Document of The World Bank Public Disclosure Authorized Report No. 13429-LV STAFF APPRAISAL REPORT REPUBLIC OF LATVIA Public Disclosure Authorized LIEPAJA ENVIRONMENTPROJECT NOVEMBER 8, 1994 Public Disclosure Authorized Natural Resources Management Division Public Disclosure Authorized Country Department IV Europe and Central Asia Region CURRENCY EQUIVALENTS as of August 1, 1994 Currency Unit = Latvian Lats (Ls.) I Lats = US $1.75 US $1 = Ls. 0.57 WEIGHTS AND MEASURES I metric ton = 1,000 kilograms = 2,205 pounds (Ibs) I kilometer (km) = 1,000 meters (m) = 3,281 feet (ft) 1 meter (m) = 3,281 feet (ft) 1 centimeter (cm) = 10 millimeters (mm) I millimeter (mm) = 0.1 centimeter (cm) I cubic meter (m3) = 35.3 cubic feet (cu ft) ABBREVIATIONS AND ACRONYMS BITS = Swedish Board for Investment and Technical Support BOD = Biological Oxygen Demand CEM = Country Economic Memorandum, published in an expanded form as: "Latvia: The Transition to a Market Economy" EMC = Environmental Management Component EU PHARE = European Union assistance program for Eastern Europe FRR = Financial Rate of Return FSU = Former Soviet Union GDP = Gross Domestic Product GOL = Government of Latvia HELCOM = Baltic Marine Environment Protection Commission (Helsinki Commission) IBRD = International Bank for Reconstruction and Development (World Bank) ICB = International Competitive Bidding ICZM = Integrated Coastal Zone Management IDA = International Development Association IS = International Shopping JCP = Baltic Sea Joint Comprehensive Environmental Action Programme LS = Local Shopping LWWE = Liepaja Water and Wastewater Enterprise MIS = Management Information System MOE = Ministry of Environment and Regional Development MOL = Municipality of Liepaja NEFCO = Nordic Environment Finance Corporation PIP = Project Implementation Plan PIU = Project Implementation Unit PPF = Project Preparation Facility WWF = World Wide Fund for Nature WWIC = Water and Wastewater Improvement Component LATVIAN FISCAL YEAR January I - December 31 REPUBLIC OF LATVIA LIEPAJA ENVIRONMENT PROJECT STAFF APPRAISAL REPORT Contents LOAN AND PROJECT SUMMARY ....................................... i I. BACKGROUND A. Country Context ........................................... 1 B. Sectoral Context ........................................... 1 C. The Project Area .......................................... 5 D. Bank Environment Strategy in Latvia, Past Experience and Rationale .... ..... 8 II. THE PROJECT A. Project Origin and Formulation .............. .... 11 B. Project Objectives ........................... 12 C. Participation by Other Organizations in Project Activities ................ 13 D. Project Components and Description ............................. 14 E. Cost Estimates . .......................................... 15 F. Project Financing Arrangements ................................ 16 G. Procurement ............................................. 17 H. Disbursements . .......................................... 19 l. Environmental Aspects . .................................... 20 III. PROJECT IMPLEMENTATION A. Organization and Management ............................. 21 B. Project Implementation Agencies ............................ 21 C. Project Supervision ............................ 23 D. Accounts and Audits ............................ 24 IV. MANAGEMENT OF FINANCIAL ASPECTS OF LIEPAJA WATER AND WASTEWATER ENTERPRISE A. Past Performance and Present Position . ............................ 25 B. Tariff Levels and Revenues ................................. 26 C. Billing and Collection .................................. 26 D. Accounting Policies and Audits ................................ 27 E. Future Financial Performance ................................. 28 F. Tariff Affordability . ................................. 29 G. Financial Rate of Return .............................. ... 29 V. PROJECT BENEFITS AND RISKS A. Project Benefits ............... 31 B. Project Risks ............... 32 VI. AGREEMENTS REACHED AND RECOMMENDATION A. Agreements Reached During Negotiations ....... ................... 34 B. Conditions of Effectiveness . ................................... 34 D. Recommendation ........................................ 35 LIST OF TABLES Table 1. Project Cost Summary by Project Comnponent Table 2. Disbursements by Year Table 2.1 Project Cost Summary by Project Component Table 2.2 Summarized Financing Plan Table 2.3 Procurement Arrangements Table 2.4 Disbursement by Year Table 4.1 Tariff Increases LIST OF ANNEXES Annex 1 Project Implementation Plan Annex 2 Action Plan Annex 3 Terms of Reference 3A Twinning Arrangements 3B Tariff Study Annex 4 Water and Wastewater Improvement Component - Environmental Aspects Annex 5 Environmental Data Sheet Annex 6 Review of Affordability MAP IBRD Map of Latvia no. 26165 This report is based on the findings of an Appraisal Mission in June 1994. Members of the Appraisal team included: Mr. Stephen F. Lintner (Task Manager), Ms. Sari Soderstrom (Deputy Task Manager/Economist), Mr. Hans Bergman (Economist, Swedish Ministry of Environment), Ms. Camilla Brown (Operations Analyst), Mr. Lars Eklund (Environmental Engineer, Swedish Environmental Protection Agency), Mr. Anders Halldin (Senior Environmental Specialist), Mr. Frederick Hasselback (Financial Economist), Mr. Jaakko Henttonen (Program Director, Finnish Ministry of Environment), Mr. Kari Homanen (Regional Environmental Specialist), Mr. Peter lanachkov (Legal Advisor), Mr. Inesis Kiskis (Regional Environmental Specialist), Ms. Solveig Nordstrom (Investment Officer, Nordic Environment Finance Corporation - NEFCO), Mr. Arturo Roa (Procurement Consultant), and Mr. Peteris Zilgalvis (Regional Environmental Specialist). Ms. Katherin Golitzen (ENVLW) served as the editor for the document. Technical assistance for preparation was provided by the World Bank, European Union PHARE Program and the World Wide Fund for Nature (WWF). Peer reviewers were Bernardo Gomez (ECIIN) and Carl Gustaf Lundin (ENVLW). The economic and financial analysis was reviewed by Brian Berman (EC4NR). The Division Chief is Geoffrey Fox (EC4NR) and the Deparment Director is Basil Kavalsky (EC4DR). REPUBLIC OF LATVIA LIEPAJA ENVIRONMENT PROJECT Loan and Project Summary Borrower: Republic of Latvia Beneficiaries: The Ministry of the Environment and Regional Development and the Liepaja Water and Wastewater Enterprise. IBRD Loan Amount: US $4.0 million equivalent. Financing Plan: Local Foreign Total -------- US $ million -------- IBRD, (loan) 0.72 3.28 4.00 NEFCO, (loan) 0.86 1.14 2.00 BITS, Sweden (grant) 0.12 6.38 6.50 Min. of Environment, Finland (grant) 2.00 2.00 Min. of Environment, Denmark (grant) 0.50 0.50 EU PHARE Program (grant) 0.12 0.12 Other Donors (grants) 0.80 0.80 Govermnent of Latvia 3.50 3.50 Municipality of Liepaja 1.75 1.75 TOTAL PROJECT COSTS 6.95 14.22 21.17 Terms: Seventeen years, including five years grace, at standard IBRD variable interest rate. Onlending Tenrs: The Ministry of Finance would provide the funds directly to the Liepaja Water and Wastewater Enterprises (LWWE). Project Objectives: The Project would: (a) reduce discharge of partially treated and untreated wastewater to the Baltic Sea; (b) restore and enhance the water quality in Liepaja, the northern portion of Lake Liepaja and adjacent recreational beaches on the Baltic Sea; (c) improve water supply and sanitation services in Liepaja; (d) improve the operational efficiency and management systems of the Liepaja Water and Wastewater Enterprise; and (e) promote environmentally sustainable management and development of the coastal zone and protected areas in and around the Liepaja, Ventspils and Talsi regions, including management of tourism development. ii Project Description: The proposed Project would be developed as an environmental management project for the Baltic coast of Latvia and would include funding for: (a) rehabilitation and expansion of the Liepaja water and wastewater system; (b) training and other institutional support, including twinning arrangements, to assist in establishing an autonomous and financially independent water and wastewater utility in Liepaja; (c) technical and financial support for the development and implementation of a comprehensive management plan for adjacent coastal areas and wetlands; and (d) support in the development of recreational and nature- based tourism in the Liepaja, Ventspils and Talsi regions. Project Benefits: The benefits of the WWIC would be derived from: (a) improved water quality through reduction of leakage of wastewater into the groundwater and reductions in discharges of untreated and partially treated wastewater, tiereby improving the status of the City Channel, Lake Liepaja and the Baltic Sea; (b) reductions in operating costs and maintenance requirements in the water and wastewater systems; and (c) improvement in the quality and reliability of the services through establishment of an autonomous water and wastewater utility. The benefits of the Environmental Management Component (EMC) would be derived from: (a) environmentally sound development of coastal and recreational areas in the Liepaja, Ventspils and Talsi regions; (b) enhanced management and improved public access for protected areas; and (c) demonstration of planning and implementation methods for regional coastal zone and tourism development programs. Environmental Aspects: An environmental review has been prepared, consistent with the provisions of the World Bank's Operational Directive 4.01, "Environmental Assessment" and the