, CurTent)
Actual Est. Projections Cornport 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 ICOMBINED OPERATINGREVENIIE WATER SUPPLY BEd WaterSas . Domntk 3.3 80.4 212.5 342.0 458.2 578.2 684.7 734.4 785.8 840.8 914.8 -nsIuions 1.4 40.2 80.7 120.6 144.4 166.1 177.8 190.7 204.1 218.4 233.7 -tdtrbl 7.6 52.7 81.1 91.8 105.6 116.1 125.4 132.9 140.9 149.3 158.3 Water Comednins Other Sub-Total:Water Suppl 12.4 173.3 374.2 554.4 708.2 860.5 987.9 1058.1 1130.8 1208.6 1306.8 SEWERAGE Bled SewerageCharges -Domestic 2.4 55.4 151.7 293.6 441.1 644.7 902.0 1001.2 1111.3 1233.6 1329.5 '-stitutIons 7.2 22.7 48.7 118.3 159.8 199.4 228.8 253.9 281.9 312.9 331.6 -hdust -Treated 9.1 11.0 22.6 33.7 45.6 35.0 40.2 22.3 24.8 0.0 0.0 .Untreated 29.6 101.5 244.0 364.0 480.6 574.0 684.4 812.1 930.5 1065.1 1163.2 Sewer Connectona Other Sub-Total: Sewerage 48.3 190.6 466.9 809.6 1127.0 1453.1 1855.4 2089.5 2,'8.4 2611.6 2824.4 Total OperatingRevenue 60.7 363.9 841.1 1364.0 1835.2 2313.5 2843.2 3147.6 3479.3 3820.1 4131.2 t5PERATIINGEPENSES Saries and Wages 7.3 80.9 194.3 286.4 329.4 362.3 391.3 414.8 439.6 466.0 494.0 Launa Waler 0.7 19.5 42.2 64.0 73.6 81.0 87.4 92.7 98.2 104.1 110.4 Natural ResourcesCharges 34.0 26.4 131.7 157.3 184.4 204.2 224.7 243.9 263.2 280.6 302.9 Eectrcidy 5.0 97.1 113.2 118.9 155.8 204.6 263.2 331.7 417.3 524.2 565.7 HeathV 0.3 9.3 19.6 21.5 27.2 16.2 21.2 27.2 28.8 30.5 32.4 Materialsand Suppries 0.2 1.5 10.7 24.0 27.6 30.4 32.8 34.8 36.8 39.1 41.4 Repaka and Maintenance 2.0 55.6 173.4 192.0 220.8 250.9 278.8 303.9 326.1 349.8 370.8 Transport 0.3 6.5 16.9 22.3 28.3 34.2 40.6 47.4 50.2 53.2 56.4 ConnectionCost 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Others 1.9 6.9 17.4 22.9 29.0 35.1 41.7 44.2 46.9 49.7 52.7 Bad Debts 0.0 0.0 0.0 136.4 183.5 115.7 142.2 78.7 87.0 95.5 103.3 Total Cash Expenses 51.7 303.8 719.4 1045.8 1259.6 1334.6 1523.9 1619.2 1794.2 1992.8 2119.8 DepreclatIon 5.1 8.3 66.2 72.5 227.0 310.4 390.6 441.3 494.3 497.0 499.9 Operating Iome (Defici) 3.8 51.8 55.5 245.7 348.6 668.5 928.7 1087.2 1190.8 1330.4 1511.5 Interest Charges 73.6 197.9 294.3 368.4 426.4 456.0 437.4 Net Inome (Derick) 3.8 51.8 55.5 245.7 275.0 470.6 634.4 718.7 764.4 874.4 1074.1 Tumover Tax 16.2 51.5 102.8 135.3 159.5 185.7 210.2 237.4 263.7 285.1 Profit Tax 48.9 108.9 157.0 178.0 184.5 213.7 276.1 Net Income (Dericit) afterTaxes 3.8 35.6 4.1 142.9 90.8 202.2 291.6 330.5 342.6 396.9 512.8
Wouli Ratb N(%) 85.2 83.5 85.5 76.7 68.6 57.7 53.6 61.4 61.6 52.2 51.3 OperatingRatio (% 93.7 85.8 93.4 82.0 81.0 71.1 67.3 65.5 65.8 65.2 63.4 ProfitMargin(aftertax) (%) 6.3 9.8 0.5 10.5 7.6 13.4 15.8 16.2 15.1 16.0 19.1 Av. Net Fbad Asets In Operation (Lats) Ralt of Return
t3K5l LIEPAJAWATER SUPPLYAND SEWERAGEPROJECT - WORLD BANKDEBT REPAYMENTPROFILE
LATS 000 USS 000 Year Debt Repayment Debt Repayment Loan Interest Principal Total Loan Loan Interest Principal Total Loan Charges Debt Charges Debt |COMBINED l 1995 1104.1 55.2 0.0 55.2 1104.1 1937.1 96.9 0.0 96.9 1937.1 1996 760.3 148.4 0.0 148.4 1864.4 1333.8 260.4 0.0 260.4 3270.9 1997 686.4 220.8 0.0 220.8 2550.8 1204.2 387.3 0.0 387.3 4475.0 1998 424.8 276.3 0.0 276.3 2975.6 745.3 484.8 0.0 484.8 5220.3 1999 444.4 319.8 0.0 319.8 3420.0 779.7 561.0 0.0 561.0 6000.0 2000 342.0 139.5 481.5 3280.5 600.0 244.7 844.7 5755.3 2001 328.1 153.4 481.5 3127.1 575.5 269.1 844.7 5486.2 2002 312.7 168.7 481.5 2958.4 548.6 296.1 844.7 5190.1 2003 295.8 185.6 481.5 2772.8 519.0 325.7 844.7 4864.5 2004 277.3 204.2 481.5 2568.6 486.4 358.2 844.7 4506.3 2005 256.9 224.6 481.5 2344.0 450.6 394.0 844.7 4112.2 2006 234.4 247.1 481.5 2096.9 411.2 433.4 844.7 3678.8 2007 209.7 271.8 481.5 1825.1 367.9 476.8 844.7 3202.0 2008 182.5 299.0 481.5 1526.2 320.2 524.5 844.7 2677.5 2009 152.6 328.8 481.5 1197.3 267.7 576.9 844.7 2100.6 2010 119.7 361.7 481 5 835.6 210.1 634.6 844.7 1466.0 2011 83.6 397.9 481.5 437.7 146.6 698.1 844.7 767.9 2012 43.8 437.7 481.5 -0.0 76.8 767.9 844.7 0.0 TOTAL COMBINED 3420.0 3859.5 3420.0 7279.5 6000.0 6771.1 6000.0 12771.1
eQ zml~ UEPAJAWATER SUPPLY AND SEWERAGESYSTEMS - SOURCESAND APPLICATION OF FUNDS (Lats000, current)
Actual Est Projectons Component 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 SOURCESOF FUNDSI NetIncomebeforelnterest&afterTax 4.1 142.9 158.0 382.8 559.6 666.2 731.1 812.4 911.3 1017.1 Depreciaton 66.2 72.5 227.0 310.4 390.6 441.3 494.3 497.0 499.9 502.9 InternalCash Flow 70.3 215.4 385.0 693.2 950.2 1107.4 1225.3 1309.4 1411.2 1520.0 LOANSAND GRANTS World BankLoan 1104.1 760.3 686.4 424.8 444.4 Sweden 1288.1 887.0 800.7 495.6 518.5 NEFC 276.0 190.1 171.6 106.2 111.1 EEC Phare 18.4 12.7 11.4 7.1 7.4 LocalContrbution 742.5 511.3 461.6 285.7 298.9 Others 95.4 190.4 1093.4 TotalLoans and Grants 95.4 190.4 4522.6 2361.3 2131.7 1319.4 1380.3 0.0 0.0 0.0 TOTALSOURCES OF FUNDS 165.7 405.8 4907.6 3054.5 3081.9 2426.8 2605.6 1309.4 1411.2 1520.0 |APPLICATIONOF FUNDS CAPITALEXPENDITURE Phase 1 Project 3797.2 2614.7 2360.5 1460.9 1528.4 Other nvestments 95.4 190.4 1154.3 65.0 69.3 73.5 77.9 82.5 87.5 92.7 TotalCapital Expendibtre 95.4 190.4 4951.5 2679.7 2429.8 1534.4 1606.3 82.5 87.5 92.7 DEBTSERVICE World Bank Loan Prinipal Repayment 139.5 153.4 168.7 InterestRepayment 55.2 148.4 220.8 276.3 319.8 342.0 328.1 312.7 TotalWorld BankLoan 0.0 0.0 55.2 148.4 220.8 276.3 319.8 481.5 481.5 481.5 DMDEND PAYMENT NEFC 13.8 37.1 55.2 69.1 79.9 85.5 85.5 85.5 WORKINGCAPITAL 70.3 116.6 207.6 408.1 545.6 627.6 677.4 538.9 634.9 737.7 TOTALAPPLICATION OF FUNDS 165.7 307.0 5228.1 3273.3 3251.3 2507.4 2683.4 1188.4 1289.3 1397.4
,,;0 t UEPA1A WATER SUPPLY AND SEWERAGE SYSTEMS - BALANCESHEET (Laf 000, acxent)
Actual Eat Projection. Component 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 IASSETS I FIXED ASSETS FicedAssetsnOperation 204.9 2060.0 2136.6 2327.0 7007.8 9536.7 11966.4 13500.9 15107.2 15189.7 15277.2 Less: AccumudatedDeprecation 94.7 934.3 1003.1 1075.6 1302.6 1613.0 2003.7 2444.9 2939.2 3436.1 3936.0 NotFixedAssetsinOperation 110.2 1125.7 1133.5 1251.4 5705.2 7923.6 9962.8 11056.0 12168.0 11753.6 11341.2 Work-in-Progress 95.4 160.4 TotalFixedAssets 110.2 1125.7 1228.8 1411.8 5705.2 7923.6 9962.8 11056.0 12168.0 11753.6 11341.2 CURRENT ASSETS Cash and Bank 15.0 3.2 52.7 213.1 275.4 612.2 1141.8 1711.5 2338.7 2852.7 3455.6 Accounts Receivable 0.0 106.3 197.5 341.0 458.8 462.7 473.8 524.6 579.8 636.6 688.5 Inventory 2.4 7.3 78.5 34.9 105.1 143.0 179.5 202.5 226.6 227.8 229.2 Others TotalCurrentAssets 17.4 116.8 328.6 589.0 839.3 1218.0 1795.1 2438.6 3145.1 3717.2 4373.2 TOTAL ASSETS 127.6 1242.4 1557.4 2000.8 6544.5 9141.6 11757.9 13494.5 15313.1 15470.8 15714.4 EQUITY AND LlABILITIES EQUITY CAPITAL Capital 110.8 127.8 264.0 424.4 2824.5 3724.2 4536.4 5039.1 5565.0 5565.0 5565.0 Revaluabon Reserve 997.9 997.9 997.9 997.9 997.9 997.9 997.9 997.9 997.9 997.9 Other Reserves 10.3 47.3 235.1 333.8 722.0 1243.5 1930.5 2475.6 3035.6 3346.3 3773.6 Profit (Loss) -4.9 NEFC Holding 276.0 466.1 637.7 743.9 855.0 855.0 855.0 Total Capital 121.1 1173.0 1492.1 1756.0 4820.4 6431.6 8102.4 9256.4 10453.4 10764.1 11191.4 DEBT LIABILITIES World Bank Loan 1104.1 1864.4 2550.8 2975.6 3420.0 3280.5 3127.1 Other Loans Total Debt Uability 0.0 0.0 0.0 0.0 1104.1 1864.4 2550.8 2975.6 3420.0 3280.5 3127.1 CURRENT UABIUTIES AccountBPayable 6.5 56.4 65.3 209.2 251.9 222.5 254.0 269.9 299.1 332.2 353.4 Oers 13.0 Total Current Uabiles 6.5 69.4 65.3 209.2 251.9 222.5 254.0 269.9 299.1 332.2 353.4 TOTAL EQUITYAND UABILUTIES 127.6 1242.4 1557.4 1965.2 6176.5 8518.5 10907.2 12501.9 14172.5 14376.8 14671.9
'El' ANNEX 1 Appendix 2 Page 15
II. NOTES ON TARIFFADJUSTMENTS
47. For the water supply system - in order to achieve a profit margin of 15 percent (before paymentof profit tax) by 1997, it is estimatedthat domestic water tariffs should increase by at least 35 percent in 1995, 25 percent in 1996 and 20 percent in 1997 - all in terms of current prices. Therefore, domesticwater tariffs are expectedto increase by 100percent in the next three years from an average of Lats 0.06 (US$ 0.10) per m3 in 1994 to Lats 0.12 (US$ 0.21) per m3 in 1997. The required increasein terms of constant prices (i.e. excludinginflation) is 46 percent, from Lats 0.06 per m3 in 1994 to Lats 0.0878 (US$ 0.15) per m3 in 1997.
48. For the sewerage system, the general rise in charges is more marked because 87 percent of the proposed investmentis allocatedto the seweragecomponent. Therefore, the sewerage charges for domesticusers are projected to rise by 50 percent in 1995, 45 percent in 1996, and 40 percent in 1997 at current prices. The unit tariff will rise by 200 percent from Lats 0.0515 (US$ 0.09) per m3 in 1994 to Lats 0.156 (US$ 0.27) per m3 in 1997. In constant prices, the real increase is 120 percent from 1994 to 1997.
Annex 2
ACTION PLAN
ANNEX2 Page I
LATVIA LIEPAJA ENVIRONMENT PROJECT
ACTION PLAN
LiepajaState Water SupplvEnterprise
A. Introduction 1. The managementof Liepaja Water and WastewaterEnterprise (LWWE)has decidedto initiatethe preparation and implementationof an Action Plan to improve LWWE's operational, commercial,and financial performance, to the enterpriseto: a) improve the quality of its services; b) internally generatefunds to finance its operations, maintenanceand infrastructure improvements;and c) service the repaymentof loans from the World Bank and the Nordic EnvironmentalFinance Corporation (NEFCO). 2. A number of actions are needed to enable LWWE to achieve its objectives are specifiedin this Action Plan. Issues and needs of specific importancethat require special attention have been identified, and these include: (a) the working frameworkbetween Liepaja City Council and LWWE; (b) a long- term enterprise strategy; (c) tariff level and structure; (d) need of operational managementassistance; (e) service quality; (f) revenue collection; (g) recording and budgetary processes; (h) accountingsystems and principles; (i) LWWE's functionalstructure; and 0) revision of position descriptions, includingthat of the director.
B. Actions to be Taken 3. The LWWE would undertakethe following activitiesunder the Action Plan:
(a) Estblishment of an AutonomousUtility. Developmentof an efficient, consistent and reliable frameworkfor cooperationbetween the Liepaja City Council and LWWE. The framework should be such, that truly autonomousmanagement of LWWE would be possible. This proposed framework would be prepared by A. Dejus and G. Viksna on or before July 1. I9. It is anticipatedthat the implementationof the framework would be completedon or before December31. 1997. (b) Enterprise Strategy. A long term enterprise strategy would be prepared, includingprojected future capital investmentprograms and policies for ANNEX 2 Page 2
elimination of defects, quality improvement, tariffs, revenue collection and organizational improvements. This would include the preparation of a management program that would identify tasks, allocate resources and staff responsibilities and set quantified performance targets. A draft strategy would be completed by A. Dejus on or before July 1, 1997.
(c) Contracting of Management Assistance. This Action Plan would be implemented with the help of a twinning arrangement with Norrkoping Water and Wastewater Enterprise (NWWE). Terms of reference for the twinning arrangement have been developed in coordination with the World Bank. A. Dejus would be responsible for formalizing the contract on or before January 1, 1995.
(d) Performance Standards. Developing a set of quality standards for each service. It is understood that it is neither financially nor technically feasible to immediately adopt corresponding European Union environmental standards but it is expected that a program of target dates for phased implementation of these higher standards should form part of LWWE's strategy. This set of phased quality standards goals would be developed by Z. Uskure on or before January 1. 1998. For this particular project, the Project Monitoring Guidelines (Attachment 1) would be utilized in accordance with the World Bank Project Agreement.
(e) Bill Collection. Improving revenue collection by taking control of collection systems, pressuring defaulters, obtaining additional authority for debt recovery through the court system and providing incentives to customers who pay promptly. A plan would be developed by Z. Niedola on or before December 1. 1997.
(f) Budgetary and Account Systems. Improve all recording and budgetary processes and systems of accounting. This would include staff and work plans and budget centers and monthly reviews. New computerized systems would be introduced in conjunction with extensive training to relevant staff. it is the responsibility of I. Kozlovska to see that the new systems are in place on or before January 1, 1998. In addition, a new set of accounting principles should be drawn up to define capital and revenue terms, to codify transactions by their type and to provide clear procedures. These principles would be formulated while setting up the new accounting systems and would be expected to be finalized on or before January 1. 1998.
(g) New Tariff Schedule. Preparation of a new tariff schedule, based on a detailed tariff study by an international consultant, and implementation of the recommendations of the study. The tariff schedule would be expected to be constructed to: (i) recover LWWE's capital and operational and maintenance costs; (ii) encourage customers to conserve water; and (iii) be affordable. The tariff structure should be optimized in terms of user ANNEX 2 Page 3
categories, tariff incrementality and standing charges. The study would determine the minimum tariff adjustments required to repay the World Bank and NEFCO loans in real terms as shown in attached table Liepaja: Proposed Tariff Rates (Attachment 2). The tariff study would be carried out by A. Tetere and be completed on or before January 1, 1996. In the meantime, the attached tariff adjustment schedule would be utilized as a guideline for regional adjustments.
(h) LWWE Organization and Staff Structure. The functional structure of LWWE would be revised to take account of new and/or modified functions and to improve the pattern of managerial control. A manpower plan would be prepared to clarify responsibilities, define skill requirements and initiate staff development and recruitment systems. This would be completed by A. Tetere on or before July 1, 1997.
(i) Position Descriptions. The position descriptions for LWWE, including that of the Director, should be revised to more accurately reflect current and planned functions and duties of the posts. The revision would be completed by A. Leismanis on or before January 1, 1997.
C. Environmental Monitoring
4. EnvironrmentalMonitoring. LWWE would establish, in coordination with the Ministry of Environment and Regional Development, Regional Environmental Office and the Liepaja Municipal Environmental Office, an environmental monitoring program to evaluate the performance of the collection system, treatment processes and status of receiving waters. This would be completed by S. Jacicenko on or before January 1, 1997.
Annex 3
TERMS OF REFERENCE
A: TWINNING ARRANGEMENT B: TARIFF STUDY
ANNEX 3A Page I
REPUBLIC OF LATVIA
LIEPAJA ENVIRONMENT PROJECT
Water and Wastewater Component
Terms of Reference for "Twinning Arrangement"
Background
1. The Baltic coast of Latvia is characterized by a smooth coastline dominated by beaches backed by sand dunes, forests and coastal wetlands. It has two major cities -- Ventspils to the north, which is a major transhipment port for hydrocarbons and chemical exports for Russia, and Liepaja to the south, which has a naval base, commercial port, fishing harbor, and a mix of industries and recreational beaches.
2. At present, the sustainable use of the existing water resources is threatened by adverse effects resulting from the discharge of under-treated municipal and industrial wastewater. The City of Liepaja is now discussing with the World Bank, the Nordic Environmental Finance Corporation (NEFCO) and the Governments of Finland and Sweden, potential funding of investments for technical, financial and institutional improvements of its water and wastewater services. These discussions are based on detailed technical, financial and institutional studies assessing the situation of Liepaja Water and Wastewater Enterprise (LWWE) and providing the company with recommendations of potential improvements. These studies have been prepared by Sir William Halcrow Consultants (UK), financed by the European Union (EU) PHARE Program, and were completed in June 1994.
3. When planning for the implementation of possible improvements in water and wastewater services in Liepaja, it is important to bear in mind, that water and sewerage services in the country have only recently been decentralized from state responsibility to the responsibility of the appropriate municipalities. Therefore, water and sewerage facilities are not yet autonomous in accordance with market-oriented management practices but are still centrally managed and function as direct extensions of municipal govemments. One of the principal obstacles in promoting the creation of autonomous enterprises which could provide cost-effective, affordable municipal services, is the municipalities' lack of experience in market-oriented operational and financial management practices. Consequently, in order to facilitate the development of the utility into an autonomous, service-oriented and efficiently run enterprise with modern management practices, external support is required. As a part of the proposed Liepaja Environment Project, it is recommended that an organized Twinning Arrangement between LWWE and a reputable foreign water supply and sewerage company be formed in order to achieve the overall project objectives. This document sets out the terms of reference for such an arrangement. ANNEX 3A Page 2
Objectives
4. The main objective of this Twinning Arrangement would be to improve LWWE's overall performance through changes in it's operational and financial management practices. These changes would be in accordance with an Action Plan, which would be developed by LWWE and agreed by the Bank. The overall objective of the Action Plan would be to define and formulate a strategic vision of the short- and long-term future of the company in terms of its operations, legal identity, organizational setup and financial condition. A particularly important objective for this task would be to provide LWWE with a commercial attitude and a sense of service directed at providing the best water supply possible to its customers at an affordable cost without further municipal or government subsidies in the future.
Scope of Work
5. The twinning partner, in close coordination with the Project Implementation Unit (PIU), would support and assist LWWE to implement the Action Plan, specifically with regard to institutional strengthening and human resources development. This coordination would take place during the first three years of the proposed project implementation period. Following this term, the "new" LWWE would be expected to operate in accordance with modern utility management practices and be fully equipped with computerized management information systems. The twinning partner would bring to LWWE, state-of-the-art know-how in utility management, administration and operation.
Workinf Arrangements
6. All activities and tasks under this arrangement are intended to be carried out in close coordination of both parties. Counterpart systems would be applied whenever appropriate and the participation of a maximum number of LWWE staff would be emphasized. The twinning partner would: provide advisors recruited from its own staff and/or outside the utility; provide minor equipment; and subcontract consultants as and when necessary. In subcontracting and procuring of equipment and software, the twinning partner would follow the guidelines of the World Bank for the use of Consulting Services. The selection of consultants would be done jointly with LWWE. Cooperation under this Twinning Arrangement would be regarded as a binding agreement between the two parties. A contract specifying duties, responsibilities, and fees and expenses, would be established and agreed between the LWWE and the twinning partner. Both parties would nominate a twinning coordinator to be jointly responsible for the execution of the agreement. This contract and its execution would be supervised by the PIU and World Bank supervision missions. Cooperation would be initiated by drafting and agreeing upon a specified work plan which would include a detailed time schedule and budget. The work plan, time schedule and budget would be cleared by the PIU and submitted to the Project Steering Committee and the Bank.
Reporting
7. The Twinning Arrangement would follow the same reporting requirements as the PIU. The twinning coordinators would be jointly responsible for preparing annual financial reports and annual ANNEX 3A Page 3
progress reports for each activity included under the twinning agreement. These reports would be cleared by the PIU and submitted to the Project Steering Committee and the Bank.
Main Tasks
8. The main task of the twinning partner is to further refine and improve LWWE's Action Plan/Business Plan in order to create a Ion-term strategic vision of the future of the company. The operational experience and knowledge of the twinning partner, including administrative, organizational and financial competencies would be transferred to LWWE through support in the following three main areas: (a) Formulation and implementation of all Management and Administration Procedures and Systems; (b) Formulation and implementation of a program for System Rehabilitation and Operational Improvements; and (c) Formulation and implementation of a Training Program.
(a) Manaiement and Administrative Procedures and Systems
(i) Objective: The main objective of this component would be to improve existing, and implement new management and information/administrative procedures and systems within LWWE to assist with the transformation of the company into an efficiently run entity. An important objective would be to provide LWWE with a commercial attitude and a sense of service aimed toward providing the best water supply possible to its customers. The tasks within this component would provide the means to achieve those objectives.
(ii) Scope: Support would be provided for the:
- preparation of an organization and human resources development plan, including definition of tasks and job descriptions, assessment of work performance and conformity with the tasks;
- identification of an appropriate computerization strategy, considering budgetary constraints, computer systems expertise available in Latvia and training needs. The strategy would include hardware and software specifications, modular growth and compatibility, software development standards, programming and interface languages, network requirements, remote access, database integrity, etc.;
- development and improvement all of LWWE's managerial, administrative, information and operating functions. This would include reporting formats for internal and external parties and design or adaptation of existing modem and appropriate computerized applications for the following functions:
- financial management (accounting, budgeting, financial planning, etc.);
- custom-oriented commercial management (meter reading, customer master file, billing, collection, customer services, consumer census, consumer education programs, etc.); ANNEX 3A Page 4
- supply management (requirements planning, purchasing, inventory control etc.);
- administration (budget controls, payroll, performance, etc.)
- personnel management (recruiting, promotion, remuneration etc.);
- operations and maintenance management (production control, work-orders generation and control, collection of water and wastewater data, etc.);
- development of a Management Information System (MIS), which will allow timely access to all information required for effective control and management of the company. The computerization of the managerial, administrative and operating functions would be developed in an integrated manner. Any databases would require the storage of information in a common format for future retrieval and analysis;
- development of a reporting system for the follow-up of capital investment with the objective of providing the company's management with appropriate tools for: making effective and efficient use of existing assets; monitoring and controlling its investment programs; and accounting for the impact of future renewals. It is proposed that the implementation of a Geographic Information System (GIS) is considered;
(iii) Training: It is expected that drafting new managerial and administrative functions would be done jointly with the twinning partner and LWWE. Most of the knowledge transfer from the twinning partner to LWWE would take place through visits to the twinning company and on-the-job training during the process of carrying out the different tasks under the component. However, specialized training through external consultants or attendance in external training courses for utilizing computers and associated software would be required as an initial step of implementation.
(b) System Rehabilitation Program, and Operational Improvements
(i) Objective: The main objective of this component would be to technically improve operations and maintenance practices in the water and wastewater system including the plant and distribution systems;
(ii) Scope: Operation and maintenance water loss reduction, equipment maintenance, etc. and the design or adaptation of existing modern and appropriate computerized applications:
- system repair and improvements;
- formulation of a network optimization program;
- supporting the implementation of a leak detection and repair program to be initiated with support from the Regional EU PHARE Program. This includes the ANNEX3A Page 5
establishment of a reliable record of system leaks, their causes and appropriate repair methods;
- system mapping; and
- demand management (development of a water loss reduction program).
(iii) Training: Most of the knowledge transfer from the twinning partner would take place through on-the-job training during the process of carrying out the different tasks under the component. Specialized training through external consultants or attendance in external training courses and visits to the twinning company would be applied as appropriate. Training should be provided to LWWE staff on the use of leakage detection equipment as well as on establishing leakage detection routines.
(c) Training
(i) Obiective: The objective of the training component is to provide LWWE staff with the skills and knowledge required to enable the company to improve its operational, commercial, and financial performance.
(ii) Scope of the Training component: A rapid assessment of training needs within LWWE would be made. The training component would be based on the Action Plan and draw upon the twinning partner's knowledge and experience. An adequate composition of study tours, external course attendance, classroom and on-the-job training would be designed. Training of trainers within LWWE would be emphasized and the provision of this required training would be initiated immediately. The results of this component would be evaluated every year by the twinning coordinators and the PIU, and the lessons learned would be incorporated in the formulation of the subsequent annual training plan.
The training program would reach all levels of the organization covering technical, administrative and management training. Three types of training modes would be utilized:
- On-the-iob training. Training needs at all levels would be addressed by on-the-job training. This training would consist of planned activities conducted at the work site using job tasks as training for the staff. The twinning partner would assist by providing the necessary technical content to the activities, and in providing training to potential future trainers at LWWE. In addition to training in their own utility, the trainers could be trained at the twinning company.
- Training by external consultants. Training in areas such as information systems; including accounting, budgeting and general computer knowledge, could be provided by selected specialized external consultants working under contract to the company. ANNEX3A Page6
Educationalvisits overseasto modem, efficiently-runwater companies,primarily the twinning partner. Introducingnew managerialand operational approaches would require that the company's staff visit appropriatewater companiesoutside of Latvia. Selected staff could study at the twinning agency, following preparationof a detailed training plan with clear objectives. This activity would be essentialbecause the staff upon their return would be responsiblefor working by themselvesto initiateand implementup-to-date managerial and operational practices. The individualtraining plans would be prepared in consultationwith and approved by the Project ImplementationUnit. ANNEX 3B Page 6
LATVIA LIEPAJA ENVIRONMENT PROJECT
Terms of Referencefor
Water and Sewerage Tariff Study
Objective
1. The objective of the tariff study is to design a tariff system for Liepaja Water Supply Enterprise(LWWE) which meets the followingcriteria: (a) allows the entity to generate sufficient cash flow for meeting its financial requirements;(b) provides incentivesfor conserving water and for undertakingpollution control and abatementactivities; (c) reflects as closely as possible the costs to the economy of meeting increasingdemands for water and sewerageservices; and (d) ensures that services will be affordableto the whole population.
Scope
2. The scope of the tariff study will include:
(a) estimatingthe incrementalcosts for the water supply system, resulting from building new capacity, rehabilitatingand updating infrastructure,reducing unaccounted-for water, and operatingand maintainingthe infrastructure;
(b) estimatingthe incrementalcosts for the seweragesystem, resulting from building new capacity and operatingand maintainingthe infrastructure. The capacity cost includes investmentsfor sewerage connections,collectors and pumping stations, interceptors, and final dispositionand treatment;
(c) estimatingthe incrementalcost of servicing different types of customers with water supply;
(d) estimatingthe incrementalcost of servicing different types of customerswith sewerage services, taking into account both the quantity and quality of the effluent, so that the costs of the sewage system and treatment can be equitably and efficientlydistributed between domesticand industrialdischargers and between the various industrial firms;
(e) estimatingthe financial requirementsfor LWWE meeting preestablishedtargets such as a viable cash position, contributionto maintenanceand investmentsfrom internal generation of funds, provision for bad debts, and debt service;
(f) estimatingthe customer's ability to pay for the services in the context of anticipated increaseof other utilities (e.g. heatingand electricity);and ANNEX 3B Page 7
(g) training of relevant LWWE staff in the developmentand use of cost estimation models.
4. The study, based on the estimatesenumerated in para. 2 should recommend:
(a) alternative tariff policies which meet the requirementsoutlined in para. 1;
(b) a plan of action and strategy to implementthe recommendedtariff policies, to the extent that Liepaja and LWWE's authorities have the legal capabilityto do it; and
(c) ways in which the public can be made more aware of the need of implementingthe proposed tariff policy. Annex 4
WATER AND WASTEWATER IMPROVEMENT COMPONENT ENVIRONMENTAL ASPECTS
ANNEX4 Page 1
WATERAND WASTEWATERIMPROVEMENT COMPONENT ENVIRONMENTALASPECTS
A. Overview
1. Introduction. Implementationof the proposed project is anticipatedto have positive environmentalbenefits through rapid improvementof water quality in the Liepaja area through significantimprovements in the performancestandards of the municipal wastewatertreatment plant and expansionof the scope of its collectionof wastewater,reduced pollution of the Baltic Sea, expandedrecreational use of the Baltic Sea beaches throughpollution reduction, and upgrading environmentalmanagement of adjacentcoastal areas and wetlands.
2. EnvironmentalReview. The proposed project componentwas the subject of an environmentalreview prepared by Sir WilliamHalcrow & Partners Ltd. (United Kingdom), working in associationwith the Water Research Center (UnitedKingdom), Wessex Water International(United Kingdom),and Zenico Ltd (Latvia). The review was consistentwith the requirementsof the World Bank for a Category B project and complieswith the Latvian Law on EnvironmentalImpact Assessment. The objective was to evaluate the potential environmentalimpacts from the reconstructionand rehabilitationof the Liepaja Water and WastewaterEnterprise (LWWE). These activities would be implementedby LWWEwith the support of the Governmentsof Sweden and Finland and EU PHARE. The study was conductedusing a site specific approach.
3. LatvianParticipation and Consultation Process. The environmentalreview for the proposed project was prepared with the full cooperationof the Latvian Ministry of Environmentand Regional Development(MOE) and its Regional EnvironmentalProtection Committee for the Liepaja District (REPC-L). Representativesof the MOE and its EnvironmentalAssessment Board have been involved in all stages of developmentof the proposed project and have participatedin a series of site visits to all proposed program sites. Consultationshave been conductedwith the representativesof the local municipality.
4. PresentConditions. The main environmentalproblems in LWWE operationsconcern the discharge of partially treated and untreated effluentand the disposalof sewage sludge. Althoughthe treated effluentis low in suspended solids and heavy metals, the BOD and ammoniacalnitrogen content is high, which could lead to low dissolvedoxygen in the receivinigwaters. The pipeline discharges 1.3 km from the coast into a fairly shallow area, where currents are of low velocity. Problems associatedwith this discharge are exacerbatedby the fact that the treatment works is unable to give full secondarytreatment to the capacity of sewageentering the system. The overload currently amountsto approximately10 - 20,000 m3 per day, and as a result these quantities are discharged through the outfall with only primary treatment. This has ecological, aesthetic, and health implications. The Liepaja Environmentaland Public Health Center reports that there is faecal contaminationof the beaches north of the harbor and that the level of coliformbacteria is sometimes unacceptable,which significantlylimits the efforts of both the Governmentof Latvia and Liepajato expand tourism in the area. ANNEX 4 Page 2
5. The raw sewage that is pumped to the wastewatertreatment plant is of medium strength and is low in heavy metals. Although the treatmentprocess releases unpleasantodors, the location of the facility is in a relatively remote and unpopulatedarea so this is unlikely to be of significanceexcept for the employeesof the utility. There are few visual impacts from the utility which is well screened by the surrounding forest. There are further deficienciesin the sewerage system itself. There is only a single pipeline carrying wastewaterfrom the final pumping station to the treatment works, and it is in a poor state of repair. There were two major breaks in the pressure line in 1990 which caused a complete breakdownof the wastewatercollection system and considerableenvironmental damage.
6. In addition to the discharge of excess sewageat the utility, there are environmentalproblems elsewhere in the city resulting from the dischargeof untreated wastewater. This arises in part because the combineddrainage system containingboth domesticand industrialeffluent dischargesto the aquatic environmentuntreated. This system contains 14 outlets to the City Channel and 8 to Liepaja Lake which release untreated domesticsewage and industrial wastewater. Water quality in the City Channel and Liepaja Lake is further degraded by direct dischargesfrom various industries. Liepaja Lake is the most important ecologicalsite in the city and has a designatedOrnithological Reserve which is of considerablebotanical interest. Data indicate that the ecology of the northern part of the lake and the channel are adversely affectedby the wastewaterdischarges and that organic load is the main problem.
7. Althoughthere are few impacts associatedwith the potable water system, the outdated chlorine dosing systemsat the treatmentworks are a cause for concern, as these are located in inhabitedareas. The use of outdatedprocedures and storage equipmentmake a hazardousrelease of chlorine gas a possibility. Non-pointsource pollutantsare less of a problem than in the past because of the changes in agriculturalpractices.
B. Elementsof the ProposedProject Component
8. Major Findings. The environmentalreview concludedthat the wastewatertreatment utility is currently hydraulicallyoverloaded. Extendingthe works to treat a greater volume of wastewater would prevent untreated sewagebeing discharged to the Baltic Sea at certain times of the day. In addition, measures aimed at reducing the septicity of incomingsewage would make the sewage less odorous and easier to treat. This would improve working conditionsfor wastewatertreatment personnel, save energy and may lead to effluent quality improvements.
9. It is apparentthat point source pollution within Liepaja is a major problem for water quality. In additionto lowing the chemical quality of the receiving waters, thus damagingaquatic ecosystems, the dischargesof untreatedsewage are resulting in unacceptablemicrobiological pollution. Diversion of these untreateddischarges to the wastewateroutfall located at the treatment plant and provision of the appropriatecapacity at the utility to treat them is a priority. In contrast, non-pointsources are not currently seen as a problem in terms of the quality of surface waters in Liepaja. This is not unreasonablegiven the urgent need to address point source pollution the city.
10. Unacceptablepollution and degradationof ecologicallyvaluable wetlandsto the west of Tosmares Lake has been caused in the past by the failure of the rising main serving the wastewater treatmentworks. In addition, this has resulted in interruptionof the city water supply which has ANNEX 4 Page 3
major public health implications. Works aimed at improvingthe security of this facility (e.g., refurbishmentor dualling) should therefore, be given a high priority. It is also thought that the sludge storage lagoons at the Liepaja wastewaterutility may be causing pollution of underground water. This will be investigatedin the detailed design of the project.
11. The fact that all houses in the city are not served by the main water supply is a public health issue. The project would include a limitedextension of the existing supply network to cover areas now suppliedby standpipes. This would be a pilot project because there is an affordabilityissue for the inhabitantswho would be connected. Refurbishingthe water treatment facilities can be expected to confer public health benefits as the reliability of supply of wholesomewater would be improved. In addition, renovationof the chlorine dosing facilitieswill reduce the risk of health-threatening accidents.
12. ProposedImprovements. A brief descriptionof proposed water supply and wastewater treatment improvementsin Liepaja is provided as follows:
(a) Water Supply. Improvementsto the water supply system can be divided into two distinct categories: those to maintain the current system and improvementsaimed at enhancingthe performanceof the system.
(i) Operationsto Maintainthe CurrentSystem. The following operations to maintain the current system are proposed:
Rehabilitationof the parts of the network which are leaking most heavily and introductionof water metering to promote water conservation;and
* Provisionof chlorination, some laboratoryfacilities, and emergency spare parts to improve the quality of suppliedwater;
(ii) ImprovementsAimed at Enhancing Performance. The following improvementsaimed at enhancingperformance of the water supply system are proposed:
Completionof the New Otanki TransmissionMain to reduce leakages and maintenancecosts, and to provide an acceptablelevel of supply security; and
* Limited extension of the existing supply network to cover areas now supplied by standpipes.
(b) WastewaterTreatment. Improvementsto the wastewatersystem can be divided into two distinct categories: those to maintain the current system and improvementsaimed at enhancingthe performanceof the system. ANNEX 4 Page 4
(i) Operationsto Maintainthe CurrentSystem. The followingoperations are proposed to maintain the current system:
* Reconstructionof sewers in imminentdanger of collapse(estimated at 2000 meters) and initiationof a rolling program of sewer by relining/reconstructionto ensure the long-termoperating capacity of the undergroundassets; and
* Rehabilitationof the terminal pumping station and reconstructionof the terminal main to the treatment works to ensure the continuous treatmentof the current and future wastewaterflows.
(ii) ImprovementsAimed at EnhancingPerformance. The followingoperations to enhancethe performanceof the system are proposed:
* Constructionof interceptorsto convey an additionalflow of 16,000 m3/d, which is currently discharged directly to the lake or the city channel, to the treatment works.
Completionof the new works currently under construction. the completedplant will be to treat current and increased flows to meet HELCOM standards.
13. Potential EnvironmentalImpacts. The environmentalimpacts which may result from the proposed water and wastewatertreatment have been divided into general impacts and specific impacts:
(a) GeneralImpacts. There will inevitablybe some environmentalimpacts associated with the constructionactivities. The magnitudeof these impacts will depend on a number of factors includingproximity of houses, length of constructionperiod, working hours, and methods of constructionbut, in the case of large construction projects (e.g., extension to the wastewatertreatment works), have the potential to be significantand prolonged. In particular such impacts could include noise and vibration, dust releases, possible odor releases when working on existingsewerage facilities,pollution of surface or undergroundwaters due to releases or spillages of material from constructionsites, disruptionof traffic and noise pollution associated with transporting constructionmaterials and large items of plant, pollution risk and hazard to the health of constructionworkers if constructionis carried out on contaminatedland (e.g., areas of where LWWE sewage sludge has been stored). Visual environmentalimpacts are expectedto be minimal.
None of the water or wastewatertreatment proposals involve any resettlementof people. However, certain temporarydisruptions to life in Liepaja are inevitable, particularlywhen work to install new sewers or water mains is being carried out.
(b) Specific Impacts of Potential Water Treatmentand Supply ImprovementSchemes. The particular impacts can be divided into those resulting from operations to maintain the ANNEX 4 Page 5
current system and improvementsto enhancesystem performance. Replacementof pumps to optimize performancewould improve the efficiencyof the units and lead to energy and cost savings.
(i) Operationsto Maintain the CurrentSystem. Operations, such as identification of failure 'hot spots" and renovationand replacementof mains, to reduce water loss from the current water treatment and supply system would have a positive environmentalimpact as less water would need to be abstracted and treated thus saving energy and materials; and
(ii) Improvementsto Enhance System Performance. Improvementsto enhancethe performanceof the wastewatercollection and treatment system will also have an overall positiveimpact on Latvia's environmentas described below:
* Improvingthe monitoring of raw and treated water in the supply system can be expectedto have a positive impact on public health in Liepaja;
* Improved treatmentfacilities will have similar health benefits to those discussed above. In addition, refurbishmentof the chlorination plants will reduce the risk of a health-threateningaccident occurring at these locations;
* Improving systemperformance and reliabilityby increasingsecurity of supply, pressure zoning and improvingemergency facilities and procedureswill confer similar benefits to those discussed in "Operationsto Maintain Current System (above);" and
* Providingan in-housesupply of water to more homes will convey public health benefits. Lack of such a facility has been related to health problems and illness.
(c) Specific Impacts of PotentialWastewater Treatment Improvement Proposals. The particular impactscan be divided into those resulting from operations to maintain the current systemand improvementsto enhancesystem performance.
(i) Operationsto Maintainthe CurrentSystem. Undertaking operations to maintain the current wastewatersystem can be expected to have an overall positive environmentalimpact. Replacing,repairing, and renovatingsewers, rising mains, mechanicaland electrical equipment, and sewage works plant will minimizefuture failures and thus help reduce the risk of discharge of untreated or partially treated sewage. This will benefit the water environment and be of benefit to public health; and ANNEX 4 Page 6
(ii) Improvementsto Enhance SystemPerformance. Improvementsto enhancethe performanceof the wastewatercollection and treatment system will also have an overall positive impact on Latvia's environmentas described below:
* Measures to prevent septicity in the sewage will make the sewage less odorous. In addition, because the sewage ill be easier to treat, improvementsin effluent quality and reductions in energy usage at the utility can be expected;
* Providing seweragefor currently unseweredareas can be expected to improve groundwaterand surface water quality as cesspools will no longer be required in those areas;
* Upgradingpumping stations to improve efficiency will save energy and reduce costs;
* Diversionand interceptionof domesticand industrial wastewater, which is currently discharged to the watercoursesuntreated, and providing suitabletreatment facilitieswill have an overwhelmingly positive impact on the Liepaja environment. This will improve the quality of the watercoursesin the city from both environmentaland health viewpoints. In particular, the bathing beaches in Liepaja will benefit from higher quality water which will encouragetourism;
* Extension of the Liepaja wastewatertreatment plant to treat a greater volume of sewage will alleviate the current plant overload which will improve effluentquality and thus enhancethe chemicaland microbiologicalquality of the Baltic Sea and bathing beaches in the discharge area. In order to gain the maximumenvironmental benefit, such an extension should also provide sufficientcapacity to treat the volume of sewage expectedfrom newly sewered areas; and
* Automationof the existing facilitiescan be expected to save energy and allow faster, or automatic, responsesto system problems thus keeping potential environmentalpollution to a minimum.
(d) Specific Impacts of PotentialSewage Sludge TreatmentImprovement Schemes. Thickeningor dewateringof the wastewatertreatment plant sludge will reduce the sludge volume by decreasingits water content. Currently this would have a positive environmentalimpact as the inadequatedrainage system in the sludge lagoons is allowing leachateto enter the undergroundstrata. However, once the lagoon drainage is improved this would no longer be a benefit. Reductionin sludge volume could reduce environmentalimpacts arising from transportationif the sludge were to be removed from site (e.g., to farmland)in the future. Improving the lining and drainage in the sludge drying lagoonswill produce an immediateenvironmental benefit as the leachatefrom the sludge, which currently enters the ground, will be ANNEX 4 Page 7
returned to the wastewatertreatment works inlet thus preventingpollution of undergroundwater. Disposal of the sewage sludgeto agriculturalland could have a negative environmentalimpact if it is not controlled effectively.
14. ProposedMitigation Plan. The overall aim of the project is to recommendmeasures which will improve the water supply and wastewaterservices of Liepaja. The major environmentalimpact of the project will therefore be beneficialin improvingthe quality of life of the human population. Further positive impacts will result from the improvementin water qualityin the presentdischarge areas resulting in improved ecologicalconditions.
15. Few of the impacts of the completedprojects will be adverseand none are likely to be significant and require mitigation. The impact of constructionwill affect primarily the human populationand will be largely limitedto relativelyminor disruption and disturbance. Environmental enhancementsthat will accrue on completionof the project are unlikely to be significantor require mitigation. Nevertheless, it should still be possible to reduce the extent of this inconvenienceby implementingsome relatively straightforwardmeasures which are normalfeatures of modem constructionsites. During appraisal, the mission, in consultationwith the MOE andthe REPC-Land LWWE, would agree on an environmentalmitigation plan for the proposedproject.
16. Proposed Monitoring Plan. It is proposed that data on water quality, biological aspects,and contaminationof sediments in the two lakes would be collectedprior to the commencementof any improvementworks. The monitoringcould be continuedduring constructionof the various improvementmeasures and the results comparedwith the baselinesituation to determine the impacts that occur and their significance. Continuationof the monitoringafter completion of the construction works will show the degree of environmentalimprovement achieved.
17. Such a program would involve samplingand analysis of waterquality at pointsin the City Channel, the military harbor, Lake Liepaja and Lake Tosmares. It would also include samplingof sedimentat points in Liepaja and Tosmares Lakes and analysis for speciesand densitiesof plankton, benthos, and fish in the City Channel, military harbor, Liepaja and Tosmares Lakes, and in the Baltic Sea in the vicinity of the outfall. Birds and plants in the two lakes, wetlands, and dunes would also be monitored to determine sensitive locationsand seasons. Ideally, datacollection would commence a year before commencementof the works. During appraisal, the mission, in consultationwith the MOE, REPC-L and the LWWE, would agree on an environmentalmonitoring plan for the proposed project.
Annex 5
ENVIRONMENTAL DATA SHEET
ENVIRONMIEiNTALDATA SHEET FOR PROJECTS in the IBRD/IDA Lending Program
Countsy: LATVIA Project ID No: 7LATPA009 Project Name: Liepaja Environment Total Project Cost: $21.17 M AppraisalDate: June 27. 1994 Board Date: December 2, 1994 Task Manager: S. Lintner Managing Division: EC4NR Sector: Environment Lending Ensaruments: SIL Status: Standby Date (est) for receipt of EA by Bank: N/A EA Category (AJB/C): B Date Assigned: July 21, 1993
Date Sheet Prepared/Updated October 21, 1994 (Please do not leave any iLemsblank use'N/A or 'To be developed' when appropriate)
Major Project Components: (presents description of project component) Regional environmental managementproject including: (a) rehabilitationand expansion of Liepaja water and wastewatet system; (b) institutionalstrengthening and training to support establishmentof autonomous water and wastewater utility: (c) support for implementationof managementplan for adjacentcoastal areas and wetlands; and (d) actions for planned development of recreationaland nature-based tourism in the Liepaja region.
Major Environmental Issues: (descnbes major environmental issues identified or suspected in project) (i) Environmental impacts resulting from improvements to4be made in Liepaja water and wastewater system; (ii) impacts of actions needed for pre-treatment of industrial wastewaters prior to discharge to municipal sewer system; (iii) adequate funding of the water/wastewater utility for proper operation and maintenance of facilities; (iv) management measures for adjacent coastal areas and wetlands supported under the project; and (v) evaluation of potential investments to support ecologically sound tourism.
Other Environmental Issues: (describesenvironmental issues of lesser scope associated with project) N/A
Proposed Actions: (describes acLionsproposed to mitigaLeenvrontmental issues described in project) An environmental review has been prepared for the proposed project by a joint British and latvian team consistent with the environmental review procedures of Larvia and those of the Bank. Preparation of the study was coordinated with the Ministry of Environmental and Regional Development (MOE) of Latvia and the regional environmental protection cotnmittee. A seminar on the Bank's environmental assessment procedures was given by Bank staff in Riga in April 1993 and the findings of the environmental review discussed with national and local authorities in April-May 1994 and a field review was conducted by the State Minister of Environment and Head of the Environmental Assessment Board in June 1994. Environmental reviews would be prepared as elements of environmental activities to be supported by the proposed project and implemented under supervision of the MOE.
Justificaaon/Ranonalefor Environmental Category: (reasons for environmental category selected & explanation of any changes from initial classificaton) The proposed project has been placed in environmental screening category "B" as the potential imnpactsare restricted in scope and largely beneficial. It should be noted that support for improved municipal water and wastewater infrastructure, including pre-treatment of industrial wastewater discharged to these systems, would focus on the completion or rehabilitation of existing facilities. All facilities to be funded under the project would be approved by the MOD and regional environmental protection committees. All improvements to the wastewater treatment plant would occur on the existing site, well outside Liepaja. In the case of activities for improved management of coastal zone and protected areas, these would largely occur in areas which are presently designated as recreational or natural areas and would not involve resettlement of any current residents.
Status of Category A Environmental Assessment: (presents EA start-update. EA first draft, and current status) N/A
Remarks: (gives sasiusof any other environrenal studies, lists local groups and local NGOs consulted. tells whetherborrower hasgiven permnissionto release EA. eSC) The World Wide Fund for Nature (WWF) has participated in the preparation of the proposed project and would implement management activities in Lake Pape and Jurkalne. Bank staff from Headquarters and the Regional Office in Riga made several site visits to areas to review coastal and wetlands management issues with representatives of the MOE, WWF(.nd local go)epments.
Signed by: Signed by:
if0 y Fx C4NR Anand Seth (EMTEN) C.-'-- ~~~~~~~~~~~~~~~~~~~~~~~~October21.1994
Annex 6
REVIEW OF AFFORDABILITY
Annex 4. Review of Affordability Affordability Projection at Fixed (1994)Prices
Number of persons per household: 3.2 Average household income: 75
Beginning of 1994 Current 1995 1996 1997 1998 1999 2000 2001 Real Income Growth: 4.00%/o 4.00%h 4.00%/o 5.00%/ 5.00%o 5.00%/o 5.00%/o
Average household income LAT/month 75 75 78 81 84 89 93 98 103 Water Consumption - per person Liter/day 160 160 160 160 160 160 160 160 160 - per household m3/month 15.57 15.57 1557 15.57 15.57 15.57 15.57 15.57 15.57
Water Charges 4.9 6.96 7.91 8.67 8.77 8.85 8.94 9.02 SewerageCharges 3.995 6.696 8.814 11.419 11.957 12.521 13.112 13.112 Combined Tariffs LAT/month 0.09 0.11 0.14 0.17 0.20 0.21 0.21 0.22 0.22 Total Monthly Charges LAT/month 1.39 1.71 2.13 2.60 3.13 3.23 3.33 3.43 3.45 Annual Tariff Increase 23.66%h 24.15% 22.47% 20.12% 3.18% 3.11% 3.19%o 0.36%/
Monthly Charges as % of income 1.85% 2.28% 2.73% 3.21% 3.71% 3.64% 3.58% 3.52% 3.36%/
Monthly Charges as average % of income 3.10% Total RealTariff Increase
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