Document of The World Bank Report No: 66009-TR RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF MUNICIPAL SERVICES PROJECT LOANS 7312-TU AND 7885-TU TO THE ILLER BANKASI ANONIM ŞIRKETI (successor to ILLER BANKASI) WITH THE GUARANTEE OF THE REPUBLIC OF TURKEY December 14, 2011 ABBREVIATIONS AND ACRONYMS BOD Biochemical oxygen demand DSI General Directorate of State Hydraulics Works EIA Environmental Impact Assessment IB Iller Bankası (General Directorate of Iller Bank) ILBANK Iller Bankası Anonim Şirketi MESKI Mersin Water and Sewerage Administration MoEF Ministry of Environment and Forestry (former) MoEU Ministry of Environment and Urbanization NRW Non-Revenue Water PMU Project Management Unit (within ILBANK) SCADA Supervisory Control and Data Acquisition System WWTP Wastewater water treatment plant Regional Vice President: Philippe H. Le Houerou Country Director: Ulrich Zachau Sector Manager / Director: Stephen Karam/Laszlo Lovei Task Team Leader: Mara K. Warwick 2 TURKEY MUNICIPAL SERVICES PROJECT P081880 CONTENTS Page A. SUMMARY ............................................................................................................... 4 B. PROJECT STATUS ................................................................................................. 4 C. PROPOSED CHANGES .......................................................................................... 5 ANNEX 1: RESULTS FRAMEWORK AND MONITORING.................................. 10 3 MUNICIPAL SERVICES PROJECT RESTRUCTURING PAPER SUMMARY 1. This project restructuring paper seeks the approval of the Country Director for the following changes to the project: a) amending the Loan Agreements and Guarantee Agreements of the original and additional loans (7312-TU and 7885-TU) to reflect the Borrower’s change in legal status from General Directorate of Iller Bank to Iller Bankası Anonim Şirketi (ILBANK); b) extension of the closing date of the original loan (7312- TU) by twelve months to December 31, 2012; c) reallocation of loan proceeds in the additional loan (7885-TU) to correct a minor error in the division of loan proceeds between categories; and, d) revisions in targets in the results framework for both the original loan (7312-TU) and the additional loan (7885-TU) to correct typographical errors in the target values and to account for a change in proposed investments by Mersin Water and Sewerage Administration and Beypazari Municipality under the additional loan (7885-TU). 2. The project restructuring has been requested by the Borrower through letters dated August 10, 2011, and confirmed by the Guarantor, through letters dated October 24, 2011. The closing date of the project (December 31, 2014) remains unchanged. PROJECT STATUS 3. The Municipal Services Project, in an amount of €212.9 million (US$275 million equivalent), was approved on June 23, 2005 and became effective on May 18, 2006. On May 6, 2010, an additional loan of €178.2 million (US$240 million equivalent), was approved and became effective on July 26, 2010. The project development objective, which remains unchanged, is to support sustainable environmental services in selected municipalities. 4. The project is being implemented in a satisfactory manner and is on track to meet its development objectives. As of September 30, 2011, the majority of the works under the original loan have been completed and disbursements have reached 93% (€197,907,427.63). A total of €795,000 has been disbursed from the additional loan which corresponds to a ratio of 0.45%. Procurement is ongoing under the additional loan and disbursements related to physical construction will commence in FY12 as planned. 5. The project was previously restructured three times: 1) in December 2009, to extend the original loan from its original closing date of June 30, 2010 to the current closing date of December 31, 2011; and, 2) in May 2010, to amend the project indicators; 4 and, 3) in May 2010 via an Omnibus Amendment to introduce cross-debarment provisions approved by the Bank’s Board. 5 PROPOSED CHANGES 6. Reform of General Directorate of Iller Bank to Iller Bankası Anonim Şirketi. The Borrower, Iller Bank (Iller Bankasi), has recently changed legal status from a general directorate of the Government to an incorporated state-owned development and investment bank, as a result of the Law on the Establishment of Iller Bankası Anonim Şirketi No. 6107 [the ILBANK Law No. 6107 ] adopted by the Grand National Assembly of Turkey on January 26, 2011 and published in the Official Gazette on February 8, 2011. The ILBANK Law No. 6107 repealed the previous Iller Bank Law No. 4759 dated June 13, 1945 and its amendments, under which General Directorate of Iller Bank had been established and was operating. Article 5 of the ILBANK Law No. 6107 specifies that Iller Bankası Anonim Şirketi assumes all of the authority, rights, liabilities, receivables and debt of the General Directorate of Iller Bank. 7. Implementation of Iller Bank reform through the enactment of the ILBANK Law No. 6107 was predicted and supported by the project, as described in the Project Appraisal Document of the original loan. The legal reforms that have been enacted by the passage of the ILBANK Law No. 6107 support ILBANK’s transition from its original status as a direct financing arm of government to a development bank focusing on the needs of municipalities and special provincial directorates, and subject to the provisions of the Banking Law. The objectives and investment priorities of Iller Bankası Anonim Şirketi are fully consistent with the content and objectives of the project. 8. The change in legal status of ILBANK has not changed the implementing arrangements of the project, including fiduciary arrangements. ILBANK’s PMU has been maintained at the same staffing levels as before, and has been assessed during project supervision to have adequate capacity and authority to continue to carry out the project. The financial management and procurement systems have been reviewed and found to be satisfactory, and unchanged from the systems used prior to the legal change. 9. Update in investments in Mersin and Beypazari. Due to changes in priorities and available sources of finance for the water and wastewater sectors in Mersin and Beypazari Municipalities since the approval of the additional loan, the following changes to the investment content have been agreed: a) for Mersin Water and Sewerage Administration (MESKI) the proposed water supply rehabilitation will be replaced with wastewater network expansion; and b) for Beypazari Municipality the project will focus on construction of the wastewater treatment plant and trunk sewers rather than water network rehabilitation, as these will be provided by a grant from Ankara Municipality through Ankara Water and Sewerage Administration. The descriptions for these two subcomponents in Annex 2 of the Project Paper for the Additional Loan1 are updated as per the following table. 1 Additional Loan Project Paper dated April 8, 2010 can be found at http://imagebank.worldbank.org/servlet/WDSContentServer/IW3P/IB/2010/04/20/000334955_2010042001 4903/Rendered/PDF/532320PJPR0P08101Official0Use0Only1.pdf 6 Extract from Annex 2: Summary of Proposed Sub-Projects, Project Paper for Additional Loan Municipality Summary of Proposed Sub-Project Mersin The subproject will finance the construction of new sewerage networks in Tece, Davultepe and Kuyuluk, areas under MESKI’s jurisdiction for which sewerage networks are currently not available. The subproject will also finance pumping stations, a pressure main, and major collectors in the Western Basin area of Mersin. Beypazari The subproject would finance the construction of a wastewater treatment plant and associated trunk sewers 10. The proposed changes have been agreed by the Ministry of Development and are included in the Government’s annual investment program. Investments in all other municipalities remain unchanged. The changes in Beypazari and Mersin do not require the triggering of additional safeguard policies. A new EMP for Mersin has been prepared, approved by the Bank and disclosed. For Beypazari, the subproject has been classified as Category A, an EIA has been prepared and is under review by the Bank. 11. Results/indicators. Changes to correct typographic errors in the Board-approved versions of the results frameworks for both the original and additional loans are proposed as follows: a) in both loans, change the wording of the indicator “Percentage of municipal wastewater in participating municipalities that is treated to required standards (%)� to “Percentage of population served by wastewater treatment plants treating to required standards (%)� to more accurately reflect standard data collected by the municipalities on an ongoing basis and thereby aligning the project with more easily comparable data between cities; b) in the results framework for the additional loan, correct the typographical errors in the targets for several indicators; and, c) amend the targets for MESKI and Beypazari to reflect the changed investment scope. 12. Reallocation. No reallocations are envisaged for the original loan (7312-TU). Minor reallocations are proposed for the additional loan (7885-TU) to correct an error in distribution between categories in the approved version. The proposed revised allocations are as follows: 7 IBRD Loan Original Revised Percentage of Amount Amount Expenditures Category (in Euro) (in Euro) to be financed (a) Goods and works for 167,600,000 167,602,636 100% sub-projects under Component 1 (b) Consultants’ services 9,100,000 9,100,000 100% and training under Component 2 (c) Consultants’ services, 1,054,500 1,051,864 100% Audit and Training under Component 3 of the Project (d) Front-end Fee 445,500 445,500 Amount payable pursuant to Section 2.03 of this Agreement in accordance with Section 2.07(b) of the General Conditions (e) Interest Rate Cap or 0 0 Amounts payable pursuant Collar Premium to Section 2.07(c) of this Agreement Total 178,200,000 178,200,000 13. Closing date. An extension of the closing date for the original loan (7312-TU) of 12 months from December 31, 2011 to December 31, 2012, is proposed. The closing date of the additional loan (7885-TU), which is currently December 31, 2014, would remain unchanged. There are no outstanding audit reports for either 7312-TU or 7885- TU. The most recent audit reports dated December 2010 for the entity and the project (7312-TU and 7885-TU) had clean audit opinions. 14. The extension of the original loan Closing Date is primarily required to ensure the satisfactory commissioning, operation and monitoring of the wastewater subproject in Mugla Municipality. While construction of the secondary wastewater treatment plant (WWTP) financed under the project has been completed, the WWTP has yet to be put into operation because it has been necessary to change the originally approved WWTP discharge system. In order to ensure that the WWTP is commissioned and operated properly, and detailed monitoring can be carried out for a minimum of 9 months of operation, it is necessary for ILBANK and the World Bank, to maintain a relationship with Mugla Municipality until December 2012. As Mugla Municipality is not a sub- borrower under the additional loan, an extension of the original loan is necessary as explained in the following paragraphs. The proposed extension is the second for the original loan (7312-TU), whose original closing date was June 30, 2010. Details are given below: 8 15. The subproject in Mugla Municipality under the original loan comprises wastewater network rehabilitation and the construction of a secondary wastewater treatment plant (WWTP) and treated effluent discharge. Mugla is located on a high altitude plain with no permanently flowing streams or rivers, and due to the unique topographic, geologic and hydrologic conditions, options for discharging the treated effluent from the WWTP are very limited. At the time that the Environmental Impact Assessment (EIA) for the subproject was approved by the Ministry of Environment and Forestry (MoEF) and the World Bank in 2008, the selected option was to discharge the WWTP effluent to a temporary, impermeable storage facility in an abandoned quarry and then to reuse the effluent for irrigation. However, during implementation of the project, it became clear that while some of the treated effluent can be reused and Mugla has made preparations for this, there would not be sufficient irrigation demand for the entire effluent quantity. 16. Mugla Municipality, ILBANK and the World Bank teams have carried out detailed technical analysis including hydrogeologic field testing to determine a feasible alternative discharge scheme. Mugla Municipality’s consultants have prepared an update to the project feasibility study that reanalyzes all options for the discharge scheme and recommends a combination of reuse and aquifer recharge as the preferred option. Reuse of effluent for irrigation will continue to be prioritized, and Mugla Municipality has received a grant from the Ministry of Development to construct a dedicated water network within the city to distribute treated effluent from the WWTP to the city’s parks and gardens. Under the recommended option, the portion of the treated effluent that cannot be reused for irrigation will be discharged into the abandoned quarry to percolate into the underlying aquifer. 17. The Ministry of Environment and Urbanization (MoEU)2 and General Directorate of State Hydraulics Works (DSI) have confirmed that the recommended solution is consistent with Turkey’s environmental laws and regulations. Mugla Municipality is preparing an addendum to the subproject EIA, and has confirmed that prior to starting operation of the WWTP, the EIA addendum will be finalized, consulted and disclosed. Moreover, before operation begins, all necessary civil works will be carried out to prepare the quarry to accept the treated effluent discharge prior to operation of the scheme. A water quality monitoring program for the aquifers in the area has been designed and agreed. Results of the monitoring program will be provided to ILBANK and the World Bank on a regular basis. 18. By extending the original loan and its associated sub-loan agreement between ILBANK and Mugla Municipality for one year until December 2012, proper implementation of the discharge scheme and monitoring program will be ensured. The extension will also ensure ILBANK’s continued close supervision of the component. Furthermore, the extension will allow the remaining loan proceeds to be available to Mugla Municipality to finance the monitoring program and civil works in the quarry. 2 The Ministry of Environment and Urbanization (MoEU) replaced the former Ministry of Environment and Forestry (MoEF) in June 2011 during a government restructuring. 9 19. The extension is also necessary to allow MESKI to complete its planned works under the original loan. During the implementation period of the original loan, MESKI’s loan allocation was increased and two high priority activities to establish a SCADA control system and customer inventory were added to the project. Due to the difficult technical nature of these activities, MESKI has been unable to finalize implementation of these activities prior to the current closing date. MESKI has completed all other activities under the original loan. 10 ANNEX 1: Results Framework and Monitoring TURKEY: MUNICIPAL SERVICES PROJECT Project Outcome Indicators Use of Project Revised Outcome PDO (Project Paper dated Outcome Indicators April 8, 2010) Information • Percentage of NRW over the supply area of the municipal government/ municipal water company. • Total annual BOD load reduction To track from municipal wastewater in the progress on To support participating municipalities. overall sustainable • Amount of waste safely disposed achievement of environmental in rehabilitated solid waste No changes. efficiency, services in landfills. environmental selected and municipalities. • Sectoral Financial Working Ratio sustainability of municipalities/ municipal goals. companies. • Percentage of projects financed by ILBANK that are implemented by municipalities or municipal companies# Use of Intermediate Outcome Indicators Intermediate Revised Intermediate Intermediate (Project Paper dated Outcomes Outcome Indicators Outcome April 8, 2010) Monitoring • Number of new population served No change by expanded water supply service. Component 1: • Percentage of population served Increased by sewerage collection network in No change participating municipalities. To track physical provision of progress towards water supply, • Percentage of municipal • Percentage of completion of wastewater and wastewater in participating population served by the agreed solid waste municipalities that is treated to wastewater treatment components. services in required standards to required standards municipalities in participating municipalities. • Constructed capacity of landfills. No change To track Component 2: • Number of Operational Plans progress towards Municipal completed. improved No change. Technical • Number of man-days of training capacity and Assistance for PMU staff. sustainability of municipalities. To track • Successful and on-time progress towards Component 3: completion of annual project improved ILBANK audits. No changes. capacity of Institutional • Number of man-days of training ILBANK to Strengthening for PMU staff. manage the project. 12 Municipal Services Project (additional loan – 7885-TU) Arrangements for Results Monitoring Project Outcome Indicators Sub-Projects Baseline 2011 2014 Frequency Data Responsibility and Collection for Data 2009 Reports Instruments Collection Percentage of NRW over the ASAT 47 45 36 supply area of the municipal Annual DENIZLI 51 47 43 Annual PMU government/ municipal water reports KIRSEHIR 78 65 53 company (%). Total annual BOD load reduction from municipal BEYPAZARI Annual wastewater in the 0 0 450 Annual PMU reports participating municipalities (tonnes/year). Amount of waste safely KAYSERI Annual disposed in rehabilitated solid 0 0 390718 Annual PMU reports waste landfills (tonnes/year). ASAT 1.21 1.01 0.94 MESKI 0.66 0.67 0.64 Sectoral Financial Working ISKI 0.56 0.63 0.63 Annual Ratio of municipalities/ DENIZLI 0.66 0.76 0.55 Annual PMU reports municipal companies. BEYPAZARI 0.74 0.74 0.68 KAYSERI 1.66 1.29 1.06 KIRSEHIR 1.09 1.00 1.00 Percentage of projects financed by ILBANK that are implemented by Annual 4.5 6 5(d) Annual PMU municipalities or municipal reports companies (measured as % of total disbursements) ( c) Intermediate Outcome Indicators Component 1: Municipal Development Number of new population ASAT 1000081 1082314 1223928 served by expanded water DENIZLI (R) 235000 336000 400000 Annual Annual PMU supply service (#). KIRSEHIR 100000 110000 150000 reports (R+N)(a) Percentage of population ASAT 48 57 70 served by sewerage ISKI (b) 0 0 100 Annual collection network in Annual PMU DENIZLI 47 67 87 reports participating municipalities MESKI 85 86 90 (%) Percentage of population served by wastewater BEYPAZARI Annual treatment to required 0 0 95 Annual PMU reports standards in participating municipalities. (%). Constructed capacity of Annual landfills (tonnes) KAYSERI 0 0 2,639,487 Annual PMU reports Component 2: Municipal Technical Assistance ASAT - - 4 MESKI - - 1 ISKI - - 2 Number of Operational Plans Annual DENIZLI - - 3 Annual PMU completed reports BEYPAZARI - - 1 KAYSERI - - 1 KIRSEHIR - - 1 ASAT 30 50 50 MESKI 70 43 Number of man-days of ISKI Annual training for Municipal PMU DENIZLI Annual PMU reports staff (#). BEYPAZARI 0 10-45 KAYSERI KIRSEHIR Component 3: Iller Bank Institutional Strengthening Successful and on-time Annual completion of annual project Y Y Y Annual PMU reports audits (Y/N). 14 Number of man-days of Annual 231 300 390 Annual PMU training for PMU staff (#). reports R: Rehabilitation N: New network (a) Population of 2009 will be rehabilitated partially by this project. (b) The population of Akfirat (Tuzla) was taken into consideration rather than that of Istanbul. (c) This indicator measures ILBANK’s transformation from an agency that directly financed and implemented projects, to one that appraises and finances projects proposed and implemented by municipalities. (d) Note that a small drop in percentage of direct disbursements is predicted in 2014 due to the increase in total lending volume in this period. This will be reviewed during the implementation of the additional loan to ensure that the final target is in accordance with ongoing lending trends in ILBANK. 15 Municipal Services Project (original loan - 7312-TU) Arrangements for results monitoring Project Outcome Sub-Projects Baseline 2009 2012 Data Responsibility Frequency Indicators Collection for Data 2006 and Reports Instruments Collection POLATLI 48 47 43 MESKI 66 61 50 ODEMIS 44 44 40 Percentage of NRW over the MUGLA 33 28 22 supply area of the municipal Annual KUTAHYA 69 53 35 Annual PMU government/ municipal water reports DENIZLI - 51 47 company (%). ILICA 40 30 25 ELBISTAN 65 60 45 ASAT 52 47 43 Total annual BOD load ODEMIS 0 0 3878 reduction from municipal Annual MUGLA 0 0 1486 Annual PMU wastewater in the participating reports ASAT(c ) 9056 10840 18109 municipalities (tonnes/year). Amount of waste safely GELIBOLU 0 0 32227 Annual disposed in rehabilitated solid Annual PMU BERGAMA 0 0 21900 reports waste landfills (tonnes/year). POLATLI 0.86 0.88 0.81 MESKI 0.64 0.66 0.67 GELIBOLU 0.74 0.70 0.65 ODEMIS 0.00 0.00 1.00 Financial Working Ratio of MUGLA 0.70 0.66 0.80 Annual municipalities/municipal BERGAMA - - 1.00 Annual PMU reports companies. KUTAHYA 0.30 0.50 0.65 DENIZLI 0.74 0.66 0.76 ILICA 0.15 0.08 0.08 ELBISTAN 0.76 0.72 0.50 ASAT 1.49 1.21 1.05 16 Percentage of projects financed by ILBANK that are implemented by municipalities Annual 3.2 4.5 6 Annual PMU or municipal companies reports (measured as % of total disbursements)(b) Intermediate Outcome Indicators Component 1: Municipal Development Number of new population POLATLI (N) - - 6000 served by expanded water MESKI (R) - 350000 400000 supply service (#). MUGLA (R) - 5200 10200 KUTAHYA (R) - 70000 100000 Annual Annual PMU DENIZLI (R) - 235000 336000 reports ILICA (N) 4000 4500 ELBISTAN (R+N) (a) 78000 83000 87000 ASAT (R+N) (a) 843641 1000081 1126430 Percentage of population MUGLA 0 0 90 served by sewerage collection DENIZLI - 47 67 Annual Annual PMU network in participating ILICA 40 85 100 reports municipalities (%) ASAT 43 48 62 Percentage of population served by wastewater MUGLA 0 0 90 Annual treatment to required standards ASAT 43 48 62 Annual PMU reports in participating municipalities ODEMIS 0 0 100 (%) Constructed capacity of GELIBOLU 0 0 340700/Lot1 Annual landfills (tonnes) 448100/Lot 2 Annual PMU reports BERGAMA 0 0 438000 Component 2: Municipal Technical Assistance 17 POLATLI 1 - - MESKI - - 6 GELIBOLU - - 1 ODEMIS - - 2 MUGLA - 1 3 Number of Operational Annual BERGAMA - 1 - Annual PMU Plans completed reports KUTAHYA - 1 1 DENIZLI - - 5 ILICA - - - ELBISTAN - - 1 ASAT - 2 8 POLATLI 35 - - MESKI - 70 43 GELIBOLU 10 0 20 ODEMIS 0 0 3 Number of man-days of MUGLA 0 0 30 Annual training for Municipal PMU BERGAMA Annual PMU reports staff (#). KUTAHYA 4 0 0 DENIZLI 0 0 0 ILICA 12 30 10 ELBISTAN 5 3 8 ASAT 20 30 50 Component 3: Iller Bank Institutional Strengthening Successful and on-time Annual completion of annual project N/A Y Y Annual PMU reports audits (Y/N). Number of man-days of Annual 231 300 390 Annual PMU training for PMU staff (#). reports R: Rehabilitation N: New network (a) Population of 2006: To be rehabilitated; Population of 2009: Rehabilitation plus New network; Population of 2012: Rehabilitation plus New network (b) This indicator measures ILBANK’s transformation from an agency that directly financed and implemented projects, to one that appraises and finances projects proposed and implemented by municipalities. (c) Lara WWTP financed by IB was put into operation in 2007 (BOD removed = 1784 t/yr) 18 19