Document of The World Bank Report No. 17268 TU STAFF APPRAISAL REPORT REPUBLIC OF TURKEY CESME - ALACATI WATER SUPPLY AND SEWERAGE PROJECT March 19, 1998 Infrastructure Sector Unit Europe and Central Asia Region CURRENCY EQUIVALENTS (as of December 1997) Currency Unit = Turkish Lira (TL) TLI = US$0.000005 US$1 = TL199.051 AVERAGE EXCHANGE RATES TL per US$1 CY 1993 CY 1994 CY 1995 CY 1996 CY 1997 10,965 29,770 45,678 81,048 151,239 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS CALBIR - Cesme - Alacati Union CAS - Country Assistance Strategy CPAR - Country Procurement Assessment Review CIF - Cost, Insurance and Freight DSI - State Hydraulic Agency EU - European Union GDRS - General Directorate of Rural Services GNP - Gross National Product IB - Iller Bank (Provinces Bank) ICB - International Competitive Bidding IRR - Internal Rate of Return IS - International Shopping LIBOR - London InterBank Rate MOE - Ministry of Environrnent MOT - Ministry of Tourism NBF - Not Bank Financed NCB - National Competitive Bidding NGO - Non Governmental Organization NS - National Shopping OED - Operations Evaluation Department PIS - Project Implementation Schedule PIU - Project Implementation Unit QCBS - Quality and Cost Based Selection SPO - State Planning Organization TURKEY - FISCAL YEAR January 1 - December 31 Vice President: Johannes Linn, ECAVP Country Director: Ajay Chhibber, ECCO6 Sector Director: Ricardo A. Halperin, ECSIN Sector Leader Walter Stottmann, ECSIN Responsible Staff: Bernardo Gomez (Principal Financial Analyst - Task Leader); Sudipto Sarkar (Operations Officer); Klas Ringskog (Principal Economist); and Ibrahim Sirer (Engineer) STAFF APPRAISAL REPORT REPUBLIC OF TURKEY CESME-ALACATI WATER SUPPLY AND SEWERAGE PROJECT CONTENTS EXECUTIVE LOAN AND PROJECT SUMMARY ...................................... i COUNTRY AND SECTOR BACKGROUND ..............1................... A. Country Profile .1 B. Municipal Govemance. 2 C. Water Supply and Sewerage Sector. 2 D. Government's Sector Objectives. 3 E. Bank's Previous Experience in the Sector in Turkey. 4 F. Bank's Sector Strategy. 5 G. Worldwide Bank Experience in the Sector and Lessons Lea rned 6 H. Water Supply & Sewerage Services in Cesme and Alacati 6 II. THE PROJECT ..10 A. Background .10 B. Project Development Objective & Components .10 C. Project Cost .11 D. Financing Plan .12 E. Environmental Issues .13 F. Project Implementation Schedule .14 G. Institutional Arrangements .15 H. Procurement .18 I. Loan Disbursements. .19 J. Accounts, Audit and Reporting .20 K. Supervision and Annual/Mid-term Review .21 III. FINANCE ..22 A. Financial Management and Performance .22 B. Projected Financial Performance .23 IV. PROJECT BENEFITS AND RISKS ..25 A. Project Benefits .25 B. Project Risks .28 V. AGREEMENTS AND RECOMMENDATIONS .32 TABLES 1. Project Cost Estimates .......................... 12 2. Project Financing Plan .......................... 13 3. Proposed Procurement Arrangements .......................... 19 4. Allocation of Bank Loan Proceeds .......................... 20 5. Estimated Loan Disbursements .......................... 20 6. Water Consumption and Tariffs .......................... 27 ANNEXES 1. Bank's Experience in Turkey's Water and Wastewater Sector 2. Project Implementation Plan 3. Project Cost 4. Environmental Analysis of Sea Water Discharge 5. Quarterly Loan Disbursement Estimates 6. Water and Sewerage Services - Financial Performance 7. Annual Water Demand 8. Water Supply and Sewerage Balance Sheet 9. Economic Analysis 10. Calculation of Average Incremental Cost of Consumption During Peak Bi-mester 11. Affordability of Tariffs by Residents 12. Cost Comparison of Wells and the CALBIR system MAPS 1. IBRD Map 29345: Wastewater Component 2. IBRD Map 29346: Water Supply Component CESME - ALACATI WATER SUPPLY AND SEWERAGE PROJECT Executive Loan and Project Summary Borrower and Implementing Agency: Cesme-Alacati Union (CALBIR) Total Project Cost: US$24.0 million IBRD Loan Amount: US$13.1 million Lending Terms: Seventeen years, including five years grace period, at the IBRD standard variable interest rate for LIBOR-based US Dollar Single Currency loan. Project Objectives: This project along with other Bank's lending and non-lending services to Turkey will: (i) bring about institutional development of the Union of municipalities to promote municipal services; (ii) increase efficiency of delivering infrastructure services through the introduction of a private operation; and (iii) improve water quality, sewerage service, and environmental conditions. The improved infrastructure services will help to promote the tourism industry in the area. Project Description: To achieve these objectives, the project would comprise the following components: (a) Institutional Development (21% of base cost) consisting of strengthening the CALBIR by: (i) setting up of the Union's technical and financial management systems, including auditing, staff training and office equipment; (ii) hiring and monitoring the performance of a private operator for improved water and sewerage services; (iii) providing technical assistance for a high level of project supervision; and (iv) technical assistance on environmental issues, including the protection of sea water quality. (b) Improving the Operational Condition of the Water Supply System (15% of base cost) consisting of: (i) hydrogeological investigation to increase water production of the wells in the Ildir area; district metering to reduce commercial loss; and chlorination for safer water quality; (ii) relocation of wells in the Ildir area and rehabilitation of the pumping stations, to improve their operational conditions; (iii) construction of a water barrier (about 500m long) to protect the aquifer in the Ildir area from sea water intrusion; (iv) provision of operational equipment to improve water and wastewater services; and (v) provision for urgent repairs and upgrading of the water supply system to reduce losses (Urgent Repairs and Upgrading). (c) Completion of Sewerage System (64% of base cost) (i) development and improvement of the sewerage network, consisting of the upgrading and expansion of the sewerage network through the construction of the main sewer pipes from the Cesme area to Ilica, and the construction of the sewerage networks including house- discharges in the areas of: Cesme, Alacati, and Ilica; (ii) acquisition and installation of mechanical and electrical equipment, and pipes for pumping stations (TM2, TM6, TM17, and TM18); and (iii) construction of a pre-treatment plant for the combined waste water flow from Cesme and Alacati to discharge into the sea through the already constructed sea outfall in Alacati. Project Benefits: The Project along with other Bank's lending and non-lending services identified as priority in the Bank's Country Assistance Strategy to Turkey (CAS of August 6, 1997) will create an institutionally strengthened Union of municipalities, introduce iii private sector participation in the provision of services, contribute to improved water and sewerage services, environmental conditions, and protect the tourism industry. The creation of the Cesme-Alacati Union is an important institutional achievement, with potential for replication in other small municipalities in Turkey, to help remove the diseconomies of scale present in each individual municipality. The Project would generate economic benefits because: (a) more water can be consumed through increased production, reduced losses, and improved quality; (b) the risk of water wastewater-related diseases will drop since water will be chlorinated; and (c) the environmental situation will improve since the present spills of raw septic sludge in areas adjacent to Ilica and Alacati will be discontinued. Environmental Impact: The project has been classified as a category 'B' project. An environmental review has been carried out consistent with the provisions of the World Bank's OD 4.01 Environmental Assessment and the applicable environmental procedures of the Government of the Republic of Turkey. The Project brings about positive environmental impacts due to increased efficiency in the use of water, improved water quality, and provisions for collecting and pre-treating wastewater. There are no significant environmental effects due to the discharge of wastewater from the sea outfall. Project Risks: There are four types of risks, all of which will influence the project's economic return. The four kinds of risk are institutional, technical, financial, and market. The institutional risks refer to the likelihood that no private operator will be attracted to bid for the management contract or that a private operator will abandon the contract. The risk that there will be no private operator bidding is judged to be small, given that potential bidders have already expressed interest in using the Cesme/Alacati management contract as a low-risk option of gaining a foothold in the potentially large Turkish water supply and wastewater market. In addition, the Project will cover the fixed and start-up costs of the operator through the Bank loan, creating an incentive for private sector participation. The institutional risk of putting the inexperienced CALBIR at a disadvantage of dealing with an experienced private operator should also be mitigated by hiring consultants to assist the CALBIR in supervising the private operator. The technical risks center around the possibility that water quality, water production and water consumption will not increase as iv projected. In order to mitigate this risk, investments aiming at increasing water quantity and quality are programmed early in the project implementation period, in 1998 and 1999. Further, system losses will be reduced through the investments for urgent repairs and upgrading of existing infrastructure. The financial risks comprise the failure of the CALBIR generating a sufficient level of cash to finance its share of investments, and the possible reluctance of consumers to paying the higher tariffs forecasted under the Project. The risk would materialize if consumers perceived water quality to be no better with the project. This risk should be mitigated through a public information campaign where the expected benefits of the safer and more plentiful future water supply and of the sewerage system are explained to all consumers. Such a campaign is planned by the mayors of Cesme and Alacati to coincide with the start-up of the Project. In addition there is a financial risk due to cost overruns. This risk, however, is not a major one as the cost estimates include adequate provisions for unforeseen events. In addition, there is no risk of a lumpy investment not being completed as all project investments are small and, thus, there is enough flexibility in the project design to delay some small investments if necessaiy without compromising the achievement of the project objectives. Also, the CALBIR should be in a position to finance any cost overruns with the cash surpluses expected for the year 2002 and thereafter. The market risk centers around the possibility that consumers will prefer to use private wells over the CALBIR system because of the cost of the services. For new customers, this is not a major risk as the cost of services is similar under the two alternatives. For the existing users, the CALBIR system will be more expensive and as a result there could be reluctance to give up the use of private wells. This risk will have to be mitigated by the implementation of a plan to phase out the use of private wells; many of which cannot guarantee a safe or sufficient water supply and also result in an inefficient use of water resources. v Project Cost: ----------------US$ Million--------------- Project Components Local Foreign Total % Foreign A. Institutional Capacity Building 1.0 2.5 3.5 70 B. Improvement of Water Supply Quality 1.3 1.3 2.6 50 C. Completion of Sewerage System 4.4 6.5 10.9 60 Base Cost 6.7 10.3 17.0 61 D. Physical Contingencies 0.7 1.0 1.7 59 E. Price Contingencies 0.9 1.3 2.2 59 Total Project Cost 8.3 12.6 20.9 60 F. Taxes & Duties 3.1 -- 3.1 0 Total Cost 11.4 12.6 24.0 53 Financing Plan: ----------------US$ Million---------------- Local Foreign Total % Total IBRD 0.4 12.7 13.1 54 Cesme Alacati Union 5.4 0.0 5.4 23 Ministry of Tourism 5.5 0.0 5.5 23 Total Financiers 11.3 12.7 24.0 100 Estimated Disbursements: Bank Fiscal Year FY99 FY00 FY01 FY02 FY03 Annual 1.0 2.4 3.6 3.5 2.6 Cumulative 1.0 3.4 7.0 10.5 13.1 Internal Rate of Return: 23% Poverty Category: n/a Project ID Number: TR-PA-8985 REPUBLIC OF TURKEY CESME-ALACATI WATER SUPPLY AND SEWERAGE STAFF APPRAISAL REPORT I. COUNTRY AND SECTOR BACKGROUND A. Country Profile 1.1 Turkey currently has a population of about 63 million which has grown at an average annual rate of about 2.3 percent during the last decade. About 60 percent of the total population lives in urban centers. The per capita income was about US$2,900 in 1997. Although there is little absolute poverty, inequality is high, with considerable differences in income between regions and between rural and urban areas. Most health indicators, including infant mortality rates, have shown substantial improvement over the same period, but regional disparities remain significant. 1.2 The recent performance of the Turkish economy has been mixed. Following the financial crisis of 1994, there has been a strong sustained recovery of growth. However, the public finances remain weak, and inflation and interest rates persist at very high levels. Real GNP increased by an estimated 6.5 percent in 1997 thanks largely to the 1996 customs union with the EU and the rapid expansion of business opportunities in the countries of the former Soviet Union. Exports increased by 15 percent in volume terms, helping to build a relatively comfortable level of foreign exchange reserves (4 months of imports). Although financial markets in Turkey were not too badly affected by the recent Asian currency crisis, the increasing volatility of the international environment highlights the vulnerability of the Turkish economy due to its long-standing financial and structural imbalances. The government has been working since late 1997 to introduce a package of measures aimed at correcting the fiscal deficit on a sustainable basis and reducing inflation. A number of steps have already been taken, including sizable cuts in agricultural subsidies. There appear to be improved prospects for an acceleration of the long-delayed privatization program as well. Reform legislation and other changes are also envisaged in critical areas such as social security, the tax system and banking sector. However, action has been delayed. It remains to be seen whether Turkey's coalition government can build the necessary consensus to accelerate and expand the pace and scope of economic adjustment and reform. 1.3 Tourism is an important element of Turkey's economy. According to Turkey's 1996-2000 Seventh Five-year Development Plan, the number of tourists increased from about 4.5 million in 1989 to about 9.7 million in 1997, generating net tourism revenue of about US$7.0 billion. Over the same period the tourism sector accounted for around 2.0% of total fixed capital investment, and total bed capacity increased from about 150,000 to about 300,000. Current plans call for a continuous expansion with the following targets for the year 2000: reaching a total bed capacity of about 800,000, attracting about 13 million visitors, and generating a net tourism revenue of 2 - about US$8.5 billion. However, as recognized by the Seventh Plan, achievement of these targets is put at risk by the persistence of severe deficiencies in tourism-related infrastructure and services. These, together with growing deterioration of environmental conditions in the main tourism host areas, risk the loss of Turkey's competitiveness vis-a-vis other Mediterranean countries. B. Municipal Governance 1.4 Turkey's system of municipal administration differs depending on the size of the jurisdictions. Currently, sixteen large cities of populations of 400,000 or more are administered, in accordance with the Metropolitan Law (Law 3030), under a regime of so-called 'fietropolitan municipalities" which provides for specific fiscal arrangements and mandates specific organizational structures for the delivery of local services. Medium-size cities and small towns with a population of at least 2,000 have a lesser degree of administrative autonomy and are administered in accordance with the Municipal Law (Law 1580). Localities of less than 2,000 inhabitants and rural areas have no administrative autonomy and come under the direct administration of the Provincial Governor. Municipal revenues are, to a large extent, derived from the redistribution of central government tax revenues channeled through Iller Bank and, to a lesser extent, from an array of taxes, fees and contributions defined by the Municipal Revenue Law (Law 2464). 1.5 All municipal authorities are elected for a mandate of five years. Municipalities are administered by a mayor who presides over an executive committee, as the executive body, and the municipal assembly, as the legislative body. Municipal administrations have little autonomy as they are constrained by a wide range of legal and administrative problems including: (a) lack of transparency of the role of central organizations like Iller Bank; (b) rigidity of the legislation on municipal administrative structure; (c) Government control of municipalities' authority to mobilize local resources; and (d) inappropriateness of salary structures which, in accordance with prevailing laws, are fixed at the central government level. C. Water Supply and Sewerage Sector 1.6 Throughout Turkey, service coverage for water supply is, on average, relatively high but quality of water delivered is often poor. Average consumption is about 80 liters/day/consumer (Vd/c). Sewerage coverage is low. The low sewerage coverage, together with and uncontrolled sewage discharges, often result in environmental hazards, especially in coastal areas. Water and sewerage service revenues typically only cover operating costs (though not always). Capital investments are funded on a grant basis by the central government through Iller Bank or occasionally from external sources. Authority for setting water and sewerage tariffs rests with municipal authorities. 1.7 Responsibility for water supply and sewerage in Turkey is shared by institutions of both the central and the local governments. At the central government level the six main institutions involved are: - 3 - * the State Planning Organization (SPO), which reviews and approves investment plans; * the State Hydraulic Agency (DSI), which administers national water resources, develops major water sources, and provides bulk water supply to cities with populations greater than 100,000; * the Bank of the Provinces (Iller Bank), which administers central government fiscal transfers to local governments and designs, funds, and executes works for water supply, sewerage, and solid waste collection and disposal for small cities; * the General Directorate of Rural Services (GDRS), which provides water supply and sanitation in rural areas; * the Ministry of Health, which sets standards of quality for water sources and water supply to consumers and monitors compliance; and D the Ministry of Environment (MOE), which monitors and enforces environmental legislation through its branch offices at the provincial government level. 1.8 In the sixteen largest cities designated as metropolitan municipalities (para. 1.4), water supply and sewerage services are the responsibility of autonomous utilities owned by the metropolitan and district municipalities. The first of these utilities, the Istanbul Water and Sewerage Company (ISKI) was established in 1981 at the time of the Bank approval of the loan for the third Istanbul Project. In smaller municipalities, water supply and sewerage services are provided by municipal departments. 1.9 Some municipalities which are too small to effectively operate services or carry out required investments have established multi- or single-purpose municipal Unions for the joint provision of services. Under Law 1580, Unions have the legal status and the prerogatives of a local authority in all matters concerning the delivery of the services for which they have been established; that is, they have full ownership of assets, are authorized to set tariffs, fees, and other charges related to service activities and collect corresponding revenues, and are allowed to borrow from domestic or external sources for investments to execute works. They are also are permitted to subcontract the provision of services to private operators through lease or management contracts or participate in joint ventures. D. Government's Sector Objectives 1.10 As outlined in Turkey's 1996-2000 Seventh Five-Year Development Plan, the objectives of the central government and its different agencies responsible for the water supply and sewerage sector are to: -4 - * satisfy the drinking water needs of the population not currently served; * promote the construction of sewerage networks and treatment facilities; and * promote the development of new management systems for water supply and sewerage operations, including the encouragement of private sector participation. 1.11 The above objectives are all the more challenging as, due to population growth, services will need to be provided to an estimated additional 16 million inhabitants over the next decade, while simultaneously improving the quality of the services and rehabilitating dilapidated infrastructure. The 10-year total investment program for the construction of new facilities and upgrading of existing urban water supply and sewerage systems and waste water treatment facilities during the 1990s requires financing resources of US$10.0 billion equivalent. 1.12 A government's policy objective is the preservation and improvement of the environment. Water pollution is an acute problem in urban and industrial zones in major metropolitan municipalities and is also beginning to become an issue in the tourism areas of the Aegean and Mediterranean coasts, which are the backbone of Turkey's tourism industry. There is a growing concern regarding the need to better protect groundwater and surface water resources, as well as to safeguard natural tourism attractions such as beaches and coastal sea waters. Legislation and regulations adopted in the 1980s and early 1990s have permitted the central government and the municipalities to take a more aggressive stance toward environmental protection. The enforcement of environmental laws and regulations is generally the responsibility of the municipalities and the provincial governments. While the enforcement capability of the provincial and local authorities is still developing, they are making progress in monitoring water quality, and in planning for substantial investments in water and sewerage facilities to mitigate incipient problems. In keeping with government's intention to eventually join the European Union (EU), and as a general target for water quality standards, the central government is seeking to progressively improve norms for effluent discharges to EU levels. E. Bank's Previous Experience in the Sector in Turkey 1.13 The Bank started assisting the water and sewerage sector in Turkey in 1972 through a combination of lending and non-lending services. The lending services are made up of nine loans amounting to US$1,046 million (Annex 1). The non-lending services are made up a variety of activities, including a sector report (1993), seminars on alternative institutional arrangements for the provision of water and sewerage services, and study tours to other countries to observe these arrangements in practice. 1.14 The results of the Bank's assistance, as measured by the rating of the five projects already closed, are very similar to the Bank-wide result of its interventions in the sector. Three projects were rated satisfactory, while two projects were rated unsatisfactory. The financial and institutional strengthening achievements under the five projects were below appraisal expectations. The two unsatisfactory projects did not achieve their physical targets. - 5 - 1.15 Three of the four ongoing projects have been in execution for several years, and the borrowers are making good progress toward the achievement of their physical objectives, although with delays. Progress in the institutional and financial areas is, as in the case of the closed loans, less satisfactory. The fourth ongoing project, Antalya Water and Sewerage Project, was designed taking into account the less than satisfactory experience with the municipal water and sewerage companies and thus introduces a major institutional change by incorporating the provision of services by a private firm rather than by a traditional water and sewerage company. The private firm, competitively selected, took over the water and sewerage systems in early 1997. 1.16 Some indicators of the less than satisfactory performance are the following: first, the water and sewerage companies have been unable to attain full cost recovery levels despite substantial real tariff increases. The main reason for this disappointing result is that the companies are generating revenues equivalent only to 40% to 60% of potential revenues at the prevailing tariff levels. The remaining revenues are lost as a consequence of water leakages in the system and of inadequate billing and collection practices. And, second, the financial relationships between the water and sewerage companies and other public sector entities lack transparency and discipline: the municipalities and many public sector agencies often do not pay their water bills, and the water companies reciprocate by not paying their financial obligations to the Government and other public sector agencies. 1.17 The net result of weaknesses like the ones above is that: (i) customers continue receiving unsatisfactory services due to the financial constraints and lack of commercial orientation of the water and sewerage companies; (ii) unfair treatment to customers paying their bills as they subsidize non-payers; and (iii) the fiscal implications of the provision of the services are not fully known. F. Bank's Sector Strategy 1.18 The Bank's strategy in the sector has changed emphasis over time. In the first operation in 1972 the focus was on soundly designed and well implemented physical facilities. Later, in the 1980s, increased attention was placed on institutional arrangements and, within this context, the Bank encouraged the Government to establish municipal water and sewerage utilities with the expectation that they would adopt a commercial orientation, and would be free from political interference. These expectations were not fully realized (para. 1.14). More recently, and as a way to overcome the weaknesses of the municipal water and sewerage companies, the Bank's strategy has sought to promote private participation in the provision of water and sanitation services (para. 1.15). In addition, the Bank's current strategy aims at providing support to sector development in medium and small municipalities. The proposed Project is consistent with current Bank's strategy as it promotes private sector participation in the provision of services and also provides assistance to small municipalities. -6- G. Worldwide Bank Experience in the Sector and Lessons Learned 1.19 Several OED reports as well as other Bank surveys have concluded that although water and sewerage projects have often been successful in achieving their physical objectives, the success in improving the institutional performance of the water utilities has been limited. Some of the reasons for the less than expected results were: * inadequate linkages between physical and institutional objectives; * lack of qualified management and financial autonomy of local utilities; * staff inexperience in project implementation and institutional problem solving; * project complexity; * lack of reliable information on production and consumption patterns that prevented the design of well-focused unaccounted-for-water reduction programs and adequate tariff structures; and * problems related to cost recovery and timely provision of counterpart funds. 1.20 These lessons have been incorporated into the design of the proposed project by: hiring a private firm to provide water and sewerage services on behalf of the CALBIR; * strengthening the institutional capacity of CALBIR to implement the Project and to hire and monitor the performance of the private provider of services; * securing strong support for the project from the local authorities, civil society and central government; * defining the scope of the project within the financial capability of the CALBIR; and * simplicity in project design and limiting the physical investments to critical infrastructure required to provide clean water, without rationing and improved sewerage service. H. Water Supply and Sewerage Services in Cesme and Alacati 1.21 Beneficiar Cities. Cesme and Alacati municipalities are located on Turkey's Aegean coast on the Cesme peninsula, about 80 km west of Izmir the capital of the Izmir Province and Turkey's third largest city. Cesme and Alacati, which until the 1960's were small fishing and agricultural communities, have become the main tourism centers of the Cesme peninsula, and have currently a total permanent resident population of about 20,000 (13,000 in Cesme and 7,000 in - 7 - Alacati). In the Summer period from May to October, about 80,000 temporary residents and tourists visit the area. This creates a need to design the infrastructure services in the area for a population size which is almost five times the size of the resident population. The resident population is projected to increase to about 50,000 by the year 2010 while the tourist and temporary summer population is expected to reach about 120,000, with a total peak population of 170,000 during the summer period. In the longer term, growth is expected to decrease rapidly with the area's population capacity peaking at about 220,000 due to restrictions on land development because of environmental considerations. 1.22 Water and Sewerage Services. Rapid growth in the Aegean coastal region in Turkey in the last two decades has transformed the Cesme-Alacati area from small fishing and agricultural communities into an important tourism center. This growth has resulted in rapidly increasing demand for infrastructure and municipal services, which has exceeded the limited financial and technical capacity of the municipalities to respond. 1.23 For many years, the only sources of water in the Cesme-Alacati area were private wells drilled by households, hotels, pensions and other businesses. The first municipal water supply system entered into operation less than twenty years ago (1979), but it had a short life, as the size of the water mains was insufficient to satisfy the growing water demand and had to be replaced by larger mains. The replacement of the mains and the expansion of the water system were started in 1989 by Iller Bank and, as of today, two thirds of the total resident and summer population is connected to the municipal water supply system (approximately 70% in Cesme, and 50% in Alacati). The remaining population (35,000 people) continues to obtain water from private wells. 1.24 The water supply services are unsatisfactory. First, there are frequent service interruptions and low pressures especially during the summer period when demand is at its peak. Second, water quality frequently does not meet Turkish standards because of high salinity and excessively high or low concentrations of chlorine with the resulting high odor and bad flavor, and the risk of bacteriological contamination. Third, system's operation and maintenance practices are unsatisfactory: the production from the main water source (Ildir wells) drops during periods of peak demand because the abstraction wells are not properly located; control devices for the pumping stations and reservoirs are lacking; there are no pressure zones; water chlorination procedures are inadequate; and the buildings for the pumping stations and their electrical and control panels are deteriorated. And, fourth, although most water connections are metered, physical and commercial water losses are high at around 68% of the production. 1.25 About 4% of the population is currently connected to the municipal sewerage system. Wastewater generated by about 80% of the population is discharged in septic tanks, and the remaining population have private sewage treatment plants. This situation is no longer sustainable as poorly constructed septic tanks and poorly operated private sewage treatment plants (43 in total) are infiltrating the groundwater and posing health risks to the population, particularly the users of private water wells. 1.26 The first municipal waterborne sewerage systems, covering limited areas, were installed by the Cesme and Alacati municipalities and Iller Bank in the early 1950's, and relatively minor extensions were made in the 1970's. Later, in 1987, Iller Bank developed plans for further - 8 - expansion of the sewerage system so as to meet increased demand for services resulting from the rapid growth of summer population. The contract for the construction of the new sewerage system was tendered in 1988 and it is expected to be completed in 1998. This contract includes: main collectors, civil works for pumping stations, two sewers to the treatment plants sites and two sea outfalls (one of the outfalls has been already constructed and the construction of the second one has been postponed until there is sufficient effluent). The contract, however, does not include essential elements to make the sewerage system operational. The treatment plant has not yet been constructed, the mechanical and electrical equipment for the pumping stations do not exist, and most of the secondary sewerage networks do not exist. 1.27 Plans for Further Developing Water and Sewerage Services. The plans of the Cesme and Alacati authorities to further develop the water and sewerage services between 1998 and 2003 are well conceived and should result in substantial improvements in both the coverage and the quality of the services. The plans include: * improving management and operations of the water and sewerage services; * improving the operational conditions of the current groundwater sources; * upgrading and expanding the water distribution network; * completing ongoing sewerage works, and adding the elements to make it operational (preliminary sewage treatment plant and mechanical and electrical equipment for the pumping stations); * expanding the sewerage network and rehabilitating its older sections; and * monitoring the water quality near the sea outfall already constructed. 1.28 The above plan has a total cost of about US$26.0 million and would be carried out with the help of Iller Bank and the proposed Bank-financed project. Iller Bank will invest about US$2 million in the completion of ongoing sewerage works and water distribution networks. The physical investment in the proposed Bank-financed project (US$24.0 million) would focus on: * providing equipment and materials for improving the operation of the water and sewerage systems; * completing the missing major elements of the sewerage system (preliminary treatment plant, and mechanical and electrical equipment for the pumping stations); and * constructing secondary sewerage networks. 1.29 On the institutional side the plan includes the establishment of a special entity, the Cesme- Alacati Union (CALBIR), with responsibility for providing water, sewerage and solid waste management services. The CALBIR, established by Decree 97/9933 of September 8, 1997 would have a small staff with responsibility for the implementation of the Bank-financed Project and for - 9 - overseeing the implementation of the investments to be carried out by Iller Bank. The CALBIR will hire a private firm to provide the water and sewerage services (para 2.19). The creation of the CALBIR, the introduction of the private operator, and the technical assistance provided to the CALBIR will help implement the water and wastewater service improvement plans in the Cesme- Alacati area. - 10- H. THE PROJECT A. Background 2.1 The Project was prepared by Cesme and Alacati municipalities and the MOT with assistance from consultants financed through a Japanese Grant (TF026610-TU) for the preparation of projects along the Turkish Aegean and Western Mediterranean coasts. Consultants financed through the Dutch Trust Fund assisted in the environmental analysis of the Project. The Project was discussed on several occasions in public meetings, with participation of the municipal councils, the general public, business leaders, academics, civil servants, and NGOs. B. Project Development Objective and Components 2.2 This project along with other Bank's lending and non-lending services to Turkey will: i) bring about institutional development in the Union of municipalities; ii) increase efficiency of delivering infrastructure services through the introduction of a private operation; and iii) improve water quality, sewerage service, and environmental conditions. The improved infrastructure services will help to promote the tourism industry in the area. The Project's objectives are consistent with the objectives of the Bank's Country Assistance Strategy of August 6, 1997. 2.3 The key indicators of development outcome are shown in para. 22 of the Project Implementation Guidelines (Annex 2). 2.4 The project development objectives are to be achieved through the following project components: (a) Institutional Development (21% of base cost) consisting of strengthening the CALBIR by: (i) setting up of the Union's technical and financial management systems, including auditing, staff training and office equipment; (ii) hiring and monitoring the performance of a private operator for improved water and sewerage services; (iii) providing technical assistance for a high level of project supervision; and (iv) providing technical assistance on environmental issues, including the protection of the sea water quality. (b) Improving the Operational Condition of the Water Supply System (15% of base cost) consisting of: (i) hydrogeological investigation to increase water production of the wells in the Ildir area; district metering to reduce commercial loss; and chlorination for safer water quality; (ii) relocation of wells in the Ildir area and rehabilitation of the pumping stations, to improve their operational conditions; (iii) construction of a water barrier (about 500m long) to protect the Ildir aquifer from sea water intrusion; (iv) provision of operational equipment to improve water and wastewater services; and (v) provision for urgent repairs and upgrading of the water supply system to reduce losses (Urgent Repairs and Upgrading). (c) Completion of Sewerage System (64% of base cost) (i) development and improvement of the sewerage network, consisting of the upgrading and expansion of the sewerage network through the construction of the main sewer pipes from the Cesme area to Ilica, and the construction of the sewerage networks including house-discharges in the areas of: Cesme, Alacati, and Ilica; (ii) acquisition and installation of mechanical and electrical equipment, and pipes for pumping stations (TM2, TM6, TM17, and TM18); and (iii) construction of a pre-treatment plant for the combined waste water flow from Cesme and Alacati to discharge into the sea through the already constructed sea outfall in Alacati. C. Project Cost 2.5 The proposed project is estimated to cost about US$24.0 million equivalent (including taxes and duties and excluding interest during construction) with a foreign component of about US$12.7 million equivalent or about 53% of total project cost. Cost estimates were prepared by the MOT with the help of consultants, on the basis of quantity estimates from preliminary design studies, and using unit prices from similar projects under implementation in Turkey. All project costs have been estimated in Turkish Lira on the basis of November 1997 prices and converted into US Dollar prices at the November 1997 exchange rate of TL190,000 per US$1. Physical contingencies (10%) have been added for unforeseen increases in quantities or supply costs. Price contingencies have been applied to base costs in accordance with the Bank's rates for expected - 12 - international price escalation as per O.P. 6.50 of November 1997, with the assumption that the exchange rate will adjust to the evolution of domestic prices and external inflation. 2.6 Summary cost estimates are shown in Table 1 below. A detailed description of project components and corresponding costs is shown in Annex 3. Table : Proect Cst~ Estimaties, Compionents Local Foreign Total Lal : Foreign Total % TL ~~TL- TLW US XSS ~USS Foreg Capacity Building 190,000 475,000 665,000 1.0 2.5 3.5 70 Water Supply 247,000 247,000 494,000 1.3 1.3 2.6 50 Sewerage 836,000 1,235,000 2,071,000 4.4 6.5 10.9 60 Base Cost 1,273,000 1,957,000 3,230,000 6.7 10.3 17.0 61 Physical Contingent. 133,000 190,000 323,000 0.7 1.0 .17 59 Price Contingencies 171,000 247,000 418,000 0.9 1.3 2.2 59 Total Project Cost 1,577,000 2,394,000 3,971,000 8.3 12.6 20.9 60 Taxes & Duties 589,000 0.0 589,000 3.1 0.0 3.1 0 Total Cost 2,166,000 2,394,000 4,560,000 11.4 12.6 24.0 53 D. Financing Plan 2.7 The proposed Bank loan of US$13.1 million equivalent would finance about 54% of the total project cost which is slightly higher than the foreign exchange component (53%). The Bank loan will be a LIBOR-based single currency loan in US Dollars, as shown in the financing plan (Annex 3). Counterpart funding would be provided for about US$5.5 million equivalent as a grant from MOT, and US$5.4 million equivalent by the CALBIR from its own resources (operating surpluses). The proposed financing sources and their respective amounts are summarized in Table 2 below. - 13 - Table 2: Project Financing Plan L_______________ (US$ M llion Equivalent) _ Source Local Foreign Total % Total IBRD 0.4 12.7 13.1 54 Union 5.5 0.0 5.5 23 MOT 5.4 0.0 5.4 23 TOTAL 11.3 12.7 24.0 100 2.8 Water investments, with a base cost amounting to US$2.6 million would be financed by the Bank loan (85%) and a grant from the MOT amounting to U S$5.4 million (Annex 3). The Bank loan would also finance 100% of the institutional capacity building component, with a base cost amounting to US$3.5 million. The financing of high priority water investments and institution capacity building with MOT grants and 85-100% loan financing would allow the CALBIR to promptly implement these project components, improve the quality of water services, strengthen its financial performance, and provide resources to monitor the quality of the water near the sea outfall. These improvements would, in turn, facilitate the implementation of the overall project and would provide the basis for further development of the services after completion of the Bank-financed project. 2.9 To ensure the timely availability of the required counterpart funds for the Project, agreement was reached at negotiations (para. 5.1 (a)) that the CALBIR will open, before December 31, 1998, a bank account with a deposit of US$100, 000 (approximately one quarter of estimated CALBIR 's counterpart to the Project and taxes in 1999) to be used only to finance its contribution to project investments. Before December 31, 1999 the CALBIR will increase the deposit in the local counterpart account to US$300,000. This increase would allow the financing of a higher level of investments starting in 2000. The Bank account should be replenished at the end of each quarter to the level of the first day of the quarter. E. Environmental Issues 2.10 For the purposes of O.D. 4.01 on Environmental Analysis, the Project has been classified as Category B, which requires limited environmental review to determine potential negative environmental impacts and mitigation measures as needed. Such a review has been carried out as part of project preparation. The Project will not raise any resettlement issues since the work on the water distribution is related to upgrading the existing infrastructure, provision of equipment, and relocating wells and constructing a barrier wall in areas which do not have settlements. For the wastewater system, most of the construction is already completed and for the proposed network, local construction procedures will be followed. As part of the Environmental Analysis, a detailed study was performed to ensure that the discharge of wastewater from the sea outfall did not affect International Waterways as defined in Bank's O.D. 7.50. The study concluded that due to the high dilution and low wastewater flow, the International Waterways would not be affected. As a result, there is no need to notify riparian states. Contractors will seek appropriate permits to ensure that the construction will not affect any archeological or historical site. Also during - 14 - construction, the contractors will be responsible for minimizing dust and noise and returning the site to its original condition. 2.11 The Project brings about positive environmental and health effects through the reduction of water losses in the distribution system, provision of better quality water, reliability of water supply, and wastewater collection and pre-treatment. The creation of the CALBIR and the services of the private sector will also ensure better institutional controls on environmental aspects of the Project. During implementation, as per the Project Implementation Guidelines (Annex 2), the CALBIR will be responsible to monitor residual chlorine and fecal coliform as indicators of water quality. 2.12 The effect of the pre-treated wastewater discharged into the sea through an existing sea outfall was extensively studied (Annex 4). Although, there will be some minimal local effect due to the discharge of the effluent, the Project does not threaten the marine ecology. Extensive modeling of the area has shown that relevant Turkish and EU standards regarding sea water outfall and water quality will be met. The effect to the marine ecology in and around the outfall is negligible due to the high level of dilution with magnitudes in order of 104 within a few kilometers of the outfall. In addition, the pre-treated wastewater would be chlorinated, if necessary, to reduce any bacteriological impacts. In the future, as the wastewater flow increases, options of treating the wastewater through land infiltration or upgrading the wastewater treatment and reusing the treated effluent will be considered. 2.13 It is important to monitor the quality of the seawater outfall and the outfall itself to ensure that the marine species are not being affected. During negotiations, agreement was reached on the monitoring program, as per the Project Implementation Guidelines (Annex 2). The CALBIR will be responsible for the monitoring which will include sampling the water for specific parameters, determining the physical condition of the outfall, and taking appropriate corrective actions, if required (para 5. 1 (b)). F. Project Implementation Schedule 2.14 According to the Project Implementation Guidelines, the proposed project would be executed over a five-year period, starting in June 1998 and ending in June 2003. The implementation period could be accelerated if the Union implements financial policies which allow it to generate funds in amounts exceeding the ones estimated at appraisal. The loan will close on December 31, 2003, six months after project completion. 2.15 The implementation schedule is guided by the need to generate economic benefits and financial revenue as quickly as possible. In this vein: an experienced private firm will be hired to provide water and sewerage services on behalf of the CALBIR; - 15 - * US$0.8 million from the Loan will be allocated for urgent repairs and upgrading of the water and sewerage systems so as to allow the private operator to improve the quality of the services in consultation with municipal authorities; * investments in water production and district metering are programmed early on to better satisfy water demand and provide data on which to base a leak detection program by the private operator; * the grout curtain will be constructed early on to reduce sharply the intrusion of sea water to the aquifer from which the wells draw water so that the chemical quality of the drinking water will improve. The hydrogeological investigations for the grant curtain is already well underway and the barrier is expected to be in place by 1999 to prevent sea water intrusion; * the chlorination system will be rehabilitated early on to ensure residual chlorine in the system and eliminate the risk of fecal contamination of drinking water; - production wells will be relocated early on to improve and boost the quality and quantity of the drinking water; * pumps will be purchased over the total project implementation period and installed to make the existing trunk wastewater system operational so that the wastewater from the Alacati town center and Ilica could be pumped away by the time of project completion; . the effect of the wastewater discharge through the sea outfall will be monitored to ensure that there are no negative environmental impacts due to the Project (Annex 4); and * septic tanks will be replaced by sanitary sewerage in the Cesme town center where the risk for contamination of groundwater and epidemics is the greatest. G. Institutional Arrangements 2.16 The Borrower and project implementation agency would be the CALBIR. At the Borrower's request the loan would be made at the Bank's standard rates for a LIBOR-based single currency loan in US Dollars. The term will be seventeen years with five years of grace. The CALBIR would bear the foreign exchange risk. The MOT contributions would be made through annual appropriations in accordance with Government budgetary procedures. 2.17 The CALBIR is responsible under its By-laws for the development, management and operation of water supply, wastewater and solid waste services in Cesme and Alacati. The CALBIR also has the authority to set tariffs for water and wastewater services. The CALBIR is administered by a Council comprised of the mayors of Cesme and Alacati, and by representatives of the Municipal Councils. One of the mayors is the president and chief executive officer of the - 16- CALBIR and the other is his/her deputy. The presidency rotates every year between the two mayors. The president is assisted by two full-time employees: the Secretary General and the Treasurer. The Secretary General and the Treasurer are expected to be appointed in June 1998 once the Council of Ministers approves the positions in March 1998 during the annual review of requests for new positions in public entities. In the meantime the CALBIR will be run by the President assisted by staff from the municipalities detached to the CALBIR. 2.18 In addition to the Secretary General, Treasurer, and support staff, the CALBIR has hired two individual consultants to assist in the management of the engineering and financial aspects of project implementation. The two consultants are financed by the Japanese grant (para. 2.1) until the closing date of the Grant at the end of 1998. After this date, the consultants would be financed out of the proceeds of the loan. 2.19 Private Operator for the Water Supply and Sewerage System. The CALBIR will sign a management contract with a qualified water supply and sewerage operator to provide services on its behalf under a performance-based remuneration. Expressions of interest from private operators were sought through the publication of a notice in the Development Forum (Issue of November 15, 1996) and Turkish media with satisfactory response from potential bidders. To ensure that the CALBIR take timely action for the hiring of the private operator, agreement was reached at negotiations (para. 5.1 (c)) that the CALBIR will select the private operator in accordance with the following schedule: Action Date * Inviting firms to prequalify July 31, 1998 * Inviting prequalifed firms to submit bids October 1, 1998 * Selecting the private firm February 1, 1999 D Signing the contract with the private firm March 31, 1999 2.20 The cost of the services of the private operator would be covered by the tariffs and other operational revenues of the water and sewerage services. The private operator will be paid on the basis of volume of water sold and the bill collection ratio. In addition, the Bank loan includes US$1.0 million to cover fees to the private operator during the project implementation period. This allocation is expected to enhance the incentives for private sector involvement in Cesme- Alacati. It would also facilitate to Cesme-Alacati the financing of the private operator's start-up costs, which are expected to be high relative to the revenue generation potential of the water and sewerage system during the initial years of the contract. The CALBIR payments to the operator will cover start-up costs, operating expenses, minor repairs, and profit margin. Investments in system's upgrading and expansion will be financed by the CALBIR and carried out in consultation and with the cooperation of the private firms providing the services. 2.21 Transitional Arrangements for Operating the Water Supply and Sewerage System. The Cesme and Alacati municipalities formally turned over the water supply and sewerage system to the CALBIR in February 1998, but the municipalities will continue operating the system under contract until the private operator takes over in March 1999. The water and sewerage revenues - 17 - will be deposited by the municipalities in the CALBIR's bank account, and the CALBIR will pay from this account the operating costs (such as personnel, energy and materials) incurred by the municipalities in providing the services. 2.22 Selecting the Private Operator and Managing the Contract. The CALBIR would seek assistance of consultants in the process of selecting and hiring the private operator and managing the resulting contract during the project implementation period. The consultant to assist the CALBIR in selecting and supervising the private operator is expected to be hired in April 1998. This consultant will be financed by the ongoing Japanese Grant during the initial months of the contract, and by the Bank loan starting in January 1999. This technical assistance will ensure the hiring of a qualified private operator under suitable institutional arrangements. Adequate supervision of the operator through institutional strengthening at CALBIR will be key to meeting the Project objectives. During negotiations, agreement was reached on the CALBIR employing, before loan effectiveness, the consultant which will help secure and supervise the private operator as a condition of effectiveness (para 5.2). 2.23 Implementing the Capital Expenditures Program. The CALBIR will be responsible for the implementation of the capital expenditures program under the Project. The CALBIR, however, will coordinate closely with the private operator to ensure that the sequencing and specific characteristics of the investments yield the highest possible return. 2.24 To ensure the sought cooperation, agreement was reached at negotiations (para. 5.1 (d)) that the CALBIR, after discussion and agreement with the private operator, would submit to the Bank for its review, not later than October 31 of each calendar year, the investment plan for the project for the next calendar year, together with a tentative investment plan until project completion. The annual investment plan for the utilization of the US$0.8 million allocated to investments in urgent repairs and upgrading of the water supply and sewerage system should be clearly separated from other project components. To ensure that the CALBIR benefits from the private operator experience in improving the services, agreement was reached at negotiations that the utilization of the loan allocation for urgent repairs and upgrading will start only after the contract with the private operator is executed (para. 5.1 (e)). 2.25 The CALBIR would also be responsible for organizing the mid-term review and for preparing and submitting quarterly reports on project implementation performance and other required documentation to the Bank and the Turkish authorities according to an agreed Reporting Plan included in the Project Implementation Guidelines (Annex 2). As part of Project implementation, the CALBIR will consult with the private operator to develop a plan for the protection of the aquifer which is currently being used. This is important since more water will be drawn from the Ildir Springs creating a need to reduce the consumption from the aquifer currently being used for efficient use of water resources in the area. - 18 - H. Procurement 2.26 All Bank-financed project elements would be procured in accordance with the Bank's Guidelines for Procurement (January 1995/revised January 1996, August 1996, and September 1997), including amendments as of the Loan signing date, and using World Bank Standard Bidding Documents. The detailed procurement plan is included in the Project Implementation Guidelines (Annex 2). Table 3 summarizes the project components, their estimated costs including taxes and duties, and proposed methods of procurement. A Project launch workshop is expected to be held before December 1998 to provide procurement training to the CALBIR. Procurement information will be included in the periodic progress implementation reports to be submitted by the CALBIR. 2.27 Works. An estimated US$13.0 million equivalent of water and sewerage contracts, consisting of the supply and installation of equipment for pumping stations, and for rehabilitation and extension of the networks would be procured through International Competitive Bidding (ICB), National Competitive Bidding (NCB) and Small Works. ICB procedures will be followed for contracts above US$3.5 million, whereas NCB procedures will be followed for contracts less than US$3.5 million up to an aggregate value of US$ 4,000,000. For contract less than $100,000, Bank's Small Works procedures will be followed which requires lumpsum fixed price contracts awarded on the basis of quotations from three qualified domestic contractors. The Small Works process will be applicable for urgent repairs and upgrading. 2.28 Goods. An estimated US$1.0 million equivalent of goods and equipment will be procured in the Project. These goods would comprise small diameter water and sewer pipes, water meters, chlorination equipment, construction materials, and office equipment. Goods for urgent repair and maintenance are also included in this category. For contracts below US$400,000 (aggregate not to exceed US$ 500,000) and US$100,000 (aggregate not to exceed US$ 500,000), International Shopping and National Shopping procedures will be followed, respectively. 2.29 Consultant Services. Consultant contracts worth US$4.3 million equivalent (see Annex 2, Attachment 3) would be executed under the project for implementation support, construction and private operator supervision, fixed fees for the private operator, and auditing. Procedures followed would be in accordance with the Guidelines for the Use of Consultants by World Bank Borrowers and the World Bank as Executing Agency (January 1997/revised September 1997) including amendments as of the Loan signing date. 2.30 Individual consultants for contracts less than $200,000 (Contract Cl) will be selected based on Section V of the Bank's Consultant Guidelines. A Quality and Cost Based Selection (QCBS) process will be followed for the consultants performing construction supervision (Contract C2). For auditing requirements under the Project, for contracts less than US$ 200,000, consultants will be selected through a Least Cost Process (Contract C4). The contract for the private operator (Contract C5), the consultant for supervision of the private operator (Contract C3) and for monitoring the sea outfall (Contract C7) will be selected through a QCBS process. It is likely that the same consultant assisting the CALBIR in securing the private operator will be employed to supervise the private operator during project implementation. - 19 - Table3: Iroposed4r n Ar-a-ge-e:- $S millD eqiae) I a:: _Pret l t Procurement Method NF Toa ._ - _ - - _ _ _ _ - : _ . _ - _ _ _ _ _ _ _ _ - _ : - - _ _ _ . _ . I C : : N CJ - - er b) C st. 1. Works Water Supply d) - 0.33 0.66 1.10 2.09 (0.28) (0.56) (0.0) (0.84) Sewerage 7.96 4.06 - 4.00 16.02 _ (4.64) (2.37) (0.0) (7.01) 2. Goods Water Supply d) 0.95 0.95 (0.81) (0.81) Office Equipment 0.20 0.20 (0.17) (0.17) 3. Consultancies Consultant Services e) 4.27 0.47 4.74 (4.27) (4.27) TOTAL 7.96 4.39 6.08 5.57 24.00 (4.64) (2.65) (5.81) (0.0) (13.10) NOTE: Figures in parentheses are the respective amounts financed by the Bank Loan a) Cost estimates include taxes & duties b) Includes National Shopping, International Shopping and Consultancy d) Includes urgent repairs and upgrading (US$460,000). e) Includes fixed fees for private operator. 2.31 Bank's Prior Review. Bank's prior review of procurement documents would be required for: a) all ICB contracts; b) first NCB contract and all NCB contracts greater than US$1.0 million; c) first Small Works; and d) consultant contracts with firms and individual consultant contracts exceeding US$50,000. All other contracts for lesser amount would be subject to ex- post review. L. Loan Disbursements 2.32 The proceeds of the proposed loan would be disbursed, net of taxes and duties, against the categories shown below (Table 4). Loan withdrawal applications would be prepared and fully documented by the CALBIR. Withdrawals on the loan can be made on the basis of statement of expenditures for: a) goods and works not exceeding US$100,000 equivalent; b) contracts with consulting firms not exceeding US$100,000 equivalent; and c) contracts with individual consultants not exceeding US$50,000 equivalent. Documentation supporting these expenditures would be retained by CALBIR during the whole project implementation period and it would be audited by external auditors (para. 2.35). - 20 - .......... Aloctin fB Bk Loan Proceeds; ~~~~~~~~~. . . . . . . 0 . . . . E Category Amount - t f :hendint .. ........... .. .. .........(.S.. .to ..e : Financed Civil Works - Water Supply 0.4 85% of expenditures Civil Works - Sewerage 7.3 61% of expenditures Civil Works - Urgent Repairs and Upgrading 0.4 85% of expenditures Goods - Water Supply 0.6 100% of foreign or ex-factory costs and 85% of other local expenditures Goods - Urgent Repairs and Upgrading 0.4 100% of foreign or ex-factory costs and 85% of other local : expenditures Consulting Services 4.0 100% of expenditures TOTAL 13.1 2.33 A Special Account would be opened by CALBIR in a commercial bank acceptable to the Bank, or in the Central Bank, with an authorized allocation of US$1.0 million (approximately four months of estimated disbursements at the peak period). The authorized allocation will be limited to an amount equivalent to US$500,000 until the aggregate amount of withdrawals from the loan plus the total of outstanding commitments equals or exceeds US$2,000,000 equivalent. Applications for replenishment of the Special Account would be submitted every three months, or when two third of the amount deposited has been withdrawn, which ever occurs first. AU applications for direct payment or special commitments must be for an amount not less than 20% of the authorized allocation to the Special Account. Monthly bank statements of the Special Account would be attached to all replenishment applications. 2.34 Estimated disbursements by Bank fiscal year are summarized in Table 5 below. The schedule of Quarterly Disbursements is shown in Annex 5. Table:5 EstimatedULoan Disbursement.; WorldBanik FiscalYear FY99 Y00 FY01 FY02M .FY03 Annual 1.0 2.4 3.6 3.5 2.6 Cumulative 1.0 3.4 7.0 10.5 13.1 J. Accounts, Audit and Reporting 2.35 The Project Implementation Guidelines (para. 20) includes details of the accounting system, financial controls and reports to be implemented by the CALBIR with the help of a - 21 - financial consultant (para. 2.18) hired under the Project. The CALBIR's accounts, including the project account and the Special Account, will be audited annually by private independent auditors acceptable to the Bank. The audit reports will contain a separate opinion on the use of Statement of Expenditures, when applicable. Audit reports in English will be forwarded to the Bank not later than six months after the end of each fiscal year. 2.36 The CALBIR will provide quarterly and yearly reports to the Bank on the progress of project implementation. These reports should include a summary of implementation status, the financial statements of the CALBIR and the project, including the Special Account, and performance indicators data. Included in these reports will also be procurement information such as: (a) contract award information; (b) revised cost estimates for individual contracts and the total project cost; (c) revised implementation schedule; and (d) compliance with aggregate limits on specified methods of procurement. The Project Implementation Guidelines includes the chart of accounts to be used and models of the reports to be submitted to the Bank. 2.37 The CALBIR will prepare an Implementation Completion Report and submit it to the Bank within six months after the closing date of the loan. K. Supervision and Annual/Mid-term Review 2.38 About 20 staff/weeks per year of staff input will be required over the life of the project. Supervision staff should include a water sector specialist, a financial analyst and private sector development specialist. Project implementation reviews, involving the Bank, the CALBIR and the private operator will be held before October 31 of each year to assess progress and problems in pursuing project objectives and to consider any corrective actions. During negotiations, agreement was reached that the CALBIR will submit to the Bank before October 31 of each year the following: a) the tariff policy to be implemented in the followingyear; b) plans and schedule for project completion; and c) corrective actions necessary to secure timely completion of the project (para 5.1I()). During negotiations an agreement was reached on conducting a Mid-term Review of project implementation to be held in mid-2000 to examine implementation progress, all major problems encountered, the continued relevance of the project as appraised and any changes to be proposed to the CALBIR, Government and the Bank (para. 5.] ). - 22 - HI. FINANCE A. Financial Management and Performance 3.1 Financial Management. As up to now the water and sewerage services have been directly provided by Cesme and Alacati municipalities, the financial management of the services has been part of the overall municipal financial management. The revenues from the provision of the services are deposited in the general municipal cash and bank accounts. The expenditures are financed from these accounts. The revenues and expenses are controlled through the municipal budgetary system on cash rather than accrual basis. The budgetary system includes specific accounts for water and sewerage related revenues and expenditures. 3.2 Financial Performance. In line with prevailing financing practices in small and medium sized municipalities in Turkey, the water and sewerage services in Cesme-Alacati have generated revenues sufficient to cover their cash expenditures and also surpluses to help support the overall municipal budget. The services are not expected to generate funds for investments as these are traditionally financed through grants and concessional loans from DSI and Iller Bank. Presently, the tariff' level for the CALBIR is around US$0.74/m3 and the officials of the CALBIR are planning to revise the tariffs to levels around US$1.00/m3 by the middle of 1998. This will help to keep up with inflation and generate a surplus required for financing initial operating costs related to paying the private operator. The cash surpluses in recent years for the combined Cesme- Alacati system has been as follows: 1995 - US$244,000; 1996 - US$32,000; and 1997- US$296,000 (Annex 6). In the case of Cesme, this budgetary support from the water and sewerage services was equivalent to 7% of municipal revenues in 1995, and 12% in 1997. The support in 1996 was less significant (less than 1%). In Alacati, the budgetary support was equivalent to 5% in 1995, 2% in 1996; and 1% in 1997. 3.3 It should be noted, however, that the operational surpluses of the Cesme-Alacati water supply and sewerage services are due to a large extent to the practice of maintaining the current expenditures at a minimal technical level to keep operations ongoing and limiting maintenance to indispensable interventions. This policy has been one of the factors contributing to the unsatisfactory quality of the services. Due to the deficiencies in the operation and maintenance of the water and sewerage system as well as inadequate commercial practices, the municipalities are not fully benefiting from the revenue generating potential of the services. In fact, only about 32% of the water produced is billed as a result of physical losses, water provided free of charge, and inadequate consumption metering (see para 1.24). l Tariffs refer to average equivalent water tariff, calculated on the basis of all CALBIR's operational revenues divided by the volume of water sold. - 23 - B. Projected Financial Performance 3.4 In the proposed Project, there will be a fundamental change in the financial policies regarding the provision of services by the CALBIR. For the first time, the CALBIR will take on a loan (the proposed Bank loan) and also will make a contribution towards investments. To support this change in policy, the CALBIR plans to take specific measures regarding improving operations and increasing tariffs. 3.5 Operations. The private operator is expected to increase the percentage of water billed against production, reduce physical losses, and improve commercial practices - mainly through improved bill collection. Improvements in the operational efficiency are shown in Annex 7. It is planned that by the year 2005, the losses, as a percentage of production, will be reduced from the current level of 68% to about 44%. The annual volume of water billed is expected to increase from the current level of 1.2 million m3 to about 3.2 million in3. This realistic increase can be attributed to increased production and connections and a reduction in losses. The per capita consumption of water was assumed to be constant, which is most likely a conservative estimate given that better service and water quality in the future would encourage increased consumption, in spite of higher tariffs (para 4.9). The number of water connections is expected to increase from around 15,000 in 1997 to around 24,000 in 2003. During the same period, the wastewater connections are expected to increase from less than 1,000 to around 4,000. If the per capita consumption increases along with the projected increase in connections, funds available to the CALBIR will be more than the projected values. 3.6 Tariffs To assure financial viability of the Project, the average yearly tariff levels should reach around US$1.2/m3 in 1999 and US$1.50/m3 in 2000. Thereafter, the tariff should peak around US$1.60/m3 by the year 2001 in current prices (Annex 8). The planned tariff levels are realistic and affordable (para 4.11), but would require political willingness for the rates to be in effect. This willingness has been expressed by the Cesme and Alacati officials. During negotiations agreement was reached on the CALBIR implementing monthly tariff adjustments to ensure that tariffs are sufficient to cover: (a) payments to the private operator; (b) the required contribution to project investments; (c) debt service payments; and (d) CALBIR operating costs (para 5.1(g)). The Consumer Price Index or any other price index satisfactory to the Bank should be used as a basis for the adjustment. 3.7 Financial Projections. Through the above operational and financial measures, the revenues of around US$0.9 million in 1997 are expected to increase gradually to US$1.3 million in 1998; US$2.6 million in 2000; and US$4.4 million by the year 2003. The financial projections are shown in Annex 8. The increase in revenues and operating expenses between 1998 and 2003 is around 3.7 and 1.4 times, respectively. The operating expenses do not rise as much since the incremental cost of producing additional water is not as high and it is expected that the private operator will seek efficient operations to minimize costs. 3.8 The projections show that there will be an increasing operational surplus needed by CALBIR to service debts and finance their portion of the investments. The year end cash in hand for CALBIR is expected to increase from the 1997 level of US$82,000 to about US$226,000 by - 24 - the year 2003, which is the last year of the project. The tariff levels and efficient improvements envisaged under the Project should enable the CALBIR to continue carrying out investments in system expansion and upgrading in addition to those under the Project. In fact, it is estimated that the CALBIR would be able to contribute around US$4.2 million for investments other than the Project between 2002 and 2005. The balance sheet shows that the current level of indebtedness of CALBIR is low allowing them to take on loans from the Bank and Iller Bank, resulting in an acceptable maximum debt to asset ratio of around 40% in 2002. 3.9 Monitoring: To monitor progress in improvement in operations the following parameters will be used: i) tariffs; ii) number of water and wastewater connections; iii) volume of water billed; iv) working ratio defined as operating expenses divided by revenues; and v) cost per cubic meter of water billed. The monitoring goals are specified in the Project Implementation Guidelines (Annex 2). - 25 - IV. PROJECT BENEFITS AND RISKS A. Project Benefits 4.1 The project would generate economic benefits because: (a) more water can be consumed since the production capacity will be increased and the quality improved; (b) the risk of water and wastewater-related diseases will drop since water will be chlorinated, and rationing will cease from 1999 onwards; and (c) the environmental situation will improve since the present spills of raw septic sludge in areas adjacent to Ilica and Alacati will be discontinued. .4.2 The economic evaluation analyzes first whether project demand is satisfied at the least economic cost. Second, an analysis is made whether discounted net economic benefits are greater than zero. And third, a calculation is made of the tariff level that reflect the economic costs of consumption. 4.3 Least Cost Analysis. The project components represent the least-cost solution since the focus is to make the minimum complementary investments to pump wastewater through an existing but unused trunk sewer, and to upgrade existing water supply facilities. At present there is water rationing during the period of peak consumption. As a consequence, the water distribution system is periodically empty during the period of peak consumption and runs the risk of being contaminated by fecal seepage from the ubiquitous septic tanks. This health hazard could at any one time trigger a water and sanitation-related epidemic. The consequences of such an epidemic would likely be considerable in human suffering and economic losses. 4.4 The project is then designed to restore water supply and wastewater service to safe and reliable standards through boosting water production in order to provide continuous service from the summer of 1999 onwards, and to make operational the existing trunk sewer and submarine outfall which have never been used. The investments are all small. For instance, the project will simply make the sewerage system operational through installing the ancillary pumps and preliminary treatment. The balance between water demand and supply will be restored through: (i) better commercial management, including tariffs that approach economic efficiency; (ii) adding more wells to extract water from the Ildir aquifer; and (iii) reducing the amount of water that is lost through leakage. - 26 - 4.5 Cost-Benefit Analysis. The cost-benefit analysis compares the level of economic benefits and costs with and without the project. Benefits with the project are assumed to rise because the present rationing will cease and because the expected improvements in water quality will stimulate demand from the public water supply at the expense of demand from private wells, many of which cannot guarantee a safe or sufficient water supply. The annual consumption from private wells is expected to decline to 33,000 m3 by 2005 compared to the 1997 consumption level of 735,000 m3 (Annex 7). 4.6 Costs with the project are those project investments and the operations and maintenance costs. Benefits without the project are assumed to decrease gradually from their present level since system breakdowns are likely to become more frequent and since the deteriorating quality of service will increase consumer resistance to paying the same tariff in constant prices. 4.7 The incremental benefits and costs are shown in Annex 9. Costs and benefits are expressed in constant prices. Prices for foreign exchange and unskilled labor have not been adjusted since market prices are estimated to reflect economic prices well. Import duties and domestic taxes have been excluded in the economic analysis. The economic rate-of-return is calculated as 23% over the 1998-2020 period. The rate-of-return is high given the nature of the project, which is to take maximum advantage of existing unused facilities through better operations and maintenance, and to improve the quality of service through contracting with an efficient private operator. 4.8 Economic Tariffs. The tariffs for water supply and wastewater should reflect the long- run marginal cost (LRMC) of service to consumers. The LRMC is usually approximated by the average incremental cost (AIC) i.e. the ratio between discounted incremental costs and the discounted incremental water consumption. A discount rate of 10% was used for the calculations. The AIC for the project can be calculated to about US$1.01 per cubic meter, allocating costs to the annual incremental consumption (Annex 10). This average AIC fails, however, to account for the substantial seasonal variations in demand. Due to the influx of tourists and apartment owners, the consumption rate during the peak bimester, July-August, is double the annual average. The principle to signaling costs through tariffs dictates that all capital expansion costs be allocated to the peak bimester consumption. In addition, the average operations and maintenance costs should be added. During the rest of the year off-peak consumption should in this fashion be charged only the unit operations and maintenance costs. The peak bimester cost has been computed as US$4.71 per cubic meter (US$4.56 for incremental capacity cost and US$0.15 for incremental operation and maintenance cost). The marginal incremental cost during the rest of the year would then be US$0.15 per cubic meter. 4.9 As in practice, such extreme variations between tariffs during the peak bimester and the off-peak bimesters would likely meet with considerable opposition a second best solution should be sought. In this context agreement was reached at negotiations that the CALBIR will implement starting in 2000, peak July-August tariffs that are two times the tariffs, charged in preceding June month (para. 5.1 (h)). The planned tariffs are shown below (Table 6). - 27 - ___________Water Cnuponan.dTairiffs Y.ear Pota Voame eak Bim-es-ter .T .S blled Consw0ptionP (118$/rn) (,,O Wi&) (10 iOO3 Yearly . Peak Tariff, Off-peak. .___ ..._ . . - - . . - : - - .Average July-August red of year. 1998 1,321 220 1.00 1.00 1.00 1999 1,467 435 1.20 1.20 1.20 2000 1,759 525 1.50 2.31 1.16 2001 2,098 626 1.60 2.46 1.23 2002 2,482 745 1.60 2.46 1.23 2003 2,756 827 1.60 2.46 1.23 2004 3,021 911 1.60 2.46 1.23 2005 3,270 992 1.60 2.46 1.23 4.10 Peak and off-peak tariffs have also a positive distributional effect since they shift the relative tariff burden away from the all-year-round population that consumes a higher share of the water during off-peak bimesters and on to the higher-income peak bimester population that accounts for the major share of the water consumed during the two-month peak. 4.11 Affordability of Tariff. The affordability of the recommended peak tariff can be estimated from data on household income. Average per capita consumption has been estimated at 97 liters per day, and average household size at 4 persons. The affordability test has been made for the year 2001 when the tariff will have reached the maximum level of an annual average of US$1.60 per cubic meter. It has been assumed that the average household income levels are similar to those in Antalya for which a 1992 household income survey exists. 4.12 In order to make the prices of 2001 comparable to the 1992 income data in the survey it has been assumed that average household income will have grown by 2% per year and that dollar inflation will average 3%. A rule-of-thumb is that the combined water supply and wastewater bill should not be allowed to exceed 4% of the household income. The first quintile of the resident population, representing the poorest group, is below this 4% rule of thumb (Annex 11). A notable feature of the tariff is that it represents equivalent tariff (i.e. total water and wastewater revenues divided by the volume of water sold). Thus, if a household is not connected to the wastewater system, its water tariffs will be lower than what is shown in Table 6. Since the poorer section of the Cesme-Alacati area are not connected to the wastewater system, the tariffs will be lesser than the ones used to calculate affordability (Annex 11). This implies that in the year 2001 the first quintile will pay about 4.0% of their household income on water tariffs, making the investments under the Project more affordable for the residents. To alleviate the financial burden to the residents resulting from peak bimester tariffs, the CALBIR would provide the option of billing the residents at a rate which will average the payment over the six bimester billing cycles of the year. 4.13 In reality, it is likely that the water and wastewater bill's share of household income will be lower than shown in Annex 11 for the lowest income quintile and higher for the higher income quintiles. This follows from the fact that per capita water consumption increases with income. As - 28 - a result, the lowest income households may probably consume less than 97 liters per capita and day. In contrast, the highest income quintile will likely consume more than 97 liters per capita and day. The net result will be to make the combined water supply and wastewater bill more affordable for the lowest income quintile. 4.14 Fiscal Impact. The project financing plan includes a US$5.5 million government grant through the MOT (para. 2.7). This grant is part of the government's overall program to ensure the sustainability of the economic benefits from tourism. It also takes into account the externalities related to the project health benefits. The government grant for the project is partially offset by the taxes (US$3.1 million) to be paid by the CALBIR as a result of project investments. Another important indirect and long term fiscal impact of the project is the shift from investments carried out and financed by Iller Bank and DSI to investments directly financed by the water and sewerage services internal cash generation. 4.15 The Project through the establishment of the CALBIR impacts also the municipal finances, as the surpluses to be generated by the services will be reinvested in the same services rather than going to the general cash of the municipalities (para 3.2). This change in the allocation of resources will require the municipalities to make some downward adjustments in their expenditures. Although the adjustments are manageable, it is important to ensure that the municipal authorities have the right incentives to make the necessary adjustments rather than to borrow from the CALBIR. To this effect, agreement was reached at negotiations that the CALBIR will not provide any loans to other entities, including the municipalities, or incur additional long term borrowings without consultation with the Bank (para. 5. 1(i)). 4.16 The present value of quantified externalities discounted at 10% is US$2.2 million, which correspond to import duties and domestic.taxes. This is the only difference between the net economic and financial benefits as: (i) prices for foreign exchange and unskilled labor have not been adjusted (para. 4.7); and (ii) other project externalities such as health benefits have not been quantified. B. Project Risks 4.17 There are four types of project risks, all of which will influence the project's economic return. The four risks are institutional, technical, financial, and market. 4.18 Institutional Risks. The institutional risks refer to the likelihood that no private operator will be attracted to bid for the management contract or that a private operator will abandon the contract. Either situation will present a serious dilemma since at present the Cesme and Alacati systems are poorly managed and the CALBIR has no ready institutional alternative to an aborted private operator contract. However, the risk that there will be no private operator bidding is judged to be small, given that potential bidders have already expressed interest in using the Cesme/Alacati management contract as a low-risk option of gaining a foothold in the potentially large Turkish water supply and wastewater market. In addition, the Project will cover the fixed and start-up costs of the operator through the Bank loan, creating an incentive for private sector participation (para. 2.20). - 29 - 4.19 The risk of the CALBIR suffering the negative consequences from a management contractor abandoning a contract should be mitigated by requiring the management contractor to keep careful technical, operating and commercial data bases on the Cesme and Alacati systems and share data continuously with the CALBIR or its designated representatives. In this way, the CALBIR will reduce the risk that it will be at a competitive disadvantage in negotiations with a management contractor that might use an information asymmetry in renegotiating a contract in his own favor. Similarly, the CALBIR would be in a better position to rebid competitively a management contract or to bid competitively a concession in case it has an up-to-date system statistics. 4.20 The institutional risk of putting the inexperienced CALBIR at a disadvantage of dealing with an experienced private operator should also be mitigated by hiring consultants to assist the CALBIR in the dealings with the Private Operator. 4.21 Technical Risks. The technical risks center around the possibility that water quality, water production and water consumption will not increase as projected. The risk that water quality will not improve as projected depends on how fast the salt water intrusion into the Ildir aquifer can be reduced. This hinges on the effectiveness of the project grout curtain in sealing off the flow from the sea into the aquifer. The decision to install a grout curtain was taken after extensive hydrogeological studies by DSI. In order to mitigate this risk, the grout curtain is programmed early in the project period, in 1998. The works should be finished well before the 1999 peak bimester which is when production from additional wells should be increased. In case improvements in water quality lag expectations the possibility should be considered to use the waters in the existing Alacati surface reservoir and mix them with the Ildir groundwater in order to reduce salinity. However, using the Alacati reservoir is only the second-best solution since it would require the completion and operation of a potable water treatment plant currently under construction. This would take longer than the investments under the Project. 4.22 A second type of technical risk is the possible failure of the private operator to improve service to a point where consumers will switch from using their private wells to using the public water supply. This risk is mitigated through the process of selecting a highly qualified and reliable operator, by establishing adequate performance criteria under the contract, and ensuring adequate monitoring of the contractor's performance. Further, system losses will be reduced through investments for urgent repairs and upgrading envisaged under the Project (para. 2.4). 4.23 Market Risks. The market risk centers around the possibility that consumers will prefer to use private wells over the CALBIR system because of the cost of the services. For new customers, this is not a major risk as the cost of services is similar, a net present value of around $ 1,100, under the two alternatives2 (Annex 12). Moreover, the high investment costs and the burden of installation and maintenance of the wells, will make connection to the CALBIR system more attractive. A total of 11, 000 new users are expected to join the CALBIR system between 1998 and 2005. For the 15,000 existing users, the CALBIR system will be more expensive (net 2The cost for wells assumes an average investment cost of around $ 900 for wells 25 to 50 meters deep and an annual operating cost of US$50 per household. An economic life of 15 years for a well and a 10% discount factor has been assumed for the calculations. - 30 - present value of around US$ 842 for wells compared to US$ 1,144 for the CALBIR system) and as a result there could be reluctance to give up the use of private wells (Annex 12). This risk will have to be mitigated by DSI, the Ministry of Health, and the municipalities. On grounds of efficient use of water resources, DSI has the authority to close illegal wells, which are prevalent in the region. The Ministry of Health and the municipalities can also close down the wells on public health grounds. To ensure that necessary steps are taken by the relevant agencies, during negotiations an agreement was reached on the CALBIR preparing by November 30, 1998 a plan to phase-out the use of private wells (para 5. 1(j)). 4.24 Sensitivity Tests of Technical Risks on the Economic Rate-of-Return. The technical risks, if they materialize, will reduce the level of water consumption. In order to test for the sensitivity of the rate-of-return calculation to this scenario, water consumption with the project has been capped at 4.5 million cubic meters per year from the year 2001 and onwards implying consumer resistance to consuming poor-quality water or inability to consume more water because of production and distribution problems. The effect of this capping would be to reduce the economic-rate-of-return from 23% in the base scenario to 15%. 4.25 Financial Risks. The financial risks comprise the failure of generating a sufficient level of internal cash generation to enable the CALBIR to finance its share of investments, and the possible reluctance of consumers to paying the higher tariffs forecast under the project. These two risks are interrelated since the level of internal cash generation depends directly on the success of increasing tariffs. The risk would materialize if consumers perceived water quality to be no better with the project. This risk should be mitigated through a public information campaign where the expected benefits of the safer and more plentiful future water supply and sewerage system are explained to all consumers. Such a campaign is planned by the mayors of Cesme and Alacati to coincide with the start-up of the project. In addition there is a financial risk due to cost overruns. This risk, however, is not a major one as the cost estimates include adequate provisions for unforeseen events. In addition, there is no risk of a lumpy investment not being completed as all project investments are small and, thus, there is enough flexibility in the project design to delay some small investments if necessary without compromising the achievement of the project objectives. Also, the CALBIR should be in a position to finance any cost overruns with the cash surpluses expected for the year 2002 and thereafter (para. 3.8). 4.26 The financial risk of lagging water sales should also be mitigated by having the Ministry of Tourism and the Bank loan finance 100% of the early works that aim at boosting water production and improving water quality. These works are critical to the success of ending rationing during the peak bimester July-August in 2000. For the same reason the peak bimester tariff is recommended to be in effect for the peak bimester in 2000 since the sharply higher tariff should help reduce wasteful consumption and bring about balance between supply and demand. The reasons for implementing a peak tariff should also be carefully explained in the public information campaign. The better quality and service of the public water supply are also expected to enable higher tariffs to be charged. If a household is connected to the sewerage system, CALBIR has the authority to charge for wastewater even if a private well is being used as a water source. This will also facilitate the charge of higher tariffs -31 - 4.27 In order to test for the sensitivity of the rate-of-return calculation to the financial risks, tariffs under this scenario have been capped at US$1.20 per cubic meter from the year 1999 onwards and throughout the project period. Under these conditions the project's economic rate- of-return would drop from 23% in the base scenario to 14%. More seriously, such reduced tariffs would severely reduce the project's internal cash generation and make the assumed financing plan unfeasible. - 32 - V. AGREEMENTS AND RECOMMENDATIONS 5.1 During negotiations, agreement was reached on the following: (a) the CALBIR will open a bank account to deposit local counterpart funding to the project (para. 2.9); (b) the CALBIR will monitor water quality near the sea outfall which will include sampling the water for specific parameters, determining the physical condition of the outfall, and taking appropriate corrective actions, if required as specified in the Project Implementation Guidelines (para 2.13); (c) the CALBIR will hire the private operator of the water and sewerage system, according to the proposed schedule (para. 2.19); (d) the CALBIR will implement the investment plan for each calendar year after discussion and agreement with the private operator (para. 2.24); (e) the CALBIR will utilize the loan allocation for urgent repairs and upgrading only after the contract with the private operator is executed (para. 2.24); (f) the CALBIR will furnish to the Bank before October 31 of each year a report on the following: a) the tariff policy to be implemented in the following year; b) plans and schedule for project completion; and c) corrective actions necessary to secure timely completion of the project (para 2.38). The CALBIR will conduct a Mid-term Review of project implementation in mid-2000 to examine implementation progress, all major problems encountered, the continued relevance of the project as appraised and any changes to be proposed to the Government and the Bank (para. 2.38); (g) the CALBIR will put into effect tariff adjustments to ensure that the tariffs and other operating revenues are sufficient to cover (i) payments to the private operator; (ii) the required contribution to investment; (iii) debt service payments; and (iv) CALBIR operating costs (para 3.6); (h) the CALBIR will implement peak-bimester tariffs in July and August that are two times the preceding June tariffs (para. 4.9); (i) the CALBIR will not extend loans to other entities, including the municipalities, not incur additional long term borrowings without consultation with the Bank (para. 4.15); and (j) the CALBIR will prepare a plan on the phase-out of use of private wells (para. 4.23). - 33 - 5.2 As a condition of effectiveness, the CALBIR will employ the consultants who will help secure the private operator (para. 2.22). 5.3 With the above assurances and conditions, the project is suitable for a Bank loan of US$13.1 million to the CALBIR, repayable in seventeen years, including five years of grace, at the standard variable interest rate for LIBOR-based US Dollars Single Currency loans. p:\turkey\infra\cesme-ws\3lenn\post-neg.doc March 19, 1998 Annex 1 Bank's Experience in Turkey's Water and Wastewater Sector 844-TU 37.0 1972 Expansion of water supply sytem for Istanbul Istanbul Water Supply 2159-TU 88.1 1982 Expansion of sewerage services, sewerage Istanbul Sewerage treatment and disposal for Istanbul 2537-TU 9.2 1985 Preparation studies for the Cukurova Urban Cukurova Region Urban Development Project Engineering Project 2818-TU 184.0 1987 Water supply, sewerage, and sewage Izmir Water Supply and treatment facilities for Izmir Sewerage Project 2819-TU 120.0 1987 Urban infrastructure, improvement of Cukurova Urban Development policies, institutional and financing Project arrangements for the Cukurova region 2888-TU 218.0 1987 Additional water supply, sewerage and Istanbul Water Supply and sewage treatment facilities for Istanbul Sewerage Project 3151-TU 173.0 1989 Sewerage and sewage treatment works for Ankara Sewerage Project Ankara 3565-TU 117.0 1993 Water supply, sewerage including sewage Bursa Water and Sanitation treatment (Water supply and sewerage component) 38936-TU 100.0 1995 Expansion of water supply, wastewater, and Antalya Water Supply and drainage system, institutional strenghtening, Sanitation Project private operator participation, and changes in municipal financial policies for Antalya Total 1,046.3 - Annex 2 Page 1 of 9 Cesme - Alacati Water Supply and Sewerage Project Project Implementation Guidelines March 19, 1998 Annex 2 Page 2 of 9 Cesme - Alacati Water Supply and Sewerage Project Project Implementation Guidelines TABLE OF CONTENTS The Project The Borrower and Implementing Agency Implementation Arrangements Project Implementation Schedule Financial Management and Auditing Monitoring and Evaluation LIST OF ATTACHMENTS 1. Making the CALBIR Operative 2. Timetable for Hiring Consultants to the CALBIR Contract a Private Operator 3. Terms-of Reference for Consultants for the Contracting with an Operator 4. Monitoring Sea Water Quality at Sea Outfall 5. Procurement Plan 6. Chart of Accounts and Reporting System Annex 2 Page 3 of 9 Cesme -Alacati - Water Supply and Sewerage Project Project Implementation Guidelines The Project Project Objectives: The Project has three objectives: * To build an effective institution, the CALBI, that would contract with a Private Operator for the operation and maintenance of the water supply and wastewater system in Cesme and Alacati; * to make the minimum investments that would enable the substantial underutilized water and wastewater infrastructure of past years to yield an economic and financial return; and * to price water supply and wastewater services along principles of peak seasonal pricing and at the same time alleviate the financial burden on low-income consumers. 2. The Project would: * increase annual water production from the present 3.9 million cubic meters to 5.6 million cubic meters by the year 2003; - make the drinking water bacteriologically safe through chlorination; * reduce the present high salinity of the drinking water through the construction of a grout curtain and relocation of some production wells; * rehabilitate sections of the existing water supply system; * increase the coverage of sanitary sewerage from the present 4 percent to 15 percent by the year 2003; and * and put the presently unused sanitary sewerage pumping scheme into operation through the purchase and installation of pumps. 3. The project cost is estimated at US$24.0 million, of which US$2.6 million for water supply; US$10.9 million for wastewater, and the balance of US$10.5 million for design and supervision consultancy, physical and price contingencies, and audit. The World Bank would finance US$13.1 million, the Ministry of Tourism US$5.5 million, the CALBIR, US$5.4 million. Annex 2 Page 4 of 9 4. Economic Analysis: The economic benefits of the project are measured by the value of the incremental revenue of the project. In addition, although they have not been quantified, the project would reduce the risks of water and wastewater related epidemics that could endanger the important summer tourism. The economic rate-of-return is estimated at 23 percent over the 1998-2020 period. 5. Tariffs The CALBIR will implement seasonal peak prices for the July-August peak period when consumption is double the annual average monthly consumption. In this way, off- peak tariffs could be reduced and in this way alleviate the financial burden of the lower-income, all-year-round population. Tariffs proposed are equivalent tariffs which is the ratio of revenues (from water and wastewater services, connection charge, contribution to investments, etc.) and volume of water sold. For instance, the proposed peak bimester tariff for the year 2001 is estimated at US$2.46 per cubic meter, the off-peak season tariff at US$1.23 per cubic meter, which yields an annual average of US$1.60 per cubic meter. The peak bimester tariff is still below the Average Incremental Cost of the peak bimester consumption which has been calculated to be US$4.71 per cubic meter over the 1998-2020 period. 6. Project Risks. The project risks are institutional, technical, and financial. The institutional risks refer to the likelihood that no private operator will be attracted to bid for the management contract or that a private operator will abandon the contract. The risk that there will be no private operator bidding is judged to be small, given that potential bidders have already expressed interest in using the Cesme/Alacati management contract as a low-risk option of gaining a foothold in the potentially large Turkish water supply and wastewater market. In addition, the Project will cover the fixed and start-up costs of the operator through the Bank loan, creating an incentive for private sector participation. The risk of the CALBIR suffering the negative consequences from a management contractor abandoning a contract should be mitigated by requiring the management contractor to keep careful technical, operating and commercial data bases on the water and wastewater systems and share data continuously with the CALBIR. The institutional risk of putting the inexperienced CALBIR at a disadvantage of dealing with an experienced private operator should also be mitigated by hiring consultants to assist the CALBIR in supervising the private operator. 7. The technical risks center around the possibility that water quality, water production and water consumption will not increase as projected. In order to mitigate this risk, investments aiming at increasing water quantity and quality are programmed early in the project implementation period, in 1998 and 1999. Further, system losses will be reduced through the fund for urgent repairs and maintenance. These measures to improve quality and increase quantity of water will be re-evaluated when the private operator is in place in 1999. Additional measures may be taken after consulting with the private operator, who will be responsible for improving the service. 8. The financial risks comprise the failure of the CALBIR generating a sufficient level of cash to enable it to finance its share of investments, and the possible reluctance of consumers to paying the higher tariffs forecast under the project. These two risks are interrelated since the level of internal cash generation depends directly on the success of increasing tariffs. The risk would Annex 2 Page 5 of 9 materialize if consumers perceived water quality to be no better with the project. This risk should be mitigated through a public information campaign where the expected benefits of the safer and more plentiful future water supply and of the sewerage system are explained to all consumers. Such a campaign is planned by the mayors of Cesme and Alacati to coincide with the start-up of the project. In addition there is a financial risk due to cost overruns. This risk, however, is not a major one as the cost estimates include adequate provisions for unforeseen events. In addition, there is no risk of a lumpy investment not being completed as all project investments are small and, thus, there is enough flexibility in the project design to delay some small investments if necessary without compromising the achievement of the project objectives. Also, the CALBIR should be in a position to finance any cost overruns with the cash surpluses expected for the year 2002 and thereafter. Borrower and Implementing Agency 9. The borrower and project implementing agency would be the CALBIR established by Decree of the Council of Ministers (No. 97/9933 of September 08, 1997). 10. In addition to its regular staff (Secretary General, Treasurer and support staff), the CALBIR has hired consultants to assist in the engineering and financial aspects of project implementation. Implementation Arrangements 11. Under its By-laws, the CALBIR is responsible for the development, management and operation of water supply, wastewater and solid waste services in Cesme and Alacati. The CALBIR will contract with a private operator the provision of water supply and sewerage services and will concentrate its administrative and technical resources on: (i) managing the contract with the private operator and monitoring its performance; (ii) carrying out the necessary investments through contractors; and (iii) supervising investment implementation through consultants. 12. Private Operator for the Water Supply and Sewerage System. The CALBIR will sign a management contract with a qualified water supply and sewerage operator to provide services on behalf of the CALBIR under a performance-based remuneration. The contract is expected to be signed in March 1999. 13. Selecting the Private Operator. The CALBIR would seek assistance of consultants in the process of hiring the private operator. The timetable for hiring the consultants and the draft terms of reference for the assignment are shown in Attachment 1. This consultant will be financed by the ongoing Japanese grant until the closing date of December 31, 1998. After this date, the consultants will be financed from the Bank loan. 14. Managing the Contract with the Private Operator. The CALBIR will seek assistance from consultants to manage the contract with the private operator and to supervise the performance during the first two years of the contract. For this assistance, the CALBIR may Annex 2 Page 6 of 9 decide to hire on a sole source basis, the consultant firm assisting in the selection of the private operator. This consultant is expected to be financed through technical assistance under the proposed Bank loan. 15. Transitional Arrangements for Operating the System. The Cesme and Alacati municipalities formally turned over the water supply and sewerage system to the CALBIR in February 1998, but the municipalities will continue operating the system under contract until the private operator takes over in March 1999. The water and sewerage revenues will be deposited by the municipalities in the CALBIR's bank account, and the CALBIR will pay from this account the costs (such as personnel, energy and materials) incurred by the municipalities in providing the services. 16. Implementing the Capital Expenditures Program. The CALBIR will be responsible for the implementation of the capital expenditures program under the Project. In implementing the program, the CALBIR will coordinate closely with the private operator to ensure that the sequencing and specific characteristics of the investments yield the highest possible return. Options to delegate to the private operator the execution of investments under the Project will be considered during the bidding for the private operator. 17. Investments in Urgent Repairs and Upgrading. The Project includes an allocation of US$1.0 million for urgent repairs and upgrading of the water supply and sewerage system. This amount is scheduled to be used in a three-year period subject to previous agreement among the CALBIR, the private operator and the Bank on annual investment programs. The implementation of this project component could be accelerated by agreement among the three parties. Project Implementation Schedule 18. The implementation schedule is guided by the need to generate economic benefits and financial revenue as quickly as possible. In this vein, investments in water production and district metering are programmed early to better satisfy water demand and provide data on which to base the leak detection program; a grout curtain will be constructed to reduce sharply the intrusion of sea water to the aquifer from which the wells draw water so that the chemical quality of the drinking water will improve; the chlorination system will be rehabilitated to ensure residual chlorine in the system and eliminate the risk of fecal contamination of drinking water; production wells will be relocated early on to improve and boost the quality and quantity of the drinking water in order to improve services; pumps will be purchased and installed to make the existing trunk wastewater system operational so that the wastewater from the Alacati town center and Ilica could be pumped away; the effect of the wastewater discharge through the sea outfall monitored (Attachment 2); and septic tanks will be replaced by sanitary sewerage in the Cesme town center where the risk for contamination of groundwater and epidemics is the greatest. 19. During project implementation, the CALBIR will submit to the Bank before October 31 of each year the following: a) the tariff policy to be implemented the next year; . b) plans and schedule for project completion; and c) corrective actions necessary to secure timely completion of the project. In addition, a mid-term review of the project implementation will be held in mid- Annex 2 Page 7 of 9 2000 to examine implementation progress, address problems encountered, the continued relevance of the project as appraised and address any changes. The procurement plan of the project is shown in Attachment 3. Financial Management, Accounting, and Auditing 20. The financial consultant to be hired by the CALBIR will assist in the detailed design and implementation of the accounting system for the CALBIR and for the Project, on the basis of the attached draft chart of accounts and reporting system (Attachment 4). The Bank procedures (OP/BP 10.02) on financial management will be followed to ensure that adequate financial management systems are in place. 21. The accounts of the CALBIR and of the Project and the Special Account will be audited annually by private independent auditors. The CALBIR will hire by September 30, 1998 private auditors acceptable to the Bank to audit its 1998-2000 accounts, and by June 30, 2000 auditors for its 2001-2003 accounts. Monitoring and Evaluation 22. The parameters to be used to monitor and evaluate the project are summarized below. The projections reflect the increased efficiency in the delivery of water and wastewater services. The CALBIR will be responsible for the monitoring and reporting of information. Corrective actions, as required, will be discussed with the Bank prior to its implementation. The development objectives of the project will be monitored through indicators which are summarized below. .Deve O e. - - V.-. l -a of Ven . :at.-i Institutional Strengthening * legal creation of the CALBIR already created * CALBIR staffed and operational reports from the CALBIR Provision of Private Services * private operator in place contract signed * private operator meeting contract periodic reports from performance standards CALBIR Improving efficiency in water * performance Indicators (below) Periodic reports and wastewater services Annex 2 Page 8 of 9 PERFORMANCE INDICATORS INDICATORS Actual Projections 1997 1998 1999 2000 2001 2002 2003 Water produced in Ildir wells 3.9 4.0 4.0 4.3 4.7 5.2 5.5 (million mi3) Conductivity (micro mhos/cm) TBD TBD TBD TBD TBD TBD TBD Residual Chlorine' (mg/l) 0 0.5 1.0 1.0 1.0 1.0 1.0 Fecal Coliform2 (FC/100 ml) poS TBD 0 0 0 0 0 Fecal Coliform3 (FC/100 ml) NA TBD 200 200 200 200 200 Water Billed (million m3) 1.3 1.3 1.5 1.8 2.1 2.5 2.8 Loss (% of production) 68% 67% 63% 59% 56% 53% 50% Number of water connections 15,625 16,158 17,159 18,921 20,781 22,757 24,080 Number of wastewater connections 862 891 923 2,388 2,470 2,556 3,969 Bill Collection (% of water billed) 85 85 85 87 90 92 95 Tariff Levels 4 ($/m3) Peak bi-mester (July-August) 0.74 1.00 1.20 2.31 2.46 2.46 2.46 Off-peak 0.74 1.00 1.20 1.16 1.23 1.23 1.23 Yearly average 0.74 1.00 1.20 1.50 1.60 1.60 1.60 Operating Expense/unit of water 0.52 0.52 0.50 0.45 0.42 0.39 0.40 billed ($/m3) Working Ratio5 0.71 0.52 0.41 0.30 0.26 0.24 0.23 TBD - To be determined by December 1999 1 In the distribution system and inside dwellings 2 In dwellings and public buildings 3 At beaches 4Equivalent tariff which is calculated by dividing total operating revenues (water and sewerage tariffs, connection fees, contribution to investments, etc.) by water billed. The tariff is shown in current prices. 5 Operating Expenses divided by revenues. The low working ratio is due to the need to establish tariffs high enough to cover contribution to investments and debt service. Annex 2 Page 9 of 9 23. As part of Project Implementation, the CALBIR in consultation with the private operator will develop a plan by December 1999 to protect the existing aquifer to ensure efficient use of water resources from the aquifer and Ilder Springs. The plan will be implemented starting in 2000. Annex 2 Attachment I Page lof 4 REPUBLIC OF TURKEY CESME-ALACATI WATER SUPPLY AND WASTEWATER PROJECT Draft Terms of Reference for Consultancy Services For Preparing and Procuring a Contract For the Provision of Water Supply and Wastewater Services BACKGROUND 1. Tourism is developing rapidly in the eastern Mediterranean basin. Turkey's tourism development is relatively new compared to other Mediterranean countries, which provides an opportunity to make precautions against potential negative environmental effects of tourism. The Cesme-Alacati Water Supply and Sewerage Project is one of the priority projects on the Aegean coastline. The Cesme-Alacati municipalities' resident population numbers about 20,000 (13,000 and 7,000, respectively). During the peak months of July/August the population rises to about 100,000 due to local and foreign tourists. 2. The feasibility studies for the Cesme-Alacati Project were recently completed and the first stage of the Project is expected to be carried out in the 1998-2002 period, and funded by the CALBIR of the Cesme-Alacati municipalities (CALBIR), the World Bank, and the Ministry of Tourism. The cost of the consultancy services to be procured under these terms of reference will be financed by a Japanese Grant to the Turkish Government. CURRENT EXPERIENCE IN WATER AND SANITATION SERVICES 3. The Cesme and Alacati municipalities are adjacent. They use the same water supply source and will share a wastewater collection and disposal system. The water supply and sanitation services were until late 1997 provided separately by the two municipalities. Both services are rated unsatisfactory by both the municipal authorities and the customers. In view of this situation, the municipal authorities decided to create a single local authority (the CALBIR) to provide water supply and wastewater services. This cooperation would allow the municipalities to benefit from economies-of-scale in the provision of services. INSTITUTIONAL ARRANGEMENTS 4. MunicilDal CALBIR The CALBIR was approved by the Council of Ministers on September 08, 1997 and published in the Official Gazette on September 30, 1997. The CALBIR was established in accordance with the provisions of Articles 133-148 of Municipal Law 1580. Under the CALBIR By-laws, the CALBIR is responsible for the development, management and operation of water supply, wastewater and solid waste services in Cesme and Alacati. Annex 2 Attachment 1 Page 2of 4 5. The CALBIR has decided to contract with a private operator the provision of water supply and wastewater services, and concentrate on financing new investments, and employing contractors and consultants to undertake and supervise the necessary investments. 6. Ministry of Tourism (MOT) MOT played an important role in preparing the Cesme-Alacati project in coordination with the municipal authorities. MOT will continue to play a central role during the duration of this consultant study and will continue to advise the CALBIR. 7. Private Operator A single private operator would be responsible for (a) managing, operating and maintaining all the water supply and wastewater service; (b) for billing and collecting water and wastewater charges on behalf of the CALBIR; (c) for maintaining detailed operating records and accounts which will be duly audited annually by private auditors; and (d) for monitoring the water supply quality and effluent quality in the planned pre-treatment wastewater plant. The CALBIR expects to benefit from the experience of the private sector participation in water supply and wastewater services in Antalya and in Bursa. OBJECTIVE AND APPROACH OF THE CONSULTING SERVICES 8. The objective of this consulting services contract is to assist the CALBIR in preparing for and contracting with a private operator in the provision of water supply and wastewater services. The contractual arrangement to be implemented shall be technically, legally, financially and politically viable. A technically viable arrangement would be one that is: (i) well-targeted to resolve existing problems, as perceived by municipal authorities, customers, and other stakeholders; and (ii) compatible with existing legislative framework. A legally viable arrangement would be one where no new legislation is required for implementation. A financially viable arrangement would be one that could be financed at tariffs that consumers are willing to pay. And, a politically viable arrangement would be one that has political support, both within the formal authorities and other relevant stakeholders. 9. The consultants shall take the recently awarded private operator contract in Antalya Municipality and the one under preparation for the Bursa Municipality as the models for a similar private operator contract for the CALBIR. The consultants shall assess the differences in conditions between Antalya and Bursa on one hand and on the other hand, and allow for the impact that these differences may have on the bidding process and conditions of the contract. 10. The consultants should ensure that the cost of engaging the private operator is reasonable in light of the relatively small size of the water supply and wastewater systems. The consultants shall use to the maximum extent the recently completed studies for Antalya and Bursa while preparing similar bidding documentation and contracts for the CALBIR. The Cesme-Alacati contract is expected to serve as model documents for small and medium-sized municipalities in Turkey. Annex 2 Attachment I Page 3of 4 SCOPE OF WORK 11. The consultants' work will be divided into four phases. The CALBIR will review and approve the completion of each phase before instructing the consultants to proceed to the following phase. Phase 1: Preparation and Documentation Phase ( Estimated time: 2 months) 12. In Phase One the consultant should undertake the following tasks: * analyzing and recommending changes to the Antalya and Bursa documents for use by the CALBIR. The consultants should, among other things, analyze the staff employed by the municipalities of Cesme and Alacati in the present operation of the water supply and wastewater systems and how the Private Operator could offer them employment to ensure continuity and transfer of knowledge; * designing and proposing a bidding process, which involves decisions such as: 0 the criteria to prequalify bidders, taking into account the need to promote wide competition, while at the same time ensuring that the prequalified firms have the capacity to provide services acceptable to the CALBIR and the municipalities; 0 the information to be provided to bidders, such as the necessary technical, financial, legal and regulatory information, inventory of existing facilities, and current tariffs; 0 the extent to which there are discussions with bidders before the formal bidding process begins, and the form of these discussions; 0 the instructions to bidders on what their proposals should contain; 0 the methods that will be used to evaluate bids; and 0 the procedures for handling complaints and appeals from the bidders. * preparing the necessary bidding documents, including prequalification documents, request for bid proposals, and draft contract. Phase 2: Prequalification ( Estimated time: 2 months) 13. In phase 2 the consultant should assist the CALBIR in prequalifying bidders, which includes activities such as providing information to bidders, as appropriate, and evaluating the Annex 2 Attachment 1 Page 4of 4 requests for prequalification. All the bidders meeting the prequalification criteria shall be allowed to bid Phase 3: Bidding ( Estimated time: 4 months). 14. In phase 3 the consultant should assist the CALBIR in carrying out the bidding process, including providing information to bidders, as appropriate, and evaluating bids. Phase 4: Contracting and Transfer of Operating Responsibility (Estimated time: 2 months) 15. In phase 4 the consultant should assist the CALBIR in negotiating the contract with the selected bidder, and in turning over the water and sewerage services to the private operator. Due attention should be paid to the transfer conditions for those municipal staff that will be retained by the Private Operator. COST OF CONSULTING SERVICES 16. In view of the expected substantial economies from using the Antalya and Bursa experiences and documentation as models the entire cost of the consulting services is estimated at US$200,000. In addition, a US$50,000 success fee will be paid to the consultants upon the successful transfer of services to the private operator. INVOLVEMENT OF LOCAL CONSULTANTS 17. Due to the nature of the consulting assignment and the need to have familiarity with the Turkish business and legal environment, the consultants are recommended to work in cooperation with local consultants. TECHNICAL ASSISTANCE FOR MONITORING THE PRIVATE OPERATOR 18. The CALBIR will most likely hire on a sole source basis the consultant working under these terms of reference (TOR) to assist in the next stage to supervise the contract with the private operator and monitoring its performance. Annex 2 Attachment 2 Cesme-Alacati Water Supply and Wastewater Project Monitoring Sea Water Quality at Sea Outfall The CALBIR will monitor sea outfall conditions,and will take once a year measurements to assess the quality of the water during peak flow in summer (July/August). The following parameters will be monitored: Physio-chemical * temperature * dissolved oxygen * salinity * turbidity * conductivity * pH Chemical and biochemical * total nitrogen * total phosphorus * biochemical oxygen demand * chemical oxygen demand * silicates . chlorophyll-alpha Bacteriological quality * T90 (decay rate) * fecal coliform * total coliform The cost of monitoring the above parameters is expected to be around $6,000 per sample including all the above tests. The measurements are to be carried out at different distances from the coastal line and at different depths following a grid pattern of which the center line follows the axis of the sea outfall and two parallel lines are located at 1,000m distance from and at both sides of the center line. Distances from the coast line as follows: 1, 650, 1300, and 2300m. In total at 12 locations at a depth of 0 (at the surface), 5, 10, and 20m. The total cost of the above Physio- chemical, Chemical and biochemical and Bacteriological monitoring during the project period is expected to be US$100,000. The physical condition of the sea outfall will be monitored by divers. The total cost for the monitoring of the physical condition is expected to be around US$10,000. Cesme - Alacati - Water Supply and Sewerage Project Procurement Plan Component Co'ntract Naturc of Cost Procurement' . 'Ddlines Identification Package Estimate Method .~~~~~~~~~i ... _ _ - - -~~~~~~~~~~Pcmni iii 0. - - BANK FINANCED COMPONENTS A - Water Supply D)istrict Nicterinig - Cliloritiatioln and Al Goods and Minor 688 IS/NS 05/30/99 07/01/99 09/01/99 12/30/99 Minor Extensions (multiple contracts) Works') Relocation of lidir Wells A2 Works 332 NCB 07/30/98 07/01/98 09/01/98 11/01(98 04/30/99 Urgent Repairs and Upgrading A3 Goods and Minor 920 IS/NS/MW Ongoing process during initial period of the Project Implementation Worksb) .. B - Wastewater Wastewater Pumping Stations BI Works 4,064 NCB 07/30/98 10/30/98 01/01/99 03/30/99 03/30/00 Wastewater Network B2 Works 7,958 ICB 07/30/98 08/01/00 09/30/00 01/01/01 02/28/03 C - Consultants and Auditors Implementation Supervision Cl Individual 436 Section V of 01/15/98 02/26/98 02/28/03 (multiple contracts) Consultancy Guidelines Conatruction Supervision C2 Consultancy 1,402 QCBS 07/30/98 06/01/98 09/01/98 11/01/98 03/31/03 Private Operator Supervision C3 Consultancy 859 QCBS" 01/01/99 01/15/99 03/31/99 03/31/03 Private Auditors C4 Consultancy 278 Least 05/30/98 06/01/98 07/01/98 09/30/98 03/31/01 Cost Private Operator Fixed Fees C5 Consultancy 1,150,1 QCBS 06/30/98 07/31/98 10/1/98 03/12/99 TBD Office Equipment C6 Goods 197 NS Monitoring Sea Outfall C7 143 QCBS 03/30/99 05/31/99 06/30/99 10/31/99 TBD MOT FINANCED COMPONENTS . . Hydrogeological Survey Di Consultancy 470 GOT' 1997 03/30/98 llica Sewer Network, Bulk Meter D2 Works 4,000 GOT 1997 12/31/99 Grout Curtain D)3 Works 1,103 GO'l' 05/30/98 07/01/98 09/01/98 06/31/99 a) Includes contingencies, taxes and duties. Wastewater Pumping Stations comprises 2 contracts. b) About $460,000 each is expected to be spent on Goods and Minor Works. Does not include contingencies but includes taxes. c) It will be continuation of a contract where the consultants will help in securing and supervising a private operator. A QCBS process, under Project preparation, is being followed la s > for selecting the consultant which will help secure and supervise the private operator. D d) Does not include contingencies and but includes taxes. CD CS e) It includes US$200,000 for minor works and US$488,000 for goods. f) Government of Turkey procurement procedures will be fbllowed. w SCHEDULE OF CONSULTING SERVICES Item Objective Possible Provider Contracting Method Cl Implementation Supervision Assist CALBIR in the supervision of Project Individual Consultants with specific expertise Section V of Guidelines execution C2 Construction Supervision Assist CALBIR in the supervision of project Consulting Firm with experience in Technical QCBS execution Assistance for Bank project implementation supervision C3 Supervision of Private Opcrator Assist CALBIR in the supervision ol Private Consulting Fimn preparing bid documents for QCBS Operator Private Operator C4 Auditing of CALBIR Accounts Audit Consulting Fimn Least Cost Method C5 Private Operator Fees To cover the fixed costs of the operator A private water company, working under a QCBS management contract C7 Monitoring Sea Outfall Enable CALBIR to take action, as appropriate, Consulting finn QCBS to ensure seawater quality IS: Intemational Shopping; NS: National Shopping; NCB: National Competitive Bidding; ICB: Intemational Competitive Bidding; MW: Minor Works QCBS: Quality and Cost Based Selection; QBS: Quality Based Selection CEsME - ALACATI WATER SUPPLY AND SEWERAGE PROJECT CHART OF ACCOUNTS Loan SAR Account Agreement Component/ Funding Account Description Category Subcomponent Source CASII ACCOUNTS 1100 000 0 Cash - IBRD Spccial Account 1200 000 0 Cash - Union Account FUNDING SOURCES 2110 000 1 Union Funding 2120 000 2 World Bank Funding 2130 000 3 Ministry of Tourism Funding WATER SUPPLY 3310 110 District Metering 3320 120 Chlorination 3330 Ilder Springs 3340 Urgent Repairs and Upgrading 3350 Hydrogeological Study 3360 Bulk Water Meter 3370 Ildir Grout Curtain WASTEWATER 3410 Pumping 3420 Grit Removal 3430 Sewage Collection (Cesme) 3440 Sewage Collection (Ilica) CONSULTANTS AND OFFICE EQUIPMENT 3510 Implementation Supervision 3520 Conslruction Supervision 3530 Private Operator (Selection and Supervision) 3540 Private Auditors o 3550 1 1 1 Office Equipment so v t CESME-ALACATI WATER SUPPLY AND SEWERAGE PROJECT SUMMARY OF SOURCES AND USES OF FUNDS As of........................... Current Quarter:.......................... Currency....................... Actual Budget Variance Year-to Current Cumulative Current Year-to Cumulative Current Year-to Cumulative date Quarter To-Date Quarter date To-Date Quarter date To-Date Project Financing 1 Union Funding 2 World Bank Funding 3 Ministry of Tourism Total Financing Project Expenditures 1. Works Water Supply 2. Works Sewerage 3. Goods 4. Urgent Repairs & Upgrading 5. Consultancy Services/Audits _ CESME-ALACATI WATER SUPPLY AND SEWERAGE PROJECT COST VARIANCE REPORT As of........................... Current Quarter:.......................... Currency....................... Loan Actual Budget Variance Project Expenditurcs Funding Agreement Current Year-to- Cumulative Current Year-to- Cumulative Current Year- Cumulative Source Category Quarter Date To-Date Quarter Date To-Date Quarter to- To-Date - Date 1. Works Water Supply 2. Works Sewerage 3. Goods 4. Urgent Repairs and Upgrading 5. Consultancy Services/Audits I Annex 2 Attachment 4 Page 4 of 9 4ta . LI C~~C oQ ~~ * y d ..: _ "~~~~I ; o ' * ~o s't s _ y r -g{ Annex 2 Attachment 4 CESME-ALACATI WATER SUPPLY AND SEWERAGE PROJECT Page 5 of 9 EXPENDITURE BY DISBURSEMENT CATEGORY As of........................... Current Quarter:.......................... Currency....................... Actual Current Quarter Forecast Next Quarter (b) (c) (d) (e) Project IBRD Project EBRD Disbursement Category Eligible Expenditurel Eligible Expenditurel Eligible (Per Loan Agreement) % Expenditures Expenditures Payable from Payable from Special Special Account Account Project Expenditures 1. Works Water Supply 2. Works Sewerage 3. Goods 4. Urgent Repairs and Upgrading 5. Consultancy Services/Audits Total Expenditure Less: Amount paid from Special Account Balance not yet paid from Special Account Total eligible to be paid Balance in Special Account (excluding adjustments) IBRD Disbursement Requested CESME-ALACATI WATER SUPPLY AND SEWERAGE PROJECT CONTRACT EXPENDITURE REPORT GOODS AND WORKS (FOR CONTRACTS ABOVE PRIOR REVIEW THRESHOLD) PRIOR REVIEW THRESHOLD: > US$ .............. PER LOAN AGREEMENT As of ............. (cumulative) Currency....................... Contract Description Contract Supplier/ Zip Code Contract Amount Amount Number Contract Nationality if US Value Invoiced Paid or to date to date Goods International Competitive Bidding National Competitive Bidding National Shopping To be determined Total Goods Works National Shopping National Competitive Bidding Direct Contracting Total Works TURKEY CESME - ALCATI WATER SUPPLY AND SEWERAGE PROJECT (IBRD LOAN _ - TR) CON'rlAcr EXPENDITIJRE REPORT (A) CONSULTANTS (FOR CONTRACTS ABOVE PRIOR REVIEW THRESIIOLD) PRIOR REVIEW TIIRESIIOLD: >= U.S. $... (INDIVIDUAL) OR U.S. S... (FIRM) As of: (cumulative) Applicable currency: Contract Description (b) Contract Consultant Nationality Zip Code Contract Amount Amount Paid to Number if U.S. Value Invoiced date _________ ___________ _______ to date Quality and Cost Based Selection Quality Based Selection _ ._. Fixed Budget Selection Least Cost Selection Single .Source Selection ..~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~;a -Commercial Practices.._ Noters: --- - Ttl,. _d (a) In orderto runthis report, the followingwili needtobe input: typeofcurrency (i.e., local or loan) and applicable quarter(e.g. Q197, Q297, CD 397, Q497). t a t (b) Amendments that are subjected to 13ank no objection should be included as all additional line with thec sanie contract nuinber aiid amendiiienit numiber. xo 1 TURKEY CESME - ALCATI WATER SUPPLY AND SEWERAGE PROJECT (IBRD LOAN _- TR) PROCUREMEN'r MANAGEMENT REPORT (A) GOODS AND WORKS (FOR CONTRACTS ABOVE REVIEW THRESIIOLD) PRIOR REVIEW THRESHOLD: >= $... (OR EQUIVALENT IN OTHER CURRENCIES) PER LOAN AGREEMENT (SCIIEDULE 4, PART D.2.) As of: (cumulative) Bidding Process Dates (DD/MM/YY) Bid Docs Ready No Objection Call for Bids (c) Bid Open No Objection Contract Contract Start Contract End Supplier/ l____________________________ Signature Contractor Contract Description (b) Tender Est Actual Est Actual Est Actual Est Actual Est Actual Est Actual Est Actual Est Actual Number Goods International Competitive Bdding _ National Competitive Bidding _ _ = =_= _ ='_=__ National Shopping _ ___ __=____ To be determined _ _ W orks = = =_= _ =_= National Shopping _ _ _ Aational Competitive Bidding = = = =_=_= Direct Contracting (a) In order to run this report, the following will need to be input: applicable date. This report has been designed for the LACI pilot phase. It duplicates information already captured in form 384. The information contained in the report vill be integrated and the format revised under the Procurement Information System already under development. (b) For Contracts witlh pre-qualification, the daic of submissioni of pre-qualification docuwtcnts and the date of no objection should be provided. (c) Call for Bids is the date of publication for specific procurement notices. 0 - 0 TURKEY CESME - ALACATI WATER SUPPLY AND SEWERAGE PRO.JECT (IBRD LOAN -TR) PROCUREMENT MANAGEMENT REPORT (A) CONSULTANTS (FOR CONTRACTS ABOVE PRIOR REVIEW TIIRESHOLD) PIZIOR REVIEW: >= U.S. $... (INDIVIDUAL) OR U.S. S... (FIRM) As of: (cumulative) ________ ProPo. Wd rocen Dage. (DDM _Y AdowI.oiog FFP FioA Dn.n No Objfi- lorto F-. P.p ... R.oipt Ten E,.1 NO F0n-l No Obij Co.o No Obj Co,.o Signord Co1ot Stat Coar.t ald SoPpli Cool,a.l Doo.plio, b) Po.o...I P E Aor -1 EoA Aotot Pot Aoto,t EP Ad.,[l olt AU1 LS Adon EA A.too Ed A O Po Adol P. Act.dl Et /kl oooi rd Coo, Booed Edonoto=_ 1,n Co.t &kWd- _ _ ngk So-e Sekailon Notes: (a) In order to run this report, the following will need to be input: applicable date. This report has been designed for the l,ACI pilot phase. It duplicates information already captured in form 384. Ilic inlorlllationt contained in the report will be integrated and the format revised under the Procurement lnformation System already under development. (b) Amendments that are subjected to Bank no objection should be included as an additional line with the same contract number ad amendment number. p:\turkey\infra\cesme-ws\21ena\finmgt.doc 0o 41 t -+ > t Annex 3 Page 1 of 2 PROJECT COST (in current US$1000) 1998 1999 2000 2001 2002 2003 TOTAL Institutional Strengthening Audit/Consultants and Office Equipmenta 50 250 250 250 250 100 1,150 Fees to Private Operator 0 300 300 200 200 0 1,000 Design and Supervision 307 195 220 330 200 100 1,352 Sub-total 357 745 770 780 650 200 3,502 Water District Metering and Extensions - 350 - - - - 350 Chlorination - 150 - - - - 150 Relocation of lldir wells - 250 - - - - 250 Urgent Repairs and Upgrading - 300 500 - - 800 Hydrogeological Study - MOT 300 - - - - - 300 Bulk Water Meter- MOT 20 - - - - - 20 Ildir Grout Curtain - MOT 750 - - - - - 750 Sub-total 1,070 750 300 500 - - 2,620 Wastewater Pumping Stations - 400 800 600 500 500 2,800 Wastewater Network (Cesme) - - 1,100 2,200 1,500 500 5,300 Sewage Collection (Ilica) - MOT 2,000 800 - - - - 2,800 Sub-total 2,000 1,200 1,900 2,800 2,000 1,000 10,900 Basic Cost 3,427 2,695 2,970 4,080 2,650 1,200 17,022 Physical Contingency (10%) 342.7 269.5 297 408 265 120 1,702 Price Contingency 38 150 352 697 595 335 2,166 Project Cost 3,807 3,115 3,619 5,185 3,510 1,655 20,890 Taxes (15%) 571 467 543 778 526 248 3,134 TOTAL PROJECT COST 4,379 3,582 4,162 5,963 4,036 1,903 24,024 Indexof UnitValueofMUVb 100% 102% 106% 109% 112% 115% 118% Price Adjustment factor 101% 105% 111% 116% 120% 125% District metering and extension (US$150,000) and service extension (US$200,000) a: Ind cons (US$300,000), superv priv operator (US$500,000), auditors (US$200,000) & office equip (US$150,000) b: Index for manufactured exports from G-5 countries, expressed in US dollars Source: World Bank Operational Manual (OP 6.50 - Annex Bl), November 1997 Annex 3 Page 2 of 2 FINANCING PLAN (in current US$ 1000) 1998 1999 2000 2001 2002 2003 TOTAL Union Contribution to Investnents 0 135 675 1,037 772 402 3,021 Taxes 8 315 543 778 526 248 2,418 Total Union 8 449 1,218 1,815 1,299 650 5,439 MOT Investments 3,752 1,017 - - - - 4,769 Taxes 563 153 - - - - 715 Total MOT 4,315 1,170 - 5,484 Bank Loan' 56 1,963 2,944 4,148 2,737 1,253 13,100 Total Financing 4,379 3,582 4,162 5,963 4,036 1,903 24,024 a: 54.5% of total project cost Annex 4 Page I of 4 ENVIRONMENTAL ANALYSIS OF SEA WATER DISCHARGE 1.0 Introduction 1.1 The Project proposes the expansion of sewer networks and disposal of wastewater through a sea outfall, south of Alacati (Figure 1). The effects of discharge on the sea water quality and marine ecology as well as compliance of the resulting water quality with relevant Turkish and EU standards were analyzed, as part of the environmental assessment. The wastewater flow considered was as follows: PERIOD FLOW (I/s) BOD (kgld) Summer 1995 0 0 2000 73 1,994 2005 130 3,448 2010 224 5,768 2015 334 8,513 2020 477 11,933 Winter 1995 0 0 2000 28 698 2005 49 1,330 2010 83 2,126 2015 122 2,873 2020 176 3,925 1.2 The Alacati sea outfall is located 1,300 meters from the coast south of Alacati (Figure 2). There is little development in the area but plans exist for a marina for Alacati Bay, a few kilometers away from the outfall. The Greek island Samos is located at about 80km south east, whereas another Greek island Khios is at 20km west of the sea outfall. 2.0 Environmental Assessment 2.1 The effect of the discharge on the sea was simulated using a model that incorporates dilution. The main conclusions are as follows: Effects on Trophic State 2.2 Nutrients (nitrogen and phosphorus) contained in untreated domestic wastewater that are discharged to the sea may affect the trophic state of coastal waters and increase the prinary productivity. Domestic wastewater contains typically 50 mg/l of total N and 10-15mg/l of total P. Simulations show that dilutions are typically in the order of magnitude of 1,000-10,000 in an area that is 3-4 km away from the diffuser. This means that the concentrations of N and P will be reduced to 0.35-3.5 micromole per liter (imol/l) and 0.04-0.4 imolIl respectively. Superposed Annex 4 Page 2 of 4 upon the existing nutrient concentrations in the Sea, the nutrient inputs may trigger an elevated level of productivity in a region within 3km diameter around the outfall. In the farfield the effect of additional nutrients fades away and has no impact on the marine biology. Analysis shows that at discharge level of 200-3001/s it will be necessary to control the nutrient inputs. These flow levels are expected to be reached around 2010. By that time, the Cesme-Alacati municipality Union (CALBIR) should consider upgrading the treatment and seek means to re-use the treated wastewater. Effect on Fish Species 2.3 A survey of the region was conducted which showed that the region has about 17 species of flora, 129 species of benthic invertebrates and 13 species of fish. When the sewage discharge starts, there will be minor effects on the flora and fauna around the diffuser. The resistant species will remain and probably will increase their population while others will evacuate the region of influence. With regard to free swinmming pelagic fishes, they are generally attracted to areas around municipal outfalls because they find abundant food in these areas. In the specific case of the Alacati outfall, there is no risk of bio-accumulation of heavy metals or persistent organics that may be toxic to the fish species because there are no industries operating in the region. 2.4 It is also unlikely that even the immediate region around the diffuser structure will suffer from oxygen depletion. The initial dilutions calculated in the simulations have all been found to be greater than 100. This means that the biochemical oxygen demand (BOD5) of domestic wastewater (typically up to 300mg/1) will exert an oxygen demand of less than 0.3mg/l on the sea water. Since it has been measured that the dissolved oxygen concentrations at the outfall location are at near saturation levels (8-10mg/l), BOD5 will not lower the oxygen concentration at critical level for the survival of the fish. Thus, the impact on the flora and fauna will be limited and no significant impact on commercial fisheries should be expected. Compliance with Laws and Regulations 2.5 The water quality standards due to the discharge was compared with EU Bathing Water directives' and Turkish laws2. From the analysis it can be concluded that: * compliance with mandatory European Union Bathing Standards is achieved for T903 values of less than or equal to 1.5h up to the year 2020. At flow rates exceeding 3001/s and at wind speeds less than 3.0 m/s, EU Bathing Water standards will be met 1,300 m away from the diffuser; * compliance with mandatory European Bathing Standards may not be achieved for T90 value of 2h and at a wind velocity exceeding 4m/s. However, since northerly winds are predominant in the project area throughout the year and persistent in summer, discharged wastewater will be 1 Microbiological standards: i) Mandatory - 2,000 E. coli per 100 ml; 10,000 total coliform per 100 ml; ii) Recommended - 100 E. coli per 100 ml; 500 total coliform per 100 ml 2 Microbiologoical standards: 200 E.coli per 100 ml; 1,000 total coliform per 100 ml 3 Decay rate measures on the basis of the time required for inactivation of 90% of coliform bacteria Annex 4 Page 3 of 4 carried away from the shore towards the open sea. This minimizes the possibility of the beaches not meeting the standards; and compliance with Turkish laws are reached under the following conditions: a) for Tgo of 1.Oh throughout the project period for wind velocities not exceeding 4 m/s; b) for Tgo of 1.5 h throughout the project period for wind velocities not exceeding 3 m/s; c) for Tgo of 2.0 h throughout the project period for wind velocities not exceeding 2 m/s. This implies that at approximately 2,000 meters from the coast line and at a decay rate of 1.5 hours, and wind speeds less than 3.0 m/s, the sea water will meet Turkish Bathing water standards until the year 2020. Since the distance between the outfall and the nearby Greek island is around 20 kilometers, the effect of the discharge on the island is negligible. 3.0 Recommendations 3.1 The analysis performed shows that there is no significant environmental effects due to the discharge of the wastewater. However, certain measures are recommended to ensure a long term solution to the discharge of the wastewater without affecting the environment. Chlorination 3.2 To remove any concems about bacteriological content in the wastewater discharge, chlorination of the wastewater before it is discharged into the sea is recommended. An optimum dosage, depending on the wastewater flow, will be evaluated and used. Chlorination is not an expensive option and would remove any risks associated with coliform contamination. Monitorina 3.3 The simulation on the dilution of wastewater has been based on project design flows. However, it could be possible that during operations, the actual wastewater flow and BOD load exceeds design values. Hence, it is recommended that from date of initial operations, sea water quality be carefully monitored. For this purpose an action program is proposed comprising annual measurements to assess physio-chemical, chemical and biochemical and bacteriological parametcr of the sea water during peak and off-peak flows. Also monitoring of physical condition of sea outfall should be performed which would require special equipment to determine the quality underwater. The CALBIR will be responsible for the monitoring and taking any corrective actions, if required. Future Plans 3.4 The analysis shows that up to the year 2015 European Union and Turkish standards on water quality will most likely be met (para. 2.5). After that, given the increase in the population, the CALBIR would have to take additional steps such as upgrading the treatment of the wastewater through the construction of a treatment plant and using the effluent for land use purposes. The wastewater treatment plant will not be required until the year 2015 and consequently construction should start around 2012. As an alternative to delaying the construction of the wastewater treatment beyond 2012, land infiltration techniques may also be considered. 3.5 The CALBIR should consider the re-use of treated effluent from the treatment plant since there is a shortage of water for agricultural purposes during summer months. The treated Annex 4 Page 4 of 4 wastewater may be used for irrigation purposes or even used to water a golf course which is expected to be built in the vicinity of the outfall. Golf courses require abundant water to maintain the greens and fairways. Since rainfall during summer is low in the area, developers of the future golf course may have a strong interest in using the effluent and contributing towards the construction of the wastewater treatment plant. The Bank during Project implementation will provide technical assistance to the CALBIR in determining options for future wastewater treatment and re-use of the effluent. Annex 5 TURKEY CESME - ALACATI WATER SUPPLY AND SEWERAGE PROJECT QUARTERLY LOAN DISBURSEMENT ESTIMATES Bank Date End Quarterly Cumulative Cumulative Fiscal Year Quarter Disbursement Disbursement Disbursement (US$ million) (US$ million) (in %) FY99 September 30 0.1* 0.1 1 December 31 0.0 0.1 1 March 31 0.2 0.3 2 June 30 0.7 1.0 8 FYOO September 30 0.6 1.6 13 December 31 0.6 2.2 16 March 31 0.7 2.9 22 June 30 0.7 3.6 27 FY01 September 30 0.8 4.4 33 December 31 0.8 5.2 40 March 31 0.8 6.0 46 June 30 1.0 7.0 53 FY02 September 30 1.0 8.0 62 December 31 0.9 8.9 70 March 31 0.8 9.7 76 June 30 0.8 10.5 81 FY03 September 30 0.6 11.1 84 December 31 0.6 11.7 89 March 31 0.6 12.3 94 June 30 0.8 13.1 100 * Initial Deposit in Special Account TURKEY CESME - ALACATI WATER SUPPLY AND SEWERAGE PROJECT WATER AND SEWERAGE SERVICES FINANCIAL PERFORMANCE* (Current US$000) 1995 1996 1997 Cesme Alacati Combined Cesme Alacati Combined Cesme Alacati Combined Operating Revenues Watertariffs 481.5 36.9 518.4 471.8 73.1 545.0 700.0 118.0 817.9 WastewaterfIanks 51.6 - 51.6 40.0 - 40.0 66.1 0.0 66.1 Contr. to Water Inv. 0.2 25.5 25.7 0.1 52.1 52.2 - 8.4 8.4 Contr. to Waste/Tanks 19.8 53.8 73.6 5.7 35.0 40.7 16.7 28.6 45.3 Penalties** 26.2 5.2 31.5 27.2 0.4 27.7 29.3 0.9 30.1 Total Operating Rev. 579.3 121.4 700.7 544.9 160.7 705.6 812.1 155.9 967.9 Operating Expenditures Personnel(Water) 60.5 53.4 113.9 76.3 60.8 137.1 115.2 71.7 186.9 Personnel (Wastewater) 23.9 - 23.9 37.1 - 37.1 52.3 0.0 52.3 Other Current Exp. (Water) 237.4 6.4 243.8 306.4 7.1 313.5 253.9 0.6 254.5 Other Current Exp. (Wastewater) 57.8 - 57.8 57.8 - 57.8 80.3 0.0 80.3 Repairs (Water) 1.3 6.4 7.7 17.9 30.1 48.0 21.2 77.0 98.2 Repairs (Wastewater) 9.6 - 9.6 35.9 44.0 79.9 - 0.0 - Total Operating 390.4 66.3 456.7 531.4 142.0 673.4 522.9 149.3 672.2 Expenditure Operational Surplus (Deficit) 188.9 55.1 244.0 13.5 18.7 32.2 289.2 6.6 295.7 Payments to I1cr Bank 85.2 - 85.2 139.4 - 139.4 159.7 39.8 199.4 Cash Surplus (Deficit) 103.7 55.1 158.9 (129.9) 18.7 (107.2) 129.5 (33.2) 96.3 * Cash Accounting ** Assuming 25% of total penalties collected by the Municipality correspond to water and wastewater/tanks. C, Annex 7 ANNUAL WATER AND WASTEWATER DEMAND 1997 1998 1999 2000 2001 2002 2003 2004 2005 PoPulation Resident 20,886 22,138 23.467 24,875 26,455 28,136 29,924 31,826 33,850 Summer bouse 65,793 67,406 69,059 70,754 72,307 73,896 75,520 77,180 78,878 Tourist 14,768 15,675 16,693 17,857 18,947 20,132 21,423 22,835 24,386 Total population 101,447 105,219 109,219 113,486 117,709 122,164 126,867 131,841 137,114 Water Demand (literslcapitalday) Resident 97 97 97 97 97 97 97 97 97 Summnerhouse 115 115 115 115 115 115 115 115 115 Tourist 247 247 250 250 250 250 250 250 250 Water Production (IOOOm3) 3,934 4,045 4,012 4,329 4,768 5,231 5,467 5,647 5,828 Water Billed (IO0m3) 1,267 1,321 1,467 1,759 2,098 2,482 2,756 3,021 3,270 Annual billings increase (%) 4.3% 11.1% 19.8% 19.3% 18.3% 11.0% 9.6% 8.2% Losses (% of production)' 68% 67% 63% 59% 56% 53% 50% 47% 44% Consumption from Private Wells (1000m3) 735 647 559 471 382 291 211 113 33 Water Connections Service Ratio Residents 73% 73% 75% 80% S5% 90% 92% 93% 94% Summer House 73% 73% 75% 80% 85% 90% 92% 93% 94% Population Comnected Residents 15,247 16,161 17,600 19,900 22,487 25,322 27,530 29,598 31,819 Summer house 48,029 49,206 51,794 56,603 61,461 66,506 69,478 71,777 74,145 Tourist 5,412 5,687 6,197 7,000 7,988 9,041 9,825 10,523 11,244 Number of Connections Residents 4,066 4,310 4,693 5,307 5,996 6,753 7,341 7,893 8,485 Sumnner house 11,301 11,578 12,187 13,318 14,461 15,649 16,348 16,889 17,446 Tourist/Comniercial 258 270 279 296 323 356 391 417 440 Total 15,625 16,158 17,159 18,921 20,781 22,757 24,080 25,199 26,371 Volume of Water biDled (10OOm') Resident Population 351 372 418 507 613 735 828 922 1,014 Summer house population 528 541 587 690 801 923 1,000 1,069 1,130 Tourists 317 333 379 460 561 677 762 845 923 Commercial 70 74 84 101 123 147 166 184 203 Total 1,267 1,321 1,467 1,759 2,098 2,482 2,756 3,021 3,270 Wastewater Connections Service Ratio 4% 4% 4% 10% 10% 10% 15% 20% 30% Population Connected Residents 223 236 250 663 705 750 1,197 1,697 2,708 Summer House 619 634 650 1,665 1,701 1,739 2,665 3,632 5,568 Tourist/Commercial 20 21 22 60 63 67 107 152 244 Total 862 891 923 2,388 2,470 2,556 3,969 5,482 8,520 Volume Billed (lOOm3) Residents 23 23 24 66 73 83 134 190 307 Sumner house 33 32 33 88 96 104 164 225 343 Tourist 19 19 20 56 64 74 120 173 279 Commercial 5 5 5 13 15 17 27 38 62 Total 80 79 81 223 248 277 445 627 991 a: Includes physical losses, water provided free of charge, and inadequate consumption metering WATER SUPPLY & SEWERAGE BALANCE SHEET (in current 1000 USD) 1997 1998 1999 2000 2001 2002 2003 2004 2005 CESMg ALACATI UNION UNION ASSETS Cash 1 80 82 343 457 437 180 352 226 219 353 Accounts Receivable 135 122 257 224 298 382 486 579 649 113 773 Inventories 32 25 56 54 67 79 97 109 116 118 120 Total Current Assets 168 227 394 620 821 898 763 1,041 991 1,049 1,245 Fixed Assets (water/ww/Iller) 8,089 5,859 13,947 19,126 23,507 27,669 33,632 38,068 40,971 42,271 43.771 AccumulatedDepreciation 1,756 954 2,710 3,041 3,467 3,979 4,592 5,309 6,099 6,932 7,792 Total Fixed Assets 6,332 4,905 11,237 16,085 20,040 23,690 29,040 32,759 34,872 35,339 35,979 TotalAssets 6,500 5,132 11,632 16,705 20.861 24,588 29,803 33,800 35,863 36,389 37,224 EQUITY AND LLABILITIES IllerBankLongTermDebt 493 1,004 1,497 2,017 2,677 2,537 2,397 2,257 2,117 1,977 1,837 WorldBankLong TermDebt , 56 2,018 4,962 9,110 11,302 11,463 10,371 7,642 IllerBankCurrentPortionofLongTermDebt 67 43 110 140 140 140 140 140 140 140 140 World Bark Current Portion oflongTcrnDeblt - - - - - - 546 I,092 1,092 2.729 Other Payables 12 7 19 19 20 23 26 30 31 32 33 Equity 5,928 4,078 10,006 14,473 16,005 16,925 18,129 19,526 21,020 22,776 24,843 Total Fquity and Liability 6,500 5,132 11,632 16,705 20,861 24,587 29,803 33.800 35,862 36,388 37,224 Debt/Asset Ratio 1299% 12.4% 22.5% 30.5% 38.6% 40.1% 37.9o/D 33.90/o 25.5% P) Gq'o INCOME STATEMENT (in current 1000 $) 1997 1998 1999 2000 2001 2002 2003 2004 2005 Water Billed (1000 mi3 1,267 1,321 1,467 1,759 2,098 2,482 2,756 3,021 3,270 Average Equivalent Water Tariff ($/m ) 0.74 1.00 1.20 1.50 1.60 1.60 1.60 1.60 1.60 TOTAL REVENUES 937 1,321 1,761 2,638 3,357 3,971 4,410 4,833 5,232 OPERATING EXPENSES Energy 236 249 254 283 320 361 387 410 434 Personnelb 228 234 241 248 255 262 369 478 591 Operation/Repair & Maintenance 156 161 200 237 290 328 349 353 360 Septic Tanks 44 40 35 30 25 20 15 10 5 Total Operating Expense 665 683 731 798 890 970 1,119 1,252 1,390 INCOME BEFORE INTEREST 272 638 1,030 1,840 2,466 3,001 3,290 3,582 3,842 AND DEPRECIATION Depreciation 225 331 426 512 613 717 790 832 860 INCOME BEFORE INTEREST 47 307 604 1,328 1,853 2,284 2,500 2,749 2,981 Interest payments to Iller Bankc 213 140 140 140 140 140 140 140 140 World Bank Commitment Fee - 33 28 20 10 3 - - - World Bank Interest - 2 74 248 500 744 866 853 775 Total Debt Service 213 175 241 408 650 887 1,006 993 915 NET INCOME (166) 132 362 920 1,204 1.397 1.494 1.757 2.066 Performance Indicators Working Ratio (operating expense/reveinucs) 0.52 0.42 0.30 0.27 0.24 0.25 0.26 0.27 Operating Expense per cubic meter of water billed () 0.52 0.50 0.45 0.42 0.39 0.41 0.41 0.43 a: The fees to the private operator during the initial years ofthe contract (1999-2002) are included as part ofproject investments and not shown in the income statement b:An additional S 100,000 of personnel costs are included from 2003 since the fees to the private operator from investments will cease in 2002. c: Iller Bank loan repayment and interest expense were maintained constant from 1998, due to uncertainties about exact investments to) and debt repayment schedule 0 R 040 SOURCES AND USES OF FUNDS (in current 1000 $) 1997 1998 1999 2000 2001 2002 2003 2004 2005 IncomebeforeDepreciation 272 638 1,030 1,840 2,466 3,001 3,290 3,582 3,842 Loans and Grants 5,170 3,932 2,944 4,148 2,737 1,253 - - IBRDDisbursement - 56 1,963 2,944 4,148 2,737 1,253 - - Iller Bank Disbursements - 800 800 MOT Disbursements - 4,315 1,170 TOTAL SOURCES OF FUNDS 272 5,808 4,962 4,784 6,615 5,738 4,543 3,582 3,842 Investments 5,179 4,382 4,162 5,963 4,436 2,903 1,300 1,500 Water and Sewerage (Iller Bank) 800 800 Investment Cost - IBRD project 4,379 3,582 4,162 5,963 4,036 1,903 - - Investmnents by Union - non IBRD project 400 1,000 1,300 1,500 World Bank Loan Repayment - - - - - - 546 1,092 1,092 Interest Expense 2 74 248 500 744 866 853 775 World Bank Commitment Fee 33 28 20 10 3 - - - WorkingCapitalNeeds - 54 85 94 119 103 74 65 61 Iller Bank Loan Repayment8 140 140 140 140 140 140 140 140 IllerBankInterestExpensea 213 140 140 140 140 140 140 140 140 TOTAL USES OF FUNDS 213 5,547 4,848 4,803 6,871 5,566 4,669 3,589 3,708 Change in Cash 59 261 114 (20) (257) 172 (126) (7) 134 Initial Cash 23 82 343 457 437 180 352 226 219 Final Cash 82 343 457 437 180 352 226 219 353 CD_ ECONOMIC ANALYSIS BENEFITS WITH PROJECT 1997 1998 1999 2000 2001 2002 2003 2004-2020 Water Production (1000 m3) 3,934 4,045 4,012 4,329 4,768 5,231 5,467 5,647 Water Losses (1000 M3) 1,574 1,618 1,404 1,429 1,526 1,622 1,640 1,638 Water Consumption (1000 m3)a 2,361 2,427 2,608 2,900 3,242 3,609 3,827 4,009 Average Economic Tariffs ($/rni) 0.74 0.99 1.14 1.35 1.38 1.33 1.28 1.23 Total With Project Benefits, $ 1000 1,747 2,403 2,978 3,928 4,490 4,797 4,885 4,920 BENEFITS WITHOUT PROJECT Water Production (1000 in3) 3,934 3,810 3,700 3,590 3,480 3,370 3,270 3,270 Water Losses (1000 mi) 1,574 1,590 1,600 1,620 1,630 1,650 1,670 1,670 Water Consumption (1000 m3)' 2,361 2,220 2,100 1,970 1,850 1,720 1,600 1,600 Average Economic Tariffs (S/m3) 0.72 0.7 0.68 0.66 0.64 0.62 0.6 0.6 Total WithoutProject Benefits, $ 1000 1,700 1,554 1,428 1,300 1,184 1,066 960 960 INCREMENTAL PROJECT BENEFITS, S 1000 47 849 1,550 2,627 3,306 3,730 3,925 3,960 COSTS WITH PROJECT Investment Costs, $1000 3,770 2,965 3,267 4,488 2,915 1,320 0 Operating and Maintenance Costs, $ 1,000 677 696 720 771 806 893 960 Total With Project Costs, S 1000 4,446 3,660 3,987 5,259 3,721 2,213 960 COSTS WITIIOUT PROJECT Investment Costs Operations and Maintenance Costs @ 0.12/mn3 457 444 431 418 404 392 392 COSTS WITHOUT PROJECT 457 444 431 418 404 392 392 INCREMENTAL PROJECT COSTS,$ 1000 3,989 3,216 3,557 4,841 3,316 1,820 567 NET ANNUAL BENEFITS, S Million -3140 -1666 -929 -1535 414 2105 3392 ECONOMtIC RATEOF RETlURN: 23% a: Includes water billed and free of charge of water b: Production figures are assumed to be constant CALCULATION OF AVERAGE INCREMENTAL COST OF CONSUMPTION DURING PEAK BlI-MESTER 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 to 2020 WITH PROJECT Annual Avg. Production, (1000 rn) 3,934 4,045 4,012 4,329 4,768 5,231 5,467 5,647 5,830 6,280 6,490 6,700 6,910 7,120 7,450 7,580 7,850 8,000 Annual Avg. billedconsumption(1000m3) 1,267 1,321 1,467 1,759 2,098 2,482 2,756 3,021 3,270 3,500 3,750 3,950 4,150 4.360 4,570 4,790 5,030 5,200 Peak BimesterFactorAs Percent of 1.74 1.76 1.78 1.79 1.79 1.80 1.80 1.81 1.82 1.83 184 1.85 1.86 1.86 1.86 1.86 1.86 1.86 Average Bimester Consumption,(1000m3) 211 220 245 293 350 414 459 503 545 583 625 658 692 727 762 798 838 867 PeakBimesterConsumption,(1000m3) - - 435 525 626 745 827 911 992 1,068 1,150 1,218 1,287 1,352 1,417 1,485 1,559 1,612 Annual Project Investment (USS 1000) 3,770 2,965 3,267 4,488 2.915 1,320 2,110 1,440 1,540 2,800 2,740 3,250 2,880 3,790 6,770 4,000 3000 Present Vde Project Investments (USSS 1000) 26,233 Present Value of annual Avg. billed consumption (1000 min) 25,975 lA-m.9e Tnffem-ntW Cost n JISS/mn) I O WITHOUT PROJECT Peak BimensterBilledConsumption,(IWO0ml) 211 220 200 180 160 ISO 150 150 150 150 150 150 150 ISO 150 150 ISO 150 IncrementalPeakBimesterConsumplion - - 235 345 466 595 677 761 842 918 1,000 1,068 1,137 1,202 1,267 1,335 1.409 1,462 (1000 m3) Present Value Peak Bimestcr Incremental 5,756 Consumption (1000 m3) Average Incremcntal Capacity Cost of Peak 4.56 Bimester Consumption (USS per cubic metcr) Average Incremental Operations and 0.15 jMaintenance Cost(US$ per cubic meter) Total incremental cost of peak bimester 4.71 [lnngumntpnSk (JSS ne tcubic meter) a: Investments necessary to increase the annual wate production to 8 million m3 by the year 2014 and maintain it at that level until 2020 ;>m t0 AFFORDIBILITY OF TARIFFS BY RESIDENTS 1998 1999 2000 2001 2002 2003 2004 2005 Total Volume billed (1000 m3) 1,321 1,467 1,759 2,098 2,482 2,756 3,021 3,270 Peak (July/August) Consumption (1000 m3) 435 525 626 745 827 911 992 Off Peak Consumption (1000 m3) 1,321 1,032 1,234 1,472 1,737 1,929 2,110 2,278 Ratio: Peak to Off-peak monthly consumption 2.1 2.1 2.1 2.1 2.1 2.2 2.2 Resident/Commercial Consumption (1000 m3) 446 501 609 736 882 994 1,107 1,217 Summer house/tourist cons. (1000 m3) 875 966 1,150 1,362 1,600 1,762 1,914 2,053 TARIFF RATIO: Peak/Off-peak 1 1 2 2 2 2 2 2 Total Revenues $ 1,321,003 $ 1,760,813 $ 2,637,819 $ 3,356,861 $ 3,971,056 $ 4,409,585 $ 4,833,369 $ 5,231,543 Average Tariff ($/m3) 1.00 1.20 1.50 1.60 1.60 1.60 1.60 1.60 Off Peak Tariff ($/m3) 1.00 1.20 1.16 1.23 1.23 1.23 1.23 1.23 Peak Tariff ($/rm3) 1.00 1.20 2.31 2.46 2.46 2.46 2.46 2.46 Number of Residents Connected 16,161 17,600 19,900 22,487 25,322 27,530 29,598 31,819 Number of Houses Connected (3.75 people/house) 4,310 4,693 5,307 5,996 6,753 7,341 7,893 8,485 Revenues from Residents $ 446,293 $ 601,202 $ 820,509 $ 1,057,655 $ 1,266,741 $ 1,427,564 $ 1,586,940 $ 1,742,554 Revenues from non-Residents $ 874,709 $ 1,159,610 $ 1,817,310 $ 2,299,207 $ 2,704,314 $ 2,982,021 $ 3,246,429 $ 3,488,989 Average Monthly Bill per Residence $ 8.63 $ 10.67 $ 12.88 $ 14.70 $ 15.63 $ 16.20 $ 16.76 $ 17.11 Household Income Distribution by Quintiled First $ 327 $ 342 $ 357 $ 373 $ 390 $ 408 $ 426 $ 445 Second $ 504 $ 527 $ 550 $ 575 $ 601 $ 628 $ 656 $ 686 Third $ 646 $ 675 $ 705 $ 737 $ 770 $ 805 $ 841 $ 879 Fourth $ 896 $ 936 $ 978 $ 1,022 $ 1,068 $ 1,117 $ 1,167 $ 1,219 Fifth $ 1,953 $ 2,041 $ 2,133 $ 2,229 $ 2,329 $ 2,434 $ 2,543 $ 2,658 Average Share of Tariffs on Household Income by Quintile First 2.6% 3.1% 3.6% 3.9% 4.0% 4.0% 3.9% 3.8% Second 1.7% 2.0% 2.3% 2.6% 2.6% 2.6% 2.6% 2.5% Third 1.3% 1.6% 1.8% 2.0% 2.0% 2.0% 2.0% 1.9% Fourth 1.0% 1.1% 1.3% 1.4% 1.5% 1.5% 1.4% 1.4% Fifth 0.4% 0.5%w6 0.6% 0,7% 0.7% 0.7% 0.7% 0.6% a: The income is assumed to grow at the rate of 4.5% annually > ft Annex 12 COST COMPARISON OF WELLS AND CALBIR SYSTEM PRIVATE WELLS CALBIR SYSTEM Year Total Costsa Average Average Inflation Annual New Userb Existing Userc Monthly Annual Factore Tariff in TariffI Tariff 1998 prices 1998 $ 950 $ 50 $ 10.67 $ 128 1.05 $ 122 1999 $ 50 $ 50 $ 12.88 $ 155 1.11 $ 139 2000 $ 50 $ 50 $ 14.70 $ 176 1.16 $ 152 2001 $ 50 $ 50 $ 15.63 $ 188 1.20 $ 156 2002 $ 50 $ 50 $ 16.20 $ 194 1.25 $ 156 2003 $ 50 $ 50 $ 16.76 $ 201 1.30 $ 155 2004 $ 50 $ 950 $ 17.11 $ 205 1.30 $ 158 2005 $ 50 $ 50 $ 17.11 $ 205 1.30 $ 158 2006 $ 50 $ 50 $ 17.11 $ 205 1.30 $ 158 2007 $ 50 $ 50 $ 17.11 $ 205 1.30 $ 158 2008 $ 50 $ 50 $ 17.11 $ 205 1.30 $ 158 2009 $ 50 $ 50 $ 17.11 $ 205 1.30 $ 158 2010 $ 50 $ 50 $ 17.11 $ 205 1.30 $ 158 2011 $ 50 $ 50 $ 17.11 $ 205 1.30 $ 158 2012 $ 50 $ 50 $ 17.11 $ 205 1.30 $ 158 Net Present Value $1,198 $842 $1,144 a: In 1998 prices b: A $ 900 investment cost and $ 50 annual operation/maintenance cost is assumed c: An investment of $ 900 is assumed in 2004 to replace the existing system and for added maintenance costs for older wells d: In current costs, until the year 2003. Thereafter in 2004 prices e: Using Index for manufactured exports from G-5 countries; World Bank Operational Manual (OP 6.50 - Annex B1), November 1997 MAP SECTION ROMANIA C - RUSSIAN j FEDERATION .. - .- ' BULGARIA NGR'. TURKEY TURKE p7>-> >&Csme-AIacati CESME-ALACATI WATER SUPPLY kg KX "r-F. *- ,- --t---- \ < a- AND SEWERAGE PROJECT '; ,-jv SARAsN 1 IRAQ 5WASTEWATER COMPONENT .Mga5ttv;. .:$ is.se-, ; as* REP./ ' *1 ' (- '-) 26oO0 - 38°31' -- 38°31'- NBOYAUK NIS~ KHISOS ~~~~~~~~~~~~~~SIFNE , __ I \ 0 0 OVACIK AL ACATI .7 L-AACATI DAM -FTUidKKoY 38l15' EX5l W StAISW ) \%38015 - EX~ISTING WASTEWATE TRANSMISSION O4NE '' - PROJCTWASTEWATERTRANSMISSIONLINE , 0 O MP STA:ION JCPt WORKS FINANCED BY llRBA 'ANK) C1 HEADER TANK (EXISTING) PPojECT rINANCEDNEwORKAREA MOT FINANaD NETWORK AREA S EXISTING NETWORK AREA . rW C PROJECrAREA 0 2 4 6 8 10 This snp was prduced by the Map Dnsig Un of The WMd BA. ¢ >[ STLEMENTCENTER . LOMETERs bh nodthas, -pconors pds -nth.o nodrprofy atir ish.aWalon 87 26030 - ~~~~~~~~G-op, any judgeseot. othe legal Vtatu a(ay tn-itosY, or any '0 _' - 26o30 4, rndorsement or acceptance of .uc -boundaries. - ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~IBRD 29346 ;4S~~~~~~~~~4 tz~~~~~~~~~~~FBUR 9