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         Environmental Benefits and Their Cost: Istanbul Sewerage Project
  

The Bank's constructive relationship with Istanbul's municipal authorities, sustained over more than 20 years, built the groundwork for this successful project, completed in 1988 but recently audited by OED. The project was motivated by concern for public health, particularly among the city's poor, but also for environmental protection and improvement. Strong public and government support was secured with the promise of clearing up the Golden Horn and the shores of the Sea of Marmara. The project itself greatly increased public environmental awareness and expectations.

Recently, responding to pressure from the public and the scientific community, Istanbul has adopted very strict sewage disposal policies that place it in the forefront of environmental protection worldwide. But implementing these policies will require huge investments. ISKI, Istanbul's water and sewerage authority, has an impressive record of cost recovery and of self-financing from tariff revenues. But growing arrears in tariff payments, over the last three years, cast a shadow over the sustainability of ISKI's ambitious program.

Istanbul's rapid growth led to large squatter settlements with inadequate and ill-maintained water supply and sewerage. Population, estimated at 3.7 million in 1981, was projected to increase to 7.8 million by 2000. Waste waters were discharged untreated into the Golden Horn, the Sea of Marmara, and the Bosphorus. Over time the static parts of the waters of the Golden Horn became anaerobic and the beaches of the Sea of Marmara became highly contaminated. Especially in densely populated low-income areas, outbreaks of often-fatal waterborne diseases were common.

A 1978 Conference on Planning and Development of Community Water Supply and Sanitation launched an ambitious national effort to reach 100 percent coverage for water supply by 1990 and sewerage by 2000. Turkey has made remarkable progress toward these targets. By 1989, 97 percent of the urban and 85 percent of the rural population was served with water; 56 percent of the country's population was served with sewers, and 29 percent with septic tanks.

Project goals, implementation

Project preparation began in the early 1970s; appraisal was not until December 1981. It took time for the government to enact legislation creating a water and sewerage agency in an institutional format acceptable to the Bank. A new agency, Istanbul Water Supply and Sewerage General Directorate (ISKI) was created to plan, design, construct, and operate all water supply and sewerage services in Greater Istanbul. Unlike the three agencies it replaced, ISKI had the right to set water and sewerage tariffs without outside approval. The Bank's patient insistence on the creation of a well-organized implementing agency, with autonomy in decision making, paid off.

The project was one of the largest infrastructure projects ever launched in Istanbul. Its goals were to:

- extend the coverage of sewerage services to reach 60 percent of Istanbul's population, of whom 70 percent would be low-income people;

- reduce the amount of sewage discharged at the shorelines of the Golden Horn and the Sea of Marmara;

- provide satisfactory sewage disposal by construction of pretreatment facilities and a deep submarine outfall main;

- strengthen ISKI's institutional capacity; and

- ensure financial self-sufficiency by introducing adequate water supply and sewerage charges.

After initial, largely procedural, delays, the project was implemented efficiently, on schedule and well within cost estimates. Designs and quality of construction were of a high standard. ISKI proved itself well able to maintain and expand its facilities.

Public information: ISKI and the municipality jointly conducted a sustained publicity campaign on the project and program. This was instrumental in the general acceptance--thus far, at least--of the substantial tariff increases ISKI introduced to help finance the project.

Benefits: The project extended water and sewerage services to an additional 300,000 low-income people. The environmental goal of improving water quality in the Golden Horn and the Sea of Marmara was achieved. The municipality reinforced the effects of the cleaner waters by beautifying the shore lines, relocating small and medium industries away. This sound urban management initiative made the results of the project more visible to local residents and, importantly, to tourists.

Tariffs: ISKI's tariff structure is highly progressive, with industrial and commercial rates up to 130 percent of residential rates, implying substantial cross-subsidization. Consumers using less than 10 cubic meters a month do not pay for water, though they pay a 100 percent surcharge for sewerage. Tariffs for households below the poverty line result in charges of less than 3 percent of household income and seem to be well accepted by consumers.

Financing: At appraisal, the government was expected to contribute $131 million to the project, with internal cash generation placed at $3 million. In fact, concerned about its growing fiscal deficit, the government contributed only $38 million while ISKI contributed $106 million (see Box). In 1988, ISKI adopted a policy of covering all operation and maintenance costs, debt service, and more than 45 percent of investment costs, as covenanted in the loan agreement of a second, ongoing, project which the Bank approved in 1987. ISKI's high self-financing capacity has already influenced water and sewerage policies in Ankara and Izmir.

Over the last three years, however, ISKI's accounts-receivable have increased much faster than sales. Customers billed monthly (most residential consumers) have a 40 percent better payment record than those billed quarterly (mostly industries and institutions); public institutions have an especially poor payment record. Though exceptional profits were recorded in 1990, ISKI's arrears threaten its creditworthiness at a time when another ambitious investment program is planned. Several measures have been introduced to counter this problem but their effects are yet to be verified.

Environmental benefits, economic costs

The environmental focus within ISKI and central government environmental agencies has steadily sharpened, in response to increased public awareness of environmental issues and the stepped-up involvement of the Turkish scientific community:

- In mid-1991 Turkey's environmental authorities ruled that all waste waters must be fully treated before discharge into receiving waters. ISKI immediately adopted this policy, whose effects on the ongoing Bank-supported project are still being discussed. Over the longer term, the policy will be extremely costly to implement. Given Istanbul's topography, it will require huge investments in complex and distant treatment facilities. But, to quote one of ISKI's publications, "Our administration's objective is to establish a chain of full treatment plants...whatever the cost, in order to solve this environmental problem..."

- ISKI has also made a policy decision to develop water supply and sewerage services completely in parallel. If fully implemented, the policy will ensure the full public health impact of clean water supplies, and ensure equitable service to the poor.

In the context of ever-increasing pressure for environmental protection such policies cannot be faulted. Progress, and public information campaigns, to date have engendered high expectations. Yet, given the recent build-up of arrears, especially from public institutions, the large investment program cost may preempt the resources needed to maintain existing facilities. Development plans will need to give full consideration to their affordability by the people, the industries, and institutions of Istanbul and Turkey in general.

Turkey's investment needs in the sector are becoming more complex technically, environmentally, and economically. Selection of priorities and judicious financial planning will be very important. The Bank proposes to maintain and strengthen its relationship with ISKI, with emphasis on further improvements in financial management and performance. Sound technical advice will continue to be needed.

Box: Phasing tariff increases to help with investment costs

When the government decided not to fulfil its commitment to contribute 59 percent of the finance for the project, ISKI relied on tariff increases to fill the gap. During the grace period on the Bank loan, the cash flows generated from increased tariffs were used to help finance the investments. This allowed the project to be implemented without delay. It also showed that it is worthwhile to implement tariff increases as soon as a project is launched, to help with investment financing, rather than waiting until the facilities are commissioned and debt-servicing starts. An effective public information campaign facilitated the implementation of this strategy.



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