Document of The World Bank FOR OFFICIAL USE ONLY

Public Disclosure Authorized Report No: ICR00005005

IMPLEMENTATION COMPLETION AND RESULTS REPORT

(IBRD-78340)

ON A

LOAN

Public Disclosure Authorized IN THE AMOUNT OF EURO 81.00 MILLION

(US$ 118.70 MILLION EQUIVALENT)

TO THE

Republic of Bulgaria

FOR A

Public Disclosure Authorized Municipal Infrastructure Development Project June 22, 2020

Water Global Practice Europe And Central Asia Region

Public Disclosure Authorized

CURRENCY EQUIVALENTS

(Exchange Rate Effective - December 31, 2019)

Currency Unit = Bulgarian Lev (BGN) 1 EURO = BGN 1.95 US$1.12 = EURO1

FISCAL YEAR January 1 – December 31

Regional Vice President: Anna M. Bjerde Country Director: Arup Banerji Regional Director: Steven N. Schonberger Practice Manager: David Michaud Task Team Leader(s): Toma Alexandrov Yanakiev ICR Main Contributor: Jacqueline Marie Tront

ABBREVIATIONS AND ACRONYMS

ALAP Abbreviated Land Acquisition Plans BGN Bulgarian Lev CBA Cost Benefit Analysis COVID19 Corona virus CPF Country Partnership Framework EC European Commission ERR Economic Rate of Return EU European Union FIDIC Fédération Internationale Des Ingénieurs-Conseils FM Financial Management GDP Gross Domestic Product GOB Government of Bulgaria IFR Interim Financial Report JV Joint Venture M&E Monitoring and Evaluation MRDPW Ministry of Regional Development and Public Works m3/yr Cubic meters per year NPV Net Present Value OHS Occupational Health and Safety PIU Project Implementation Unit PAD Project Appraisal Document PDO Project Development Objective TOC Theory of Change WTP Water Treatment Plant

TABLE OF CONTENTS

DATA SHEET ...... 1 I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES ...... 6 A. CONTEXT AT APPRAISAL ...... 6 B. SIGNIFICANT CHANGES DURING IMPLEMENTATION (IF APPLICABLE) ...... 10 II. OUTCOME ...... 12 A. RELEVANCE OF PDOs ...... 12 B. ACHIEVEMENT OF PDOs (EFFICACY) ...... 14 C. EFFICIENCY ...... 20 D. JUSTIFICATION OF OVERALL OUTCOME RATING ...... 23 E. OTHER OUTCOMES AND IMPACTS (IF ANY) ...... 23 III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME ...... 24 A. KEY FACTORS DURING PREPARATION ...... 24 B. KEY FACTORS DURING IMPLEMENTATION ...... 25 IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME .. 26 A. QUALITY OF MONITORING AND EVALUATION (M&E) ...... 26 B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE ...... 28 C. BANK PERFORMANCE ...... 30 D. RISK TO DEVELOPMENT OUTCOME ...... 31 V. LESSONS AND RECOMMENDATIONS ...... 32 ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS ...... 34 ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION ...... 43 ANNEX 3. PROJECT COST BY COMPONENT ...... 46 ANNEX 4. EFFICIENCY ANALYSIS ...... 47 ANNEX 5. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS ... 58 ANNEX 6. SUPPORTING DOCUMENTS (IF ANY) ...... 60 ANNEX 7. POVERTY DATA FOR MUNICIPALITIES SUPPORTED BY THE PROJECT ...... 61

The World Bank Municipal Infrastructure Development (P099895)

DATA SHEET

BASIC INFORMATION

Product Information Project ID Project Name

P099895 Municipal Infrastructure Development

Country Financing Instrument

Bulgaria Investment Project Financing

Original EA Category Revised EA Category

Full Assessment (A) Full Assessment (A)

Organizations

Borrower Implementing Agency

Republic of Bulgaria Ministry of Regional Development and Public Works

Project Development Objective (PDO)

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

Revised PDO The project objectives are to: (a) improve bulk potable water provision in target areas, and (b) assist municipalities to improveinvestment-planning capacity. These objectives are in line with Bulgaria's National Strategy on Environment (2005-2014) which hasa goal to provide good quality and sufficient quantity of water for various purposes.

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FINANCING

Original Amount (US$) Revised Amount (US$) Actual Disbursed (US$) World Bank Financing

118,700,000 102,580,247 64,854,031 IBRD-78340 Total 118,700,000 102,580,247 64,854,031

Non-World Bank Financing 0 0 0 Borrower/Recipient 29,600,000 25,600,000 14,363,236 Total 29,600,000 25,600,000 14,363,236 Total Project Cost 148,300,000 128,180,247 79,217,267

KEY DATES

Approval Effectiveness MTR Review Original Closing Actual Closing 24-Nov-2009 30-Apr-2010 18-Nov-2012 31-Dec-2015 31-Dec-2019

RESTRUCTURING AND/OR ADDITIONAL FINANCING

Date(s) Amount Disbursed (US$M) Key Revisions 26-Apr-2011 0 Change in Results Framework Change in Components and Cost 04-Aug-2014 18.35 Change in Project Development Objectives Change in Results Framework Change in Components and Cost Change in Loan Closing Date(s) Cancellation of Financing Change in Financing Plan Reallocation between Disbursement Categories Change in Legal Covenants Change in Implementation Schedule 15-Jul-2016 24.64 Change in Results Framework Change in Components and Cost Change in Loan Closing Date(s) Reallocation between Disbursement Categories Change in Implementation Schedule

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KEY RATINGS

Outcome Bank Performance M&E Quality Moderately Unsatisfactory Moderately Unsatisfactory Modest

RATINGS OF PROJECT PERFORMANCE IN ISRs

Actual No. Date ISR Archived DO Rating IP Rating Disbursements (US$M) 01 08-Apr-2010 Satisfactory Moderately Satisfactory .06

02 14-Sep-2010 Moderately Satisfactory Moderately Unsatisfactory .06

03 13-Dec-2010 Moderately Satisfactory Moderately Unsatisfactory .06 Moderately 04 13-Jun-2011 Moderately Unsatisfactory .06 Unsatisfactory Moderately 05 03-Mar-2012 Moderately Unsatisfactory 4.19 Unsatisfactory Moderately 06 13-Oct-2012 Moderately Unsatisfactory 4.82 Unsatisfactory 07 26-Dec-2012 Unsatisfactory Moderately Unsatisfactory 5.41

08 26-Jun-2013 Unsatisfactory Moderately Unsatisfactory 8.62

09 23-Dec-2013 Unsatisfactory Moderately Unsatisfactory 13.89

10 21-Jun-2014 Unsatisfactory Moderately Unsatisfactory 16.36

11 07-Nov-2014 Unsatisfactory Moderately Unsatisfactory 18.41 Moderately 12 27-Feb-2015 Moderately Unsatisfactory 20.19 Unsatisfactory Moderately 13 01-Aug-2015 Moderately Unsatisfactory 21.87 Unsatisfactory Moderately 14 07-Feb-2016 Moderately Unsatisfactory 24.03 Unsatisfactory Moderately 15 04-Aug-2016 Moderately Unsatisfactory 24.70 Unsatisfactory 16 28-Dec-2016 Moderately Satisfactory Moderately Satisfactory 34.03

17 23-Jun-2017 Moderately Satisfactory Moderately Satisfactory 38.34

18 08-Dec-2017 Moderately Satisfactory Moderately Satisfactory 43.94

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19 07-Jun-2018 Moderately Satisfactory Moderately Satisfactory 46.39 Moderately 20 07-Dec-2018 Moderately Unsatisfactory 55.06 Unsatisfactory Moderately 21 03-Jun-2019 Moderately Unsatisfactory 61.74 Unsatisfactory

SECTORS AND THEMES

Sectors Major Sector/Sector (%)

Water, Sanitation and Waste Management 100 Public Administration - Water, Sanitation and Waste 35 Management Other Water Supply, Sanitation and Waste 65 Management

Themes Major Theme/ Theme (Level 2)/ Theme (Level 3) (%) Urban and Rural Development 10

Rural Development 10

Land Administration and Management 10

Environment and Natural Resource Management 90

Environmental policies and institutions 30

Water Resource Management 60

Water Institutions, Policies and Reform 60

ADM STAFF

Role At Approval At ICR

Regional Vice President: Philippe H. Le Houerou Anna M. Bjerde

Country Director: Theodore O. Ahlers Arup Banerji

Director: Peter D. Thomson Steven N. Schonberger

Practice Manager: Wael Zakout David Michaud Task Team Leader(s): Gabriel Ionita Toma Alexandrov Yanakiev

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ICR Contributing Author: Jacqueline Marie Tront

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I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES

A. CONTEXT AT APPRAISAL Context 1. Country Background. Following a severe financial and social crisis in 1996-97, Bulgaria established macroeconomic stability and accelerated growth supported by a number of structural reforms and fiscal discipline measures. By 2005, most non-infrastructure enterprises and virtually all banks had been privatized or liquidated, trade and prices were liberalized, and the investment climate improved. These measures accelerated growth to about 5 percent per year during 2000-05, inflation slowed to single digits, unemployment declined to 10.7 percent in 20051. Bulgaria acceded to the European Union (EU) in 2007, during a period when Bulgaria’s economy was growing steadily. The global recession which occurred in 2008-2009 impacted the Bulgaria economy in mid-2009, where economic decline of 5.5 percent was observed in 2009. Government measures such as renewed fiscal discipline and reduced budgetary spending, along with global market recovery, are associated with Bulgaria’s slow but steady recovery from the global recession. A positive growth rate was recorded as early as 2010 and gross domestic product (GDP) reached pre-recession levels in 2014. 2. Sectoral Context. As part of its accession to the EU in 2007, Bulgaria was required to comply with existing EU directives and laws related to water. During preparation for EU accession the Government of Bulgaria (GOB) prepared and endorsed the Strategy for Water Supply and Sewerage Management and Development (March 20042) to meet requirements for the 1998 EU Drinking Water Directive and the 2000 EU Water Framework Directive. This Strategy outlined a plan to meet water supply related requirements such as the 1998 Drinking Water Directive which requires EU-wide minimum quality standards for water supply systems3. In line with the Directive, the Strategy also set out a path for alignment with principles related to water supply planning, regulation, monitoring and information and reporting. In addition, the 2009 EU Water Act set the stage to implement a new water sector policy framework in general, and a framework for water supply and sanitation, in particular. Other related directives, such as the 1991 Urban Wastewater Directive, required comprehensive planning and investment actions. Compliance with these directives required a number of changes in the legal, regulatory and organizational structure within GOB that resulted in a shifting landscape for undertaking investment activities in the sector. 3. In addition to the shifting policy context, Bulgarian officials observed water shortages in river basins in the period leading up to appraisal, with very dry years reported as observed in 1993,1997, 2000, 2003, 2007 and extreme drought was recorded in 2000 and 2007. Looking retrospectively at the preparation and appraisal period, Bulgaria was experiencing changing precipitation patterns, with both of Bulgaria’s climatic zones (continental in the western areas and Mediterranean in the eastern and southern areas) experiencing lower than historic levels of precipitation and increasing variability. In communities without water storage, household water supply was regularly placed on an intermittent schedule and

1 Bulgaria Country Partnership Strategy FY07 – FY09, Report 36146-BG 2 Note that an update to this document was approved by the Council of Ministers in 2014, titled Strategy for Development and Management of the Water Supply and Sanitation Sector in the Republic of Bulgaria 2014 - 2023 3 EU wide quality standards were required for all distribution systems serving more than 50 people or supplying more than 10 cubic meter per day, as well as other uses such as tankers, bottled water and food industry usage.

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serious water rationing was in place during extreme drought years. For example, in 2008, after more than 30 days without rainfall, residents of Panagyurishte town located near Luda Yana dam, had to secure their water supply from another town, and had water for two hours twice a week, through water tanks, for about one month. In this evolving context, support for the construction of four municipal water supply dams provided by this Project was an innovative, ambitious program for a MIC and recent EU member, which was set to address water security and climate resilience challenges by leveraging the Bank’s technical and project management expertise, which were evolving within GOB at the time. 4. The Government Strategy for Water Supply and Sewerage Management and Development estimated that total sector investment needs were about €6.9 billion for water supply, improved water efficiency, sewerage, and wastewater treatment. In light of the water shortages and increasing number of droughts, investments included completing eight water supply dams that were under construction during the 1970’s and 1980’s, but stopped due to lack of funds. Three of the eight dams-Luda Yana, Neikovtzi, and Plovdivtsi were included in this Project and the construction of these projects stopped in the late 1980’s and was finally suspended in 2000 and 2001, when the economy was transitioning from a socialist system to a market economy. The Strategy outlined plans to replace about 70 percent of Bulgaria's existing water transmission and distribution networks to reduce the Non-Revenue Water, estimated to be around 60 percent during appraisal. In addition, Government planned to increase coverage of sewerage connections from 50 percent to 85 percent and wastewater treatment coverage from 35 percent to 85 percent. The Strategy also specified that municipality-level water supply and wastewater Master Plans would be developed to identify needs in each utility. Support for development of these Master Plans was included in this Project to provide recommendations for meeting EU directives and to ensure that investment could be appropriately mobilized and prioritized. Theory of Change (Results Chain) 5. The Project Appraisal Document (PAD) did not require a Theory of Change (TOC) or Results Chain therefore an ex-post Results Chain was constructed based on the PDO, and the results indicators primarily utilizing indicators after the 2014 restructuring. The overall objective of improving reliability and quality of water supply for settlements in the Project area is realized by improving water treatment infrastructure and by increasing the volume of water stored for municipal use such that seasonal variability does not reduce the availability of water that can be abstracted for that purpose. The results chain assumes that the water distribution network is in place, that leakages or disrepair of that network does not prevent quality water from reaching the beneficiaries and that the storage, treatment and distribution infrastructure is operated and maintained in accordance with industry standards. The results chain assumes that the Project areas have water management systems in place that allow them to monitor and predict water quality and to regulate water withdrawals during times of scarcity or other system-impacts and that the responsible authorities have the political will of the municipal and regional authorities to manage water to maximize drinking water supply benefits. The overall objective of improving investment planning capacity is realized through support for regional master plans for water supply and sewerage and related support to package and submit those plans for investment financing from the national budget and the EU Structural Funds. The impact of these improved investments in water supply systems reduces water-borne disease related illness and results in reduced healthcare and hospitalization related costs. An indirect benefit of the water storage infrastructure is regulation of flood peaks and reduction of flood- related losses in downstream communities.

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Theory of Change constructed for the project ex-poste based on Approval and 2014 PDO and Results Framework.

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Project Development Objectives (PDOs) 6. The Project development objectives at appraisal were to: (1) Improve the reliability and quality of water provision to the communities in selected settlements in the Project area; and (2) Assist municipalities to improve investment-planning capacity.

Key Expected Outcomes and Outcome Indicators 7. The Project Appraisal Document delineates the following Project Outcomes (as PDO) and associated Outcome Indicators:

Table 1. Outcomes and Outcome Indicators at Approval

Key Expected Outcomes Outcome Indicators

(1) Improve the reliability and quality of water Water intakes completed in Luda Yana, Plovdivtsi, provision to the communities in selected Neikovtzi dams and refurbished in Studena dam, and settlements in the Project area operational in all Project sites;

Quality of water delivered to population towards meeting the EU and Bulgarian standards, whichever is higher;

(2) Assist municipalities to improve investment- Completion of 48 regional Master Plans for water supply planning capacity and sewage systems including 40 urban Master Plans, of satisfactory quality for acceptance by Bulgaria and EC, to support investments in service delivery

Components 8. Component 1 Project Implementation Support (Total Cost €5.12 million): This support was provided to carry out activities under Component 3 of the Project and consultant services associated with Project implementation. This included preparation of feasibility studies, updates of design and Environmental Management Plans, preparation of bidding documents, construction supervision and other consulting assignments needed for Project support, including audit, development and implementation of the communication plan to help ensure people are aware of the status of Project-related land issues, training of Project Implementation Unit (PIU) and Ministry of Regional Development and Public Works (MRDPW) staff.

9. Component 2 Preparation of Water Supply and Sewerage Regional Master Plans (Total Cost €20.88 million): This component intended to support preparation of forty-eight (48) regional Master Plans for Water Supply and Sewerage systems, including forty (40) Master Plans for urban settlements, within the six (6) economic development regions. These master plans were intended to support the Borrower, through MRDPW, to: (i) identify investment needs for rehabilitation of water supply networks and construction of sewerage networks and wastewater treatment plants and (ii) meet the applicable EU water and wastewater directives commitments. The Master Plans were intended to include corporate development plans and any other related documents and activities promoting improved service delivery and greater efficiency.

10. Component 3 Completion and rehabilitation of water supply dams and associated water treatment plants (Total Cost €75.00 million): The support for completion and rehabilitation of water supply dams was prepared to include completion of Luda Yana, Neikovtzi, and Plovdivtsi dams. It also

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planned to support rehabilitation of the Studena dam, a water supply dam that is currently operational and supplies water to the town of Pernik. This component was also intended to support the completion of water treatment plants. The PAD stated that feasibility studies for the dams would be completed during Project implementation.

B. SIGNIFICANT CHANGES DURING IMPLEMENTATION (IF APPLICABLE)

Revised PDOs and Outcome Targets 11. In 2014, the first part of the PDO was changed from "improve reliability and quality of water provision to the communities in selected settlements in the Project area" to "improve bulk potable water provision in target areas"; while the second part of the PDO remained unchanged and read, “ (b) assist municipalities to improve investment-planning capacity.”

Revised PDO Indicators 12. The PDO indicators were revised during the following Project restructurings:

Table 2. PDO Indicators at Approval and Revised During Restructuring Original PAD 2011 Restructuring 2014 Restructuring Water intakes completed in Luda Volume of additional potable Yana, Plovdivtsi, Neikovtzi dams water (number of cubic and refurbished in Studena dam, - meters/year) produced by the and operational in all Project dams and WTPs*, completed sites; under the Project Quality of water delivered to Percentage of samples from the population towards meeting the water produced by the dams and EU and Bulgarian standards, - WTPs, completed under the whichever is higher Project, meeting national drinking water standards Completion of 48 regional Master Regional Water and Wastewater Number of regional master plans Plans for water supply and Master Plans to cover the entire for water supply and sewage sewage systems including 40 territory of the country (with the systems, of satisfactory quality urban Master Plans, of exclusion of Sofia Municipality) for acceptance by Bulgaria and satisfactory quality for are prepared and approved by EC**, to support investments in acceptance by Bulgaria and EC**, MRDPW and Water Associations service delivery to support investments in service delivery

*Water Treatment Plant (WTP) **European Commission (EC)

13. The PDO indicators were not revised during the 2016 Project restructuring.

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Revised Components 14. The following revisions were made to Project components during the following restructurings:

Table 3. Changes to Components During Project Restructuring

Component 2011 Restructuring 2014 Restructuring 2016 Restructuring Approved Budget*

Component 1 Budget was increased to Budget was increased to No change enhance implementation enhance implementation support support Project: €5.12 m IBRD: €4.10 m Project budget increased to Project budget increased to €7.78 m, IBRD: €6.22 m €10.5 m, IBRD: €8.40 m (US$11.4m) (US$15.4m) Component 2 Component 2: Urban Master Component 2 activities were 18.00 to 17.10 Plans were removed from the completed prior to 2014 and Project and budget was budget was reduced to consequentially reduced; reflect implementation cost support for development of under-run Regional Water and Project: €20.88 m Wastewater Master Plans IBRD: €16.70 m was retained Project budget reduced to Project budget reduced to €12.3 m, IBRD: €9.84 m €16.20 m, IBRD: €12.96 m (US$18.0m) (US$23.7m) Component 3 Component 3: no change in Component 3: Construction 94.80 to 95.70 scope of the Neikovtzi dam and its associated WTP was dropped from the Project; Rehabilitation of Studena Project: €75.00 m WTP was added to the IBRD: €60.00 m Project budget increased to Project scope €77.02 m, IBRD: €61.62 m (US$112.8m) Project budget reduced to €64.7 m, IBRD: €51.76 m (US$94.8m)

*The co-financing ratio of 80% IBRD/20% GOB was maintained throughout the Project.

Other Changes 15. The project implementation period was extended as a part of the second and third restructurings that were processed, with loan closure and restructuring dates as shown below. GOB and the Bank informally discussed further extension of the Project, but given that the project already exceeded 10 years and the capacity of the government to implement was considered sufficient to complete the project activities, the parties decided that further extensions were not merited.

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Processing Step and Date Original and Revised Closing Date

Approval: November 24, 2009 December 31, 2015

Restructuring 1: April 26, 2011 No change in closing date

Restructuring 2: July 10, 2014 December 31, 2017

Restructuring 2: July 11, 2016 December 31, 2019

Rationale for Changes and Their Implication on the Original Theory of Change 16. Insufficient budget and delayed implementation timeline for specific subprojects was the primary rationale for the 2014 restructuring that altered the scope of the Project by removing construction of one dam and the corresponding water treatment plant and by adding the rehabilitation of one water treatment plant. This change was primarily a reduction in scale, not scope and did not alter the Theory of Change for the Project. The rationale for dropping the support for the Urban Master Plans, while retaining support for the Regional Water Supply and Sanitation Master Plans, during the 2011 restructuring is anchored in the evolution of Bulgarian legislation and establishment of the Water Associations. According to the Water Act, the Implementing Agency for this Project (MRDPW) was not responsible for preparation of Urban Master Plans. This change did not alter the Theory of Change as Urban Master Plans were not required to achieve the Project objectives.

17. The PDO and indicators changes during the 2014 restructuring were the most significant changes to the Project structure. The change in PDO was largely a reformulation of the objective rather than a substantive change in objective. The Project’s support for water storage dams was intended to contribute to increasing water available for water supply during the dry season, a key contribution to the long-term goal of providing more reliable supply of potable water to the beneficiaries. Therefore, the reformulation basically entailed replacing the phrase “improve reliability and quality of water” with “improve bulk potable water provision.” The term “bulk potable water” is not common term in the practice and is not defined in the Project paper, however from the Project paper description and the results indicator it is straightforward to infer that the term can be defined as: the volume of treated, potable water which is available to be distributed for municipal use. The 2014 restructuring made the indicator formulation more measurable, adding quantitative targets for the first PDO.

II. OUTCOME

A. RELEVANCE OF PDOs 18. Alignment with the Country Partnership Framework (CPF). Water management and provision of improved water supply and sanitation services continue to be a strong focus of the CPF for Bulgaria for the Period FY17-FY224. Water supply and sanitation are core elements of:

• Objective 3: Better protected natural assets and improved efficiency in use of resources, which describes the importance of investment in water supply and sanitation as well as water resources

4 Country Partnership Framework for Bulgaria FY17-22 Report 104987

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management and includes a specific target for people benefitting from improved water supply and objectives on improving water resources management, environmental management and climate resilience; and

• Objective 5: Improved access to essential services (housing, water, economic and community development (ECD), long-term care) for bottom 40 and marginalized groups, which focuses on mobilizing investment in water supply and sanitation for improved service delivery, closing the service and affordability gap for the poorest, and improving sustainability of utilities. This objective includes an indicator targeting improved wastewater collection and treatment.

19. Alignment with National and EU Policies. This Project’s support for the development of Water Supply and Sanitation Master Plans remains central to government prioritization and absorption of EU financing and concretely strengthening institutions to deliver services. Accordingly, the CPF is clear that the Bulgarian water sector still faces capacity constraints in absorbing EU funds efficiently and effectively. The CPF sets out the importance of both enhancing compliance and promoting sustainability of sectors with EU funding. The political dialogue in the country has recently assigned a high priority to strengthening the institutions in key sectors of the economy, particularly finance, energy and water and sanitation.

20. The PDO related to strengthening bulk water supply is highly relevant to the Bulgarian context and remains central to key policy objectives and EU regulatory requirements, including: (i) achievement of objectives outlined in the Strategy for Development and Management of the Water Supply and Sanitation Sector in the Republic of Bulgaria 2014 – 2023; (ii) compliance with the EU Water Framework Directive, the 2009 EU Water Act and related directives; and (iii) Bulgarian water-related regulatory measures required to implement the Strategy and comply with the EU Framework Directive and the EU Water Act.

21. Intermittent Drought and Water Shortages. In 2019, the Northern and Western portions of Bulgaria experienced a moderate drought which caused water shortages for some cities, most notably the city of Pernik served by the Studena dam rehabilitated under this project. The city of Pernik was put on intermittent water supply schedule for several months and a political crisis related to water shortages ensued5. These events are a continued signal of the on-going relevance of the need for enhanced water storage and supply services provided by this project.

Assessment of Relevance of PDOs and Rating

22. Capacity for and increased investment in systems required to enhance delivery of water supply and sanitation services remains a core focus of the CPF in terms of efficiency of resources use and essential service delivery. The PDO also remains highly relevant to the Bulgarian context and is central to key policy objectives and EU regulatory requirements. Given the continued importance of water storage and

5 Indicative press on the crisis: https://www.seattletimes.com/nation-world/nation/bulgarian-minister-charged-with-causing- citys-water-crisis/; https://www.euronews.com/2020/01/25/bulgaria-residents-in-pernik-protest-about-water-shortages; https://www.reuters.com/article/us-bulgaria-government/bulgarian-government-survives-no-confidence-vote-over-water- crisis-idUSKBN1ZS0UA

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investment planning capacity for water supply and sanitation, the Relevance of the PDOs for this Project were rated High.

B. ACHIEVEMENT OF PDOs (EFFICACY) 23. Due to the narrowed scope and altered PDO indicators, a split rating was applied for the assessment of efficacy (Table 4 summarizes the key changes during the restructurings). Less than one percent was expended prior to the first restructuring (2011) and PDO and PDO indicators were not changed in the third restructuring (2016), therefore the split rating development is shown for two main phases of the Project when the funds were expended. However, the same efficacy rating was achieved for all phases of the Project.

Assessment of Achievement of Each Objective/Outcome

24. PDO 1: Original PDO: Improve the reliability and quality of water provision to the communities in selected settlements in the Project area. The scope of the Project support for this PDO at Approval was construction of three dams (Plovdivtsi, Luda Yana and Neikovtzi), rehabilitation of one dam (Studena) and construction of three municipal water supply facilities (Plovdivtsi, Luda Yana and Neikovtzi). This component lacked readiness and received limited implementation support at Approval. A series of implementation challenges delayed progress including lack of/limited responsive bidders for major works, underestimation of budget and slow decision making on the part GOB. Contracts for dam works used the Fédération Internationale Des Ingénieurs-Conseils (FIDIC) contract templates, which was new to GOB and created some supervisory challenges. During the 2014 restructuring, the Project scope was revised to include the construction of only two dams and the two related municipal water supply facilities (Plovdivtsi and Luda Yana), rehabilitation of one dam (Studena) and added rehabilitation of one municipal water treatment plant (Studena). During the 2014 restructuring, PDO 1 was revised to “improve bulk potable water provision in target areas” and the related PDO indicators were revised to reflect the additional volume of water stored and treated at the Plovdivtsi and Luda Yana sites and the quality of water treated by the water treatment plants. Rehabilitation of Studena dam and water treatment plant were not reflected in the PDO indicators from 2014 until Project close, however this sub-project was a major contribution to bulk water provision in the project area, therefore data was gathered as part of this ICR and is included in Table 4.

25. PDO 1 was partly achieved according the original and revised PDO statements and indicators with one subproject completed (Plovdivtsi), one subproject which is nearly completed (Studena), one subproject with likely completion in two to three years (Luda-Yana), and one that is unlikely to be completed in the near to medium term. The first PDO was only partially met during Project implementation, therefore the achievement of this objective was assessed as Modest. The details of efficacy for each of these sites are described by subproject.

26. Plovdivtsi. The Plovdivtsi subproject was a partially-constructed water storage dam and water treatment plant that was designed to increase reliability and quality of water supply to the residents of Rudozem, Madan and Smolyan (2.45 million m3 storage to serve 40,000 people). Originally designed in 1985, previous works began in 1998 and were suspended in 2001 (approximately 36 percent of dam was completed prior to the Project). Before the Project, water supply was highly unreliable and residents sourced their water from more than 67 springs, wells and streams. Some of the settlements in the municipality of Rudozem, the town of Madan and the municipality of Madan were operating fully in water- saving regime at night during low water season and during high water seasons, the water was highly turbid

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and was not of acceptable quality for drinking. The Plovdivtsi dam and water treatment plant were completed during the Project implementation period and municipal water that meets Bulgarian national standards6 is continuously supplied to communities in the Project area. The water treatment plant built under the Project serves Rudozem and Madan (population 19,306) and will serve Smolyan once the planned conveyance from the reservoir to the municipality is constructed7. The enhanced reliability and quality of water supply in the municipalities it serves is also a benefit to the development and restoration of the tourism and mining industries in the area and provides a potential opportunity for further growth if the near-by border point with Greece is opened in future as anticipated. This sub-project contributes 2 million m3/yr to the PDO 1 Indicator “Volume of additional potable water” (target: 8 million m3/yr) and produces a total of 6.6 million m3/yr of potable water (Project aimed to enhance reliability and quality of 32.1 million m3/yr).

27. Studena. The lake created by the existing Studena dam provides water for seven settlements in the area, most notable of which is Pernik with 91,000 inhabitants. Studena dam is a 60-year old structure and surveys established significant deterioration prior to rehabilitation due to normal weathering and wear processes associated freeze-thaw cycles, salt- and chemical suffusion and physical deterioration. Rehabilitation was required to ensure the safety of downstream communities (Studena village, immediately downstream, Pernik is located around 10 km downstream of the dam) and the uninterrupted drinking water supply to the communities it serves. Notably, prior to rehabilitation, the dam wall was heavily corroded with water penetrating the wall and seeping through the dilations, the waterproofing on the slope was heavily cracked and separated from the concrete surface, the gates were no longer operable, the dam crest was badly damaged, with deteriorating reinforced concrete, damaged walkways and ledges, and a deformed service-roadway. The water intake tower was damaged as were the railings and the footbridges of the water intake tower and were no longer providing their protective function. The dam safety monitoring equipment was damaged, limiting operators’ ability to assess compliance with safety regulations.

28. Through major rehabilitation works for Studena dam and by refurbishing the water treatment works, the works that are completed for the Studena subproject have materially achieved the objective of increasing reliability and quality of water supply to the communities it serves as well as providing dam safety benefits. Rehabilitation of the dam wall, placement of the geo-membrane and rehabilitation of the spillway and gates are completed for Studena dam, allowing dam operators to safely and effectively regulate the reservoir level and release water for municipal supply and other benefits. Rehabilitation of the water intake tower and the penstock to the distribution chamber are still required, which when completed, will further increase reliability of water supply at this site. The rehabilitation of the Studena dam was carried out while the dam remained fully operational, and reduction in water level for rehabilitation was not permitted, creating a complex operating environment and requiring development of innovative approaches for implementation and supervision. For example, the geomembrane was put in place by divers and the supervising engineers had to develop special technology so that they could supervise installation of the geomembrane underwater. Rehabilitating the structure while it remained in operation increased the overall implementation timeline, however it allowed the municipality to retain the benefit of flow regulation and dry-season water supply during the Project period, which has both

6 Quality of water treated was verified by reviewing WTP quality control and compliance data logbook maintained at the plant. 7 The conveyance from the reservoir to Smoylan municipality was planned by GOB outside the scope of this project, but is not yet under construction, therefore this project is not considered to directly benefit Smoylan.

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economic and societal benefits8. Slow decision making internal to GOB and lack of prompt responsiveness to design and procedural alterations further delayed project implementation. Therefore, the Studena sub- project (i.e., rehabilitation of Studena dam and refurbishment of the water treatment plant) was assessed to be 90 percent complete at the close of the Project. Physical progress for the rehabilitation of the water treatment plant was estimated to be 50 percent when the Project closed.

29. The contracts for completion of the rehabilitation Project were in place at the time of this report and the government provided assurance that funds required to complete the Project are secured in the 2020 budget for the completion of remaining works9. In December 2019, the contractor provided an estimated timeline for Project completion by November 2020, however this timeline is likely further delayed by the drought in Pernik10 and the 2020 Corona virus (COVID19) crisis.

30. Therefore, given the advanced nature of the works and fact that work completed has materially achieved the objective of increasing reliability and quality of water supply to the communities it serves, and the active contracts and the budget secured, this subproject was assessed to have a strong likelihood of completion and in alignment with ICR methodology, is considered to contribute to overall achievement of the Project’s objective.

31. However, while the project contributes to the overall objectives of enhanced reliability, quality and dam safety enhanced through Project support, it should be noted that this sub-project does not contribute to the PDO 1 Indicator “Volume of additional potable water” (target: 8 million m3/yr) because the structures were in place and provides no additional water, and it produces a total of 16.4 million m3/yr of potable water (Project aimed to enhance reliability and quality of 32.1 million m3/yr).

32. Luda Yana. The Luda Yana subproject was a partially-completed dam and water treatment plant that was intended to provide multipurpose benefits, storing water for use during the dry season and drought periods observed in the region. The dam was designed to supply water for the benefit of the municipality of Panagyurishte, with an estimated population of 35,000 people11 as well as to a number of settlements in the municipalities of Strelcha, Pazardzhik, Lesichovo and Septemvri and will benefit the local tourism industry. The dam was originally intended to provide water for the 65,000 ha irrigation scheme, however this scheme is no longer maintained, and this structure will only be used for municipal water supply. The sub-project was originally designed in 1985 and works started and were suspended

8 The design engineer determined that there were no feasible options for diversion during construction, therefore the designer proposed three options for water supply during rehabilitation – two options involving alternative water supply during construction and a third option of rehabilitation during operation while retaining full supply levels. Maintaining fully supply was the most expensive option, but alternative supply options were also expensive and time consuming; the municipalities involved also raised concerns about water security during construction if alternative supply was provided.. Therefore, the High-Expert Council at the MRDW decided that the rehabilitation while maintaining full supply levels was the preferred option. 9 The publicly available budget for the Ministry of Regional Development and Public Works includes a line for completion of the Studena and Luda Yana sub-projects, however, in keeping with standard practices, the amounts are not specified in public documents. 10 The region experienced a drought in 2019, significantly reducing the overall runoff into the Studena reservoir. This caused serious water supply reliability issues, where the city of Pernik went on intermittent water supply in November 2019 – March 2020. The low reservoir levels resulted in a several month delay in works to rehabilitate the water intake, as the utility required contractors to wait until the water level was sufficiently high to undertake further water intake rehabilitation so that the construction would not further impact water supply availability. 11 Population estimates show that the municipality of Panagyurishte has a population of 35,000 people with no increasing or decreasing trends; the water treatment facility was designed for 2050 servicing an anticipated population of 69,000.

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twice before the Project (1986-1990 and 1995-2000). Approximately 59 percent of dam wall was completed prior to the Project.

33. When the Project closed, physical Project at the Luda Yana dam was estimated to be 37 percent complete and financial progress was 26 percent. At the close of the Project, the following achievements were noted: three overhead power lines were relocated, the ground works were completed for the dam service building, 49 percent of the dam wall was completed, 55 percent of the spillway, chute and stilling basin were completed, 9 percent of the works for the water intake tower were completed, and a portion of the water supply pipelines were completed. Design and construction of the Luda Yana dam and water treatment plant faced a number of delays throughout the Project period, including delays in procurement, numerous design revisions, dispute between parties in the joint-venture (JV) holding the construction contract, insolvency of one of the primary parties in the JV, limited mobilization on site, challenges with availability of clay on site that meets design specifications, disagreements related to laboratory testing and disagreements between the design/supervisory engineer and the contractor. Complicated by a prolonged decision making processes internal to GOB and failure to take prompt corrective actions, the culmination of these delays ultimately resulted in very limited physical progress on site. At the time of this report, the contract between the Government and the JV was in place and the government stated its intention to complete the Project with the JV utilizing the Ministry’s budget. The supervising engineer estimated that at least two additional years of work are required to complete the Project. Given the limited progress on-site and the limited budget available, this report assesses that there is a moderate likelihood of completing the Project in the near term and the Bank’s support for the Luda Yana subproject did not contribute to achievement of the overall objective. This sub-project was intended to contribute 6 million m3/yr to the PDO 1 Indicator “Volume of additional potable water” (target: 8 million m3/yr) and produce a total of 9.1 million m3/yr of potable water (Project aimed to enhance reliability and quality of 32.1 million m3/yr), but these results were not achieved.

34. Neikovtzi. The Neikovtzi subproject was a partially completed water storage dam and water treatment plant intended to benefit 12,000 in the towns of Tryavana and Platchkovtsi by providing more reliable water supply during summer, by enhancing overall water quality supplied to residents and the tourism industry and by reducing the water tariff in the Project area. The project was originally designed in 1979 and construction initiated in 1986 and was suspended in 2001 (approximately 38 percent of dam and 80 percent of WTP completed prior to Project). Site investigation and due diligence studies to update earlier feasibility studies as well as design studies were completed for the Niekovtzi site but the construction of the dam and water treatment plant was removed from the Project during the 2014 restructuring because of the slow implementation progress on this subproject and insufficient budget availability under the project. This report assesses that there is a low likelihood of completing the Project in the near term and the Bank’s support for the Neikovtzi subproject did not contribute to achievement of the overall objective.

35. PDO 2. Assist municipalities to improve investment-planning capacity. The aim of this objective was to assist the government in planning and mobilizing financing for water supply and sanitation as a measure to improve basic service delivery and to enhance compliance with national and EU regulations12. The scope of support for this objective at approval was preparation of 48 Master Plans for water supply and sanitation and the related Urban plans for the relevant areas, where the project aimed to support investment capacity building at the municipality level a national scale. In 2011, the Urban Planning

12 Project Appraisal Document, Higher level objective to which the project contributes, paragraph 7

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element was dropped from the Project and technical assistance focused primarily on water supply and sanitation planning. In 2014, the total number of Master Plans was increased to 51 to reflect jurisdictional changes for local government and retain the national coverage. The targeted 51 Master Plans were developed, fully meeting the objective of PDO 2. The Master Plans include a diagnosis of the current situation, diagnosis of management practices, general planning criteria for both water supply and sanitation, assessment of water demand and sanitation requirements, identification and definition of possible technical solutions for water supply and sanitation, comparison of options, development of medium and long-term investment programs. The Master plans also contain a corporate development plan which promotes improved service delivery and greater efficiency in the water utilities covered under the Master Plans. The corporate development portion of the Master Plans includes organizational and institutional arrangements, assets control and management, budgeting, accounting and cost control, tariff setting methodologies, revenue collection procedures, operational performances. With these major technical elements, the Master Plans have provided a fundamental basis for Water Associations as they mobilize additional investment financing for water supply and sanitation as well as in identifying fiscal and investment measures required to more sustainably operate the existing and planned systems.

36. The Master Plans were developed using a robust process of engagement with the Ministry, municipalities and other stakeholders. For example, water authorities were engaged in monthly planning meetings for Plan development; municipalities commented on multiple draft versions of Plans prior to finalization; non-governmental organizations and communities participated in a robust consultative process during plan development. This process helped to ensure that development of the plans built capacity for investment planning and mobilization in the Ministry and the water authorities across the country. At present, more than 2 billion BGN (approximately 1.1 billion USD, 1.0 billion Euro) have been mobilized for water supply and sanitation investment with feasibility studies completed for investment benefitting 14 Water Associations and construction works already underway benefiting municipalities of 12 Water Associations (Varna, Plovdiv, Smolyan, Stara Zagora, Kurdjali, Sliven, Yambol, Pernik, Vidin, Silistra, Ruse and Vratsa). Feasibility studies for works benefitting an additional six Water Associations are under preparation (Veliko Tarnovo, Gabrovo, Haskovo, Sofia district, Pleven and Targovishte) and the works are anticipated after completion of the studies. The Master Plans were used as a core element of the application package for national and EU financing for investments in 20 of the 51 municipalities. Therefore, based on the fact that this Component fully achieved its objectives and there is strong evidence that the intended higher-level outcomes are already mobilized by way of significantly scaled up investment in the sector, the efficacy of this PDO is rated High.

Justification of Overall Efficacy Rating 37. A split rating was applied for the assessment of efficacy due to the narrowed scope and altered PDO indicators as shown in Table 4. The first PDO was only partially met during Project implementation, therefore the achievement of this objective was assessed as Modest. The second PDO was fully met according to the agreed indicators and there is evidence that expected higher-order outcomes were achieved, therefore the achievement of this objective was assessed as High. The same efficacy rating was achieved for all phases of the Project for both PDOs. Given the partial achievement of the Project’s objectives and the targets set out in the PDO indicators, the overall efficacy is rated as Modest.

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Table 4. Efficacy rating and PDO indicator achievement against targets13. Disbursement and Indicators After Disbursement and Indicators After Restructuring 1 (2011 - 2014) Restructuring 2 (2014 - Close)14 Percent disbursed (Total disbursement, US$m) 29% (18.6) 71% (64.9) Efficacy rating associated with the two PDO: Modest Modest PDO 1 (before 2014): Improve the reliability and quality of water supply to Efficacy PDO 1 Modest - the communities in selected settlements in the Project area before 2014 Target 3 intakes completed, 1 refurbished, 4 operational - Water intakes completed in Luda Yana, Plovdivtsi, Neikovtzi dams and 1 completed, 1 rehabilitation with high likelihood of Progress refurbished in Studena dam and operation in all Project sites completion15, 1 incomplete, 1 dropped PDO 1 (after 2014): Improve bulk potable water provision in targeted areas Efficacy A. Volume of additional potable water (number of cubic meters/year) PDO 1 after - Modest produced by the dams and WTPs, completed under the Project. 2014 A. 8,000,000 m3/yr (additional) Note: See Annex 6 for methodology to calculate results values for PDO1 B. 95% Target - B. Percentage of samples from the water produced by the dams and WTPs, C. 170,000 people completed under the Project, meeting national standards D. 32,072,112 m3/yr (total)16 C. Direct Project Beneficiaries A. 2,022,560 m3/yr (additional) B. 100% D. Additional Results: Volume of water stored and treated annually by dams Progress - and WTPs constructed or rehabilitated under this project (m3/yr) C. 107,190 people D. 23,021,280 m3/yr (total) PDO 2: Investment planning capacity of municipalities Efficacy High Indicator 2011 - 2014 restructuring: Regional Water and Wastewater PDO 2 Master Plans to cover the entire territory of the country (with the exclusion Bidding packages for financing priority investments of Sofia Municipality) are prepared and approved by MRDPW and Water Target are submitted to EC for funding through Structural Associations Funds Evidence of bidding packages mobilized 2 billion BGN Progress from EC and national funds is available PDO 2: Investment planning capacity of municipalities Efficacy - High Indicator after 2014 restructuring: Number of regional master plans for PDO 2 water supply and sewage systems, of satisfactory quality for acceptance by Target - 51 Bulgaria and EC, to support investments in service delivery. Progress - 51

13 Less than one percent was expended prior to the first restructuring (2011) and PDO and PDO indicators and their targets were not changed in the third restructuring (2016), therefore the split rating development is shown for the 2011-2014 and 2014 – close implementation periods. 14 No modification to indicators during Restructuring 3 (2016) 15 Studena dam rehabilitation is 90% complete and is likely to be completed within a year time 16 WTP Net Capacity: 6,622,560 m3/yr for Plovdivtsi; 9,050,832 m3/yr for Luda Yana; 16,398,720 m3/yr for Studena

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C. EFFICIENCY 38. Economic Efficiency. A consolidated economic assessment was not conducted prior to Project approval and Project documentation stated that economic analyses for the dam and WTP subprojects would be evaluated as part of the update to feasibility studies. Ex-ante cost-benefit analyses (CBA) for the three subprojects, Luda Yana, Plovdivtsi and Studena, were prepared using ‘with and without Project’ methodology to calculate the Economic Rate of Return (ERR) for a 30-year Project horizon (Table 5). A CBA was not conducted for Neikovtzi sub-project. The benefits measured in monetary terms were: (i) savings in healthcare (accounting for over 60 percent of benefits); (ii) savings from hospitalization (accounting for around 20 percent of benefits); and (iii) creation of new jobs (during construction and operations). Costs and benefits of the institutional strengthening support were not included in the individual ex-ante analyses. An aggregated ex-ante cost-benefit analysis for the Project was calculated during preparation of this report using individual sub-project CBA data and including costs occurred under Component 1 and 2 of the Project.

39. The ex-post analysis utilized a bottom-up approach where an analysis for each sub-project was developed and then results for all dams and other activities covered by the Project, including institutional strengthening and Project support, were aggregated at a Project level. The discount rate of 5 percent and a 30-year infrastructure life time horizon were applied as per the applicable EU Regulation (480/2014) for 2014-2020 programming period. The ex-post analysis envisages materialization of benefits once the corresponding dam is in operation given that water supply distribution networks are in place in Project areas and no additional physical works are required to realize the benefits of more reliable and improved quality of water supply provided by the Project. The summary comparison of the ex-ante and ex-post ERR for individual sub-projects and the aggregated Project ERR is provided in Table 5. Note that the aggregated EER for the project is lower than the EERs for the individual subprojects as the aggregated EER accounts for all project costs, including institutional strengthening, project implementation support and preparatory studies for Neikovtzi. Table 5. Summary of the results of the ex-ante and ex-post cost-benefit analyses. Summary of the results of the ex-post CBA vs. ex-ante CBA Dam Investment cost, mil EUR ERR Population to be served in 204217 Ex-ante Ex-post Ex-ante Ex-post18 Ex-ante Ex-post Plovdivtsi dam19 22.0 17.9 7.33% 10.46% 60,000 13,603 Luda Yana dam20 26.8 22.1 6.22% 6.16% 34,600 18,890 Studena Dam21 13.0 18.7 8.01% 15.37% 67,448 66,928 Aggregated22 101.2 81.1 2.21% 10.09% 162,048 99,421

17 The forecast for the dynamics of the population in the ex-ante CBA was developed based on the National Statistics Institute data for 2004- 2012 and their long-term forecasts till 2060 per district. The forecast for the dynamics of the population in the ex-post CBA was developed based on the National Statistics Institute data for 2011-2019 and their long-term forecasts till 2048 per project area. 18 The realistic scenario is considered in the ex-post ERR for comparison with the ex-ante results. 19 The ex-ante analysis includes the population of Madan, Rudozem and Smolyan municipalities, while the population of Smolyan municipality is excluded from the ex-post analysis because it is beyond the project area. 20 The ex-ante analysis includes 100% of the population of municipality Panagyurishte, 80% of the population of municipality Strelcha and 10% of the population of Pazardzjik. Only population of Panagyurishte, including the tourists there, are considered in the ex-post analysis, because the remaining population is beyond the project area. 21 Population of Pernik municipality was used in the ex-ante and ex-post analyses. This region has accelerated negative demographic trends. 22 Aggregated ex-ante CBA results are calculated based on the information provided in the ex-ante CBAs of Luda Yana, Plovdivtsi and Studena Dams, while total project investment costs are as per PAD and include Components 1 and 2, and Neikovtzi dam as well.

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40. The ex-post economic analysis indicates economic viability for all three of the subprojects. The ex-post economic viability of Plovdivtsi and Studena subprojects is slightly greater than the expected results projected by the ex-ante cost-benefit analysis, despite decreased number of the population in the served area. This is mainly due to the fact that ex-ante economic benefits considered included: (i) savings in healthcare (ii) savings from hospitalization; and (iii) creation of new jobs during construction and operations, whereas ex-post analysis also considered unit-benefits of household water supplied and savings from individual water solutions as well as avoided losses due to rehabilitation of the wall for the case of Studena. The ex-post economic viability of the Luda Yana subproject shows marginally negative economic results and it is expected that a further delay in its implementation will only further offset the expected benefits.

41. Works are not completed for two of three dams, therefore two scenarios (optimistic and realistic) were developed to capture the range of potential impacts of various Project completion timelines as follows: • Realistic: Plovdivtsi is operational; works for Studena and Luda Yana resume near the end of 2020, once COVID19 situation stabilizes mid-2020, contracts are extended, and works are completed in 2022 and 2023, respectively, according to contractors projected timelines. • Optimistic: Plovdivtsi is operational; works for Studena and Luda Yana resume mid- 2020, with minimal time lost due to contract extension and works are completed in 2021 and 2022, respectively, according to contractors projected timelines. 42. Results of the scenario analysis (Table 6) demonstrate only a modest impact of the delays of completion of Studena and Luda Yana sub-projects on the Project-level aggregate ERR, where the realistic scenario for works completion is an ERR of 10.09 percent. A sensitivity analysis was also performed for the ex-post realistic scenario to determine how changes in operating costs, beneficiaries and an increase in capital expenditure for Luda Yana affect the ERR (Table 6). The economic efficiency of this Project is most sensitive to changes in number of beneficiaries of the Project, where a 10 percent decline in population results in an aggregated ERR of 8.82 percent for the realistic scenario.

Table 6: ERR under different scenarios of the economic ex-post analysis and sensitivity analysis for the realistic completion scenario. Luda Aggre- ERR Plovdivtsi Yana Studena gated Ex-ante: Feasibility study stage 7.33% 6.22% 8.01% 2.21% Ex-post Scenarios for Project Completion: Realistic: Plovdivtsi completed, Luda Yana completed in 10.09 2023, Studena completed in 2022 10.46% 6.16% 15.37% % Optimistic: Plovdivtsi completed, Luda Yana completed in Equal to 10.75 2022, Studena completed in 2021 realistic 6.54% 16.94% % Ex-post Sensitivity Analysis: Realistic, 20% increase in O&M costs 10.33% 5.91% 14.92% 9.88% Realistic, 10% decrease in benefits 9.08% 5.03% 13.76% 8.82% Realistic, 20% capital cost increase for Luda Yana - 5.26% - 9.65% Population to be served in 2042 13,603 18,890 66,928 99,421

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43. Net present value (NPV) calculated for the subprojects ex-ante and ex-post is provided in Table 7. The ex-ante NPV for the full Project produced a negative NPV due to limited consideration of benefits of the Project and because all anticipated Project costs were included in the ex-ante aggregate calculations. The ex-post NPVs were positive for all scenarios.

Table 7: NPV under different Scenarios of the economic ex-post analysis versus ex-ante analysis Completion Scenarios Impact on NPV NPV, '000 EUR Plovdivtsi Luda Yana Studena Aggregated Ex-ante At feasibility study stage* 4,772 2,742 3,554 (24,753) Ex-post Realistic 11,164 2,720 28,719 51,371 Optimistic Equal to realistic 3,710 31,415 57,045

44. Operational efficiency. The Project was approved in November 24, 2009, became effective April 30, 2010 and was expected to close December 31, 2015 with an implementation period of four years and eight months. The Project was restructured three times and the implementation period was extended twice given implementation delays. The Project closed December 31, 2019 with a nine year and eight months implementation period. However, it must be noted that a five-year implementation to update feasibility, design and construct dams is faster than the industry standard and faster than could reasonably be expected for this Project. A generic timeline for a dam sub-project using a sequential procurement of site investigation-design-works, as per the Project’s procedures, shows that a reasonable expected implementation timeline is approximately eight years, as shown in Annex 4. The generic implementation timeline for a study and construction of a dam was constructed for a dam that does not face significant complication during implementation and doesn’t require significant re-design. The Studena dam rehabilitation was complicated to design and implement given that the dam needed to remain in operation during the rehabilitation works. The Luda Yana dam required re-design given technical factors identified during implementation. Therefore, it must be noted that while the implementation period exceeded that which was anticipated, it only marginally longer than industry standards.

45. It must also be noted that project support (Component 1) costs were elevated for a high-capacity client. These costs were associated with the highly technical and specialized nature of support required for some aspects of dam construction and implementation, longer-than expected implementation period as well as numerous expert reviews required by the Ministry to advance decision making.

Assessment of Efficiency and Rating 46. There are two main considerations included in the assessment of efficiency. First, the economic benefits of the Project are modest with an aggregated ERR of the of 10.09 percent and a range of ERR for infrastructure sub-projects from 6.16 – 15.37 percent . Operational efficiency was also modest given that the Project implementation period was significantly longer than anticipated at approval and marginally longer than industry standard which lowers the overall efficiency of the Project. The efficiency of the Project is lower than the sector norm and the efficiency rating is Modest.

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D. JUSTIFICATION OF OVERALL OUTCOME RATING 47. The Project is considered to have High Relevance to the Bulgarian context and the CPF. The Efficacy of the Project is rated Modest given the partial achievement of the Project’s objectives. The Efficiency of the Project is rated Modest. Therefore, the overall rating for the Project is Moderately Unsatisfactory.

E. OTHER OUTCOMES AND IMPACTS (IF ANY) Gender 48. This Project was approved prior to the Bank’s regularization of gender tag assessments and it was not designed to close any specific gender gaps. There were no gender gaps identified and the only gender- specific indicators is the sub-indicator of Project beneficiaries (50 percent of Project beneficiaries were expected to be female). The Project is expected to benefit women in the communities served through improved quality and reliability of water services. The project was implemented without large-scale labor influx and there are no known unintended negative impacts of the Project on women and girls - no known or anticipated unpaid work by women and girls, no known increase in risk of gender-based violence during or because of the Project.

Institutional Strengthening 49. Institutional strengthening was a substantial part of the Project’s objectives and its accomplishments in this regard were considerable as is documented elsewhere in this Report, in particular in relation to achievements of PDO2.

Mobilizing Private Sector Financing 50. Enhancing reliable provision of water supply that meets water quality standards creates the enabling environment for industrial and private sector investment in a community or region. Increased investment in small industry and tourism is anticipated in the municipalities benefitting from this Project.

Poverty Reduction and Shared Prosperity 51. Overall, this Project contributed to poverty reduction and increased shared prosperity by enhancing water supply service delivery to the communities both directly through the support for infrastructure and through capacity building which helped the government of Bulgaria to mobilize additional resources to increase investment in water supply and sanitation across the country. These gains will provide a number of benefits that help to break the cycle of poverty including reducing the need for private investment in water supply, reducing water borne disease and related work-time lost and medical expenses, and enhancing overall productivity and welfare of the people benefitting from the Project. The municipalities served by this Project and their respective poverty rates are shown in Annex 6 with a comparison to the national poverty headcount ratio in Bulgaria of as 22 percent23 in 2017. From the analysis of the available poverty data, the infrastructure completed under the Plovdivtsi subproject benefits the municipalities of Rudozem and Madan with poverty levels of 25.1 and 30.0 percent which are higher than the national average . The investment at Studena does not necessarily target the poorest communities in Bulgaria as the share of poor in Pernik is 17.0 percent, although it should be noted that the Iztochen section of Pernik has a 39.6 percent share of poor, which is much higher than the national average. The Luda Yana subproject, when completed, will provide services to the municipality of

23 Source: World Bank, Global Poverty Working Group. Data are compiled from official government sources or are computed by World Bank staff using national ( i.e. country–specific ) poverty lines.

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Panagyurishte, which has 17.0 percent poor. The Neikovtzi subproject, for which the feasibility study and design of the water storage dam and water treatment plant were completed but works were not undertaken as part of this Project, benefits the Tryavana municipality and nearby settlements which have a poverty rate of 28.4 percent. The communities where Project’s capacity building support has helped to increase investment in the sector has a range of poverty levels (6.9 percent for Sofia and 17.0 to 31.2 percent for smaller settlements), many of which are above the national poverty line, as shown below in Table 5.

Other Unintended Outcomes and Impacts 52. The Plovdivtsi dam is located in the Rhodope mountains and it regulates the flow of the Arda river. It is located in the southern part of the Arda basin, where the highest precipitation rates in Bulgaria are observed. Flooding was often observed in early spring, when snow melt often coincides with heavy rain and river flow in the upper river courses which have short concentration times and high specific peak discharges because of steep slopes and landcover patterns. Although the Plovdivtsi dam was not designed specifically for flood control, the dam will regulate the flow in the catchment and will provide some flood control benefits reducing losses of downstream communities. The previous flooding and related losses in the sub-basin is not well characterized and therefore this benefit is considered to be an additional positive impact. The flood-reduction benefits were not included in the Project’s objective and the flooding related losses are not well characterized for this area, therefore this outcome is not included in the efficacy and efficiency analyses.

53. The rehabilitation of Studena dam also contributed to the safe operation of the facility. As characterized above, the project’s aim was to improve reliability of water supply, however in the case of Studena, the over-aged infrastructure posed safety risks to workers at the facility and downstream assets and communities. Rehabilitation enhanced safety of the facility and protected workers, assets and neighboring communities.

III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME

A. KEY FACTORS DURING PREPARATION 54. Accession to the EU and shifting nature of World Bank support in Eastern Europe. Bulgaria acceded to the European Union in 2007, shortly before Project approval and compliance with EU regulations necessitated major investment in water supply and sanitation services. Availability of EU structural funds to support investment in the sector provided GOB with an opportunity to meet the requirements and to alleviate water stress in the country. During this period, economic growth was accelerating in Bulgaria and across Eastern Europe and membership in the EU was expanding. The World Bank’s role in provision of direct investment support in the region was declining and there was pressure to channel support towards infrastructure investments that were not eligible for EU Structural funds. Water storage and dam investments are not eligible for support from EU structural funds but were a necessary investment to meet drinking water EU regulations. The two major lines of support under this Project align with the need to mobilize EU and national investment in both water supply systems and the need for sources of financing beyond EU structural funds to meet the countries water needs.

55. Recent reengagement of the World Bank and GOB on dams. The 2003 Water Resources Sector Strategy: Strategic Directions for World Bank Engagement report was finalized a few years before preparation of this Project began. The World Bank had not invested heavily in large hydraulic

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infrastructure in many years and as stated in the Strategy “the World Bank will reengage with high- reward–high-risk hydraulic infrastructure, using a more effective business model:” In addition, GOB is a high-capacity client with capabilities to implement and water-related projects, however GOB had not invested significantly in dams since the 80’s, leaving Bulgaria without recently prepared feasibility or design studies for the dam subprojects or the specialized technical capacity needed to oversee dam design and construction. The Project was well aligned with GOB priorities and it followed the principles outlined in the World Bank Strategy and adequately identified environmental and social risks. However, partly because the Bank and GOB were rebuilding operational experience in storage infrastructure, project design failed to recognize operational risks associated with budgeting, complications in design, contracting challenges and introduction of FIDIC contracts, delayed decision making, government’s fiscal controls and project management inadequacies.

56. Lack of readiness and under-estimation of operational timeline for dams subprojects. As shown in Annex 4, the implementation period agreed at Approval was unrealistic for the Project’s level of readiness and procurement strategy. This under-estimation of the time required for implementation led to a near-continuous state of alarm and observed delay from Project effectiveness until closure. As the time of Approval, there was also pressure for the Bank to remain a relevant partner to the Eastern European countries as EU Structural Funds became available to finance development operations. Dams are one of the key large infrastructure investments that are not eligible for EU financing, therefore, the Bank may have accelerated approval of a project that was not mature in response to pressure to continue support and engage with GOB. The GOB was also interested in pressing ahead with the Project, despite limited readiness.

57. Droughts observed in Bulgaria during preparation. The PAD notes an increased incidence of dry years in the 15 years prior to Approval - 1993, 1997, 2000, 2003, 2007 were noted to be very dry years, and extreme drought was recorded in 2000 and 2007. These drought situations spurred investment in water storage.

B. KEY FACTORS DURING IMPLEMENTATION 58. Global Recession and Fiscal Controls. Project approval coincided with the 2009 global recession that began in Bulgaria in mid-2009. In response to the recession, GOB took strong measures such as strict fiscal discipline and reduced budgetary spending, and fiscal controls were imposed on line ministries and governmental priorities shifted. Bulgaria’s GDP reached pre-recession levels in 2014, long after impacts were felt on Project performance. At Approval, the Project envisioned a sizable PIU within the MRDPW that included technical experts financed by the GOB (signaling strong government ownership at Approval). Due to budget constraints exacerbated by the economic crisis and shifted priorities, GoB could not provide sufficient manpower to staff the PIU, slowing implementation. The 2011 Project restructuring allocated Project financing for the PIU, in lieu of government financing. In 2011, a Project Implementation Support Assistance consultant was hired to support MRDPW and implementation improved noticeably, in both timing and quality. Inadequate budget allocation to the Project also caused implementation delays in Component 3 (dams) in 2012 and 2013. Efficiency gains from implementation of Component 2 (Master Plans) were allocated to PIU support during the 2014 restructuring.

59. Limited capacity of GOB to manage large FIDIC construction contracts. Many of the delays experienced throughout the project implementation period were associated with procurement and contracting challenges. For some of the key contracts, GOB received only one bid or bidders were non- responsive, creating challenges in contract price negotiation and with overall progress. Numerous

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contractual disputes occurred among the parties and the government was not able to manage and resolve those disputes in a timely manner. Timelines for completing design studies and geotechnical investigations were not sufficient in some cases, leading to numerous iterations between design/supervision team and the contractor. These challenges are likely the result of the limited capacity – both of the local market to respond adequately to the tenders and of the GOB to manage large construction contracts for complex works.

60. Evolving sectoral context. As outlined in the context section, Bulgaria joined the EU shortly before project Approval. Compliance with EU regulations meant that the policy and administrative landscape was actively responding to the new regulatory environment. The sector experienced many changes over the 10-year Project period, ranging from the establishment of Water Associations with responsibility for water and sanitation planning and development to more tedious changes such as altered and new permit requirements. These frequent changes resulted in numerous delays in decision making which impacted project performance.

61. Varying government ownership. Governmental buy-in for the project was relatively high at Approval, signaled by regular follow-up and compliance with preparation tasks and letters from municipalities addressed to the Bank. However, there were eight governments in place during the 10- year implementation period and commitment and attention to the project varied over the lifetime of the Project. During periods of limited government ownership, the Project experienced long delays in decision making, limited provision of staff resources to coordinate project implementation and limited ability to resolve project-related challenges.

62. Decision to close the project. World Bank management decided not to further extend the Project implementation period beyond the 10 years provided, for two primary reasons: (i) GOB is a high-capacity client and EU member state that is able to implement complex projects such as completion of Studena and Luda Yana as they will be able to continue to build on experience and capacity gained under this Project; and (ii) there was no clear line of sight on successful implementation of Luda Yana dam given required additional timeline for completion, the on-going contractual dispute between the JV under contract and based on experience of lack of prompt decision and other self-inflicted delays. As described above, continued World Bank involvement is unlikely to change the results achieved by the GOB.

IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME

A. QUALITY OF MONITORING AND EVALUATION (M&E)

M&E Design 63. The Project’s Results Framework and M&E arrangements were rudimentary at Approval. The Approval PDO 1 made reference to benefitting communities in the Project area, but the M&E system did not include a beneficiaries metric or a clear definition of Project beneficiaries. PDO 1 also made reference to improving reliability and quality of water provision, but the Results Framework did not measure reliability and did not show progress on improving quality. The Project papers do not provide a clear picture of the historical reliability and quality of water provided in Bulgaria or the anticipated Project- services areas. PDO 2 was not specific in its formulation and the specific objective must be inferred from the PDO indicator. Biannual progress reviews were used to monitor progress towards the final goals of water-intake completion for the dams subprojects and Master Plan completion. A limited number of

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intermediate results indicators were put in place to monitor completion of design studies and construction progress for the dams subproject and completion of the diagnosis study for the Master Plans.

64. During the 2014 restructuring24, the PDO indicators became more quantitative when they were changed to provide numeric values for the volume of water stored and treated by works under the Plovdivtsi and Luda Yana subprojects and numeric target for treated water produced by WTPs to meet Bulgarian standards. However, the reformulated PDO uses the undefined term “bulk potable water provision” which is not a widely used term in the industry. Definition and calculation of the revised metrics were not recorded and baseline information against which to calculate the values was not provided (Annex 6 contains information on calculation methodology for PDO Indicator 1). Results associated with rehabilitation of the Studena dam, a major undertaking of the Project, were not included in the PDO indicators.

M&E Implementation 65. The results framework was improved through project implementation allowing the borrower and the Bank to more readily assess component performance, benchmark Project achievements, identifying problems, and channeling lessons learned for improvements. However, it should be noted that the revised Results Framework’s focused primarily on infrastructure completion rather than Project objectives and beneficiaries results and limited outcome and impact data was gathered during implementation. It is noted that the Project closed during the drought crisis in Pernik and the COVID19 crisis impacted Bulgaria in the months after the Project closed, both of which reduced government’s ability to participate in final evaluation of Project performance.

M&E Utilization 66. The original results indicators and dialogue with the client were used to inform the mid-term review and, together with the proposed measures to address implementation constraints formed the basis for the restructuring in June 2014. The revised PDO and Intermediate Results indicators were then used to monitor implementation progress and results in the years that followed both by the Borrower and by the Bank through the end of the Project. However, while the Results Framework was improved during the 2014 restructuring, it presented challenges in interim and overall assessment of Project performance as described above under Design.

Justification of Overall Rating of Quality of M&E 67. The overall rating for Quality of M&E is Modest as there were some shortcomings in both design and implementation of the M&E system.

24 71% of project expenditure was made after the 2014 restructuring and the majority of results reported under this project were achieved after that date; therefore the PDO and Results Framework designed during the 2014 restructuring are an essential element of M&E Design for this project.

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B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE 68. Environmental Safeguards Compliance. The Project fell under Category A for the purpose of OP/BP 4.01 Environmental Assessment. The policy was triggered by the construction of new - Luda Yana, Plovdivtsi and Neikovtzi dam (dropped through project restructuring) and rehabilitation of Studena Dam. Since some of the works on these investments started prior to the Bank involvement, the Environmental Impact Assessment (EIA) were updated to meet World Bank requirements for Category A project and Environmental Management Plan (EMP) were separately prepared. All documents were publicly consulted. Ecological flow was defined in EAs for new dams and reflected in the design review. The supporting and relating dam infrastructure, such as rehabilitation of PWTPs and the temporary forest road in Plovdivtsi, was rated as of Category B with no expected significant environmental impacts and easily designed mitigation measures. These components were managed and monitored through site specific EMPs.

69. The major environmental issues envisaged at the project preparation stage were: (i) changes in downstream hydrology and morphology; (ii) reduction of biodiversity and river ecosystems due to blockage of movement of local species (e.g. fish) and because of elimination of floods; (iii) impacts on existing infrastructure such as roads and bridges, and (iv) the impact on local communities and workers (OHS related) typical for the large construction works. Given the nature of the project interventions supported by the Project, and the specifics of Project locations, in addition to the OP/BP 4.01 Environmental Assessment, the Project triggered the following environmental and legal Safeguard Policies: OP/BP 4.04 Natural Habitats, Safety of Dams (OP/BP 4.37) and Projects on International Waterways (OP/BP 7.50). During the works on Luda Yana Dam, a colony of European Ground-squirrels was discovered that was successfully relocated. Though impacts on the national heritage was not envisaged, a chance-finds clause was integrated to all EAs. The clause was triggered and successfully applied on the archeological findings at Luda Yana Dam.

70. The safeguards compliance rating for the overall project implementation is rated as moderately satisfactory since no incidents causing adverse impacts to, of threatening, human health or environment during the project implementation were reported, and the compliance was relatively good. This is in particularly evident in the management of nature protection and cultural/archeological heritage preservation issues where good cooperation with competent authorities and experts was established. However, during the implementation, there were also occasional incompliances in mitigation and monitoring measures implementation (particularly OHS, water and waste management), quality of monitored environmental features as well as in reporting..

71. Social safeguards compliance. Land acquisition and introduction of restrictions on land use have been conducted in compliance with the Bank social safeguards requirements, the Land Acquisition Policy Framework (2009) and Abbreviated Land Acquisition Plans (ALAPs), and applicable national legislation. The scale of social impacts at the three dams (Neikovtzi, Luda Yana and Plovdivtsi dam) was limited due to the fact that the dam constructions had been partially performed in the 1980s or 1990s, and consequently, most of the necessary land acquisition had been completed before the involvement of the World Bank. At the start of Project preparation, the MRDPW conducted due diligence of historical expropriation which concluded that it was done in compliance with the relevant national legislation in force at the time of expropriation and in line with the objectives of OP 4.12.

72. In 2014, the Project was restructured in order to scale-down Component 3 by dropping the construction of the Neikovtzi dam. Thus, no land acquisition procedures have taken place for Neikovtzi

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Dam under the Project. For the completion of Plovdivtsi Dam and construction of potable water treatment plan, an additional 0.99 ha (13 plots) was acquired from private individuals in the period 2008-2014. For the completion of Luda Yana Dam, an additional 6.89 ha of private land and easement rights for another 0.25 ha of private property were acquired in the period 2014-2016. At Studena Dam, the rehabilitation of the dam wall and associated infrastructure were completed without the occurrence of the initially anticipated impacts on private land and assets.

73. ALAPs for sub-projects with land related impacts, namely Luda Yana and Plovdivtsi dams, have been fully implemented. No land take occurred without prior compensation. To compensate for the loss of access to grazing land during construction of Luda Yana dam and after impoundment, the Panagyurishte Municipality annually publishes information about available alternative pasture lands on its territory. During Project implementation, no negative livelihood impacts nor physical displacement occurred.

74. Before Project closure, MRDPW prepared a land acquisition completion report for the Lada Yana dam, Plovdivtsi dam and Neikovtzi dam (covering historical expropriation only as no land acquisition occurred under the Project).

75. Grievance Redress Mechanisms (GRMs) were available at the respective municipalities for land acquisition related impacts. In the case of Luda Yana, an additional Commission for voluntary settlement on grievances related to land acquisition was established, but was never utilized. The only land-related dispute for Luda Yana was settled by the administrative court in 2014. In 2018/9, the information boards at Studena and Luda Yana dam construction sites were supplemented with information on various grievance channels, including onsite grievance logs.

76. Fiduciary compliance. MRDPW`s FM capacity was assessed during appraisal and deemed to be acceptable, with no significant weaknesses identified. The FM performance of the Project was overall satisfactory during Project implementation in terms of staffing, budgeting, flow of funds, accounting, internal controls, reporting and external audit. The Project benefitted from a stable and experienced FM team and used a comprehensive set of accounting policies and internal control procedures as described in the POM. Quarterly Interim un-audited Financial Reports (IFRs) were sent to the Bank on time, in the formats agreed and were of adequate quality. The yearly Project financial audits were also submitted on time and had an unmodified (clean) opinion throughout implementation.

77. Following effectiveness in April 2010, the Project faced implementation delays due to lengthy and cumbersome processes of finalization and approval of designs of the dams by municipalities and budgetary constraints during 2012-2013. The delays in the procurement and implementation of several high value contracts impacted also the realism of forecasting financing needs, predictability of in-year spending and ultimately achievement of disbursement targets. As a result of implementation bottlenecks, the disbursement ratio after 7 years of implementation was of only 40 percent, and 80 percent at closing.

78. The PIU documented the use of the Designated Account funds by April 30, 2020 and the outstanding balance will be reimbursed to the Bank by June 30, 2020. The last Project financial audit (covering 2019 and grace period of January-April 2020) is due by June 30, 2020.

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C. BANK PERFORMANCE

Quality at Entry 79. The Quality at Entry of this Project was mixed. The strategic relevance and approach of the Project were well aligned with needs of the country and the Bank’s approach to preparation of technical aspects of the Project were well developed. The policy and institutional environment evolved over the course of preparation and implementation of the Project and the Project was well designed to flexibly deliver on institutional capacity needs (PDO 2) despite the changes. Because of the well-designed Component 2, where technical needs were clearly identified but implementation remained flexible in an evolving policy environment, the master planning process help GOB mobilize much more significant investment benefits and to enhance utility sustainability.

80. However, the economic assessment for the Project was not prepared prior to approval and poverty, gender and social development aspects of the Project were not prepared. The implementation arrangements at approval were not appropriate for the operating environment in Bulgaria and were adjusted at the 2011 restructuring to include a PIU, and later during implementation to ensure that sufficient financing was available for Project support. No weaknesses fiduciary systems were identified during appraisal and no significant fiduciary challenges were experienced during implementation. Environmental and social risks were adequately assessed and reflected in project design. The M&E system was not well prepared at Approval as described elsewhere in this report. Finally, two major gaps in quality at entry were Bank overestimation of client capacity for implementation of complex infrastructure projects and underestimation of implementation period required for the dam and WTP sub-projects. Implementation pace was slow because of the overestimation of client capacity to take complex decisions in a timely way and to manage complicated contracts and resolve disputes ; however, even after additional support for implementation was secured utilizing Project funds, underestimation of time required for implementation resulted in underbudgeting for Project support, and was partially responsible for the multiple restructurings, extensions and low performance ratings throughout the Project.

Quality of Supervision 81. In view of several quality of entry shortcomings, the Task Team proactively restructured the Project three times to mobilize financing for Project implementation support, and to work with the clients to prioritize and focus on the most needed investments and delivering on the development objectives. The Bank team played a crucial role throughout supervision including regularly mobilizing world-class experts to support supervision and advise the government as they undertook complex and innovative actions, such as those required for Studena dam rehabilitation. The close collaboration between client and Bank team was essential to keep the Project moving toward achievements realized at closure. The Bank team also followed up closely with the Borrower as the Project neared closure, and even after closure, seeking to enhance likeliness of completion of Luda Yana and Studena. During the final implementation support mission in December 2019, the Bank team provided expert advice to the Borrower on measures required to secure the Luda Yana site, seeking to avoid abandoned site accidents and failure of the partially completed infrastructure, in the event that Project completion is further delayed. Task Team support for development of strong Master Plans which were used to mobilize significant additional investment for the sector is an achievement that goes beyond Project objectives captured in the Project-specific evaluation. This steady collaboration and assistance through both periodic supervision missions and continual day-to-day support was essential to the achievements under this

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Project. However, the despite the team’s day to day engagement, the Bank was not able to mobilize decision making at the necessary levels during implementation to overcome the challenges faced under the Project. In addition, during the 10-year implementation period, there were seven World Bank Team leaders and specialists on the Bank team also changed frequently. These elements of Bank performance diminish the quality of supervision, despite the commitment and dedication of the task team.

Justification of Overall Rating of Bank Performance 82. Overall, Bank performance is rated Moderately Unsatisfactory. Despite the proactive support to GOB on technical and operational aspects of Project during implementation, the quality at entry challenges were high and the Bank’s support during implementation was not sufficient to overcome the challenges.

D. RISK TO DEVELOPMENT OUTCOME 83. The risk to development outcome is considered Moderate. The achievements realized under PDO 1 (dams subprojects) are partial and sustainability will depend on GOB’s capacity to complete the un- finished sub-projects, to operate and maintain the infrastructure. The project will require a minimum of two years beyond project close to complete. The project is highly relevant to the GOB and the government has taken the necessary steps to see the project through to completion. The GOB has committed the funds for the completion of the Studena project and part of the Luda Yana project and contracts remain in place. The MRDW will need to pay particular attention to ensure that all the civil works are completed as early as possible. All the obligations related to signed contracts as well as the required funds to complete unfinished civil works contracts will be financed by the Government. Recent experience in Bulgaria and lessons learned point to the need for strong and transparent water management systems to maximize benefit and sustainability of water storage and supply investments.

84. Concerns remain regarding compliance with World Bank environmental and social safeguards procedures in works pursued post-closure, however the likelihood of these risks materializing is considered to be low. For Luda Yana, the Bank team provided expert advice to the Borrower on measures required to secure the Luda Yana site, seeking to avoid abandoned site accidents and failure of the partially completed infrastructure, in the event that Project completion is further delayed. The supervisory engineer incorporated this advice into the site-closure recommendations which will be implemented by GOB in the event that works are suspended at Luda Yana. For other related environmental and social measures, GOB has incorporated EU regulations into national law and is therefore obliged to follow procedures and take measures that parallel World Bank safeguards. The Bank’s land-acquisition procedures (i.e. OP 4.12) differ from Bulgarian legislation, therefore if additional land-take is required there might be a deviation from Bank policy. However, the land acquisition anticipated under the Project is completed therefore this risk is deemed to be low.

85. It should be noted that support for operations and maintenance of dams and related capacity for water management systems that would assist water managers to manage reservoir levels to optimize benefits and minimize negative impacts. These potential gaps in capacity, if not remedied, could result in further water shortages, such as was experience in Pernik at the close of this Project.

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86. The achievements under PDO 2 (investment capacity building) are already realized, where GOB leveraged Project support for significant additional investment in the sector, and works are already underway across the country

V. LESSONS AND RECOMMENDATIONS 87. Relevance and contribution of water security projects goes beyond project-completion ratings. The high relevance of this project, and its important contribution to climate resilience and water security in Bulgaria remain 10 year after approval. The project directly benefitted more than 100,000 people and was instrumental in mobilizing investment in water security measures across the country. It allowed the country to restart its water storage investments for the first time in 30 years, with modern construction techniques and project management approaches. While not all planned results were achieved under the project, the project is still considered to contribute successfully to water security in Bulgaria.

88. For complex projects, readiness should be assessed and ensured early in project cycle. The lack of technical and operational readiness for infrastructure design and implementation at Project approval caused delays in implementation that were never overcome during the 10 years of implementation. The operational timeline set out also underestimated the time required to take sequential steps, conduct technical reviews and carry out the required iterations to design, implementation and adjust the Project as it was carried out. Factors such as: ensuring that key contracts have reached advanced stages of procurement prior to approval and packaging procurement to ensure efficient and effective studies are conducted would have streamlined the implementation of Component 3. Recognizing the complexity of the Project and setting a more realistic implementation period for the Project could have reduced frustration and repeated contract extensions during Project implementation. In addition, ensuring that the systems and capacity required to manage the operational complexity of the project are in place at Approval and throughout implementation is essential to ensuring adequate project implementation. Examining factors such as the number of large contracts and coordinating entities matches with the government’s institutional capabilities and interests as well as early assessment of the market for key contracts is important to ensuring that the Project activities will be prioritized and carried out in a timely manner. Ensuring that arrangements are in place to take measures and decisions required to accelerate project implementation, address contractual disputes and to respond to evolving technical complexity of implementation is essential for complex infrastructure projects.

89. Bank project cycle may not be well suited for large-scale, complex investment programs. Bank procedures associated with the traditional project cycle, formal and informal, are often not appropriate for large complex infrastructure projects leading to disbursement lags, rating downgrading, and lengthier timelines required for implementation than are typically allowable. The project stands as an example of a project that did not fit well within the traditional World Bank project cycle. For many types of Bank- supported projects, advanced readiness can help to alleviate some of these procedural mis-alignments, however Bank clients often do not have the financing or capacity to achieve advanced states of readiness without Bank support. Making better use of Multi-Phased Approach and other instruments or taking a more flexible approach to timelines for large dam could help improve project outcomes. In some cases, the Bank is already taking these lessons on board - For example, the Kariba Dam rehabilitation project was approved in 2014 with a 10-year project implementation period, recognizing that rehabilitation works while maintaining an operational dam is complex and takes time. However, this kind of example is rare. Given the challenges faced under this Project implemented by a middle-income country and a high- capacity client, further consideration on how procedures may be more flexibly adapted for large complex

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infrastructure projects around the world, where implementation capacity often much lower, is recommended

90. Institutional capacity building is a powerful development tool and should be considered a key element to ensuring sustained implementation and operation of water infrastructure. The outcome level results of PDO 2, more than one billion euro in investment informed by support for institutional capacity building, is a powerful testament to the importance of focusing on longer-term outcomes derived from institutional strengthening. However, clients are often reluctant to borrow for capacity building. Support from the GPs and regional units could help share lessons and support teams in making the case for complimentary institutional and capacity building support.

91. Irrespectively of final outcome, large, complex projects in high-capacity clients have strong knowledge spill-over on technical aspects and operational matters. Knowledge and information sharing events within the World Bank have highlighted the technical elements related to geomembrane attachments and working with divers and new and future dams projects have and will take these lessons on board during design and implementation. The project also offers knowledge spillover in terms of operational processes and lessons learning for implementing complex infrastructure projects in other countries. For example, learning from timeline and readiness challenges on this project, teams can make better use of MPA and other instruments or taking a more flexible approach to timelines for large dam could help improve project outcomes. Teams may also conduct an earlier assessment of market presence and responsiveness to tenders may help overcome contractual challenges and implementation delays such as those faced under this project. In some cases, the Bank is already taking these lessons on board - for example, the Kariba Dam rehabilitation project was approved in 2014 with a 10-year project implementation period, recognizing that rehabilitation works while maintaining an operational dam is complex and takes time. However, given the challenges faced under this Project implemented by a high- capacity client, Further consideration on how procedures may be more flexibly adapted for large complex infrastructure projects around the world, where implementation capacity often much lower, is recommended.

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ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS

A. RESULTS INDICATORS

A.1 PDO Indicators

Objective/Outcome: Improve bulk potable water provision in target areas Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion (Revised June2016) Percentage 0.00 95.00 100.00 Percentage of samples from the water produced by the 02-Nov-2009 10-Jul-2014 13-Dec-2019 dams and WTPs, completed under the project, meeting nationalstandards

Comments (achievements against targets): All of the samples from WTPs completed under the project (100%), namely the Plovdivtsi WTP and the rehabilitated Studena WTP, met or exceeded national standards.

Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion

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Volume of additional potable Cubic 0.00 2000000.00 2022560.00 water (number of cubic Meter(m3) meters/year) produced by the dams and WTPs, 02-Nov-2009 10-Jul-2014 13-Dec-2019 completed under the project.

Comments (achievements against targets): The working understanding of this indicator is that the “additional volume” is the measured as water supplied by the new WTP minus the previously supplied water in the municipalities. Before the project, water was withdrawn from surface water body and chlorinated prior to distribution. After the project, water is stored in the reservoir and treated at the WTP prior to distribution.

Plovdivtsi dam:

• WTP net capacity 210 L/s (225 L/s gross)

• Annual production 6,622,560 m3; (New WTP net capacity, annualized)

• Water supplied to Madan, Rudozem and Smolyan municipalities before the project – 4,600,000 m3

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• The additional potable water 2,022,560 m3 is the difference between before project and after project supply.

Luda Yana dam:

• WTP net capacity 287 L/s (300 L/s gross)

• Annual production 9,050,832 m3 (Anticipated new WTP net capacity, annualized)

• Water currently supplied to Panagyurishte and Strelcha municipalities and 10% of Pazardzhik municipality – 2,930,000 m3

• The anticipated additional potable water is the difference: 6,120,832 m3

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Objective/Outcome: Assist municipalities to improve investment-planning capacity Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion (Revised Feb2014) Number of Number 0.00 51.00 51.00 regional master plans for water supply and sewerage 02-Nov-2009 10-Jul-2014 13-Dec-2019 systems, of satisfactory quality for acceptance byBulgaria and EC, to support investments in service delivery

Comments (achievements against targets): Regional master plans for water supply and sewerage systems were prepared for 51 jurisdictions in Bulgaria providing nationwide coverage. The plans were of satisfactory quality for acceptance by Bulgaria and EC and supported investments in service delivery that are now under implementation and being designed.

A.2 Intermediate Results Indicators

Component: Preparation of Master Plans

Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion (Revised June 2014) Percentage 0.00 100.00 100.00

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Component 2: Diagnosis of 02-Nov-2009 04-Jun-2018 04-Jun-2018 the present situation and investment needs completed, as part of Master Plans preparation, and submitted to the MRD and Water Associations

Comments (achievements against targets): Diagnosis and assessment of investment needs completed and submitted to municipalities for the 51 Master Plans (100% achievement).

Component: Completion and Rehabilitation of Dams

Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Number of water utilities Number 0.00 51.00 51.00 that the project is supporting 08-Dec-2012 06-Dec-2018 06-Dec-2018

Comments (achievements against targets): The project supported planning and investment capacity building for 51 municipalities, fully achieving the target.

Indicator Name Unit of Measure Baseline Original Target Formally Revised Actual Achieved at

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Target Completion (Revised May2011) Percentage 0.00 98.00 100.00 Component 3: Preparatory works for dams and water 02-Nov-2009 06-Dec-2018 13-Dec-2019 treatment plants completed (% progress)

Comments (achievements against targets): The preparatory works were completed for all dams (Studena, Plovtivtsi and Luda Yana) supported under the project (100% completion).

Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion (Revised June2016) Percentage 0.00 50.00 52.80 Component 3: Construction works for water treatment 02-Nov-2009 27-May-2019 13-Dec-2019 plants completed and equipment installed (% progress)

Comments (achievements against targets): In December 2019, the following achievements were observed for the WTP sub-projects: Luda Yana: 8.5%; Plovdivtsi: 100%; Studena: 50%.

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Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion (Revised June2016) Percentage 0.00 72.00 75.60 Component 3: Construction works for dams completed 02-Nov-2009 27-May-2019 13-Dec-2019 (% progress)

Comments (achievements against targets): In December 2019, the following progress was observed: Luda Yana dam: 37%; Plovdivtsi dam: 100%; Studena dam: 90%

Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Direct project beneficiaries Number 0.00 170000.00 19616.00

02-Nov-2009 10-Jul-2014 27-May-2019

Female beneficiaries Percentage 0.00 50.00 50.00

04-Jun-2018

Comments (achievements against targets): 19,616 beneficiaries of Plodivtsi dam and WTP

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B. KEY OUTPUTS BY COMPONENT C.

Objective/Outcome 1: to improve bulk potable water provision in target areas 1. Volume of additional potable water (number of cubic meters/year) produced by the dams and WTPs, completed under the Project. Outcome Indicators 2. Percentage of samples from the water produced by the dams and WTPs, completed under the Project, meeting national standards 1. Preparatory works for dams and water treatment plants completed (% progress) 2. Construction works for water treatment plants completed and Intermediate Results Indicators equipment installed (% progress) 3. Construction works for dams completed (% progress) 4. Direct Project beneficiaries25 1. 2,022,560 m3/year additional potable water produced by Plodivtsi WTP supported under the Project 2. 100% of samples from water produced by Plovdivtsi meet national standards Key Outputs by Component 3. 19,616 beneficiaries of Plodivtsi dam and WTP (linked to the achievement of the Objective/Outcome 1) 4. Construction works for Studena dam (90%) and WTP (50%) partially completed 5. Preparatory studies for Luda Yana dam and WTP completed; Construction of dam (37%) and WTP (9%) partially completed

25 Persons residing in the areas serviced by the dams and the WTPs completed/rehabilitated under the project

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Objective/Outcome 2: to assist municipalities to improve investment-planning capacity

1. Number of regional master plans for water supply and sewerage systems, of satisfactory quality for acceptance byBulgaria and EC, to Outcome Indicators support investments in service delivery

1. Diagnosis of the present situation and requirements completed in all six regions under the Master Plans and submitted to the MRDPW Intermediate Results Indicators for review. 2. Number of water utilities that the Project is supporting

1. 51 Regional Master Plans for Water Supply and Sewerage completed and of satisfactory quality for acceptance by Bulgaria and Key Outputs by Component EC (linked to the achievement of the Objective/Outcome 2) 2. 51 water utilities supported

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ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION

A. TASK TEAM MEMBERS Name Role Preparation Gabriel Ionita Team Leader Orlin Dikov Operations Officer Sudipto Sakar Lead Specialist Michael Webster Sr. Water and Sanitation Specialist Alessandra Palmeiri Lead Dam Specialist Kishore Nadkarni Fianancial Analyst, consultant Vladislav Krasikov Sr. Procurement Specialist Blaga Djourdjin Procurement Analyst Bogan Constantinescu Sr. Fianancial Management Specialist Ruxandra Floroiu Environmental Engineer Natasa Vetma Operations Officer Radhika Srinivasan Sr. Social Scientist Ruxandra Costache Counsel Anarkan Akerova Counsel Nicholay Christayakov Sr. Finance Officer Yarissa Lyngdoh Sommer Urban Specialist, consultant Martha Jarosewich-Holder Environmental consultant Fritz Schwaiger Engineer, consultant Eolina Petrova Milova Operations Officer Milane Reyes Program Assistant Teresa Lim Program Assistant Adelina Dotzinska Program Assistant Sudipto Sarkar Team Leader during preparation Supervision/ICR Toma Alexandrov Yanakiev Task Team Leader Anna Cestari Task Team Leader Javier Zuleta Task Team Leader Elisabetta Capannelli Task Team Leader Michael Peter Steen Jacobsen Task Team Leader

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Antonia G. Viyachka Procurement Specialist(s) Anneliese Viorela Voinea Financial Management Specialist Orlin M. Dikov Team Member Alessandro Palmieri Team Member Satoru Ueda Team Member Albena Alexandrova Samsonova Team Member Anneliese Viorela Voinea Financial Management Specialist Natasa Vetma Environmental Specialist Eolina Petrova Milova Team Member Ivaylo Hristov Kolev Team Member Carolina Abigail Delgadillo Medina Team Member Ifeta Smajic Social Specialist Jacqueline Tront ICR Lead Contributor

A. STAFF TIME AND COST

Staff Time and Cost Stage of Project Cycle No. of staff weeks US$ (including travel and consultant costs) Preparation FY06 3.200 33,368.62 FY07 16.325 65,435.08 FY08 31.642 120,393.29 FY09 40.479 161,409.30 FY10 11.267 27,698.80

Total 102.91 408,305.09

Supervision/ICR FY10 6.696 27,149.41 FY11 38.447 125,593.23 FY12 17.830 84,709.98 FY13 23.025 100,354.08

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FY14 28.110 94,579.96 FY15 18.835 108,023.16 FY16 25.019 106,402.57 FY17 28.704 139,554.51 FY18 29.978 186,845.10 FY19 20.441 94,515.31 FY20 24.325 106,016.24 Total 261.41 1,173,743.55

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ANNEX 3. PROJECT COST BY COMPONENT

Amount at Approval Actual at Project Percentage of Approval Components (US$M) Closing (US$M) (US$M) Project Implementation 7.47 11.17 194.61% Support Preparation of Master Plans 30.60 13.08 55.88% Completion and 109.91 49.85 59.28% Rehabilitation of Dams Total 148.01 74.33 65.64%

December 31, 2019: 1 US Dollar = 0.89184 Euros

Note that there is a discrepancy between the data sheet and the actual disbursement at project closing due to currency exchange rates. The total disbursements under the project are:

Actual (EUR) Cumulative To-Date Sources of Financing (Funds Received) World Bank 54,547,000.00 Designated Account 54,344,500.00 Front-end fee 202,500.00 Government contribution 13,217,949.07 Total Funds Received 67,764,949.07

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ANNEX 4. EFFICIENCY ANALYSIS 1. Economic analysis. An ex-ante cost-benefit analysis was prepared at feasibility study phase using a ‘with and without Project’ methodology to calculate the Economic Rate of Return (ERR) of the Project- related investments in Luda Yana, Plovdivtsi and Studena dams for 30-year Project horizon26. 2. The benefits measured in monetary terms were: (1) savings in healthcare (accounting for over 60% of all benefits); (2) savings from hospitalization (accounting for around 20% of total benefits); and (3) creation of new jobs (during construction and operations). All dams were expected to generate benefits in all three of the above-mentioned categories. Lack of more sophisticated methodologies had prevented a more in depth quantitative evaluation of the Project-related impacts, such as access to improved water supplied and savings from individual water solutions, at the time of the appraisal, and resulted in significant underestimation of the economic returns27; therefore, these assumptions were corrected in the ex-post analysis. 3. Ex-ante returns ranged from 6.22 percent (Luda Yana dam) to 8.01 percent (Studena dam). An ERR for the overall Project was not included in appraisal documents and was not conducted during the feasibility study phase, but the information provided was sufficient to allow for its calculation to compare expected results with the corresponding values from the ex-post CBA. However, the aggregated ex-ante ERR at Project level is lower than the threshold of 5%, because (i) the investment costs related to Component 1, 2 and the Neikovtzi dam, which are not considered at dam level, were accounted for at Project level; and (ii) underestimated benefits in the individual CBAs for the three sub-projects calculated at feasibility study stage. 4. The ex-post economic analysis (at Project end) is performed for the Project, based on the bottom- up approach, i.e. an economic analysis at dam level is developed first, and then all dams and other activities covered by the Project, including Component 1 and Component 2, are aggregated at a Project level. The discount rate (of 5%) and 30-year Project time horizon are applied as per the applicable EU Regulation (480/2014) for 2014-2020 programming period, which is consistent with the time horizon used in the ex-ante analysis. Benefits from improved access to drinking water, i.e. the benefits to human health from availability of improved drinking water as a result of the Project, savings for households as a result of the eliminated water rationing for both Luda Yana and Plovdivtsi, and benefits from avoided loss due to rehabilitation of the wall of Studena dam are considered in the ex-post CBA in line with applicable methodologies for the sector in EU member states. All the above-mentioned changes have direct impact on the Project’s net benefits, namely a more than two-fold (on average) increase in benefits versus those estimated at PAD/feasibility study phase. The economic analysis envisages materialization of benefits once the corresponding dam is put into operation, because it is normally to expect that at that time all the people in the Project area connected to piped water supply will physically connect to the newly constructed networks. Results of the ex-post Project-level economic analysis, compared to the results of the Project appraisal/feasibility study stage, are summarized in the Table 6.1.

26 At the feasibility study phase the ex-ante CBA results were presented for Plovdivtsi, Luda Yana and Studena dams. CBAs were not prepared for Neikovtzi dam, Component 1 and Component 2, and aggregated results were not prepared for the project level. 27 A simulation performed by the ex-post CBA consultant shows that the aggregated ex-ante ERR at project level would be above the threshold of 5% if more sophisticated methodologies for quantifying project-related benefits had been available the PAD.

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Table 6.1: Summary of the results of the ex-post CBA vs. ex-ante CBA by dam and aggregated Summary of the results of the ex-post CBA vs. ex-ante CBA28 Dam Investment cost, mil ERR Population to be served in 2042 EUR Ex-ante Ex-post Ex-ante Ex-post29 Ex-ante Ex-post Plovdivtsi dam30 22.0 17.9 7.33% 10.46% 60,000 13,603 Luda Yana dam31 26.8 22.1 6.22% 6.16% 34,600 18,890 Studena Dam32 13.0 18.7 8.01% 15.37% 67,448 66,928 Neikovtzi Dam NA NA NA NA NA NA Aggregated33 101.2 81.1 2.21% 10.09% 162,048 99,421

5. Considering the delay in two out of three dams (i.e. Studena and Luda Yana dams) different scenarios (optimistic and realistic) were developed to better understand the range of potential impacts, based on the Projects’ changes on the overall benefits as compared to what was originally envisaged. Results of the ex-ante scenario analysis (Table 6.2) demonstrate that all scenarios are economically viable.

Table 6.2: Ex-post Scenarios Project completion ERR Assumption (Year) Plovdivtsi dam The dam had been completed by the end of Realistic Scenario 2019 10.46% 2019, and in 2020 the dam is already fully operational; hence optimistic scenario is not Optimistic Scenario NA NA considered for Plovdivtsi. Luda Yana Realistic Scenario 2022 6.16% Construction completed and beneficial operation starts in 2023 Optimistic Scenario 2021 6.54% Construction completed and beneficial operation starts in 2022. Studena Realistic Scenario 2021 15.37% Construction completed and beneficial operation starts in 2022.

28 The forecast for the dynamics of the population in the ex-ante CBA was developed based on the National Statistics Institute data for 2004- 2012 and their long-term forecasts till 2060 per district. The forecast for the dynamics of the population in the ex-post CBA was developed based on the National Statistics Institute data for 2011-2019 and their long-term forecasts till 2048 per project area. 29 The realistic scenario is considered in the ex-post ERR for comparison with the ex-ante results. 30 The ex-ante analysis includes the population of Madan, Rudozem and Smolyan municipalities, while the population of Smolyan municipality is excluded from the ex-post analysis because it is beyond the project area. 31 The ex-ante analysis includes 100% of the population of municipality Panagyurishte, 80% of the population of municipality Strelcha and 10% of the population of Pazardzjik. Only population of Panagyurishte, including the tourists there, are considered in the ex-post analysis, because the remaining population is beyond the project area. 32 Only the population of Pernik municipality is considered in both (the ex-ante and the ex-post) analyses. Deviation in figures is due to accelerated negative demographic trends in the region. 33 Aggregated ex-ante CBA results are calculated based on the information provided in the ex-ante CBAs of Luda Yana, Plovdivtsi and Studena Dams, while total project investment costs are as per PAD and include Components 1 and 2, and Neikovtzi dam as well.

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Project completion ERR Assumption (Year) Optimistic Scenario 2020 16.94% Construction completed and beneficial operation starts in 2021.

6. A sensitivity analysis for the scenarios above was performed to investigate the impact of potential of: (i) 20% increase in investment costs; (ii) 20% increase in O&M costs; and (iii) 20% decrease in benefits on the economic viability of the projects. The results from the sensitivity analysis display that the most sensitive variable is the “benefits” as shown in Table 6.3. The ERR sensitivity analysis showed that the Project is deemed to not be sensitive to these risk factors. Results of the ex-post Project-level economic analysis per dam and per Scenario, as well as aggregated for the Project are summarized in the Figures 6.1 and 6.2 and Tables 6.3 and 6.4 below, demonstrating the expected deviations in the ERR and NPV under different Scenarios.

Table 6.3: Sensitivity analyses per ex-post Scenario Change in variable Base case ERR per Scenario Investment O&M Benefits 0% +20% +20% -20% Plovdivtsi dam ERR of Realistic Scenario 10.46% NA 10.33% 7.63% ERR of Optimistic Scenario NA NA NA NA Luda Yana dam ERR of Realistic Scenario 6.16% 5.26% 5.91% 3.81% ERR of Optimistic Scenario 6.54% 5.60% 6.28% 4.14% Studena dam ERR of Realistic Scenario 15.37% 13.02% 14.92% 12.03% ERR of Optimistic Scenario 16.94% 15.94% 16.41% 13.12% Aggregated at Project level ERR of Realistic Aggregated Scenario 10.09% 9.65% 9.88% 7.45% ERR of Optimistic Aggregated Scenario 10.75% 10.26% 10.52% 7.94%

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Figure 6.1: ERR under different Scenarios of the economic ex-post analysis versus ex-ante analysis.

20.00% Comparision of Different Scenarios (ERR) 18.00% 16.00% 14.00% Plovdivtsi 12.00% Luda Yana

10.00% ERR 8.00% Studena 6.00% Aggregated 4.00% 2.00% 0.00% Ex-ante* Realistic Optimistic

Table 6.4: ERR under different Scenarios of the economic ex-post analysis versus ex-ante analysis Comparison in terms of ERR ERR Plovdivtsi Luda Yana Studena Aggregated Ex-ante At feasibility study stage 7.33% 6.22% 8.01% 2.21%34 Ex-post Realistic 10.46% 6.16% 15.37% 10.09% Optimistic Equal to realistic** 6.54% 16.94% 10.75%

34 Aggregated ERR for ex-ante is calculated to allow for comparison with the ex-post Scenarios. The former appear to be below the minimum required level (5%), because the investment costs at project level includes also Components 1 and 2, and Neikovtzi dam related investments, which benefits are difficult to be quantified. Moreover, the other ex-ante quantified benefits are underestimated.

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Figure 6.1: NPV under different Scenarios of the economic ex-post analysis, including the aggregated Scenario.

Comparision of Different Scenarios (NPV) 60,000

40,000 Plovdivtsi

20,000 Luda Yana Studena 0 Aggregated

NPV, NPV, '000 EUR (20,000)

(40,000) ex-ante**** Realistic Optimistic

Table 6.5: NPV under different Scenarios of the economic ex-post analysis versus ex-ante analysis Comparison in terms of NPV NPV, '000 EUR Plovdivtsi Luda Yana Studena Aggregated ex-ante At feasibility study stage* 4,772 2,742 3,554 (24,753) Ex-post Realistic 11,164 2,720 28,719 51,371 Optimistic Equal to realistic 3,710 31,415 57,045 *ENPV for ex-ante are calculated at 5% discount rate to allow for comparison with ex-post Scenarios

7. The ex-post economic analysis indicates sufficient economic viability at closure, and except for Luda Yana dam, the ex-post economic viability of the remaining dams is significantly above the minimum required return of 5% and expected results as per the ex-ante cost-benefit analysis. Moreover, the ex- post economic benefits of Plovdivtsi dam (the only one that is already fully operational) exceed the ex- ante estimates, despite decreased number of the population in the service area. Studena dam displays the highest returns, despite not being fully completed yet, because of the various benefits it brings to the service area. With regard to Luda Yana dam, however, positive economic results are observed even though long delays were experienced. It is noteworthy that further delays in its implementation would decrease the economic viability of the Luda Yana dam, and at some point will render its return below the five percent threshold for economic viability. Methodology for the ex-post economic analysis 8. The traditional economic evaluation method, based on the incremental benefit and cost flows between the situation “with” and “without” the Project was applied, to catch only the “pure Project” impacts, where the specifics provoked due to the introduced changes in the Project implementation were well considered in the ex-post analysis. 9. A bottom-up ex-post cost-benefit analysis was prepared using the ‘with and without Project’ methodology to calculate the Economic Rate of Return (ERR) and Net Present Value (NPV) of the

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investments for each of the 3 Project dams and aggregated at Project level, on the basis of the investment costs, benefits and operational costs listed below. The Project time horizon is 30 years, and a 5% discount rate was applied (as per EU Regulation 480/2014). Each of the dams was analyzed separately, based on the assumptions described in next Section, and the results were aggregated at Project level. The following annual costs and benefits were considered. 10. Investment costs: Total €81.1 million are the investment costs for construction of two dams in Bulgaria, namely Luda Yana (22.1 mil. EUR) and Plovdivtsi (17,9 mil. EUR), rehabilitation of Studena dam (18.7 mil EUR), development of 28 master plans for Water and Wastewater Sector in the country (1.7 mil EUR), technical support (10.7 mil EUR) and 0.2 mil EUR for front-end fee, where the analyses are broken down by dam, and aggregated at Project level. 11. The Project-related capital investments were based on the following assumptions in Table 6.6:

Table 6.6: Assumptions for different Scenarios. Plovdivtsi dam Total, 17.9 mil EUR, of which all were spent by the end of 2019; Project had been implemented and put into operation before the end of 2019; hence the optimistic scenarios is assumed to be equal to the realistic one, and is not calculated.. Luda Yana dam Total, 22.1 mil EUR, of which 10.4 mil EUR were spent by the end of 2019, while the remaining €11.7 million that have not been spent so far will be: 1/equally distributed in 2021 and 2022 under the realistic scenario; 2/ spent in 2020-2021 under the optimistic scenario. Studena dam Total, 18.7 mil EUR, of which 11.7 mil EUR were spend by the end of 2019, while the remaining €7.0 million that have not been spent so far will be spent in 2020-2021 under the realistic scenario, and in 2020 under the optimistic scenarios. Master plans Completed Technical Completed assistance

12. Costs: The incremental operating and maintenance costs (directly resulting from the Project) were calculated based on the feasibility studies for the newly constructed dams (Luda Yana and Plovdivtsi), and a benchmarking reflecting the adequate operation and maintenance costs for the rehabilitated water supply infrastructure was applied to Studena dam. They are transferred to unit costs based on the specific domestic and non-domestic consumption of the dam service area, reflecting also the corresponding NRW, where data are taken from the Business plan 2017-2021 of the respective Operator, approved by the Energy and Water Regulatory Commission.

13. Benefits35: Benefits from improved access to drinking water, i.e. the benefits to human health from availability of improved drinking water as a result of the Project. As per the JASPERS’ CBA

35All economic benefits (except the benefits from avoided loss due to rehabilitation of the wall of Studena dam) are calculated as per the JASPERS’ CBA methodology for water and wastewater, Romania, 2008,(JASPERS CBA Methodology). This is the only tailored to the sector internationally recognized CBA methodology, applicable also to Bulgaria. A unit benefit transfer approach from Romania based on the household income was applied for the benefits for which JASPERS do not provide a reference value for Bulgaria. The annual values of all benefits were projected by adjusting them for the changes in the real GDP growth over the project reference period (as recommended on page 20 of the JASPERS’ CBA methodology).

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methodology this benefit is to be applied to all households, benefiting from the Project, in Project service area36, i.e. to all households connected to the water supply dam. The unit value of this benefit per household for Bulgaria was set by JAPSERS at 125 EUR/household/year in 2008 value. 14. Benefits from costs savings for households as a result of the eliminated water rationing for both Luda Yana and Plovdivtsi. These are the benefits accruing to households that give up the use of individual water supply solutions (e.g. savings of copying costs) due to ensured permanent access to high-quality of the piped water supply during the seasonal water shortages (they would no longer need to rely on private reservoirs, private wells, private pumps, etc. and do no longer have to buy bottled water). This benefit as per JASPERS CBA Methodology for Romania is to be applied to the corresponding households in the Project area37, and its unit value was estimated at 59 EUR/household/year in 2008 values; reflecting the country and Project specifics. This benefit is applied only for 3 months per year – during the seasonal water shortages. 15. Benefits from avoided loss due to rehabilitation of the wall of Studena dam. These are the avoided losses of human life, avoided costs associated with (temporarily) disabled people, roads and urban infrastructure damages. These benefits are calculated based on unit costs for corresponding types of damage, under the assumption of 100-year wave. Avoided loss of arable land is not considered in the analysis, because of lack of sufficient data available.

Table 1.7: Assumptions for ex-post analysis DESCRIPTION as per JASPERS' CBA Methodology for Water and Wastewater, 2008 (page 15 of the

Access to drinking water, guideline for Bulgaria). This is applied to all dams, but for Studena dam it is reduced EUR unit value by 50, because the Project is about rehabilitation of existing dam, not for constructing 115.00 a new one. as per JASPERS' CBA Methodology for Water and Wastewater, 2008 (page 21) Individual water supply transferred from Romania to Bulgaria based on annual household income per capita, solution, EUR and reflecting the seasonal impact of Luda Yana and Plovdivtsi dams, i.e. 3 months a unit value 59.00 year. This benefit is not applicable to Studena dam. Reflects incremental costs associated with damaged share of the affected area, e.g. roads and urban area, expected to be flooded by failure in the wall of the dam under 100-year wave. Costs of human lives, heavily and lightly injured people are also Avoided loss due to considered.

rehabilitated dam wall, Costs are calculated based on unit costs applied to corresponding damaged share of Various Unit values the affected area/population, where national benchmarking for such unit costs is used. Affected area is based on the information provided in the emergency plan of the WSSO Pernik and floods map of Studena (Flood Management Plan of the responsible Basin Directorate) and expert judgement. Annual household income per capita USD https://www.ceicdata.com/en/indicator/bulgaria/annual-household-income-per- (PPP) in Bulgaria 2,618.9 capita Annual household USD https://www.ceicdata.com/en/indicator/romania/annual-household-income-per-

36 Page 20 of the JASPERS CBA Methodology 37 Page 21 of the JASPERS CBA Methodology

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income per capita 3,485.1 capita (PPP) in Romania Source: Historical data up to 2018, National Convergence Programme 2019-2022, GDP growth then constant Historical data from National Statistics Institute up to 2018, then forecast, based on Population in the Project area the average annual demographic trends for the dam-service area in 2012-2018 Assumptions for the Realistic Scenario Plovdivtsi dam Fully implemented by the end of 2019 with savings, operations start in 2020 Luda Yana dam Fully implemented by the end of 2022, operations start in 2023 Studena dam Fully implemented by the end of 2021, operations start in 2022 Assumptions for the Optimistic Scenario Plovdivtsi dam As per the realistic Scenario; it was fully implemented by the end of 2019 Luda Yana dam Fully implemented by the end of 2021, operations start in 2022 Studena dam Fully implemented by the end of 2020, operations start in 2021

Table 6.8: Ex-post Economic analysis in EUR – Aggregated Realistic YEAR 2019 2020 2021 2022… ….2042 I. TOTAL INVESTMENT EUR k 62,304 3,512 9,379 5,867… - COSTS II. OPERATING COSTS EUR k 102 115 731 1,027 III. BENEFITS EUR k 1,941 1,974 8,096 15,255 III.1 Access to drinking water for the households in the Project area Real GDP growth % 3.3% 3.3% 3.3% 3.3% Benefiting population # 19,306 19,001 103,257 99,421 Persons per average household # 2.8 2.8 2.8 2.8 Benefiting households # 8,394 8,261 37,288 35,507 Unit benefit EUR 144 149 154 294 III.1 Access to drinking water EUR k 1,208 1,228 5,726 10,438 III.2 Savings from individual water supply Benefiting households # 8,394 8,261 8,131 12,428 Unit benefit EUR 87 90 93 178 III.2 Water savings EUR k 733 746 758 2,218 III.3 Benefits from avoided EUR k 0 0 1,611 2,599 loss

FREE CASH FLOW EUR k (62,304) (1,672) (7,519) 1,497 14,228 (III –(I+II) NPV (5% economic EUR k 51,371 discount rate) ERR 10.09%

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For each of the Scenarios a sensitivity analysis was performed, and results for the aggregated Scenarios are presented in the Table below: Variable Investment O&M Benefits Change +20% +20% -20% Realistic aggregated 9.65% 9.88% 7.45% Optimistic aggregated 10.26% 10.52% 7.94%

The switching values for the realistic scenarios are as follows: Scenario Switching values For Investment costs For O&M costs For Benefits Realistic Plovdivtsi dam NA +742% -36.5% Realistic Luda Yana dam +26% +91% -10% Realistic Studena dam +157% +399% -53% Realistic Aggregated +65% +440% -36%

16. The most sensitive variable is the “benefits”, which depend mainly on the population in the Project area. The results would switch if the population decrease with additional 36% to what is already assumed in the population dynamics of the realistic Scenarios. Based on the results above, and bearing in mind that the probability of such a decrease in the population during the Project horizon is not very likely to happen in the Project area, the risks of switching the aggregated Project results is considered low. 17. Financial analysis. The capacity of the operators (Panagyurishte WSSO for Luda Yana dam, Smolyan WSSO for Plovdivtsi and Pernik WSSO for Studena dam) were assessed with regard to the financial sustainability of the investments, based on the results from their approved Business Plans 2017- 2021, publicly available financial statements, including the Independent Auditor's Reports, where available), and the methodology of the Energy and Water Regulatory Commission (EWRC) for water tariff formation, applicable for all Project investments. WSSO Smolyan is a regional, 100% state owned operator. WSSO Pernik is also a regional operator; 51% state owned, and remaining 49% are owned by the municipalities located in Pernik district. WSSO Panagyurishte is a small municipal operator, which is under a procedure for merging with other eight WSSOs in Pazardzhik district to form a consolidated regional WSSO, following the national policy in the sector for consolidating smaller WSSOs. The WSSO sector in Bulgaria is regulated by the Energy and Water Regulatory Commission, and so are the WSS service tariffs, for which formation and regulation specific national legislation has been developed. 18. The price for Water Supply is defined on the basis of the corresponding O&M cost recovery, plus depreciation allowance and a small profit allowance for the WSSO. Following the requirements of the applicable legislation and EWRC the price levels are set in a way that they are socially affordable for the average households in the district. Therefore, partially depreciation allowance is currently included into the actual prices of the WSSO, but gradually it has been increasing unless full cost recovery is to be achieved in early 2030s in each one of the WSSOs. 19. This methodology is also used in calculating the Project incremental revenues necessary to cover the Project incremental O&M costs, where 6% depreciation allowance (for Luda Yana dam), 36% depreciation allowance (for Studena dam), and 1% depreciation allowance (for Plovdivtsi dam) are used, and for the sake of safety this depreciation allowance is kept constant during the Project horizon. Likewise,

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the typical for the respective WSSO profit allowance is also applied in constant terms. The revenues are adjusted for the financial collection rate, and as a result, the Project demonstrates sufficient sustainability during the Project horizon. Bearing in mind the regulatory mechanism that is in place, and the fact that historically all those WSSOs have not demonstrated affordability or sustainability problems, such are not expected as a result of the Project either. 20. Operational efficiency. The Project was approved in November 2, 2009, became effective April 30, 2010 and was expected to close December 31, 2015 with an implementation period of four years and eight months. The Project was restructured three times and the implementation period was extended to adjust for implementation delays. The Project closed December 31, 2019 with a nine year and eight month implementation period. However, it must be noted that a less than five-year implementation to assess feasibility, design and construct dams is faster than the industry standard and faster than could reasonably be expected for this Project. Construction of a generic timeline with standard periods for study and construction of a dam that does not face significant complication during design or implementation requires eight years. The generic timeline assumes technical and operational capacity are in place at the inception of the Project and follows the path chosen by most of the sub-projects where site investigations and CBA, required to update earlier feasibility studies, were procured separately from design studies and design studies are procured separately from works contractors. The generic timeline also allows for sufficient time for the site-investigation, CBA and design consultants to conduct the requisite studies and for the POE to review documents, acknowledging that geotechnical studies are often required and are often seasonal. It should also be noted that any technical-complications that arise during design or implementation, such as was the case in the Luda Yana and Studena, could require suspension of works, additional analyses, re-design, high-level decision making, stakeholder communication and application for revision of permitting – all of which would be a normal part of implementing a complex Project and would necessarily slow the implementation of the Project but are not necessarily a lack of operational efficiency. Therefore, while the implementation period exceeded the initial loan period, it was not far beyond what should have been expected for this Project.

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ANNEX 5. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS

TO Mr. FABRIZIO ZARCONE WORLD BANK RESIDENT REPRESENTATIVE FOR BULGARIA, THE CZECH REPUBLIC AND SLOVAKIA THE WORLD BANK SOFIA OFFICE INTERPRED/WORLD TRADE CENTER SOFIA Blvd. DRAGAN TSANKOV 36 SOFIA 1057

RE: Draft Municipal Infrastructure Development Project Implementation Completion Report

DEAR MR. ZARKONE,

A Draft Municipal Infrastructure Development Project (the Project) Implementation Completion Report prepared by the World Bank experts has been submitted to the Ministry of Regional Development and Public Works (MRDPW).

In relation to the report submitted to us, we believe that the Project has been successfully implemented by the Ministry of Regional Development and Public Works though some of its objectives have not been fully achieved by its end date. The fully successful completion of Component 2 - Preparation of Regional Master Plans for Water Supply and Sanitation for the entire territory of the Republic of Bulgaria proved to be extremely important for the next phase of investment planning in Bulgaria in the water supply and sanitation sector, namely for preparation of Regional feasibility studies. The first drinking water supply dam in the last thirty years - Plovdivtsi Dam, was completed within the framework of the project, while the rehabilitation of Studena Dam is in its last stage - a unique project, where all activities were carried out in a situation of a fully functioning drinking water supply system. The rehabilitation of the Drinking water

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treatment plant, which treats water from Studena Dam, was also in its final stages of completion by the end date of the Project. It should be noted that the construction of Luda Yana Dam created certain difficulties that were not that much of technical and financial nature but rather of administrative and legal one and were related to the economic issues and interrelations between the partners in the construction Consortium. Nevertheless, the intentions of the Ministry of Regional Development and Public Works are to complete Luda Yana Dam, since it is of crucial importance for drinking water supply of the population in the area.

Throughout the Project duration, adequate national co-financing was secured at each stage of its development. Many job opportunities were created under the Project for experts with specific expertise in the field of hydraulic engineering and water supply and sanitation and for unskilled workers, which provoking broad public interest in the entire WSS industry.

Considering the Project implementation, we should also note the fact that the originally planned completion date by December 31, 2015 has been quite unrealistic in view of the average duration of construction works in the field of hydraulic engineering, and given the activities upcoming at that time for investigation of previous construction works and preparation of development plans.

Difficulties were also encountered in carrying out the procedures for land acquisition not only in accordance with the requirements of the national legislation, but also in line with the safeguard policies of the World Bank. This resulted in taking much of the time of both the Project Management Unit and the technical assistance consultants. Precise setting of deadlines and the eventual simplification of applicable procedures would have contributed for timely Project implementation.

In conclusion, we would like to express our gratitude to the entire World Bank team for their assistance in the Project implementation, and especially to the experts at the WB Sofia office for their efficiency and dedication.

PETYA AVRAMOVA MINISTER Electronic signature format: .p7s

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ANNEX 6. SUPPORTING DOCUMENTS (IF ANY) 1. Project Appraisal Document (PAD), dated November 2, 2009. 2. Legal Agreement, dated February 1, 2010. 3. Implementation Status and Results Reports (numbers 1 – 21) 4. World Bank Supervision Aide Memoires 5. April 2011 Restructuring Paper 6. July 2014 Restructuring Paper 7. July 2016 Restructuring Paper 8. Bulgaria - Country Partnership Strategy FY07-09 Report No. 36146-BG 9. Bulgaria - Country Partnership Strategy FY011-13 Report No. 60604-BG 10. Bulgaria Country Partnership Framework Performance and Learning Review for the period FY17- 22, May 2 2019 Report No. 135421-BG 11. Bulgaria Country Partnership Framework FY17-22 Number: 396289B 12. Borrowers response to request for Project closure information, April 2020

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The World Bank Municipal Infrastructure Development (P099895)

ANNEX 7. Poverty Data for Municipalities Supported by the Project

Table 7.1. Municipalities supported under the Project and share of the poor38. Municipalities Supported Share of Poor39 Investment Support National poverty level: 22% Panagyurishte 15.8 Luda Yana subproject Pernik 17.0 Studena subproject Rudozem 25.1 Plovdivtsi subproject Madan 30.0 Plovdivtsi subproject Tryavana 28.4 Neikovtzi subproject Construction underway Pernik 17.0 Construction underway Plovdiv 17.9 Construction underway Ruse 19.1 Construction underway Silistra 19.1 Construction underway Sliven 35.1 Construction underway Smolyan 25.4 Construction underway Stara 17.6 Construction underway Vidin 29.7 Construction underway Varna 15.2 Construction underway Vratsa 28.2 Construction underway Yambol 22.7 Construction underway Zagora Construction underway Gabrovo 23.3 Feasibility studies underway Haskovo 22.8 Feasibility studies underway Pleven 22.2 Feasibility studies underway Sofia district 6.940 Feasibility studies underway Targovishte 31.2 Feasibility studies underway Veliko Tarnovo 20.6 Feasibility studies underway

*Poverty data not available for Kurdjali and Zagora municipalities, where Project-influenced investments in the sector

38 Source: World Bank, Global Poverty Working Group. Data are compiled from official government sources or are computed by World Bank staff using national ( i.e. country–specific ) poverty lines. 39 Data taken from the 2018 Publication Poverty Mapping in the Republic of Bulgaria. 40 Average value across 23 zones of Sofia district

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