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Implementation Completion Report (ICR) Review - Inland Waters Project


  
1. Project Data:   
ICR Review Date Posted:
06/27/2014   
Country:
Croatia
PROJ ID:
P098948
Appraisal
Actual
Project Name:
Inland Waters Project
Project Costs(US $M)
 140.08  126.59
L/C Number:
L7453
Loan/Credit (US $M)
 133.41  119.63
Sector Board:
Water
Cofinancing (US $M)
   
Cofinanciers:
Board Approval Date
  03/15/2007
 
 
Closing Date
12/31/2012 12/31/2012
Sector(s):
Sewerage (53%), Water supply (34%), Flood protection (9%), Central government administration (4%)
Theme(s):
Water resource management (25% - P) Other urban development (25% - P) Urban services and housing for the poor (24% - P) Environmental policies and institutions (13% - S) Regional integration (13% - S)
         
Prepared by: Reviewed by: ICR Review Coordinator: Group:
Peter Nigel Freeman
George T. K. Pitman Christopher David Nelson IEGPS1

2. Project Objectives and Components:

a. Objectives:

The Project Appraisal Document (PAD, page 5) states that the development objectives are:


    "to improve water supply services, wastewater services, and flood protection measures in municipalities selected from the inland part of Croatia. The area covered would be from the Sava and Drava, and Danube river basins and the proposed investments would enable Croatia to meet EU directives".
The development objectives stated in the loan agreement (LA page 5) are:

    "to improve water supply services, and flood protection measures in the Sava/Drava, and Danube river basins of the Republic of Croatia".

This review uses the PAD version of the objectives as they are more comprehensive.

The project underwent a level 2 restructuring in December 2011. The objective remained unchanged and no additional safeguards were triggered.

b. Were the project objectives/key associated outcome targets revised during implementation?
No

c. Components:
The project had two components: Technical Assistance (TA) and Investments.

A: Technical Assistance. (Appraisal estimate US$ 6.39 million; Restructuring estimate (December 2011) US$ 12.60 million; actual US$ 7.46 million). The technical assistance component included the following three sub-components:


    Al - EU Accession Support: Hrvatske Vode (HV) as a national entity for water management is principally responsible for the implementation of activities related to meeting EU directives and absorption of EU funds. To this end, it implements the Water Management Strategy that involved strengthening of institutions and preparing projects that would receive funds from the EU or other sources. This component included:
      • Institutional strengthening of HV and Ministry of Agriculture (MOA) to implement the Water Management Strategy, including training and technical assistance linked to absorption of EU funds; and
      • Preparation of projects for financing by the EU and other sources. The Bank loan was to finance feasibility studies and other documentation needed for location and construction permits, including preliminary design, final design, environmental assessments, and bidding documents.
    A2 - Project Implementation Support: This sub-component was implemented by HV and included financing of:
      • Preparation of the Bank-financed investment program, including preparation of feasibility studies, securing necessary construction and environment permits, and preparation of bidding documents;
      • Meeting the project's fiduciary (financial management and procurement) and safeguards requirements (environment and land acquisition);
      • Preparation of project reports; and
      • Preparation of annual audit reports.
    A3 - Institutional Strengthening of Utilities: This sub-component focused on providing TA to the participating utilities and included:
      • Preparation of feasibility studies and other documentation needed for location and construction permits, including preliminary design, final design and environmental assessments;
      • Preparation of bidding documents;
      • Construction supervision;
      • Measures to increase operating efficiency and improve customer service, including specific TA to help utilities reduce commercial water losses and improve their financial position;
      • Reporting to HV on the sub-project progress; and
      • Customer surveys, at the beginning and end of sub-project implementation.

B: Investments. (Appraisal estimate US$ 125.61 million; Restructuring estimate (December 2011) US$ 117.40 million; actual US$ 104.01 million) The Investments Component included the following three sub-components:

    B1- Utility Investments. This sub-component included three sets of utility investments:
      • Set 1 Investments: (i) Virovitica - increase sewerage coverage; (ii) Northern Baranja - improve water supply coverage; and (iii) Ogulin - increase sewerage coverage and construct a wastewater treatment plant. Feasibility studies for these investments were prepared with support from the Japanese Policy and Human Resources Development (PHRD) Fund.
      • Set 2 Investments: (i) Davor-Nova Gradiska - improve water supply coverage; (ii) Slavonska Podravina region - improve water supply coverage; (iii) Nasice - increase sewerage coverage and construct a wastewater treatment plant; and (iv) Southern Baranja region - increase sewerage coverage. The PHRD grant also supported the preparation of feasibility studies for set 2.
      • Set 3 Investments: At the time of appraisal only a partial list of projects was identified and ready, this included: (i) Vukovar - increase the sewerage coverage; (ii) Ilok - increase the sewerage coverage; (iii) Ivankovo - increase the sewerage coverage and construct a wastewater treatment plant; (iv) Otok and Komletinci - increase the sewerage coverage and construct a wastewater treatment plant; and (v) Cema - increase the sewerage coverage and construct a wastewater treatment plant.
      • During implementation, an investment in the sewerage system of Dugo Selo-Rugvica was also identified by HV as a priority and included in the investment program of the project.
    B2 - Flood Protection. This sub-component financed rehabilitation and expansion of flood protection infrastructure, including dykes, canals, and channels. At the time of appraisal it envisaged only works in the Central Posavina area in the Sava river basin, but following the 2011 restructuring, activities were extended to also cover the Drava and Danube river basins. Six investments were initially proposed - two in Lonjsko Polje (designated Ramsar wetlands), and four outside the wetland area. Through the investments, the volume of flood water retained was expected to increase from 600 million m3 to 720 million m3 , reducing the risk of downstream flood damage (for a 25- year flood event). The PHRD grant also financed a feasibility review of these investments.

Following the level 2 restructuring in 2011:
  • Component B2 (Flood Protection Investments) was extended to cover investments in the Drava and Danube river basins, beyond the Central Posavina area, in the Sava River basin.
  • Component A (EU Accession Support, Project Implementation Support and Institutional Strengthening of Utilities) was adjusted to reflect project support for implementing water sector reforms. This included TA services for institutional reform studies, the preparation of sub-projects and studies for future EU financing, and the cost of TA for strengthening project utilities. Preparation of the water management strategy was dropped and subsequently carried out by HV.

d. Comments on Project Cost, Financing, Borrower Contribution, and Dates

Project cost:

    The estimated cost of the project at appraisal was US$ 140.08 million, while the actual cost at closure was US$ 126.59 million. In 2011 the project was restructured (level 2 restructuring by country director) with the objective of maximizing the project's outcomes towards flood protection and EU accession support. The values of several construction contracts were lower than estimated. These savings allowed for more investments under component BI (in Dugo Selo-Rugvica) and for reallocation to other components. Loan proceeds from Component B1 (Utility Investments) were allocated to Component B2 (Flood Protection investments) and to Component A (Technical Assistance) to meet higher than expected expenses for consulting services and enable expanded activities under these components.
Financing:
    An IBRD loan for EUR 100 million (US$ 133.41 million equivalent) was approved for the project. US$ 119.63 million was disbursed and US$ 13.78 million was cancelled.
Borrower contribution:
    The estimated borrower contribution was US$ 6.67 million at appraisal and the actual amount expended was US$ 6.96 million.
Dates:
    The estimated and actual dates for closure were the same i.e. December 31, 2012.


3. Relevance of Objectives & Design:

a. Relevance of Objectives:
High
Project objectives were relevant to the problems Croatia had to address as part of its accession process. 76% of the overall population receives reliable water supply services. However, the figures are much lower in the inland river basins of the Sava and Drava where coverage rates were as low as 31% in some counties. Water losses were high (46% on average, nationally) and with 127 municipally-owned water companies in a country of 4.5 million people, the sector was fragmented. While 44% of the population was connected to the public sewerage system, only 25% of wastewater generated was treated –even then, only about half of the treated wastewater satisfied the effluent requirements, and most of the existing wastewater treatment plants needed to be upgraded to meet the EU directives on wastewater standards, Floods posed a threat to human life, agriculture and economic development in the inland areas. A comprehensive flood protection scheme was designed in the late 1960s and subsequently this scheme was modified to make it consistent with the current approach towards flood protection in EU countries. However, parts of the scheme are not yet completed, especially in the Sava and Drava river basins, and in 2010, for example, the flood-related damages in the country amounted HRK 1 billion (Euro 150 million equivalent).

When the project was appraised Croatia was carrying out negotiations for EU accession. In this context, a critical priority for the country was to meet compliance with EU directives, including drinking water and urban wastewater. Targets not met within an agreed timeframe could result in penalties. Thus the opportunity to obtain funds through an IBRD loan was an attractive option for the Government of Croatia. The project was designed to concentrate investments on the poorer areas of the country, and to focus on communities where access to water supply and wastewater services was comparatively low. A 'Study on Institutional Options in the Water Supply and Wastewater Sector' (IWP) provided a foundation for the agglomeration of water and sewerage utilities, a necessary condition for compliance with the EU directives on service efficiency. The IWP was a key project in the Bank's 2004 Country Assistance Strategy (CAS), which had as its main objective assisting Croatia to join the EU. The project was also fully in line with the CAS's attention to sustainable natural resources management and measures to address improvements in Croatia's wastewater and water supply management and services, to comply with the EU requirements.

b. Relevance of Design:
Substantial
The project design comprised activities that were consistent with achieving the stated objectives. Specifically, the TA component focused on strengthening the financial capacity of local utilities, undertaking analytical studies, and preparing EU-funded projects. All these tasks were of high importance to the Ministry of Agriculture, HV and the participating municipal water and sewerage companies (MWSCs). The 'Study on Institutional Options in the Water Supply and Wastewater Sector' provided a foundation for the agglomeration of water and sewerage utilities, an essential condition for compliance with the EU directives on service efficiency. The physical roll out of the project was to be achieved through investments in utilities and flood protection measures. The results framework included measurable indictors that would enable tracking of the causal chain and outcomes. The design also called for longer preparation time, but this was not possible because of the tight timeframe for EU accession.


4. Achievement of Objectives (Efficacy) :

There were three objectives of the project - i) to improve water supply services; ii) to improve wastewater services, and iii) to improve flood protection measures in the Sava/Drava, and Danube river basins of the Republic of Croatia.
    Since the number and full scope of project investment activities were not defined at the beginning of the project, the baseline values had to be established at a later stage, when the final list of sub-projects and activities became known. Similarly, the targets in the results framework were not all set at the beginning of the project due to lack of baseline data. The EUR 3.9 million that was expended on technical assistance was linked to investments worth EUR 123 million.

i) Improved water supply services: Substantial

Outcomes

  • On average the infrastructure investments increased water supply connections to household in targeted areas from 40 percent (2007 baseline) to 85 percent, (target 85 percent).
  • Technical assistance aimed at reducing water losses, improving efficiency, and strengthening the financial position of the utilities. The working ratio (operating expenses divided by collected revenues) target of 1.0 was exceeded at 0.7 due to unspecified reductions in water losses and improvements in collection and billing procedures.
Outputs
  • A study on Institutional Options for the Water Supply and Wastewater sector to provide a foundation for utility optimization and agglomeration. Both the Ministry of Agriculture and HV recognized this as crucial to implementing the EU requirement for the sector efficiency and financial sustainability.
  • Eight project designs were submitted to the government for future financing either by the EU or other financial institutions, exceeding the target of seven. The total estimated value of investments prepared was about EUR 123 million, or over 30 times the value of funds invested in this component.

ii) Improved wastewater services: Substantial

Outcomes

  • Sewerage coverage increased from 35 percent (December 2011 baseline) to 73 percent (before the 2011 restructuring the target was 76 percent).

Outputs
  • The development of a model-based decision making process for the selection of wastewater treatment technology;
  • Improvement of technological operation of Wastewater treatment plants;
  • New technologies were introduced by the project, especially for wastewater treatment, which included biological treatment ponds and tertiary treatment with nano-filtration of the effluent. Such investments have brought new knowledge to the water sector in Croatia and are likely to be replicated as necessary.

iii) Improved flood protection measures: Substantial

Outcomes

  • Overall, the project contributed to the flood protection of at least 51,300 people living in the Sava river basin area, around 12,000 ha of agricultural land, an international transport corridor, and several regional roads as well as preserving the flora and fauna in the Lonjsko Polje Nature Park. The project also benefitted neighboring countries by lowering the water levels of the Sava river.
  • The target retention volume for flood protection of 720 millon m3 was exceeded and 800 m3 was achieved. According to the baseline data, this was a significant improvement from the baseline of 600 million m3.
  • The flood protection measures also paved the way for the restoration of several sites leading to the creation of recreational areas.

Outputs
  • Project preparation for ecological and hydrological revitalization, predominately the revitalization of flood plains, the rehabilitation of meanders, and the creation of new aquatic systems.

iv) Utility Performance: substantial

Outcomes:

  • The initial financial results signal that the Municipal Water and Sewerage Companies (MWSCs) have strengthened their financial position over the course of the project; this is highlighted by the significant turnaround in the working ratio. Working ratios were calculated by dividing operating expenses (excluding depreciation) by operating revenues, and were measured with fresh data collected from the utilities for 2012. The data demonstrated a strong turnaround in the utilities' financial situations with an average (for all 12 utilities) of 0.7, substantially exceeding the target of 1.0 which was the threshold target at which MWSCs could meet their cash commitments through operating revenues.
  • The improvement in operating efficiency was measured by the bill collection rate. Billing revenue nearly doubled between 2008 and 2012 as a result of increased water and sewerage tariffs. The collection rate over the same period was high at around 90 percent. All MWSCs were required to introduce development fees to cover loan repayments for the sub-projects.
  • The Joint Assistance to Support Projects in European Regions (JASPERS), an EU entity that reviews projects proposed by EU accession countries, commended the project for its capacity building . JASPERS reported improved capacity, especially within HV for the assessment of investment proposals and complimented the TA component of the project and its contribution to the sector reform analysis and agenda for Croatia (ICR, partner comments,p.23, 7c). Following JASPER'S favorable reviews of the feasibility studies the projects involved were regarded as eligible for EU financing.
  • Customer satisfaction with water and wastewater services was measured through a survey that was posted on municipality websites. Some municipalities reached 93 percent satisfaction (Nasice was the best), but none were lower than 68 percent among those connected (Northern Baranja was the worst). On average, the satisfaction was about 81 percent among those who had been connected, just over the target of 80 percent.


5. Efficiency:

Substantial


Economic and Financial Efficiency


    No economic and financial analyses were undertaken during appraisal of the utility investments including flood protection, (covering 83 percent of the project costs). This was claimed to be because all the investment sub-projects had not been identified at that time. Even so, a methodology could have been devised ex ante and assumptions made regarding average expected costs.

    A comprehensive economic and financial analysis was undertaken at project closure. The economic rate of return (ERR) for the utility investments at completion was 16 percent, while the net present value (NPV) was HRK 2.04 billion. The economic analysis was based on the assumption that the economic benefits of compliance with EU Water related Directives was quantifiable through the willingness to pay for improved water supply and wastewater services. Collection was used as a proxy for estimating the economic value of the willingness to pay. The other proxy was the cost saving for consumers. Two scenarios were generated to calculate the range for the financial rate of return (FRR). Using a conservative scenario whereby full cost recovery is reached only after 30 years still produces an FRR of 8 percent, whereas assuming full cost recovery is reached within four years produces an FRR of 13 percent. IEG believes the result is likely to be in between these figures and that the methodology is sound.


Administrative Efficiency

    One hundred and ten contracts were awarded and 92 percent of the funds were disbursed, but six projects were still ongoing at project closure, largely due to delays at the start of the project. HV undertook to complete these remaining projects using its own budget. Delays in the signing of the first two Subsidiary Financing Agreements (and therefore project effectiveness) had a knock-on effect in the project. Had preparation of the sub-investments started earlier all sub-projects might have been completed by project closure.

    a. If available, enter the Economic Rate of Return (ERR)/Financial Rate of Return at appraisal and the re-estimated value at evaluation:


Rate Available?
Point Value
Coverage/Scope*
Appraisal:
No
%
%
ICR estimate:
Yes
16%
83%

* Refers to percent of total project cost for which ERR/FRR was calculated

6. Outcome:

With high relevance of objectives, substantial relevance of design, substantial efficacy for technical assistance, utility investments and flood protection and substantial efficiency, the outcome is satisfactory. The development objectives were substantially met against a very tight time line.

a. Outcome Rating: Satisfactory

7. Rationale for Risk to Development Outcome Rating:


Croatia became the 28th member of the EU on July 1, 2013 and, given that it has met the requirements for accession and gained access to the financial resources of the EU, the risk to the development outcome is considered low to negligible. A quarter of the EU funds to be allocated to Croatia in the next seven years is for water and wastewater investment. Loan repayments are covered by a development fee levied by the MWSCs. However, to ensure long-term sustainability of all project investments, HV needs to continue to address the financial aspects.

The financial position of the utilities has indeed improved substantially, but to ensure sustainable revenues the municipalities must continue to accelerate the connection rate to new assets, especially sewer lines. In some areas the willingness to connect was demonstrably low - as shown by the customer survey. This appeared to be due to a lack of construction permits for many houses in the project areas. A new policy has, however, recently been introduced to allow for connections to properties without permits, and for connections to become mandatory within a year of water supply and sanitation construction. Some municipalities have already taken steps in this regard and HV is monitoring the situation closely.

a. Risk to Development Outcome Rating: Negligible to Low

8. Assessment of Bank Performance:

a. Quality at entry:

The Bank had already financed two projects in the sector, from which lessons were learned and to the extent possible these lessons were adopted in the design of this project. The Bank was aware of the limited capacity of many of the MWSCs and hence the project was designed to provide extensive support to participating MWSCs during implementation, and a substantial TA component was included to improve the utilities' institutional capacities. From previous experience, the stakeholders were aware that without a ready sub-project pipeline implementation would likely be delayed, and the Bank correctly flagged this as a risk. However, given the pressing conditions and the tight EU accession time line the project could not be held back to identify all needed investments before approval. More sub-projects should have been prepared prior to effectiveness, however, and there should have been a greater effort by all parties in this area since the time line was dependent on having sufficient ready-to-go sub-projects. In addition to a contingency plan to tackle the consequences of the very real risks of slippage, the Team could also have developed an assumption-based methodology for economic and financial analysis at appraisal.

Quality-at-Entry Rating: Moderately Satisfactory

b. Quality of supervision:

Supervision and procurement reviews were performed in a timely manner providing advice to the borrower and project implementation unit (PIU) as needed. Supervision was carried out regularly and benefitted from the presence of a small team based in Zagreb. The task team leader was in due course also assigned to the region allowing more frequent visits. Response to variation order requests was effective, but the team was unable to persuade the borrower to take more interest in M&E.

The Bank team was proactive in assisting the implementing agency to accelerate performance to the point where, despite the delays, 90 percent of the project was accomplished. The Borrower's ICR (page 20) says that although the Bank's team was changed during the project implementation, this change did not impact the continuity of the project performance. Supervision and procurement reviews were performed in a timely manner providing advice to the Borrower and PIU as needed. Close attention was given to the ensuring that the project complied with the Bank's safeguard policies.

Quality of Supervision Rating: Moderately Satisfactory

Overall Bank Performance Rating: Moderately Satisfactory

9. Assessment of Borrower Performance:

a. Government Performance:

Generally, there was strong support and interest in the project from the sector Ministry, even though at times attention shifted to other priorities, towards the final years of the project. The Borrower's financial contributions to the project were always timely. Delays in the signing of the two Subsidiary Financing Agreements between HV and the municipalities led to delays in project implementation. Negotiations on the local contribution and repayment conditions with many of the municipalities took longer than anticipated. Difficulties were finally overcome, however, and the project was implemented and closed on time without extension.

The Borrower decided not to ask for an extension of the project closing date and to use HV's funds instead to complete all pending contracts. While this decision put considerable pressure on HV to complete all contracts, it should also be seen as a sign of maturity that Croatia was soundly managing its external debt commitments.

Government Performance Rating: Satisfactory

b. Implementing Agency Performance:

Physical construction began 20 months after board approval. The slow start was due to a combination of delays in signing the first two sub-loan agreements with participating utilities, (a condition of effectiveness), delays in properly staffing the Project Implementation Unit (PIU), processing delays for subsequent sub-loan agreements with the other ten utilities; and time needed to complete design and bidding documents. Additional preparation time would have allowed for more discussion on repayment terms and the contribution of municipalities, a better staffed PIU, and a completed Operations Manual. It would also (according to the ICR, p.20) have reduced uncertainty between the PIU and the Bank.

Overall, HV implemented the project fairly well, despite the long time to establish adequate implementation capacity; the PIU was inadequately staffed until the end of year two. After that, however, implementation substantially accelerated and an effective PIU manager was brought in to lead the project. Procurement, on the other hand, was never better than moderately satisfactory throughout. HV also never showed much commitment towards providing an effective M&E system and was late in agreeing to have a customer satisfaction survey. At first, the PIU focused mainly on designing and launching the physical components, but later it focused more attention to implementing the project's TA component. It strategically revised the content of the TA and asked for the Bank's support to supervise and design new TA activities, such as the study on utilities agglomeration. A retrospective review of involuntary resettlement practice showed compliance with Bank safeguard OP 4.12.

Implementing Agency Performance Rating: Moderately Satisfactory

Overall Borrower Performance Rating: Satisfactory

10. M&E Design, Implementation, & Utilization:

a. M&E Design:

Appropriate arrangements for data collection and analysis were ineffective to begin with and the baseline survey commenced late. This was because HV was unwilling with its limited capacity to do the M&E (as the design had intended) and a consulting firm had to be appointed to undertake this work. Specific and measurable project development objective indicators were used to keep track of the results achieved with the utility investments, though some of the intermediate outcomes were included just for monitoring physical project implementation. The percentage of contract value disbursed could have been substituted with more meaningful indicators measuring physical progress like km of sewer collector or drinking water pipelines built. Baseline data were not collected until project implementation was underway.

b. M&E Implementation:
Despite the limited number of indicators, HV and participating utilities struggled to keep up with data collection, analysis and reporting. Since not all sub-projects were initially identified, HV carried out an accurate baseline survey only in 2010, when all subsidiary agreements were in effect, but prior to the commencement of construction. The baselines, however, were only updated in the results framework during the December 2011 restructuring. Given the fast pace of implementation, HV and the utilities focused more on procurement and implementation than on data monitoring. Initially, the utilities expected HV to carry out the M&E, but it claimed to have insufficient capacity. At Bank insistence, additional consulting services were subsequently contracted to collect the necessary data and allow for results to be more accurately measured. To keep the results framework manageable with sub-projects ongoing in 12 utilities, HV and the Bank agreed to measure the indicators as averages. One indicator was dropped at restructuring in 2011 because it was found to be misleading and not representative of project achievements. However, another core indicator was added, namely the number of utilities supported by the project. A customer satisfaction survey was carried out only in 2010 due to delays with contracting the consulting company for this work and according to the ICR (p. 9) "the novelty of the concept to the PIU and HV."

a. M&E Utilization:

The ICR does not report on how the M&E was utilized. Since there was low ownership of the M&E it must be assumed that this was likely negligible. In the discussion with the TTL he confirmed that both HV and the PIU regarded the M&E as something the Bank wanted and did not perceive its benefits to them.

M&E Quality Rating: Modest

11. Other Issues:

a. Safeguards:

The project was classified as a financial intermediary (FI) project and the following safeguards were triggered: Environment (OP 4.01), Natural Habitats (OP 4.04), Involuntary Resettlement (OP 4.12), Forests (OP 4.36), and International Waterways (7.50). Overall, compliance with safeguards was reported to be satisfactory (ICR page 10).

Environment: As per Bank policy, an Environmental Framework was prepared, disclosed and followed. Environmental Impact Assessments (EIAs) were prepared for the sub-projects as part of the feasibility studies. Environmental Management Plans (EMP) were prepared and closely monitored. The HV environmental specialist visited the sites regularly and collected EMP reports from the site supervisors. Irregularities were corrected in a timely manner and reported. The Bank monitored the quality of the EIAs as well as the implementation of EMPs carefully and regularly.

Involuntary Resettlement: The project followed Croatian Law on Expropriation, and in November 2012 a detailed ex-post review confirmed that there were no claims and that the project was in compliance with Bank policies (ICR page 10). The assessment concluded that the designs were done considerately as to minimize the impact on private land. Execution of works was also optimized to minimize disruption to private activities and property. The review was undertaken because the project may not have fulfilled all requirements as laid out in the Land Acquisition and Resettlement Policy Framework, which was prepared and disclosed before appraisal. The retrospective review found that in five cases the law on expropriation had been applied, accounting for about 0.4 percent of the land affected by the project.

Natrural Habitats: The natural habitats safeguard policy was triggered due to project activities in areas listed by the Convention on Wetlands. The EIAs and EMPs envisaged mitigation measures for borrow pits that would enhance biodiversity and extend water and wetland habitats. This was done in consultation with the public, HV, and local non-governmental organizations. The borrow pits were designed outside the wetlands in a manner such that the excavations replicated naturally shaped ponds and wetland areas. The investment not only did not negatively affect critical habitats within the park area, but also had a positive impact (ICR page11).

Forests: The policy was triggered due to project activities and dykes built in Lonjsko Polje that could increase water levels during flood events affecting the trees in the wetlands and flood plain. However, given that the water would be retained in the area for limited periods, the impact on the local plants was not found to be significant.

International Waterways: The Croatian Government notified the International Commission for the Protection of the Danube River and the riparian countries about the project, but these countries raised no issues. Overall, by financing improved wastewater treatment and the project was expected to have a positive impact on effluents.

b. Fiduciary Compliance:

Financial Management: FM was largely satisfactory throughout the project. Unaudited Interim Financial Statement Reports (IFRs) were received by the Bank regularly and found acceptable. The staff of the PIU working on the project reported that FM entailed a lot of work as the HV financial management software was not programmed to produce reports according to Bank requirements, hence IFRs had to be prepared "manually" using spreadsheets. The project and entity audits were generally conducted on time (only the 2008 annual audit was late). Over the project life the auditors expressed unqualified opinions.

Procurement: was a major challenge because of the large number of contracts and the speed at which the project had to be implemented. While the outcomes were mostly positive, procurement was rated moderately satisfactory (ICR page 11). About 110 contracts were awarded during the project. Of these, all but six were completed by the project closing date. One large procurement package, of EUR 1 million for equipment, had to be cancelled due to substantial delays in the awarding procedure. Given the large number of contracts to be processed in a short period of time and the initially limited staff capacity allocated by HV to the PIU, the World Bank provided extensive support. The HV staff that worked on the procurement of the project reported that they benefitted from the learning experience and found Bank's guidelines clear and adequate.

c. Unintended Impacts (positive or negative):
The project paved the way for the ecological restoration of several sites, which has led to the improvement of tourism services as well as the creation of recreational areas.

d. Other:



12. Ratings:

ICR
IEG Review
Reason for Disagreement/Comments
Outcome:
Satisfactory
Satisfactory
 
Risk to Development Outcome:
Negligible to Low
Negligible to Low
 
Bank Performance:
Moderately Satisfactory
Moderately Satisfactory
 
Borrower Performance:
Satisfactory
Satisfactory
 
Quality of ICR:
 
Satisfactory
 
NOTES:
- When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006.
- The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate.

13. Lessons:
Lessons from the ICR:
  • When the time for project preparation is shortened for political reasons, there is a higher risk that problems will occur and special arrangements may be needed to fast track legal processes. If the project is to be implemented very quickly, with designs to be done during the implementation phase, sufficient capacity should be mobilized and trained at the very start of the project to accelerate the preparation of a pipeline of sub-projects.
  • Economies of scale should be considered in utility reform. While some utilities have the capacity to implement, engage beneficiaries, and supervise the works effectively, others require considerable support. In the weakest utilities works can be seriously delayed. This indicates that a further merging of utilities would not only foster financial but also technical efficiency.
  • Political commitment for investment in water utilities must be sustained at the central level to implement reforms to move the sector (in this case towards EU compliance). Municipalities, elected mayors and council members had to make tough choices on tariff adjustments and enforce connection policies.

14. Assessment Recommended?

Yes
Why?
It would be useful to assess what was learned from the EU accession process and to ascertain whether the Bank pursued the best courses of action.

15. Comments on Quality of ICR:


For the most part the ICR is well written, well presented, concise, and in conformity with the guidelines. It also has appropriate lessons. Some minor issues are that the ICR claims that the per capita investment costs per beneficiary were fairly small if compared to typical investment projects to meet EU requirements in other EU accession states, but examples to support this statement were not provided. Although the loan was denominated in Euros it would have been helpful to the reviewer if the currency had been reflected in US dollars throughout; in the efficiency section NPV is also expressed in Croatian kuna. More information would have been useful on whether the Bank could have done anything to speed up the delays before physical construction could start. The Borrower implies that perhaps more could have been done, but specifics are lacking.

a. Quality of ICR Rating: Satisfactory

(ICRR-Rev6INV-Jun-2011)
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