|1. Project Data:
ICR Review Date Posted:
|Inland Waters Project
Project Costs(US $M)
Loan/Credit (US $M)
Cofinancing (US $M)
Board Approval Date
|Sewerage (53%), Water supply (34%), Flood protection (9%), Central government administration (4%)|
|Water resource management (25% - P)
Other urban development (25% - P)
Urban services and housing for the poor (24% - P)
Environmental policies and institutions (13% - S)
Regional integration (13% - S)|
||ICR Review Coordinator:
|Peter Nigel Freeman
||George T. K. Pitman
||Christopher David Nelson
|2. Project Objectives and Components:|
The Project Appraisal Document (PAD, page 5) states that the development objectives are:
The development objectives stated in the loan agreement (LA page 5) are:
"to improve water supply services, wastewater services, and flood protection measures in municipalities selected from the inland part of Croatia. The area covered would be from the Sava and Drava, and Danube river basins and the proposed investments would enable Croatia to meet EU directives".
"to improve water supply services, and flood protection measures in the Sava/Drava, and Danube river basins of the Republic of Croatia".
This review uses the PAD version of the objectives as they are more comprehensive.
The project underwent a level 2 restructuring in December 2011. The objective remained unchanged and no additional safeguards were triggered.
b. Were the project objectives/key associated outcome targets revised during implementation?
c. Components:The project had two components: Technical Assistance (TA) and Investments.
A: Technical Assistance. (Appraisal estimate US$ 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:
A2 - Project Implementation Support: This sub-component was implemented by HV and included financing of:
- 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.
A3 - Institutional Strengthening of Utilities: This sub-component focused on providing TA to the participating utilities and included:
- 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.
- 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:
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.
- 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.
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
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.
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.
The estimated borrower contribution was US$ 6.67 million at appraisal and the actual amount expended was US$ 6.96 million.
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
- 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.
- 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
- Sewerage coverage increased from 35 percent (December 2011 baseline) to 73 percent (before the 2011 restructuring the target was 76 percent).
- 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
- 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.
- 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
- 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.
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.
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:
* Refers to percent of total project cost for which ERR/FRR was calculated