PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB7397 Project Name Water Supply and Sanitation Project Additional Financing Region EUROPE AND CENTRAL ASIA Country Belarus Sector Water supply (25%);Wastewater Treatment and Disposal (35%);Wastewater Collection and Transportation (25%);General water, sanitation and flood protection sector (5%);Public administration- Water, sanitation and flood protection (10%) Project ID P146493 Parent Project ID P101190 Borrower(s) THE REPUBLIC OF BELARUS THE REPUBLIC OF BELARUS Implementing Agency Ministry of Housing and Utilities Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared September 25, 2013 Date of Appraisal December 09, 2013 Authorization Date of Board Approval February 27, 2014 1. Country and Sector Background Belarus, situated in Eastern Europe, is a landlocked country with a total surface area of 20.8 million ha. It is bordered by the Russian Federation, Ukraine, Poland, Lithuania and Latvia. The country has four distinctive geographic regions. The north has many lakes and hills, and is covered with forests. The east is an elevated plain region. The Polessye, a lowland area of rivers and swamps, occupies the south, and the west is an agricultural region with mixed conifer forests. The marshy land of the Polessye is the largest swamped area in Europe. The climate is continental in the central and eastern parts of the country and maritime in the rest of the country. The average annual precipitation is about 700 mm, and varies between 550 mm in the southeast to 800 mm in the elevated areas of the central part of the country. Groundwater resources are available throughout the country. They amount to 18 km3 per year and drain entirely into surface water bodies. The population amounts to 9.465 million people (2012 data), with an urbanization rate of 75.8 percent. The country has six oblasts (regions), with their administrative centres in Minsk, Brest, Vitebsk, Gomel, Grodno and Mogilev. There are 110 towns, of which 13 towns have population over 100,000. Up until 2008, Belarus was a strong economic performer in a fast-growing region. During 2000– 08, the country’s GDP grew on average by 8.1 percent annually. Rapid economic growth was propelled by a combination of favorable external factors, including (i) strong export demand by key trading partners (CIS, especially Russia), (ii) underpriced energy imports from Russia and (iii) large terms of trade gains stemming from exporting goods such as oil products and fertilizers, which saw steep price increases, especially in the years prior to the global economic crisis. The strong economic and social progress came to a halt in 2009, with the account deficit widening to over 12 percent of GDP, as the global financial crisis led to reduced access to external borrowing and a sharp decline in exports, and price of gas imports from Russia increased. In response, the government tightened macroeconomic policy and devalued the Belarusian Rubel (BYR) by 30 percent, supported by financial assistance from Russia and the International Monetary Fund (IMF). Initial stabilization gains were reversed, however, after completion of the IMF Stand-By Arrangement (IMF SBA) in March 2010. Expansionary fiscal and monetary policies, including rapid credit and wage growth, led to a widening in the current account deficit and intensified pressure on international reserves. After a significant loss of reserves at the beginning of 2011, confidence in the BYR collapsed, sparking a foreign exchange crisis. By December 2011, the BYR had lost about 70 percent of its value to the US Dollar and inflation soared to 109 percent. However, by early 2013, the authorities managed to restore macroeconomic stability by tightening monetary and fiscal policies, while a new favorable energy trade agreement with Russia helped to improve trade balance and, consequently, ease pressure on the current account. Water Supply and Sanitation Sector. Water resource. Belarus is a relatively water-rich country, and the available water resources are sufficient to meet both current and future demands. Groundwater resources are abundant, and the yearly volume of fresh water abstraction represents less than 3 percent of the total volume of fresh water generated. Water utilities are the main user of water resources: 31 percent of the water is used for agriculture, 20 percent for industries and the remaining 49 percent for residential consumption. A large majority (about 84 percent) of the country’s water supply needs are met by groundwater supplies, with the notable exception of the capital city, Minsk, where surface water is used for the production of potable water. Water demand has been almost halved over the last two decades. The decrease was largely driven by a decrease in industrial output in the 1990s and then, in the late 2000s, by the spread of water metering. In some places, water production has also been affected by the response of industries to high industrial tariff. Level of service. The level of service in urban areas is high by regional standards, and has shown steady improvement in the last 15 years: water supply coverage in 2011 reached 86 percent and sewerage coverage 74 percent, due to massive investments since 2006. Water is supplied on a continuous basis in almost all utilities at acceptable potability standards. Despite these important achievements, vast new investments are required to close the remaining coverage gaps, in particular in small towns and rural areas. Wastewater treatment, affected by obsolete equipment and technology, often fails to meet acceptable standards in terms of nutrients removal– water with excessive iron content is still supplied to more than 20 percent of Belarus population. Low operational efficiency coupled with user charges well below cost-recovery level puts a strain on public utility and communal budgets, which force local authorities to postpone important capital replacement and rehabilitation investments. As a result, operational efficiency is deteriorating. Infrastructure. The water and wastewater sector shows a solid but ageing and oversized infrastructure, which urgently requires modernization. Except for recently constructed facilities, the infrastructure is rather old and in dilapidated condition due to lack of maintenance over the past two decades. The current rate of replacement as the networks age does not seem sufficient to reverse their overall deterioration. As a result of the major decrease of water consumption since 1991 and to a certain extent of conservative design norms, water and wastewater systems are now greatly oversized, resulting in excessive maintenance costs and operating difficulties. Sector strategy and planning. The government’s current policy orientation in the water and wastewater sector is clearly identified, although it is not specifically framed in a national strategy document. Sector policy orientation includes (i) full coverage of services, including in rural areas; (ii) continuous provision of safe potable water; (iii) affordable services for all segments of population; (iv) improvement of systems’ operational efficiency (with reduction of water losses and increased energy efficiency); and (iv) protection of the environment. These orientations are reflected in particular in 5-year “clean water” national investment programs (2006-2010 and 2011-2015), which set clear nation-wide baselines and targets for indicators such as coverage of services and the quality of potable water and treated wastewater. These programs reflect a strong political will and the government’s determination to improve the sector by developing and modernizing infrastructure. Average investments within these plans represent about US$60 million (2006-2010) and US$40 million (on-going plan) per year. Sector stakeholders. The water supply sector in Belarus is strictly regulated and vertically integrated from local councils to the central government. The central government develops sector policy and strategy and controls their implementation. At the national level, the MHU is the pivotal actor coordinating the sector for the government. MHU implements the state water policy, monitors and supervises water provider operations, provides managerial guidance and training to the operators, and compiles sectoral data. Other key stakeholders include (i) the Ministry of Natural Resources and Environment (MNRE), which manages water resources and controls their quality; (ii) the Ministry of Health (MOH), which monitors and supervises potable water quality and environmental health; (iii) the Ministry of Finance (MOF), which allocates funds for investments in, and subsidies to, the sector; and (iv) the Ministry of the Economy (MOE), which reviews and approves the tariff for water and wastewater services. Regional administrations are closely involved in sector coordination, while local authorities and their service providers are responsible for service provision. Civil society organizations (CSOs) are marginally involved in the sector. Service providers. Services are operated by “unitary enterprises” accountable to district or municipal authorities, which are ultimately responsible for the provision of water and wastewater services. The service providers’ charter permits the providers to engage in virtually any public or private service (as long as it appears to be profitable), and this has led to the development of two types of service providers, water and wastewater utilities and multi-service utilities. The vodokanals operate mostly in large cities. In addition to water and wastewater services, these organizations may have “water-related” activities, such as a bottled water business and plumbing services, on the side. The multi-service utilities (MUs) are responsible for a diverse range of communal services across the raion. The water and wastewater sector comprises a total of 25 vodokanals and 120 MUs, each type covers close to 50 percent of the total population. Sector governance. The sector’s legal and institutional framework is, overall, well-defined and functional. However, several factors hinder sector operational efficiency: (i) the lack of performance requirements for service providers; (ii) an insufficient monitoring of performance data that would enable benchmarking or yardstick competition; and (iii) the allocation of operational subsidies on the basis of short-term needs to cover utilities’ losses, and without any commitment by utilities to improve performance. Service providers have low staff productivity and do not follow best practices of business management. Their human resources policies are clearly not geared towards the stimulation of efficiency and performance. Customer relations are still emerging in most utilities, and social accountability mechanisms are weak. In addition, investment planning is not geared towards the stimulation of efficiency: (i) existing infrastructure design and sizing norms often lead to excessive investment and operating costs; (ii) investments are often identified without any reference to a master plan and appraised without the clear and transparent procedures required to guarantee the efficiency of capital investments; and (iii) infrastructure renewal is often planned without any updated assessment of current needs, perpetuating infrastructure overcapacity. Economic policies. Tariff regulation, performed by the Ministry of Economy and by oblast authorities, lacks transparent tariff adjustment instruments, which would enable customers to anticipate tariff changes. The socially driven tariff policy leaves the sector dependent upon recurrent budget support and a few large customers to generate revenue. Local authorities’ discretion in setting tariff levels is limited and deficits are generally covered by subsidies and transfers. It is estimated that these tariffs cover about 90 percent of the cost of water and wastewater services, with the difference covered through cross subsidies from non-households customers and other transfers from national budgets. The 2011-2015 Social and Economic Development Program aims to eliminate both operational and cross-subsidies by 2015. This reform of sector financing policies is further complicated by the continuing decrease in residential consumption and the incapacity of local markets to provide funding on terms consistent with the economy of the sector. These daunting challenges call for (i) sound sector policies conducive to economically efficient investment programs and water and wastewater operations, and (ii) financing mechanisms (including tariff policies) guaranteeing sector sustainability, while ensuring the affordability of services. 2. Objectives The original project development objective was to improve the quality, efficiency and sustainability of water supply and waste water treatment services in six (6) participating project oblasts. The new project development objective is to increase access to water supply services and to improve the quality of water supply and wastewater services in selected urban areas in all six (6) participating oblasts. The objective will be achieved through rehabilitation and reconstruction of water supply and wastewater infrastructure. Furthermore, support will be provided through a technical assistance to the Ministry of Housing and Utilities and to selected utilities to improve the efficiency and sustainability of investments made in the water sector. 3. Rationale for Bank Involvement Scaling up project impact. The AF will deepen investments in five towns and provide first time investments in three new towns, for which designs were prepared under WSSP. These activities will help in particular to: (i) reduce the discharge of untreated wastewater (through rehabilitation of wastewater treatment plants and sewerage systems); and (ii) improve water quality to achieve compliance with standards for potable water (through the modernization of water production and distribution systems). Improving sector sustainability. Whereas WSSP focused exclusively on physical investments, the proposed AF is part of a larger commitment by the Government to support the overall sustainability of the water sector. The Belarus Municipal Water Sector Review (2013) identified a number of acute challenges, in particular (i) ageing infrastructure requiring urgent modernization; and (ii) low levels of financial sustainability in the context of decreasing budget support. To address these challenges and foster sector efficiency and sustainability, the government has requested Bank support for a TA under the proposed AF. This new project component will focus on topics such as the regionalization of services, tariff policies, utilities’ operational efficiency and social accountability. Piloting the use of master planning to guide priority investments. As recommended by the Sector Review (2013), the appraisal and financing of future investments should systematically be based on a comprehensive master plan that identifies and prioritizes activities based on clear and transparent criteria. The proposed AF will support the piloting of such studies and prepare a pipeline of future high-priority investments. The additional financing is included in the CPS FY14-17 and is fully consistent with the CPS Pillar 2 “Improved efficiency and quality of public infrastructure services, enhanced and sustainable use of agricultural and forestry resources and increased global public good benefits” (CPS FY11-14; Report No. 77458-BY). The AF contributes directly to the Outcomes “Improved quality of supplied water” and “Improved performance of wastewater treatment systems” under the CPS Results Area 3 “Improved public infrastructure and municipal public utility services”. 4. Description The additional financing would include the following components: Part A: Rehabilitation of Water Supply and Sanitation Systems (US$84.63 million). This component will finance the provision of goods, works and consultants’ services for: (a) rehabilitation and construction of deep wells, pumping stations, transmission mains, distribution network, ground and elevated reservoirs and iron removal plants, and other water supply facilities; and (b) rehabilitation and construction of wastewater collection systems and wastewater treatment plants including upgrade of monitoring stations and laboratories, and other water sanitation facilities. Part B: Support to the Preparation of Subprojects (US$4.60 million). This component will finance provision of goods and consultants’ services for, inter alia: (a) (i) preparation of feasibility studies, preliminary designs and bidding documents; and (ii) carrying out of bids evaluation; (b) construction management, including supervision, monitoring and evaluation of physical implementation of investments; and (c) development of benchmarking systems and review of design norms. Part C: Project Implementation and Management (US$0.25 million). This component will finance: (a) provision of goods, consultants’ services and training to the Project Coordination Team (PCT) to assist in the implementation, management and auditing of the Project; and (b) strengthening social accountability mechanisms on water and wastewater services through, inter alia the provision of support to: (i) Selected Water and Wastewater Service Providers to develop communication plans to improve their communication with their customers through, inter alia: (A) the development and/or update of websites; and (B) the enhancement of the information contained in existing websites and/or information displayed publicly in their premises; and (ii) strengthen existing grievance redress mechanisms to enhance service delivery. 5. Financing Source: ($m.) Borrower 0 International Bank for Reconstruction and Development 90 Total 90 6. Implementation The Ministry of Housing and Utilities (MHU) is responsible for the overall project coordination and monitoring of implementation progress. The Project Coordination Team (PCT) has overall responsibility for disbursement, financial and procurement management and coordination. The water and wastewater service providers will share the responsibility for civil works contracts management with the PCT. They are also responsible for supervising construction activities under the project and for reporting to the PCT any issue regarding the quality of the civil works and timely implementation of the contract. The PCT has been implementing two Bank financed projects since 2009 and has the knowledge and capacity necessary to implement the project. The PCT is subordinate to the Ministry of Housing and Utilities. It will be responsible for daily project implementation and monitoring and adherence to the World Bank requirements. The PCT has experienced and trained technical and fiduciary staff. A weak point is that the PCT, as part of government administration, is limited in its ability to hire qualified staff on attractive terms. The AF will include an opportunity to hire loan-financed consultants on terms sufficiently competitive to attract qualified professionals. The PCT has been recently reinforced with two new specialists (procurement and technical), and with additional training and additional staffing it will have the required capacity to manage both the original project and the AF. 7. Sustainability The Municipal Water Sector Review (2013) has identified clear recommendations to improve the sustainability of service assets and operations. The technical assistance under the additional financing will support the implementation of many of the key recommendations through a broad Technical Assistance Component. It will include a number of activities aimed at increasing the operational efficiency of the sector and piloting the preparation of future investments, which could include: (a) the development of a utilities benchmarking system; (b) a review of design norms; and (c) preparation of energy efficiency audits of selected water and wastewater service providers. In addition, large civil works contracts will include extensive training activities on the operation and maintenance of assets. 8. Lessons Learned from Past Operations in the Country/Sector Lessons drawn from past WSSP implementation difficulties have been incorporated into the design of the AF. This includes: (i) ensuring a higher level of preparedness of technical designs at appraisal stage to mitigate cost uncertainties; (ii) introducing price adjustment clauses for all contracts to mitigate risks associated with macroeconomic crises; (iii) fostering competition for civil works contracts by intensifying business outreach and by reflecting lessons of current contractors' market study in the design of procurement packages; and (iv) hiring Project Coordination Team staff financed directly by the project and on terms sufficiently competitive to attract highly qualified professionals. 9. Safeguard Policies (including public consultation) Social safeguards. The AF will not involve changes in water infrastructure or institutions that will pose any adverse impacts on final consumers. Moreover, increased access and/or improved quality of water and wastewater services will contribute to enhancing social welfare. The project triggered OP/BP 4.12 on involuntary resettlement in response to the possible relocation of one family in Mogilev. A Resettlement Policy Framework has already been prepared and disclosed in the local language on December 2, 2011, to allow for public feedback. A draft abbreviated resettlement action plan (RAP) has been prepared for the Mogilev subproject. It was disclosed in the local language on November 19, 2013. Under the original project, public consultations were held at all project locations. For locations where there were no activities under the original project, public consultations will be organized by the client. Should the need for any new RAP be identified, participating utilities will finance their preparation as is currently the case in the original project. Environmental Impact. The original project, as well as the AF, have been classified as Environmental Category B. The investments proposed under the AF are very similar, in size and type, to those under the original project. The Environmental Management Plan (EMP) prepared and approved by the Bank for the original project will be used for activities under the AF. During project implementation, the EMP provisions will be applied to all undertaken activities and appropriate mitigation measures specified in the EMP will be incorporated as requirements in the bidding documents. The contracts will include adequate provisions to ensure that contractors undertake EMP-specified measures. The proposed AF is in compliance with the Belarusian and World Bank regulations, policies and procedures for environmental assessment (EA). The anticipated adverse environmental impacts will occur mainly during the construction stage and are likely to be site-specific and manageable. The project will not adversely affect human populations or involve conversion or degradation of natural habitats, or have a negative impact on forest ecosystems. The mitigation measures foreseen in the EMP will prevent and/or significantly reduce any adverse impacts. Should the need for any additional Environmental Impact Assessment be identified, the AF will finance their preparation. Several subprojects under the AF will have positive impacts on the environment and on human health as a result of decreased pollution discharge to water bodies. A Physical Cultural Resources Action Plan has been prepared for the Mogilev subproject, where on part of the construction site, movable cultural artifacts may be found during excavation works. The OP/BP 7.50 International Waterways applies to water projects that involve “the use or potential pollution of international waterways.” An “Exemption to the notification of riparian states” was prepared and approved by ECA Region VP on October 23, 2013. The exemption is justified, since the scope of AF investments will not adversely change the quality or quantity of water flows to other riparians. 10. Contact point Contact: Stephane Raphael Dahan Title: Senior Water & Sanitation Specialist Tel: (202) 458-2078 Fax: Email: sdahan@worldbank.org 11. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Email: pic@worldbank.org Web: http://www.worldbank.org/infoshop