Document of The World Bank FOR OFFICIAL USE ONLY Report No: 25176-LT IMPLEMENTATION COMPLETION REPORT (CPL-38160; PPFB-P2560) ON A LOAN IN THE AMOUNT OF USS 7.00 MILLION TO THE LITHUANIA FOR A KLAIPEDA ENVIRONMENT 12/24/2002 Environmentally and Socially Sustainable Development Unit (ECSSD) Europe and Central Asia Region (ECA) This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective December 1, 2002) Currency Unit = LTL LTL I = US$ 0.29 US$ 1 = LTL 3.5 FISCAL YEAR January I December 31 ABBREVIATIONS AND ACRONYMS BOD Biological Oxygen Demand CEM Country Economic Memorandum ECA Europe and Central Asia Region EMC Environmental Management Component ERR Economic Rate of Return EU LSIF European Union Large Scale Infrastructure Facility EU-PHARE European Union Assistance Program to Eastem and Central Europe FRR Financial Rate of Return HELCOM Helsinki Commission ICR Implementation Completion Report KW Klaipeda Water Enterprise LTL Lithuanian Litas MTR Mid-term Review Ntot Total Nitrogen O&M Operations and Maintenance OED Operations Eyaluation Department Ptot Total Phosphorus PCD Project Concept Document QAG Quality Assurance Group USD United States.Dollars WTP Willingness to pay WWF World Wide Fund for Nature WWTP Wastewater Treatrnent Plant Vice President: Johannes F. Linn Country Manager/Director: Roger W. Grawe Sector Manager/Director: Laura Tuck Task Team Leader/Task Manager: Inesis Kiskis LITHUANIA KLAIPEDA ENVIRONMENT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 5 5. Major Factors Affecting Implementation and Outcome 11 6. Sustainability 12 7. Bank and Borrower Perfornance 17 8. Lessons Leamed 19 9. Partner Comments 20 10. Additional Information Annex 1. Key Performance Indicators/Log Frame Matrix 28 Annex 2. Project Costs and Financing 29 Annex 3. Economic Costs and Benefits 30 Annex 4. Bank Inputs 31 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 34 Annex 6. Ratings of Bank and Borrower Performance 35 Annex 7. List of Supporting Documents Project ID: P008553 Project Name: KLAIPEDA ENVIRONMENT Team Leader: Inesis Kiskis TL Unit. ECSSD ICR Type: Core ICR Report Date: December 24, 2002 1. Project Data Name: KLAIPEDA ENVIRONMENT L/C/TF Number: CPL-38160; PPFB-P2560 Counny/Department: LITHUANIA Region: Europe and Central Asia Region Sector/subsector: Water supply (55%); Sewerage (34%); Other industry (I 1%) KEY DATES Original Revised/Actual PCD: 07/09/1993 Effective: 04/01/1995 05/26/1995 Appraisal: 06/27/1994 MTR: 09/30/1997 09/30/1997 Approval: 12/08/1994 Closing: 06/30/1999 06/30/2002 Borrower/lImplementing Agency: Government of Lithuania/Klaipeda Municipal Water Supply Enterprise "Klaipeda Water"; Government of Lithuania/The Nemunas Delta Regional Park Other Partners: Danish Environmental Protection Agency, EU PHARE Program, Government of Finland, Swedish Intemational Aid Agency, Municipality of Klaipeda STAFF Current At Appraisal Vice President: Johannes F. Linn Wilfried Thalwitz Countr Manager: Roger W. Grawe Basil G. Kavalsky Sector Manager: Jane E. Holt Geoffrey B. Fox Team Leader at ICR: Inesis Kiskis Stephen F. Lintner ICR Primal)' Author: Inesis Kiskis; Paavo Eliste; Kari Johansson 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L hnstitutional Development Impact: SU Bank Perfornmance: S Bor-ower Performance: S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Timtte: Yes Project supervision was reviewed by QAG in 2000. Effort of the project task team was assessed as "highly satisfactory" 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The Project was prepared simnultaneously with the Liepaja and Haapsalu Matsalu Environment Projects. Later, the Siauliai Environment project and the Daugavpils Component if the Latvia Municipal Services Project were also prepared following the same concept. The Liepaja, Haapsalu Matsalu and Siauliai Environment Projects closed earlier and Implementation Completion Reports (Bank Reports #20967, #21738 and # 23261 respectively) are available and bear very sirnilar conclusions to this Report. The Project objectives remained unchanged throughout the project implementation. These were: (i) to reduce discharge of partially treated or untreated wastewater into the Baltic Sea; (ii) to restore and enhance the water quality in Klaipeda and adjacent recreational beaches; (iii) to improve the quality, reliability and cost efficiency of water and wastewater services in Klaipeda; and (iv) to improve the environmental management and development of the Kursiu Lagoon and adjacent coastal areas. Project objectives were clear and realistic. They were in line both with national priorities and the Country Economic Memorandum (CEM), and were based on extensive field visits jointly conducted by Lithuanian and Bank specialists. Although the title indicates that this was an environment project, the real development impact was much broader: improvement in environmental quality, better water and wastewater services, improved water company management, development of the utility staff skills. Project Component B supported promotion of community driven development in the Nemunas Delta Regional Park. WWF-Denmark was actively involved in planning and implementing this activity. 3.2 Revised Objective: Objectives were not revised. 3.3 Original Components: Water and Wastewater Improvement Component The component intended to address the following water and wastewater system improvement needs in Klaipeda: Water Supply and Distribution (a) rehabilitation of wellfields I and 2 to improve the supply reliability and to eliminate the hydrogen sulphide traces in supplied water; (b) extension of the supply network to cover areas supplied by shallow wells; (c) procurement of leakage detection equipment; limited rehabilitation of leaking parts of the network; and, introduction of water metering to promote water conservation; (d) water treatment analysis and study on Wellfield 3 to examine least-cost solutions to improve the quality of water provided to residents; and (e) rehabilitation of Wellfield 3 to improve water quality (excessive iron and humus plus micropollutants) and increase supply security. Sewerage and Wastewater Treatment (a) extension of sewerage network to cover areas served by septic tanks; (b) rehabilitation of the terminal pumping station and the terninal main to the treatment works to ensure continuous treatment of current and future wastewater flows; (c) completion of the construction works under way at the new treatment plant and supply and -2 - installation of electrical and mechanical equipment to meet HELCOM treatment recommendations; and (d) rehabilitation of selected parts of sewer system and provision of equipment to locate system leakages. Consulting Services for (a) technical assistance in project implementation for coordination and construction supervision of above works; (b) technical assistance in institutional development for strengthening the organizational arrangements through a twining arrangement. The main objective of this sub-component was to improve Klaipeda Water's overall performance through changes in operational and financial management. The twining partner was expected to support and assist Klaipeda Water in regard to institutional strengthening and human resources development for the first two years of the project implementation period. Areas of assistance included support for: (i) implementing a system rehabilitation and optimization program; (ii) developing and initiating implementation of a conisumer interaction program; and (iii) imnplementing the proposed recording and information system. The component targeted to (i) ensure 24 hour supply of about 80,000 m1/d of water and improve the easily recognizable water quality deficiencies (hydrogen sulphide smell and iron and humus taste and coloring), (ii) to complete the partly constructed wastewater treatment plant and bring the treatment to HELCOM recommendations level (e.g. reduce biological oxygen demand (BOD) discharge from 3500 tons/year down to 500 tons/year, extend service networks to unserviced parts of the town, and finally (iii) develop Klaipeda Water institutionally toward financial self-sustainability. Environmental Management Component (EMC) The Environmental Management Component consisted of 4 activities: (i) Integrated Coastal Zone Management Plan (ii) Eco-Tourism Priority Action Program (iii) Management Plan for Nemunas Delta Regional Park, and (iv) Kursiu Lagoon management Plan In the course of Implementation, activities (iii) and (iv) were merged under the preparation of the Management Plan for Nemunas Delta Regional Park. 3.4 Revised Componenits: Component; Cost; Rating A. Water Supply and Distribution $7,600,000.00; S B. Sewerage and Wastewater $26,100,000.00; S C. TA for Klaipeda Water - Twining; $800,000.00; S D. Management Plan for Nemunas Delta $600,000.00; S E. Integrated Coastal Zone management Plan; $900,000.00; S The borrowing ceiling for Klaipeda was determined based on the affordability analysis using generally accepted benchmark of 5 % of average household income spent on water costs, and was established at level -3 - US$ 7 million. Therefore, several acute investment needs were left outside the scope of the current project. During project preparation, the prioritizing investment needs within this ceiling was initially resolved by assuming that the quality improvement at the Wellfield 3 could be realized with cost effective double in-situ filtration. A subsequent study proved this impossible, and determined a more expensive solution was required, thus creating about US$ 6 million gap in project financing. Fortunately, at the same time the EU Large Scale Infrastructure Program was looking for suitable projects, and grant financing to meet the gap was agreed on. Thus, Phare funds were used to finance the treatment works for wellfields 1, 2 and 3. The wastewater treatment plant. Although some of the structural works had been completed at the project commencement, in reality it proved to be costlier to complete than anticipated (estimate US$ 13 million, actual US$ 18 million). The Government of Lithuania and other donors provided the extra resources. 3.5 Quality at Entnr: Quality at entry was not reviewed by the Quality Assurance Group but is rated here as satisfactory. During project preparation, the best available, although not always accurate, information on water production, consumption and system losses as well as professional judgement were used. Based on that, only the highest priority activities were selected for financing, thus leaving otherwise important sludge disposal investments outside the scope of the first phase project. It was assumed that at the end of the current project the Klaipeda Water company would be financially capable of addressing its final sludge disposal problems in a cost efficient way. In the event, this proved to be the case. In the course of Project implementation, it became obvious that water consumption, in Klaipeda sharply declined compared to projected figures. The Staff Appraisal Report assumed that, in the period of 1994-2003, water "production and sales would remain constant at annual levels of 28.2-29.2 million m while actual production in 2001 was only 10.5 million m', or only 36% of the 1994 level. Decline in demand has been a common feature for similar projects in countries with transitional economies, including the Bank's projects in the Baltic countries (projects in Haapsalu, Estonia; Liepaja and Daugavpils, Latvia; Siauliai, Lithuania). As a result, the facilities financed and built under the Project are overdimensioned for present day needs, and cause additional financial burden on the Klaipeda Water and its customers. However, by completion of the Project, the overall water consumption in Klaipeda has started to grow and within the nearest future (3-4 years) the existing capacity will be more suited to actual needs. While highly relevant, the objectives were also thought to be reasonably realistic but also suitably ambitious. The project design anticipated that the utility would move to full cost recovery and assumed this could be achieved from 1997 onwards and be able to start financing further network rehabilitation from revenue income. In practice, cost recovery has not been fully achieved; revenue does not cover maintenance and rehabilitation up to the full physical depreciation level. The gap can be attributed, in part, to the collapse in water demand and lower revenue received thereafter. While it was understood during project preparation that the Soviet legacy per capita consumption figures were about double compared to the Westem ones, it was assumed that it would take decades before the consumption levels in Lithuania became comparable to the Western pattem. Consequently, the physical facilities and financial projections were based on flat demand till 1998, and slight decline thereafter. However, metering, tariff increases and a general industrial collapse pushed the production down -4 - to only one third of the Soviet time levels of around 400 I/p/d in many transition countries in Eastem Europe. The countries (e.g. Commonwealth of Independent States ) which have not imposed higher tariffs, and metering remains low, still have high production per capita figures. None of the projects designed in early 1 990s foresaw this reduction. In Klaipeda, the sales collapse was from 81,500 m3/d (year 1994) down to 30,000 m3/d (year 2001). The consequent need to steepen tariff increases has been politically difficult to implement in a timely manner, and the consequent revenue lag, combined with overinvestment, have postponed the attainment of full cost recovery for several years compared to original expectations. In general, the efficiency of final treatment of the waste water and disposal of sludge decides the overall environmental impact. In the Klaipeda case, the limited financial resources did not allow developing sludge treatment and disposal, so sludge continues to be managed under temporary arrangements. The quality at entry is judged satisfactory as the collapse of water demand became clearly visible only in 1997. The technical preparation of the project was well done, the components well identified and implementation arrangements in place at project start, including identification of a twining partner. 4. Achievement of Objective and Outputs 4.1 Outcome/achiev ement of objective: In terms of physical implementation, the Project achieved all its objectives. In terms of capacity building and institutional strengthening of Klaipeda Water company, the project also tumed out to be satisfactory. By the end of the Project, Klaipeda Water had the most solid financial standing compared to the other four Baltic water utilities where the Bank had similar projects. However, it should be noted that the goals were achieved very late, mostly during the three extensions of the project closing date, when by joint effort of the Municipal Govemment of Klaipeda and Klaipeda Water's rnanagement, the further financial situation of the company was turned to solid footing. The financial results of the company could have be even better, if it had not been obliged to follow Government Decree 1507 of December 31, 1998. This Decree requests that the water companies install and maintain the water meters in all apartments of multi-apratment blocks at company expense. The Bank recommended that water company should be responsible only for the master meter and that billings should be based on the readings of the master meter. The individual meters within apartments (due to layout specifics there may be up to 4 water meters in one apartment) are too easy to be manipulated which is believed to be a rather common phenomenon. In addition, the water company becomes responsible for the leaks inside the buildings in common areas. Individual meters, however, can be used as a basis for sharing the bills within the building. In a similar project in Daugavpils, Latvia, the unaccounted water volumes started to decreased in line with introduction of master meters in multi-apartment blocks. Unfortunately, the lengthy dialogue with government on this project did not lead to modification of this decree. The environmental management capacity in the Nemunas Delta Regional Park was enhanced, as the preparation of the management plan coincided with legal establishment of the Park as the WWF worked with local partners from the very beginning. 4.2 Outputs by components: Water and Wastewater Improvement Component -5- Water supply * Rehabilitation of Well-field 1&2 PumDing Stations (Bank financed - US $0.92 million). Implemented.. * Wellfield No. 3. Analysis of Alternative Treatment Methods and Pilot Test (Bank financed-US $0.29 million). lmplemented. * Rehabilitation of Well-field 3 (Initially to be Bank financed-US $1.59 million). Completed. However, in 1998, this component was coupled with the replacement of high voltage and transformer gear to the WWTP, and aeration facilities at wellfield No. 1, but subsequently was handed over to the EU LSIF (100% grant financing). Until commissioning of the rehabilitated Wellfield No 3 water (50% of the total water supply), the water suffered from brownish color due to high humus and iron concentrations. The new water purification plant was over-designed to a capacity of 40,000 m /day, while the current production rate is only 16,000 mn. * Service Extension (Bank financed- originally US $0.35 million, but increased to US$ 3.0 million). I As a result of this contract, 13,157 m of water supply pipes and 13,501 m of sewerage pipes were laid into ground in three distinct areas of Klaipeda. More than 400 families were provided with access to water and wastewater services, that previously were not in the system. However the connections from the main pipelines to individual houses are financed by house owners themselves. The Labrenciskes and Kosmonautu areas are inhabited by people with higher than average income and connection to the network will be done with no delay. Rimkai area has been joined to Klaipeda only recently and is inhabited predominantly by lower income population. By November 2002, more than 100 families had connected to the networks. * Water Conservation (Bank financed-US $0.35 million). Completed. Master meters in Kauno street installed and water meter calibration equipment procured. * Rehabilitation and Leakage Promram (Bank financed-US $0.33 million). Completed. Losses in the networks are down to 7% which is a very good achievement. Activity was launched using the loan proceeds and is continued on routine basis by the Klaipeda Water using its own funds. * Sewerage * Completion of Wastewater Treatment Plant (Swedish and Finnish financing-US $12.67 million). The new WWTP has been operational since December 1998. Wastewater treatment efficiency has reached the levels expected by the Project, i.e. Total Nitrogen (N)- 15 mg/l , and Total Phosphorus (P) -1.5 mg/I. The Ministry of Environment insists on further improvement of the treatment so that the effluent quality meets the HELCOM recommendations, which are 12 mg/l of N . The figure below illustrates the sharp decrease of BOD, , nitrogen and phosphorus loads in treated effluents after commissioning of the new wastewater treatment plant in 1998. BOD7 load was reduced from 3205 t/y to 181 t/y; nitrogen - from 764 t/y down to 242 t/7, and phosphorus - from 90 t/y - down to 23 t/y. - 6- Effluent Load, Klaipeda 5000 4902 4000 Xe ||| N n N) t y 3000 1500 918 10 1000 - L'o?S 500 59 2 24 O 51~~~~~~~~~~~~1 CMN ce n so - X 0 CY) 0 0 0 0 0 C 0 o o * Sludge Dewatering (EU - Phare financed-US $0.886 million). Implemented. The EU Phare Program financed procurement of sludge dewatering centrifuges which are now used in the wastewater treatment plant. * Sewer Rehabilitation (Bank financed-US $0.8 million) Implemented. * Pumping Station No. 6 (Rehabilitation of Terminal Mlain) (Bank financed-US $ 1.06 million). Implemented. Environmental Management Component. In the context of the Klaipeda and Liepaja Environment Projects, EU PHARE Program financed preparation of a Coastal Zone Management Plan covering the entire Lithuanian and Latvian coast. In Lithuania, this activity complemented the Klaipeda Development Plan which had been initiated by the Lithuanian authorities and undertaken by leading Lithuanian regional planning specialists. Working together revealed differences in regional planning approaches used by the Lithuanian and EU experts. The main difference was that the EU experts promoted public participation in arriving at decisions - a tool which was largely neglected by their Lithuanian colleagues. At the same time, it should be noted that consultation process was held and demonstrated its viability. The plan in its entirety was not adopted by the authorities for immediate implementation as it was intended to be of advisory nature, and drew only a broad based vision of the development options for the area. The Nemunas Delta Regional Park is up and running. The staff of 7 people, which includes 5 professionals, has good control over the territory of the park. The activities which were envisaged under the umbrella of the Klaipeda Environment Project are completed. The management plan for the Park is being gradually implemented. The cooperative work with the WWF-Denmark served as a good basis for - 7 - the newly established park administration. Effective two-way participatory relationships were created. Not all suggestions of the WWF were accepted as originally presented and solutions were sought in joint workshops and exercises to better adopt the proposals for local circumstances. A number of other projects are being concurrently implemented in Nemunas Delta and all of them are oriented on sustainable ecosystem management. The partner organizations include the European Union for Coastal Conservation, WWF-Germany, and local NGOs. 4.3 Net Present Value/Economic rate of return: The economic rate of return (ERR) of the Water and Wastewater Component has not been calculated but would be significantly higher than the Financial Rate of Return which is estimated at 9.2 % (see next section). The main benefits which are not included in the financial analysis are: (a) health benefits of improved water quality, (b) increased amenity in the form of higher property values and (c) environmental amenity benefits for those who visit beaches in Klaipeda area. The FRR presented here would represent thus a conservative lower bound estimate of actual project benefits. The economic benefits of the project are described qualitatively below: Health Benefits. Health benefits were not quantified. However, in a world with full information, such benefits should be reflected in the higher willingness to pay (WTP) for water what the people currently pay through water tariffs. To the extent that people use poor quality water because they are not informed about its health effects, an additional benefit can be added to the normal economic benefit. However, unlike some countries in the ECA region the motivation for this project was not the poor quality of the water in terms of organic or microbial pollution, but in terms of unreliable supply and improved taste properties (i.e. smell, hardness and high iron content). Property Values. Increased benefits in the form of higher property values as a result of improvement of water quality in coastal areas is indeed a reality and could be estimated using indirect valuation techniques (i.e. hedonic pricing). The property valuation studies in the US and other high income industrialized countries have shown that these benefits can be significant. Environmental Amenity Values. For valuation purposes, the economic benefits of environmental improvements to Klaipeda's beaches should be included. However, in this case, these are not related to a reduction in nutrient load or nutrient concentration per se, but to the reduction of eutrophication effects that in one way or another affect people's well being. For example, reduced eutrophication of coastal waters would likely generate significant direct use benefits which are related to people's recreation activities, since decreased algal blooms and a changed composition of the algae flora may increase the peoples' utility from swimming, angling, birdwatching, etc. It is thus possible to measure how much individuals are willing to pay (WTP) for improvement in environmental quality in the Klaipeda beach areas, i.e. increased water visibility, aesthetic beauty, improved fish catch, etc. Aggregating WTP across individuals who directly benefit from this environmental improvement would give us a measure of the total environmental benefits, which could be a part of project economic analysis. However, evaluation of environmental amenity benefits from improved water quality is complicated in reality since the quality of coastal waters in Klaipeda beach areas is significantly affected also by pollution (e.g. by oil spills) from the Klaipeda port. It would be thus difficult for individuals to separate the changes in water quality resulting from reduced pollution loads from changes in water quality as a result of oil spills. 4.4 Financial rate of rentrn: The Financial Rate of Return (FRR) of the project for the 1995 - 2015 period is calculated at 9.2 - 8 - percent which is the highest among the Bank financed water supply projects in the Baltics States. The financial analysis carried out during the project preparation had FRR of 10.1 percent. The main reasons for lower than expected FRR was deeper then projected reduction in water demand. As a result, investments into new water supply and wastewater treatment facilities were over-dimensioned with sub-optimally high capital cost of new investments. For example, if the capital cost of new investments would have been 20% lower, the FRR would increase to 12% under actual dynamics of tariff development and water use. 4.5 Institutional development inpact: The project had a significant institutional development impact. This is particularly true for the Klaipeda Water company. During project implementation, Klaipeda Water company was transformed into a shareholding company with a modem management structure. The introduction of new management structures and behavior took time and the process sometimes painful. The most important achievements in this respect were: (i) creation of the Company Board with a clear line of division between the owner (Municipality) and the executives of the company, to avoid conflicts of interest in decision making; (ii) adoption of a long term strategic planning process, which previously was not used in Lithuanian water companies; (iii) introduction of financial management and accounting software SCALA, which has enabled management to see a broad picture of the company performance and to prioritize short term decision making. The Management of Klaipeda Water also benefited from a twining arrangement with the Malm6 (Sweden) water company. However, it should be noted that twining cooperation was quite successful on technical aspects but had only marginal impact on govemance and managerial changes. As a result of the managerial improvements, Klaipeda Water company was able to improve its billing collection indicators, reduce staff numbers and improve the financial performance substantially. Since the year 2000, Klaipeda Water's financial indicators show a cash profit. -9- Tariffs (excl. VAT) and Billing Collection in Klaipeda Note: Tariffs for other than domestic consumers are the same, except for BOD5 surcharge for highly polluted sewage 120- 3.5 08 3.03 3.08 100 101 101 2.5 80 - 2 s 60 -_E -0-Billing Collection % 1.5 40 - oo -- Combined Average TarUff, 20 --ri-Combined Domestic Consumption Tariff, LUm3 0.5 0l 0 1995 1996 1997 1998 1999 2000 2001 Staff Number Development, Klaipeda 650 Water 600- l 550- 581 576 5 549 500 - 450- 400 -l 350 t| -Numbe of Saff| f 300 250 200 - 1 0 - 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implemientinig agency: There were no factors outside Governnent or Implementing Agency Control. 5.2 Factors generally subject to government control: 1. Managing the declining water consumption. As experienced elsewhere in the Baltic countries and Eastern Europe, in Klaipeda the transition to a market economy resulted in a significant decline in water demand. This decline started first due to slowing industrial activities, but was intensified later by introduction of metering of water consumption in individual apartments (see details in para 3 of this chapter), and by increasing tariffs. The decline in consumption was anticipated by the Bank tearn, however opposed by the Borrower who anticipated increasing consumption patterns at least up to the levels of late 1980s, when industrial water use was considerable higher. Eventually, (as mentioned in Section 3.5) a "zero growth" option was adopted, but the decline in consumption was deeper than anybody could expect at the time of project preparation.This resulted in overcapacity of the water and wastewater treatment facilities, at least in the medium term. Currently, about 75% of apartments are metered and invoiced individually and billed consumption is only about 81 liters/person/day. However, the latest data confirms consumption increase in the year 2002 compared to year 2001. 2. Counterpartfinancing. Government allocated sufficient counterpart funding, particularly to co-finance construction of the waste water treatment plant. 3. Introducing water meters. A Government Decision (#1507 of December 31, 1998) required installation of water meters in all apartments at the expense of the water company, and demanded settlement of bills based on the readings of the individual rather than master meters. This put an unfair financial burden on all Lithuanian water companies. Although the Bank has been raising this issue with Government ever since, the Decree remained in force by the Closing date of the Project. Bank's view was that the readings of the master meters, rather than meters which are located inside individual apartments, shall serve as a basis for billing, because the water company is not responsible for piping within the buildings, and its possibility to supervise the condition of meters (like manipulation) is very limited. 4. Anti-corruption efforts. The Lithuanian Competition Council was extremely pro-active and cooperative with the Bank in investigating and proving the collusive bidding practices by two local contractors. 5.3 Factors generallv subject to inipleinenting agency control: Klaipeda Water. Klaipeda Water company progressed a long way and is now a managerially and financially robust company. Inexperience in dealing with foreign partners at some point threatened the implementation of the twining arrangement with the partners from Malm6 Water utility. Also, in the beginning, the company was slow to adopt the managerial improvements suggested by the Bank Task Team and the consultants. These included optimization of the management structure, outsourcing of non-core activities, introduction of computerized information management system as well as adoption of a strategic planning process. The situation started to improve after the management of the company was changed in 1998. Eventually, adoption of new management practices and style brought quick improvement in Klaipeda Water's operational and financial performance. Klaipeda Municipality. Dialogue with Klaipeda Municipal government during most of project implementation period was constructive. The Municipality, as owner of the water company, made an -11 - important decision to strengthen the management of the company and to modify the composition of the Company Board as recommended by Bank. The common practice in Lithuania was that company Board consisted mostly of the company staff and was chaired by Director General of the utility. The arrangement did not facilitate the decision making, particularly on long term strategic issues and on managerial staff appointment decisions, as the owner and hired staff often had different views on those problems. During most of the project implementation period, tariff setting was the Municipality's prerogative and tariff adjustment decisions were not made in timely manner. Nowadays, the National Energy Pricing Commission, an independent utility price regulator, reviews all tariff adjustment proposals and decides accordingly. However, the new tariffs become effective only after being formally approved by Municipality. 5.4 Costs andfinancing: The project turned out to be more expensive than originally planned. This was due to two activities: the wastewater treatment plant and Wellfield #3. Cost of the wastewater treatment plant eventually was USD 22.49 million compared to USD 12.60 million in the Staff Appraisal Report (SAR) . The cost of the drinking water component was USD 5.58 million versus USD 2.99 million in SAR. For more data on project costs please refer to Annex 2. Higher cost of the wastewater treatment plant was envisaged as one of the project risks, and it indeed materialized. The main reasons for cost overrun were the long delay in commencing of the construction (inflation), excessive standards imposed by the authorities (double cabling, stand by transformers etc) and including the nitrogen removal process, which was not foreseen at appraisal. The Lithuanian Government provided sufficient additional resources to allow the completing of the upgraded plant. In Wellfield # 3, the treatment method originally envisaged did not work and another option was selected. Financing of the water improvement plant at Wellfield # 3 was taken over by the EU LSIF program, while Bank funds were reallocated for the network extension activities. Except for the delay to start the Integrated Coastal Zone management activity, the cooperating co-financiers, including the Lithuanian government and Klaipeda Municipality, provided funds in a timely manner. 6. Sustainability 6.1 Rationale jfi suistainabilirv rating: Rating for the sustainability of the entire project is "likely". 1. Water Demand The future performance of Klaipeda Water company is primarily determined by company's ability to adjust its operations with water demand, the Municipality's tariff policy, and improvements in system efficiency (i.e. reduction of unaccounted for water, scrutinizing production costs, increasing energy efficiency etc). The water consumption forecasts, based on 3 rd quarter data suggest that in 2002 the water consumption will be higher than in 2001. While the domestic water demand declined some 3%, water consumption of institutional users actually increased by 2% compared to the third quarter if 2001. It is expected that introduction of two tier tariffs (consisting of fixed "subscriber's fee" and variable - 12 - volumetric part) combined with the prospective billing of housing blocks based on master meters would limit "in house" water losses (i.e. manipulation with meters) which should have further stabilizing effect on water demand. At the time of writing of this report the decision on introduction of the two tier tariff was pending. In addition, the improvement of economic situation is also likely to have an impact on water use habits of consumers. Current levels of household water use are very low and indicate very strict water use regulation within the family, as well as high level of manipulations with water meters. Although at the time of completing this report the forecasts suggested that water sales in 2002 may exceed 10 mill. m, for purposes of this report it was conservatively assumed that water demand will stabilize by year 2003 at the level of 9.5 mill. m, or about 75 lpcd. Total water production is expected to stabilize at the level of 11 mill. m, leaving the overall level of imaccounted for water 14% (i.e. same as for 1995) (see Figure 1). (As mentioned earlier, 7% of leakage is in networks only.) Flgure 1: Actual and projected water production and consumption trends (1995-2004) 350 300 25.0 _ h 1995 0 6 1997 19 1999 2000 2001 2002 2003 2004 -13 - 2. Financial Outcome and Cost Recovery Assuming a two tier tariff, with the fixed monthly payment of 5.25 LTL and volumetric portion of 3.19 LTL/m3 will be approved by the Municipal government in full extent by end of 2002, the company would be able to achieve a satisfactory financial sustainability and full cost recovery by 2003. After that, only marginal tariff adjustments would be needed to maintain Klaipeda Water financial health and allow proper cost recovery (including revaluation of assets) and debt service. The actual and projected combined tariffs are illustrated in Figure 2 (here and elsewhere tariffs are given in nominal terms). Figure 2: Actual and projected tariff adjustment (1995-2010) 6.00 - 5.00 __I_I___ L 4.00 -h~*I 3.00____1111 I- 1.00111 1 0.00 - -.- 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1995-2002 - Actual tariffs 2003-2010 - Projected tariffs The actual tariff decisions will of course depend on the management decisions on performance improvement, such as cost cuttings and on the future water demand. It will also depend whether the company will be allowed to start billing domestic consumers in apartment blocks based on master meters. The latter is critical to stabilize the service demand during the coming years. Table 1: Major assumptions of the projections of water demand (2001 -2010). Year Unit 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total population _ _1000 210 217 217 217 217 217 217 217 217 217 Sales volumes: - Domestic Water 1000 m 6,209 6,000 5,700 5,700 5,700 5,700 5,700 5,700 5,700 5,700 - Institutional Water 1000 ml 2,737 2,800 2,660 2,660 2,660 2,660 2,660 2,660 2,660 2,660 - Commercial Water 1000 m 1,537 1,200 1,140 1,140 1,140 1,140 1,140 1,140 1,140 1,140 Total Water Consumption I 000 m 10,483 10,00 9,500 9,500 9,500 9,500 9,500 9,500 9,500 9, _ _ _ _ _ _ O0 - 14 - Domestic Consumption Ipcd 84 79 75 _ 75 75 1 75 75 75 1 75 | 75 Combined Tariff LTL/m 3.07 3.77 4.52 4.75 4.94T 5.09 5.24 5.339 | 5.53 T 5.63 Based on above assumptions and tariff development, the planned net revenues and financial indicators are shown in Table 2. It is expected that the company will achieve the full cost recovery only by 2007 as it will face the increasing debt service costs and depreciation charges. The projections assume a slightly increasing O&M costs, as it is expected that gains in cost efficiency will be offset by real price increases of major production inputs (i.e. electricity, heating, and labor), and increasing maintenance costs due to accumulation of fixed assets. Table 2: Projected Financial Performance of Klaipeda Water (2002 - 2010). Year Unit 2002 2003 2004 2005 2006 2007 2008 2009 2010 Net Revenues MLTL 35.7 40.6 42.6 44.3 45.7 47.0 48.4 49.7 50.9 - Total O&M Costs MLTL 22.2 22.8 23.5 24.2 24.9 25.7 26.5 27.3 28.1 Operating Margin MLTL 13.5 17.7 19.1 20.1 20.7 21.3 21.9 22.4 22.8 - Depreciation MLTL 14.8 15 .4 15.4 15.4 15.4 15.4 15.4 15.4 15.4 - Net income/loss MLTL 1.5 -0.3 -0.2 -0.4 -0.5 -0.5 -0.5 -0.5 -0.4 Net Profit MLTL 0.2 2.3 3.4 4.3 4.8 5.4 5.9 6.5 6.9 Operating Margin ° 38 44 45 45 45 45 45 45 45 Working Ratio % 62 56 55 55 55 55 55 55 55 Operating Ratio % 104 94 91 89 88 87 87 86 85 The company would be able to generate sufficient cash flow (operating margin more than 40%) to be able to fully carry out self-financed replacement investments (i.e. 100 percent of amortization of its fixed assets). However, the company is planning to carry out some new investments in 2003, mainly into wastewater treatment plant in order to meet EU standards, for which it is currently seeking additional loan financing. The annual debt service costs would remain some 2.9 mill. LTL during the period of 2002 - 2010. The cash flow from operations is sufficient to cover fully the debt service costs, assuming that projected tariff adjustments will take place (Table 3). Table 3: Projected Use of Funds and Cash Flow for 2002 - 2010 Year Unit 2002 2003 2004 2005 2006 2007 2008 2009 | 2010 Cash flow'from MLTL 15.0 17.7 18.8 19.7 20.2 20.8 21.4 21.9 22.4 operations - Debt Service Cost MLTL 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 ______ _____ _____ ~~~~~~~~~~2.9 - Change in NWC 1/ MLTL 0.4 0.5 0.2 0.1 0.1 0.1 0.1 0.1 0.1 Cash for Investments MLTL 11.6 14.2 15.7 16.7 17.2 17.8 18.4 18.9 ~~~~~~~~~~~19.4 Replacement investments MLTL 17.4 26.6 16.5 15.3 15.4 15.4 15.4 15.4 2/ __ _ _15.4 Required Financing MLTL 5.8 12.3 0.7 0.0 0.0 0.0 0.0 0.0 0.0 - 15 - 1/ Net Working capital 2/ Assuming 100 percent of depreciation reinvestment 3. Affordability The impact of the recommended tariffs on domestic customers' ability to pay is summarized in Figure 3. The figure shows the share of the Klaipeda Water service cost in relation to earnings of average and low income families. It is assumed that there are 3.2 family members per average household. The income of average and low income households were 1,148 and 784 LTL per month respectively in 2001. It was assumed that the nominal incomes increase at the rate of 3% per year. The share of water services is expected to increase to 3 percent and 4.4 percent from average and low income household monthly income in 2003 and will gradually decrease thereafter, well below 5 percent limits of acceptability. Figure 3: Service cost share from household eamings In 2001*2010 5 _ 4.5 4 3.5 3 at 25 [ mincoe 2 1.5 0 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 6.2 Transition arrangement to regutlar operations: Throoughout the project implementation, Klaipeda Water operated in "regular" mode. Indicators for monitoring the future operations are in place, which include, but are not limited to: Financial and operational indicators: (i) operating margin; (ii) level of bill collection; (iii) percentage of unaccounted water, (iv) number of employees per km of network. Environmental indicators: (i) BOD7 mg/I; (ii) Suspended solids, mg/I; (iii) N, mg/l; (iv) P mg/I. Hygienic and drinking water quality indicators: Nitrate mg/I; nitrite mg/I; Fe.; turbidity, special energy conductivity. - 16- 7. Bank and Borrower Performance Bank 7. 1 Lending: The Bank's performance during identification, preparation and appraisal was satisfactory. The project was prepared as a response to a request of the Govermment of Lithuania, which under its obligation as a Contracting party to the Helsinki Convention and as a national environmental priority had committed itself to clean-up of the Baltic Sea. The project was identified, prepared and appraised in close cooperation with the Government and potential donors. The Bank's team represented a mix of environmental, technical economic and procurement specialists with extensive knowledge of the sector and Bank operations, The team was comprised of Headquarters and Field office based staff who all possessed good knowledge of local conditions. The Bank provided its assistance to the Government of Lithuania in designing a two-component project concept, which introduced market based approaches in the water and wastewater management sector, institutional strengthening of the water utility and also provided for demonstration of new enviromnental management approaches in the adjacent area. A number of risks were identified during appraisal: (i) possible delays due to limited experience of the Ministry of Environment and Klaipeda State Water Supply Enterprise to implement projects of such complexity; (ii) the costs of the project could have been underestimated due to high local price volatility in newly independent country; (iii) the failure of Government and Municipality to provide counterpart funds in a timely manner; (iv) lack of political commitment at Klaipeda Municipality to support transformation of the Klaipeda State Water Supply Enterprise into a independently managed water and wastewater utility; (v) political and macro-economical factors could interfere with the commitment of Klaipeda Municipality to authorize tariff increases which would be sufficient for full cost recovery, (vi) failure to collect water bills, (vii) difficulties in coordination of activities between national and local and nongovernmental and consultant organizations. These were well-predicted risks and most of them were encountered in various phases of project implementation. The Bank team in close cooperation with partners, including the Government, was able to mitigate the emerging problems. There were no risks anticipated in introducing the wastewater treatment technology. Although most of the technology was fine, however, the wastewater treatment plant did not perform in accordance with design specifications, and a long fine-tuning period was required. Water demand was not identified as a separate risk but this eventually became the most critical for the success of the project. And there is no surprise, as similar demand drop had never been experienced in any part of the world. However, due to the. critical nature of sales, the traditional sensitivity analysis which was carried out as part of the financial analysis, might not have been adequate to measure the magnitude of the sales decline risk. During appraisal, the Bank maintained very close relationship with prospective co-financiers from the European Union (Phare Program), Governments of Denmark Finland and Sweden. The donor representatives were invited to participate in the appraisal mission and to commnent on the project design and implementation arrangements. - 17 - The project was fully consistent with the Bank's safeguard policies valid at the time of project appraisal. It was placed in environmental screening category "B" and did not involve any involuntary resettlement or land acquisition. 7.2 Supervision: Bank's performance during supervision was satisfactory. Supervision missions visited Klaipeda regularly at 6 month intervals. In between missions, continuous implementation support to the Borrower was extended from the Bank's Riga and Vilnius Offices. In order to maximize the efficiency of supervision, the missions included representatives of both the Bank and co-financiers. The project used a unified reporting process for all cooperating parties, including the Bank, which allowed for greater efficiency in the preparation, distribution and review of the reports by Lithuanian and extemal parties There was a continuity in supervising the project. The core of the supervision team remained constant. While Task Team Leaders changed twice, the new one each time was selected from the project tearn. Four years before the project completion, the task team leader's responsibility was transferred to the field office staff that had been part of the team since inception of the project. Both of the previous Task Team Leaders remained available for advice which provided additional continuity in the Bank team. Supervision was substantially supported by short term Finnish consultants paid through the Consultant Trust Fund. They were instrumental in advising the Klaipeda Water on financial and institutional development issues. The Bank exercised considerable flexibility allowing 3 extensions of the project closing date. This enabled to implement the revised network extension component and to achieve the original project objectives. In the year 2000, QAG reviewed the supervision process of the Project and it was recognized as a best practice case. 7.3 Overall Bank peiformance: Overall Bank performance was satisfactory. Preparation and supervision was very closely coordinated with the co-financiers, which enabled to solve emerging problems, but at the same time to remain firm on critical issues. Borrower 7.4 Preparation: Borrower performance during preparation was satisfactory. During preparation and appraisal, the Government of Lithuania and the ultimate beneficiaries remained highly committed to the project, as they saw this as an opportunity to meet their intemational obligations and to improve environmental conditions in the Nemunas Delta area, the Kursiu lagoon and the Baltic Sea itself. While the Government's primary concern was achieving that the treated wastewater meet the HELCOM recommendations, it accepted more comprehensive approach, as proposed by Bank, which concentrated on achieving gradual environmental improvements through phased introduction of market based elements into water sector management. 7.5 Government implementation performance: - 18 - During implementation there were four mayors in Klaipeda, and their performance during implementation was uneven, therefore it is rated as marginally satisfactory. Government performance. Ministries of Finance and Environment as well as the Municipality of Klaipeda were budgeting adequate counterpart resources for implementation of the project. Government did not respond positively to the Bank's numerous requests to modify the Government Decree #1507 of December 31, 1998 which put unjustified financial pressure on all Lithuanian water companies. Klaipeda Water estimates that as a result of following this decree the company every year loses around 4-5 million LTL. At the same time it should be noted that Government and its Competition Council closely cooperated with Bank in resolving the bid rigging in case arising under the network extension contract in Rimkai, Labrenciskes and Kosmonautu areas. Municipal performance. During implementation, four Mayors changed in Klaipeda, and their support to project varied. In the beginning of implementation, Municipality fully appreciated importance of the project to Klaipeda city and was supportive to the project. Later, support declined and re-emerged in the final stage of implementation and during the extension periods. Municipality reorganized the former Klaipeda State Water Supply Enterprise into the municipally owned joint stock company "Klaipedos vanduo" (Klaipeda Water), and was attentive to Bank's suggestions on how to streamline the management structure of the company. The change of the management of the company in late 1998 marked a beginning of the upward trend in the technical and financial performance of the "Klaipeda Water". The company has taken drastic steps to irnprove the efficiently of operations and its staff ratio per population served has been substantially improved. In the course of implementation, the Municipality was slow to adjust the tariffs in a timely manner which would have allowed to ensure sustainable operations of the Klaipeda Water company well before the end of the project. 7.6 Implementing Agency: The Klaipeda Water at all times showed a strong interest in the success of the project, however the implementation performance, particularly in early stages of implementation was lower than originally expected. As a result of the targeted training effort which was supported by SIDA and Bank, the staff and management acquired knowledge on modem utility company management styles which eventually allowed the newly appointed management to improve the performance of the Klaipeda Water. 7.7 Ov erall Borrowi er perjbrniance: The overall Borrower performance is rated as marginally satisfactory. 8. Lessons Learned The lessons learned for the Klaipeda Environment Project in principle are similar to those of the Liepaja Environment Project, the Haapsalu Matsalu Environment Project and the Siauliai Environment Project (Bank reports #20967, #21738 and # 23261 respectively), however the most important ones are as follows: * Cooperatively planned and implemented projects that are based on mutual trust between Bank and Borrower can "change the way" the cooperating parties think about the environment and development - 19- issues; * The stronger the commitment at various levels within the Borrower country, the Bank and the donors/co-financiers, the better result. In case of Klaipeda, the commitment level at municipal level was fluctuating at certain stages of implementation, and that immediately affected on implementation progress both in negative and positive way; * Project reconfirmed findings of earlier projects that it is import to ensure continuity of task team leaders and task teams. This helps to build confidence among various parties participating in the project, which is particularly important in solving sensitive issues; * Project explicitly demonstrated that transfoming of an existing water and wastewater utility developed in a centrally planned economy into an efficiently managed self sustaining entity, and introduction of modem corporate management ideas are much more challenging tasks than physical implementation of the project. In similar projects special emphasis should be placed on institutional capacity building; * The Klaipeda Environment Project reconfirmed the fact that while drafting the financial and economic projections, the project teams should be conservative in their assumptions of critical variables, which have the highest impact on revenues and costs. These tend to be too optimistic, and in long run the projects are likely to experience lower than anticipated economic and financial rates of retum. Project appraisal should ensure that the assumptions are realistic and that contingency plans are drawn for coping with deviations from the most likely outcomes. 9. Partner Comments (a) Borrower/implementing agenci: LIETUVOS RESPUBLIKOS APLINKOS MINISTERIJA THE MINISTRY OF ENVIRONMENT OF THE REPUBLIC OF LITHUANIA x Jaksto St 4/9, LT-2600 Vilnius Tel. (+370 5) 2 66 35 39 Fax (+370 5) 2 66 36 63 E-mail: info@am.It URL: www.am.tt |Mr. Inesis Kiskis, Task Team Leader 2002-12-18 No. 05-04-7137 he World Bank, Vilnius Office l I I EVALUATION OF THE KLAIPEDA ENVIRONMENTAL PROJECT Dear Mr. Kiskis, The Klaipeda Environmental Project was the first environmental investment project in - 20 - Lithuania, financed by a group of financiers led by the World Bank. It was undertaken in response to the request of Lithuanian Government to help in meeting its intemational obligations in improving the state of the Baltic Sea, and to provide better water and wastewater services to inhabitants of Klaipeda city. Additionally, the project aimed at improvement of environmental management practices in the Nemunas lowland basin. The main objectives of the project were as follows: * Reduction of various pollutant loads from the Klaipeda area into the Baltic sea. * Improvement of the quality, reliability and cost efficiency of the water supply and wastewater services in Klaipeda. * Assistance in establishment of financially sustainable provision of municipal services. To implement the project, the Govemment of Lithuania signed a number of agreements. These included the World Bank, Danish, Environmental protection Agency, EC PHARE, SIDA -Swedish Intemational Development Agency, Finnish Ministry of Environment. In Ministry's opinion, the Project outcome is generally positive, although implementation process was not smooth, and due to slow start, its duration was longer than originally planned. Project substantially contributed to the improvement of water and wastewater services in Klaipeda city and enhanced the environmental management practices in the Baltic sea. Component 1. Water and Wastewater Improvement. It is important to note that the SPJSC "Klaipeda Water" has been operating under commercial law During the project, the management and the staff of the company underwent a major capacity building exercise as a part of the twinning arrangement with the Swedish water companies. Currently Klaipeda Water is one of the best performing water utilities in Lithuania. At the same time, the lessons learned on this project are consistently used in other similar projects which are financed by the local and EU funds, and all the effort is to avoid repetition of mistakes made in designing and implementing this project. The main lesson learned from this project component is that upgrading of the water and wastewater utilities has to be carried out in a phased manner, avoiding over-investment into facilities and hardware. The development shall be in line with the affordability limits of population, so that service cost does not become an excessive burden on family budget. However the water companies must have all incentives to strive for early achievement of prescribed effluent quality standards at a cost which is affordable to customers. The project demonstrated that - 21 - efficiency of operations at water utility can be substantially improved by small scale investments into better accounting systems, including water metering, reducing electricity consumption by replacing inefficient and over-dimensioned pumps, improved leakage detection and prevention, thus reducing operational losses and through reduction of excessive staff. Component 2, Environmental Management. Activities within this Component were mainly concentrated in the Nemunas River Delta Regional park, which started practical functioning during the project. Close cooperation with WWF-Denmark allowed for cross-fertilization of nature conservation and management ideas accumulated in two countries. The small scale activities in the Park, which originally seemed to be disconnected and scattered, eventually complemented each other. The Management Plan for the Regional Park, which was prepared as a part of the Project is being implemented and updated as required. The larger scale Integrated Coastal Zone Management exercise contributed to better understanding of regional development priorities in the Westem Lithuania. Ministry of Environment would like to thank the World Bank, Danish Environmental Protection Agency, the European Commission, the Swedish International Development Agency, the Finnish Ministry of Environment for their assistance and cooperation implementing the Klaipeda environment Project. The experiences gained will be used in developing and implementing other investment projects. Sincerely yours, Secretary of the ministry Emilis Gustainis "KLAIPEDOS VANDUO" - 22 - SHORT ASSESSMENT OF KLAIPEDA ENVIRONMENT PROJECT, WATER AND WASTEWATER IMPROVEMENT COMPONENT 1995 - 2002 GENERAL The Klaipeda Environment Project was planned to be implemented in the years 1995-1999. However, in 1998, PHARE committed additional financing to the project, and the implementation term was extended to 2001. Due to delayed tendering procedures (extension of new network) and modified scope of works (rehabilitation of wellfield No. I and construction of water treatment plant at wellfield No. 3 and Dumpiai Transformer sub-station) the duration of the project was extended until 2002. The last contract of the Environment Project (the non-Bank financed rehabilitation of wellfield No. I and construction of water treatment plant at wellfield No. 3 and Dumpiai TP sub-station) is currently being fmalised. MAIN OBJECTIVES All main objectives of the Project were achieved. The benefits of the project were acknowledged not only at the company level, but also on the level of Klaipeda city and the Republic of Lithuania.. The objectives: 1. Reduce discharge of partly treated and untreated wastewater into the Baltic Sea. To improve quality of surface and ground water in Klaipeda and water quality in Curonian Lagoon and upgrade the coast of the Baltic Sea. The biological wastewater treatment plant was completed and started operation in 1998. It improved ecological status of the Curonian Lagoon and the Baltic Sea significantly. Discharges into the Curonian Lagoon were reduced: suspended solids - by 96% BOD7 - by 95% total nitrogen - by 65% total phosphorus - by 75% When construction of pumping station No. 4 and rehabilitation of wastewater network in the area of Rutu-Minijos streets was completed, the wastewater, which earlier had been discharged directly without treatment, was collected and directed to the WWTP for treatment. The rehabilitation of the main pumping station of the city has reduced significantly consumption of the electrical power and number of breakdowns of the wastewater pressure line. 2. To improve water supply and wastewater services in the citv of Klaipeda During the rehabilitation of the wellfields No. I & 2, the most worn-out equipment was rehabilitated and new, modern water treatment equipment was installed, which ensure continuous water treatment and supply to the customers at minimal costs. Rehabilitation of water and wastewater network (more than 15 km) reduced number of breakdowns in the network by 53%. The time for localisation and liquidation of the breakdowns and water losses were reduced by 46%. That was the result of the network rehabilitation and of application of purchased leak detection equipment and TV camera for network inspection. Water and wastewater network extension to Kosmonautu, Rimku and Labrenciskiu areas (30 km total) gave a possibility for 400 new customers to connect and improved the quality of the services to the existing - 23 - customers. About 100 of new customers have already connected to the water supply and wastewater network. During implementation of the water conservation program, master water meters were installed in the blocks of flats, which allowed to measurement of water amount consumed in separate blocks of flats. Decentralisation of water metering and replacement of water connections to the dwelling houses reduced number of breakdowns and water losses in the network. The purchased water meter testing bench allows the company to render services of good quality to the customers promptly. The rehabilitation of the aeration system at the wellfield No. I will stop discharge of the hydrogen sulphide gas, which was unpleasant odour, into the atmosphere, and the water will not be contaminated with dust. The renovated building will ensure sustainable and safe operation of the wellfield. The construction of the water treatment plant at the wellfield No. 3, the biggest wellfield in the city, is close to completion. When the operation of the new water treatment plant starts, the population of the southern part of the city will be supplied with the potable water of good quality, complying with all quality standards of the EU. 3. To improve performance and management system of Klaipeda Water Company. Among the wide range of environmental problems, the issues of institutional development of the company, strategic planning, development of management information systems were discussed and analysed, which helped to improve the financial standing of the company, necessary to fulfil financial obligations of the project and ensure the financial sustainability of the company in the future. These issues were solved through the twinning - co-operation agreement with the similar Water Company in Malmoe, Sweden. The co-operation allowed taking over the Swedish experience in the implementation and operation of management and information systems and in the development of the company management model, strategic planning. It also allowed the specialists of the company to implement their ideas utilising westem equipment and technologies. With the support of the World Bank consultants, a number of measures were implemented and a number of decisions were made, which allowed the company to obtain a new attitude towards the processes of planning and financial analysis. The accounting program SCALA was introduced and implemented within the project, which allowed further improvement of the company management: the personnel management program was introduced, the customer accounting program is being implemented. The planning process in the company was changed simultaneously by introducing long-term strategic plans until 2010, the module of financial planning was introduced for long-term planning of financial indicators. The management structure of the company was modified in accordance with the model of completely decentralised structure, in order to make management of the company more efficient. Separate departments were established in accordance with the key-function of the company, with each department being responsible for its budget and costs. The introduced system of department budgets allows the company to implement the cost-saving plan of the company efficiently. The experience of the company in the breakdown of financial indicators by the cost centres, which allows application of a new method of the company's performance analysis - performance analysis through performance indicators - has been transferred and is being successfully implemented by other Lithuanian water companies. Efficient management of the company allows supplying of the customers with the water of good quality at minimal prices (water and wastewater tariffs in Klaipeda are one of the lower in Lithuania). The company is able to invest part of its own funds into the renovation of the assets and to fulfil all its obligations related - 24 - to the repayment of the World Bank loan. More that 40 various tenders for procurement of works and services were carried out during the implementation of the project, and the same number of the contract were implemented following the of the procurement requirements of Lithuania, the World Bank and the EU. The personnel of the company, working together with the trained staff of the project implementation unit, acquired a lot of experience in this area, and now this experience is applied in the contract procedures by the staff of the company. PROJECT SUPERVISION / CO-ORDINATION The Project Steering Committee established at the beginning of the project implementation, consisted of representatives from ministries of Environment and Finance, Parliament, Klaipeda Municipality and Klaipeda Water Company worked more efficiently until the completion of construction of the Klaipeda Wastewater Treatment Plant. Later the work of the Steering Committee was not efficient. The supervisory functions were carried out by the Ministry of the Environment of Lithuania. During the entire implementation period of Klaipeda Environment Project the supervision missions of the World Bank took place twice a year, which had the main role in the supervision and co-ordination of the project and rendered much support and advice in decision making regarding the project implementation issues. The intemational financial audit of the financial statements of Klaipeda Water Company and Klaipeda Environment Project was carried out every year. The Project Implementation Unit established in the company fulfilled successfully the tasks related to all project implementation issues and co-ordinated properly actions of the parties involved in the project, submitted project progress reports of required scope and in due time. The services of the Project Implementation Unit were outsourced during the last year of the project. NOTES / COMMENTS Implementation of the project was hindered to some extent by the following: 1. The inflation figures used in SAR (which were based on IMF estimates and were uniformn for all projects in Lithuania), in reality turned out to be different. For 1995 the estimate was 15% and the real figure was 37.5%; for 1996 - 6% and 13.7% respectively. This fact had certain negative impact on overall project cost. 2. The implementation plans and financing schedules included in the Staff Appraisal Report prepared in 1994 were changed and modified, as not complying with the real situation. Therefore, the requirements set in this document could not be followed fully. 3. Some cases of long-lasting tender evaluation procedures by the World Bank had an influence on the extension on the project implementation period. 4. The management of the municipality of Klaipeda changed for four times during the project implementation period. It complicated continuity of decisions made arnd their implementation. 5. The project implementation term was affected by irregularities in providing co-financing from the budget of the Republic of Lithuania (for the Klaipeda Wastewater Treatment Plant construction contract) and from EU PHARE (for the implementation of the Wellfield No.1 Aeration Systems, Wellfield No.3 Water Treatment Plant construction contract). - 25 - 6. In some cases, the Lithuanian requirements for procurement were not compatible to the intemational requirements of the World Bank and European Union, and it affected time of decision making. 7. At the beginning of the project the scope of the Klaipeda Environment Project was reduced with respect to the affordability of Klaipeda population, therefore the sludge treatment component was not included in the project, and this issue is still awaits its resolution. 8. The performance of the company was negatively influenced by significant decrease of water demand and by the Decree #1507 of the Govemment of Lithuania. The following factors had a positive influence on the project implementation: 1. Close co-operation with the World Bank task managers ensured prompt and efficient support in decision making. 2. The World Bank consultants rendered continuous and qualified assistance and advice on procurement, financial management and strategic management issues. 3. The specialists of the Project Implementation Unit received appropriate training, which helped to fulfil their tasks successfully. 4. The World Bank missions were organised efficiently and the implementation of the project benefited from the decisions made there. 5. The conditions for the Klaipeda Water specialists were arranged to take over intemational experience in all areas of company work and project implementation. 6. The twining co-operation with the Malmoe Water Company, Sweden, was efficient in all respects. 7. Active participation of the Municipality of Klaipeda and the Ministry of Environment in the imnplementation of the project. Jurgis Nauseda Director General (h) Cofinaniciers: * * * * * 0 * * 0 YmPARISTOMINISTERIO *. *** .-. M I L J O M I N I S T E R I E T b * . - MINISTRY OF THE ENVIRONMENT Dear Sir, Referring to your e-mail on 17, December, the Finnish Ministry of the Enviromnent would like to share the following observations on the Klaipeda Environment Project; - 26 - As part of the Project, Finland has allocated grant financing to the construction of the waste water treatment plant and the training programme A) Waste Water Treatment Plant The construction of the waste water treatment plant turned to be more expensive as preliminarily planned More accurate project monitoring by the Finnish Ministry of the Environment started as its financing decision was prepared. After this the implementation was carried out satisfactorily. One of the major obstacles for smooth project implementation was Lithuanian construction norms and standards which had to be followed. Consequently, delays were due to associated bureaucracy which still prevails in Lithuania. Knowledge of the procurement regulations of SIDA would have been essential to be aware of before tendering. The same problem occurred as in many cases in the Baltic States. The plant is over-dimensioned. We would like to recommend, in particular, that the dimensioning of plants should be taken into account in developing new similar projects. Environment impact: It seems that there is no exact information available about the reduction of nutrient load into the Baltic Sea resulting from the project. It would be very useful to estimate the cost efficiency of the project in terms of USD/ton of reduction. B) training We would like to recommend that in similar projects the training component should be included into the project already in the tendering documents and therefore implementation of training could be started already during construction works. Yours sincerely, Kristiina Isokallio Director, Central and East European Cooperation (c) Other partners (NGOv/private sector): 10. Additional Information - 27 - Annex 1. Key Performance Indicators/Log Frame Matrix Indicator Beginning of Project End of Project BOD7 (tly) in treated effluent 2985 181 N (t/y) in treated effluent 776 242 P (tly) in treated efflluent 87 23 Staff numbers (persons) 592 432 Staff per I kin of network 2.3 1.7 Sales (million in') 29.2 10.3 Unaccounted water (%) 25 (estimated) 9.5 Operating margin (target 40%) 35.8 Drinking water quality indicators at the end of Project Wellfield Conducti Color Turbidity NH NO, NO, Mn Fe - Intestine No of No of ity, ms mgi g/] g/l mg mg/l g/ Bacteria coliform untis bacteria creating colonies Standard 2000 30 0.87 1.0 0.10 50.0 0.05 0.2 0 0 20 #1 706 6 0.59 0.75 0.062 1.33 0.010 0.10 0 0 1 #2 1452 <5.0 0.46 0.33 0.094 1.33 0.020 0.08 0 0 1 #3 476 35 0.48 0.37 0.005 0.57 0.070 0.13 0 0 <1 - 28 - Annex 2. Project Costs and Financing Project Cost by Component (in USS million equivalent) Appraisal Actual/Latest Percentage of Estimate Estimate Appraisal Component US$ million US$ million Project Implementation Unit 0.56 0.48 86 Water Supply and Distribution 2.99 8.11 271 Sewerage and Wastewater Treatnent 12.60 22.49 178 Contract Coordination and Supervision 0.59 1.75 297 TA and Training 0.60 1.48 247 Audit, Tariff Study, Asset Evaluation 0.00 0.22 Environmental Management Component 1.50 1.50 100 Total Baseline Cost 18.84 36.03 Physical Contingencies 1.73 0.00 Price Contingencies 2.53 0.00 Total Project Costs 23.10 36.03 Total Financing Required 23.10 36.03 Project Financing by Component (in USS million equivalent) Percentage of Appraisal Component I Appraisal Estimate Actual/Latest Estimate Bank Govt. CoF. Bank Govt. CoF. Bank Govt. CoF. PIU 0.41 0.26 0.39 0.09 95.1 34.6 Water Supply and 3.83 0.00 0.00 2.50 0.03 5.58 65.3 0.0 0.0 Distribution Sewerage and Wastewater 2.39 6.36 6.91 2.97 11.21 8.21 124.3 176.3 118.8 Treatment Contract Coordination and 0.37 0.37 0.00 0.47 1.28 0.0 127.0 Supervision TA & Training 0.69 0.57 0.91 131.9 Audit, Tariff Study, Asset 0.22 Evaluation Environmental 1.50 1.50 100.0 Management Component - 29 - Annex 3. Economic Costs and Benefits Results of Financial Analysis Investment Networkin O&M costs O&M costs Incremental Revenues Revenues Incremental Incremental cost g capital w/ Prqect w/o Projed O&M Costs wl Project w/o Project Revenues Net Benefits O00 LTL 000 LTL 00 LTL 000 LTL 000 LTL 000 LTL 000 LTL 000 LTL 000 LTL 1995 __ a 21,23C 21,23 25,779 25,77' C 0 1996 13,65 472 26.173 21,867 4,306 30,026 26,037 3.989 -14,446 1997 21,731 -471 25,891 22,191 3,691 28,753 26,291 2,451 -22,501 1998 49,921 -971 24,11 22,521 1,591 26,25C 26,561 -31t -50,847 1999 8,46 1,751 21,617 22,81 -1.19. 30,923 26,824 4,09i -4,931 2000 5,46, -131 20,291 23,03c -2,74 34.78a 27, 7,686 5.106 2001 11,661 671 20,69 23,26c -2,574 31,913 27,361 4,54c -5.21 2002 12,10E 421 22,171 23.501 -1,323 35,70 27,631 8,061 -3,14 2003 531 22," 24,20t -1,36 40,553 40.551 12,638 13,461 2004 18c 23.521 24,93, -1,40. 42.624 28.19 14,43t 15.645 2005 141 24,23- 25,68t -1,44t 44,34; 28,470 15,861 17,169 2006 9 24,961 26,45c -1,491 45,691 28,761 16,93q 18,328 2007 91 25,701 27,241 -1.531 47, 29,041 17,991 19,4314 2008 go 26,47 28,061 -1,58. 48,38 29,331 19,051 20,542 2009 7 27,27 28,90 -1,63 49,651 29,63 20,01 21,57 2010 7; 28,09: 29,77C -1,67E 50,91 29,921 20,981 22,591 2011 28,93 30,66 -1,72' 50,915 30,221 20,686 22,342 2012 71 29,80: 31,58 -1,781 50,913 30,52' 20,38 22,087 2013 7) 30,69( 32,53( -1,834 50,913 30,83 20,079 21,836 2014 31,61i 33,50 -1,889 50,91 31,14: 19,771 21,587 7. 2015 C 72 32,56f 34,511 -1,94 50,91 31,45 19,46 21,33 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _. FR 9.2% FNP -15.001 (000 LTL -30 - Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, I FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation 09/29/1993 10 ENV. SPECIALISTS (5) SANITARY ENGINEER (1) NATURAL RESOURCES SPECIALISTS (I) DONOR REPRESENTATIVES (2) Appraisal/Negotiadon 07/05/1994 15 ENV. SPECIALISTS (4) NATURAL RESOURCES SPECIALIST (1) ENV. ECONOMIST (I) PROC. SPECIALIST (1) FINANCIAL ANALYST (1) OPERATIONS ASSISTANT (1) LAWYER (1) DONOR REPRESENTATIVES (4) INTERNATIONAL NGO REPRESENTATIVE (1) 10/11/1994 7 ENV. SPECIALISTS (3) ENV. ECONOMIST (1) LAWYER (1) DISBURSEMENT SPECIALIST (I) PROCUREMENT SPECIALIST (I) Supervision 06/16/1995 3 ENV ENGINEER S S (CONSULT) (I); TASK MANAGER (ECONOM) (I); PROCUREMENT ANALYST (I) 02/16/1996 7 ENVIRONMENTAL S S ENGINEER (I); PROCUREMENT SPECIALIST (I); TASK MANAGER (1); MANAGEMENT SPECIALIST (I); FINANCIAL SPECIALIST (I); LOCAL STAFF (I); MONITORING INDICATORS (!) 06/26/1996 4 ENVIRONMENTAL S S ENGINEER (I); MISSION - 31 - LEADER (1); FINANCIAL SPECIALIST (I); REG'L ENV SPEC (LOCAL) (1) 01/24/1997 6 OPERATIONS ANALYST (1); S S MISS. LD/ENV. ENG. (I); PROCUREMENT ANALYST (1); UTILITY MAN. SPEC. (1); FINANCIAL SPEC. (1); REG. ENV. SPEC. (1) 09/30/1997 4 FINANCIAL ANALYST (1); S S LEADER/ENV. ENGINEER (1); ENVIRONMENT SPECIALIST (1); MANAGEMENT CONSULTANT (I) 04/27/1998 7 MISSION LEADER (I); U U ENVIR.ENG. (2); ENVIR.SPECIALIST (I); FINANCIAL SPECIALIST (1); MANAGEMENT SPECIALIST (1); OPERATIONS ASSISTANT (1) 11/09/1998 7 MISSION LEADER (I); ENVIR. S S ENG. (2); OPERATIONS ANALYST (I); MANAGEMENT SPECIALIST (1); FINANCIAL ANALYST (I); RESEARCH ASSISTANT (1) 05/13/1999 6 MISSION LEADER (1); ENVIR. S S ENG. (I); MANAGEMENT SPECIALIST (1); FINANCIAL SPECIALIST (I); OPERATIONS ASSISTANT (I); ENVIR. ECONOMIST (1) 11/09/1999 5 TEAM LEADER (I); ENV. S S ECONOMIST (1); MANAGEMENT SPECIALIST (I); ENV. ENGINEER (I); FINANCIAL SPECIALIST (I) 05/09/2000 4 TEAM LEADER (1); S S ORGANIZATION SPECIALIS (I); FINANCIAL SPECIALIST (I); STAFF ASSISTANT (1) 10/24/2000 5 TEAM LEADER (1); ENV. S S ECONOMIST (I); ENV. ENGINEER (1); FINANCIAL SPECIALIST (1); MANAGEMENT SPECIALIST (1) 04/26/2002 2 TASK TEAM LEADER (I); S S ENV. ECONOMIST (1) - 32 - (b) Staff Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ ('000) Identification/Preparation 44 166 Appraisal/Negotiation 39 105 Supervision 95 358 ICR 5 5 Total 183 634 The shown figures combine the Bank and Trust Fund financed costs - 33 - Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating O Macro policies O H O SU O M O N O NA ? Sector Policies O H *SUOM O N O NA N Physical * H OSUOM O N O NA ? Financial O H * SU O M O N O NA O Institutional Development 0 H * SU O M 0 N 0 NA ? Environmental O H *SUOM O N O NA Social O Poverty Reduction O H OSUOM O N O NA EO Gender OH OSUOM ON ONA O Other (Please specify) O H OSUOM O N O NA EO Private sector development 0 H O SU O M 0 N 0 NA O Public sector management 0 H * SU O M O N 0 NA O Other (Please specify) OH O SU OM ON O NA - 34 - Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bank performance Rating F Lending OHSOS OU OHU • Supervision OHS * S O U O HU 0 Overall O HS * S OU OU HU 6.2 Borrower performance Rating • Preparation OHS OS OU O HU • Government implementation performance O HS OS O U 0 HU ? Implementation agency performance O HS OS O U 0 HU Z Overall O HS * S 0 U O HU - 35 - Annex 7. List of Supporting Documents -36 - MAP SECTION .Th-~~ -.Cc-~~',.I- -- -. 'k~~~h..r,' 7t'cezr .-tZ' - I - IL"'..J ~~~ IBRD 3218A sit . I--~~~~~~~~~~~~~~~~~~~~~~~~~c . 115.1~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-. I * ~~ ~~I --c 'If~~~~~~6' A 'I, 12~~~~~~~~~~~~, 11 l: ' 4 6 C. I - iD 039 ,Ii < 0~~~I 5:.. Lu__~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- IC.' ,f :A 3:~ ~ ~~~~--' C .365 I I Z)~ ~~~~~~~~- --/'' ~'T*'* LU 0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ I 2 CL,~~~~~~~~~~---I I~ ~ - rz E~~~~~~~~ & QCa LU co~~~~~~~~ .-4 ~ -- tt j -- 4 I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~c - r"~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~N lMAGMNC Report No.: 25176 Type: C