Document of The World Bank Report No. PAD00000479 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROJECT APPRAISAL DOCUMENT ON A PROPOSED GEF GRANT IN THE AMOUNT OF US$ 6.77 MILLION TO THE REPUBLIC OF CROATIA AND BOSNIA AND HERZEGOVINA FOR THE GEF ADRIATIC SEA ENVIRONMENTAL POLLUTION CONTROL PROJECT (I) CROATIA AND BOSNIA AND HERZEGOVINA April 23, 2014 Sustainable Development Department South East Europe Country Unit Europe and Central Asia Region 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 April 23, 2014) Currency Unit = Euro Euro 0.724 = US$1.00 US$ 1.38 = Euro 1.00 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS ASEP Adriatic Sea Environmental Program BiH Bosnia and Herzegovina CPS Country Partnership Strategy DA Designated Account EA Environmental Impact Assessment EC European Commission EcAp Ecosystem Approach EMP Environmental Management Plan EPEEF Environmental Protection and Energy Efficiency Fund ESMF Environmental and Social Management Framework EU European Union GDP Gross Domestic Product GEF Global Environment Facility GPA Global Program of Action GTAP Global Trade Analysis Project IBRD International Bank for Reconstruction and Development ICZM Integrated Coastal Zone Management IFI International Financing Institutions IRR Internal Rates of Return MAP Mediterranean Action Plan MoFTER Ministry of Foreign Trade and Economic Relations MSFD Marine Strategy Framework Directive NAP National Action Plans NBSAP National Biodiversity Strategic Action Plans NEAP National Environmental Action Plan NGO Non-Governmental Organization NPV Net Present Value PDO Project Development Objectives PMT Project Management Team PSC Project Steering Committee SAP Strategic Action Plans SAM Social Accounting Matrix SEA Strategic Environmental Assessment SIL Specific Investment Loan SOEs Statements of Expenditures SWMC Solid Waste Management Company TA Technical Assistance TDA Trans-boundary Diagnosis Analysis TORs Terms of Reference WPP Water Partnership Program  Regional Vice President: Laura Tuck (ECAVP) Country Director: Ellen Goldstein (ECCU4) and Mamta Murthi (ECCU5) Sector Director: Laszlo Lovei (ECSSD) Sector Manager: Sumila Gulyani (ECSUW) Task Team Leader: Manuel Mariño (ECSUW) GEF ADRIATIC SEA ENVIRONMENTAL POLLUTION CONTROL PROJECT (I) CROATIA AND BOSNIA AND HERZEGOVINA P096213 CONTENTS I.  STRATEGIC CONTEXT....................................................................................................1  II.  PROJECT DEVELOPMENT OBJECTIVES (PDO) .......................................................6  III.  PROJECT DESCRIPTION ................................................................................................6  IV.  IMPLEMENTATION .......................................................................................................11  V.  KEY RISKS AND MITIGATION MEASURES ..............................................................13  VI.  APPRAISAL SUMMARY .................................................................................................15  Annex 1: Results Framework and Monitoring ............................................................................22  Annex 2: Detailed Project Description.........................................................................................25  Annex 3: Implementation Arrangements.....................................................................................30  Annex 4: Operational Risk Assessment Framework (ORAF) ....................................................40  Annex 5: Implementation Support Plan ......................................................................................44  Annex 6: Economic analisis of the program and Financial analysis of the implementing utilities ...........................................................................................................................................47  Scientific and Technical Advisory Panel .....................................................................................64  STAP Scientific and Technical screening of the Project Identification Form (PIF) ................64  MAPS.............................................................................................................................................67  PAD DATA SHEET GEF Adriatic Sea Environmental Pollution Control Project (I). Croatia and Bosnia & Herzegovina (P143921) PROJECT APPRAISAL DOCUMENT . EUROPE AND CENTRAL ASIA ECSUW Report No.: PAD00000479 . Basic Information Project ID Lending Instrument EA Category Team Leader P143921 Specific Investment Loan B - Partial Manuel G. Mariño (GEF Grant) Assessment Project Implementation Start Date Project Implementation End Date 30-May-2014 15-Sep-2016 Expected Effectiveness Date Expected Closing Date 30-Jun-2014 15-Mar-2017 Joint IFC GEF Focal Area No International waters Country Sector Manager Sector Director Regional Vice President Directors Mamta Murthi Sumila Gulyani Laszlo Lovei and Laura Tuck Ellen Goldstein . Borrower: Croatia, Bosnia and Herzegovina . Project Financing Data(US$ M) [ ] Loan [X] Grant [ ] Other [ ] Credit [ ] Guarantee For Loans/Credits/Others Total Project Cost (US$ M): 29.97 Total Bank Financing (US$ M): 6.77 . Financing Source Amount (US$ M) BORROWER/RECIPIENT 23.20 Global Environment Facility (GEF) 6.77 Municipalities of Borrowing Country 0.00 i Total 29.97 . Expected Disbursements (in US$ Million) Fiscal Year 2014 2015 2016 2017 Annual 0.50 1.00 2.50 2.77 Cumulative 0.50 1.50 4.00 6.77 . Global Environmental Objective(s) Proposed Global Environmental Objective(s) The Project’s development and global environmental objectives are: (a) to reduce the discharge of pollutants with transboundary importance, particularly Nitrogen, in selected hotspots of the eastern Adriatic Sea; and (b) to improve the capacity in the Republic of Croatia and Bosnia and Herzegovina to prepare pollution control projects in selected localities of Dalmatia and Herzegovina and to strengthen the capacity to monitor the sea water quality. Project Beneficiaries The primary Project beneficiaries are the people directly dependent on the Adriatic Sea waters for their livelihood and recreation, such as those involved in the fisheries and the tourism industry. In addition, institutional development and knowledge sharing facilitated through the Project would contribute to strengthening of various institutions and/or agencies responsible for environmental management in Croatia and Bosnia and Herzegovina to implement the required reforms. These institutions include local and central governments (including urban planning departments / institutes and water resources institutions), NGOs, water and sanitation companies/municipal departments, and solid waste management operators. PDO Level Results Indicators Achievement of the PDO would be monitored and measured through the following indicators: • Nutrient load reduction (Nitrogen-N) achieved in the demonstration investments financed under the project (Kg/year) • Number of investments proposals prepared and presented to the EU for funding; and • Number of sea water quality measurements reported annually by the Croatian Ministry of Environment and Natural Resources from the new monitoring system . Components Component Name Cost (US$ Millions) Component 1: Demonstrative Investments to reduce 27.77 Nutrient Discharges and Improve Monitoring Component 2: Technical Assistance 1.98 Component 3: Project Management 0.22 . Compliance Policy ii Does the Project depart from the CAS in content or in other significant Yes [ ] No [ X ] respects? . Does the Project require any waivers of Bank policies? Yes [ ] No [X] Have these been approved by Bank management? Yes [ ] No [ X ] Is approval for any policy waiver sought from the Board? Yes [ ] No [X] Does the Project meet the Regional criteria for readiness for Yes [X] No [ ] implementation? . Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 X Natural Habitats OP/BP 4.04 X Forests OP/BP 4.36 X Pest Management OP 4.09 X Physical Cultural Resources OP/BP 4.11 X Indigenous Peoples OP/BP 4.10 X Involuntary Resettlement OP/BP 4.12 X Safety of Dams OP/BP 4.37 X Projects on International Waterways OP/BP 7.50 X Projects in Disputed Areas OP/BP 7.60 X . Legal Covenants Name Recurrent Due Date Frequency Effectiveness No Before N/A Effectiveness Description of Condition (Summary) (a) Adoption of the Project Operations Manual by each the Croatian Environmental Protection and Energy Efficiency Fund (EPEEF) and the Ministry of Foreign Trade and Economic Relations (MoFTER). (b) Execution of the Subsidiary Agreement on behalf of the Republic of Croatia and EPEEF. (c) EPEEF and Cistoca d.o.o. Zadar and the City of Zadar have entered into contractual arrangements, satisfactory to the World Bank, to ensure EPEEF’s access rights at the solid waste leachate collection and treatment plant in Zadar’s landfill for the implementation of the Project. (d) MoFTER and J.P. Deponija d.o.o. Mostar and the City of Mostar have entered into contractual arrangements, satisfactory to the World Bank, to ensure the MoFTER’s access rights to the solid waste leachate collection and treatment plant in Mostar’s landfill for the implementation of the Project. (e) Satisfactory legal opinions with regard to the Grant Agreements, Project Agreement and iii Subsidiary Agreement have been received. . Conditions Name Type Signing of Implementation Agreement Implementation Description of Condition (Summary) No later than twelve (12) months after the Effective Date, and except as the World Bank and Recipients shall otherwise agree, the Recipient (for Bosnia and Herzegovina) and the Project Implementing Entity (for the Republic of Croatia) shall enter into arrangements, satisfactory to the World Bank, with the respective Solid Waste Management Company (SWMC) which shall: (i) regulate and describe the support provided by the SWMC during the design phase and works supervision under Part 1 of the Project; (ii) set forth the procedure for the acceptance of final works and handing over the leachate treatment plant to the SWMC; (iii) set forth a plan for operating procedures upon completion of the works for the leachate treatment plant, including compliance with the Environmental Management Plans (EMPs) and Environmental and Social Management Frameworks (ESMF); and (iv) set forth requirements and mechanisms for ensuring the financial sustainability of each SWMC to ensure coverage of the operation and maintenance costs for the leachate treatment facility. Name Type Transfer of assets upon completion of works Implementation Description of Condition (Summary) Upon completion of the works for the upgrading of the leachate treatment plants, the Recipient (for Bosnia and Herzegovina) and the Project Implementing Entity (for the Republic of Croatia) shall transfer ownership of the plants and related assets to the respective SWMC under contractual arrangements satisfactory to the World Bank, which shall include the details of the requirements set forth in sub-paragraphs (iii) and (iv) above. Name Type Nomination of representatives to Project Steering Committee Implementation Description of Condition (Summary) The Recipient (for Bosnia and Herzegovina) and the Project Implementing Entity (for the Republic of Croatia) shall nominate appropriate representatives to the Project Steering Committee, no later than three (3) months after the Effective Date, Name Type Project Management Teams (PMT) Implementation Description of Condition (Summary) The Recipient (for Bosnia and Herzegovina) and the Project Implementing Entity (for the Republic of Croatia) shall: 1. Maintain the respective Project Management Teams (PMTs) throughout the duration of the Project, in a form and with functions, staffing, resources, terms of reference and qualifications and scope of responsibilities satisfactory to the Bank; 2. Carry out the Project in accordance with the Project Operating Manuals (POMs), and shall not amend, suspend, abrogate, repeal or waive any provision of the POMs, without prior iv approval of the World Bank Name Type Safeguards Implementation Description of Condition (Summary) 1. The Recipient shall ensure that the Project is carried out in accordance with the ESMF and the EMP and shall ensure that no provision of the ESMF and EMP is amended, suspended, abrogated, repealed or waived without prior written approval of the World Bank. 2. The Recipient shall ensure that no activities under the Project involve the involuntary taking of land resulting in relocation or loss of shelter, loss of assets or access to assets, loss of income sources or means of livelihood, or involving the involuntary restriction of access to legally designated parks and protected areas according to the Bank’s policy on “Involuntary Resettlement”. 3. For the purposes of technical assistance under Part 2 of the Project, the Recipient shall ensure that the terms of reference for any consultancies shall be satisfactory to the World Bank and, to that end, such terms of reference shall require that the advice conveyed and documentation prepared through such technical assistance be consistent with the requirements of the Bank’s Safeguards Policies. Team Composition Bank Staff Name Title Specialization Unit Manuel G. Mariño Lead Water and Sanitation Team Leader ECSUW Specialist Natasa Vetma Senior Operations Officer Environment ECSEN Stjepan Gabric Senior Operations Officer Engineering ECSUW Karina Mostipan Senior Procurement Specialist Procurement ECSO2 Goran Tinjic Senior Operations Officer Project ECCBM Management Lamija Marijanovic Financial Management Financial ECSO3 Specialist Management Joseph Formoso Senior Finance Officer Disbursement CTRLA Adam Shayne Lead Counsel Legal LEGLE Julie Rieger Senior Counsel Legal LEGLE Diego Juan Rodriguez Senior Economist Economist TWIWA Vera Dugandzic Senior Operations Officer Social ECSSO Sanyu Lutalo Senior Water Supply and Engineering AFTU1 Sanitation Specialist Sergio Dell’Anna DRM Specialist Engineering ECSUW Ronnie Hammad Senior operations Officer Quality Control ECSUW v Milane de Jesus Reyes Project Assistant ACS ECSUW Guy Tchabo Project Assistant ACS ECSUW Non Bank Staff Name Title Office Phone City . Locations Country First Administrative Location Planned Actual Comments Division Croatia Zadar County Zadar X BiH Mostar County Mostar X . Institutional Data Sector Board Water . Sectors / Climate Change Sector (Maximum 5 and total % must equal 100) Major Sector Sector % Adaptation Mitigation Co-benefits % Co-benefits % Water, sanitation and flood protection Wastewater 45 Treatment and Disposal Water, sanitation and flood protection Solid waste 35 management Water, sanitation and flood protection General water, 20 sanitation and flood protection sector Total 100 I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project. . Themes Theme (Maximum 5 and total % must equal 100) Major theme Theme % Environment and natural resources Pollution management and 60 management environmental health Environment and natural resources Environmental policies and 40 vi management institutions Total 100 vii I. STRATEGIC CONTEXT A. Regional and Country Context 1. The proposed Global Environmental Facility (GEF) Adriatic Sea Environmental Pollution Control Project (I). Croatia and Bosnia and Herzegovina (the Project thereafter) is a regional project that was conceived as part of a broader Adriatic Sea Environment Program (ASEP). It will include activities in two of the Adriatic Sea’s riparian countries: Croatia and Bosnia and Herzegovina (BiH). 2. The Adriatic is a semi-enclosed sea forming a distinct sub-region within the Mediterranean Sea. It is home to many of the region’s largest cities and one of the most important water bodies in Southern Europe because of its ecological values and important marine habitats. Unfortunately, the ecological balance of the Adriatic is threatened by trans- boundary pollution. The deteriorating state of the sea affects its fisheries, services, and tourism, threatening important economic sectors for Croatia and BiH, together with other riparian countries. These problems have been exacerbated and the need for solutions is now more urgent because of climate change. 3. The Republic of Croatia has a population of 4.3 million people and a GDP per capita of US$ 13,530 (2013 figures). About 1.5 million (35% of the country’s population) live in the Adriatic Sea’s discharge basin. Croatia’s territory, which covers a total area of about 56,594 square kilometers, is among the best preserved in Europe, with 47% of its land and 39% of its sea designated as specially protected areas and areas of conservation. Croatia’s natural beauty draws in millions of tourists each year1, with tourism revenues representing around 15% of the country’s GDP. Preservation of the environment is therefore high on the development agenda and a country priority after accession to the European Union (EU). Within this context, addressing transboundary challenges to the water quality of the Adriatic is among the priorities for Croatia to maintain sustainable growth, particularly in industries such as tourism and fisheries. 4. Croatia joined the European Union on July 1, 2013 as the 28th member state. The country’s economy grew at a healthy 4-5% until 2009, but like many European countries was hit by the financial crisis. The government still faces the challenge of competing in the large EU market and maximizing the opportunities membership will bring, especially the absorption of a large amount of EU Structural Funds. 5. Bosnia and Herzegovina, like Croatia, is rich in natural resources and is regionally and internationally renowned for its natural beauty and cultural heritage. BiH has a population of 3.8 million out of which about 500,000 live in the Adriatic Sea catchment basin. The GDP per capita is US$ 4,446 (2012 data). Total tourism contribution to its GDP is about 8.4 %. The country has 25 km of the Adriatic Sea coastline, all of it in the Municipality of Neum, which has a permanent population of about 4,000 people, increasing to 8,000 during the summer months. 1 About 9 million tourists visit the Croatian coast each year, significantly increasing the demands on environmental services and the pressures on the environment. 1 6. The importance of BiH for transboundary pollution management in the Adriatic stems from the fact that large parts of the catchment basins of Adriatic tributary rivers are located there. Consequently, pollution sources located in BiH significantly contribute to the pollution loads discharging into the Adriatic, either directly carried by the rivers (Neretva, Krka and Cetina) or indirectly through the karsts. BiH is an aspiring EU candidate country and is moving slowly toward alignment with EU acquis requirements. B. Sectoral and Institutional Context 7. In 2011 the World Bank, with funding from the Water Partnership Program (WPP) Trust Fund, commissioned a study to update the inventory of pollution hotspots2 in the Adriatic. This Hotspot Assessment identified potential interventions, building upon the previous Transboundary Diagnostic Analyses (TDAs) conducted in 1997 and 2005. The study also confirmed that the three major causes of trans-boundary pollution in the Adriatic are: (a) municipal sewage point-sources and agriculture non-point discharges along the coast and the main rivers in the Adriatic basin, which pollute coastal waters and have created a highly eutrophic system in its northern sections; (b) chemical and oil discharges from point sources such as industry and port wastes; and (c) solid waste and litter from unsanitary waste dumping in cities and towns at the coast and/or transported via rivers discharging into the Sea, as well as its leachates. These are aggravated by the fact that tourism places unique technical and financial challenges to liquid and solid waste disposal management because of its seasonal concentration in summer months. Consequently, virtually all the priority investments identified in the Hotspot Assessment are liquid and solid waste treatment, disposal management plans, and monitoring programs for coastal zones and sensitive areas. 8. Total investment required to reach desirable environmental conditions in the eastern Adriatic region are estimated at €1.6 billion: € 793 million are already being implemented (or are underway) and € 808 million are the remaining funding gap. The remaining funding gap at the priority hotspot sites is estimated at 355 million €. Virtually all investments identified in the assessment are focused on liquid and solid waste treatment, disposal management plans, and monitoring programs for coastal zones and sensitive areas. The Hotspot Assessment study was complemented by a technical workshop and follow up meetings to mobilize stakeholders, including potential co-financiers of the program and national governments to assess the appetite for supporting the program. Stakeholders consulted, including the EC, governments of the respective countries, and regional institutions, all expressed strong positive support for the proposed program. 2 The TDAs carried out in 1997 and 2005 with GEF support, identified in the Adriatic Coastline thirty one (almost one third of the total) Mediterranean Sea pollution hot spots. The recent WPP study considered 41 potential sites and confirmed the existence of 27 “hotspots” in the Adriatic, out of which 6 at the eastern coast were identified as priority sites that require immediate actions. “Hotspots” were defined as a coastal area where the environment is subject to pollution due to intense human activities regardless of their location and source, which potentially affect public health, threaten biodiversity, degrade ecosystem services and put at risk the prospects for sustainable development both on the spot but also in a wider area. The study also identified 14 “Endangered Areas”, defined as a coastal area that is in danger of becoming a pollution hotspot in the future due to existing human activities, but it still cannot be classified as such in accordance to the coastal pollution hotspot definition 2 9. Croatia. In Croatia the Hotspot Assessment identified solid waste disposal as the main source of pollution, and noted that there are almost no properly operated sanitary landfills on the coast, but numerous dumping sites. Due to the karstic nature of terrain, leachates from waste dumping sites are thus released into the sea. The priority pollution hotspots identified through earlier studies and confirmed by the Assessment are the following (from North to South): Pula, Rijeka, Zadar Channel, Krka Estuary, Split-Kastela, Ploce-Neretva Delta (which also receives pollution originating in BiH), and Dubrovnik-Ston. Croatia’s National Environmental Action Plan (NEAP) has also prioritized coastal pollution in these areas for intervention. 10. BiH. While there are no identified pollution hotspot sites at BiH’s short Adriatic Sea coastline, there are major municipal point pollution sources that contribute to the pollution load carried by the Neretva river into its delta (one of the identified Hotspots), as well as Krka and Cetina Rivers and the Karst aquifer. 11. Wastewater treatment is a significant problem throughout the territory of BiH. Sewerage systems in the Mediterranean part of BiH, many of which were damaged during the war, are obsolete, and only a few municipalities (Trebinje, Grude and Ljubuski) have wastewater treatment plants, which need to be upgraded. Solid waste is another critical problem. Local (municipal) landfills are mostly simple waste dumps set on inadequate locations without basic technical protection measures, and cannot therefore be considered proper sanitary landfills. An exception is Mostar’s landfill at Uborak, which has been recently upgraded with the construction of a new disposal site and the closing of the old waste dump; however the leachate treatment is still not adequate. It consists only of retention lagoons and does not include any treatment of leachates generated on the old disposal site. Neum, on the coast, while not reaching pollution levels already present in the identified hotspots, is also under threat because of its dependency on tourism and the sensitivity and fragility of the Mali Ston inlet. 12. Previous Projects and Initiatives. Given the importance of the Adriatic Sea and the pollution challenges it faces, there have been numerous pollution control projects in recent years financed by various International Financing Institutions (IFIs) and donors, including the World Bank. Most important among these projects are the two Coastal Cities Pollution Control projects in Croatia, the Neretva-Trebisnjica Management Project in Croatia and BiH, and some bilateral and international programs supported by the European Commission (EC). The EC financed investments in wastewater treatment and solid waste management in several coastal cities and in the Neretva basin. 13. Nonetheless, much remains to be done to address the growing needs of urban areas and to restore the ecosystems, particularly on water treatment facilities in coastal towns and in solid waste management with transboundary influence. Failure to do so will certainly lead to the aggravation of the present situation and lost economic opportunities, both in tourism and in other coast and sea dependent economic sectors. 14. On the institutional level, regional efforts to address the environmental issues facing the Adriatic Sea began in 1975 with the adoption of the Mediterranean Action Plan (MAP)3, 3 16 Mediterranean countries and the European Community adopted the Mediterranean Action Plan (MAP) in 1975. MAP was the first-ever plan adopted as a Regional Seas Programme. The main objectives of MAP were to assist the Mediterranean 3 followed by the signing of the Convention for the Protection of the Mediterranean Sea Against Pollution (Barcelona Convention) in 1976. 15. EU Directives provide the most comprehensive framework for the protection of the Adriatic Sea. Transposition and implementation of EU acquis related to marine environment (specifically the Marine Strategy Framework Directive, MSFD4, 2008/56/EC) and of the Integrated Coastal Zone Management (ICZM)5 Protocol of the Barcelona Convention sets challenging tasks for both Croatia and BiH as signatories. 16. Alignment with World Bank Strategies. The Project is aligned with respective Country Partnership Strategies (CPS) for Croatia and BiH, and is in line with the Bank’s Regional Strategy of developing closer regional partnerships with the EU institutions. 17. The recently approved CPS for Croatia for the FY 2014-2017 is centered on Croatia’s goal of compliance with EU requirements and accelerating its income convergence with other member states in a fiscally, socially, and environmentally sustainable way. The CPS is therefore supporting Croatia’s post-accession reforms through projects and analytical and advisory activities that complement the EU accession agenda. The Project is also aligned with the country’s priorities for management of its marine and coastal environment, outlined in the previous section. The FY 2014-2017 CPS gives high relevance to the EU agenda by dedicating the third pillar to seek maximizing the benefits of EU Membership. 18. The proposed Project is therefore strategic and critical both in terms of supporting innovative technologies and for preparing project proposals for EU funding. Without this Project’s support, the capacity of the country to absorb and properly use these funds would be at risk. The limited support provided by the Project thus becomes crucial to accelerating the achievement of Croatia’s regional targets in terms of pollution control in the Adriatic and by leveraging substantial financing. countries to assess and control marine pollution, to formulate their national environment policies, to improve the ability of governments to identify better options for alternative patterns of development, and to optimize the choices for allocation of resources. Although the initial focus of MAP was on marine pollution control, experience confirmed that socio-economic trends, combined with inadequate development planning and management are the root of most environmental problems. Consequently, the focus of MAP gradually shifted to include integrated coastal zone planning and management as the key tool through which solutions are being sought. Twenty years later, the Action Plan for the Protection of the Marine Environment and the Sustainable Development of the Coastal Areas of the Mediterranean (MAP Phase II) was designed, taking into account the achievements and shortcomings of the MAP in the context of recent developments. Today MAP involves 21 countries bordering the Mediterranean as well as the European Community. More information available at http://www.unepmap.org 4 Marine Strategy Framework Directive: The aim of the European Union's ambitious Marine Strategy Framework Directive (adopted in June 2008) is to protect more effectively the marine environment across Europe. It aims to achieve good environmental status of the EU's marine waters by 2020 and to protect the resource base upon which marine-related economic and social activities depend. The Marine Strategy Framework Directive constitutes the vital environmental component of the Union's future maritime policy, designed to achieve the full economic potential of oceans and seas in harmony with the marine environment (http://ec.europa.eu/environment/water/marine/directive_en.htm). 5 Integrated Coastal Zone Management: In order to further promote sustainable development of coastal zones, the European Commission adopted on the 12th of March 2013 a draft proposal for a Directive establishing a framework for maritime spatial planning and integrated coastal management. The proposed instrument will require Member States to establish coastal management strategies that build further on the principles and elements set out in the Council Recommendation on Integrated Coastal Zone Management of 2002 and the Protocol to the Barcelona Convention on Integrated Coastal zone Management, ratified by the EU in 2010. (http://ec.europa.eu/environment/iczm/) 4 19. Similarly, supporting BiH’s EU integration process has become the overarching theme of the Bank’s CPS. The CPS also focuses on competitiveness, environmentally sustainable growth, and social inclusion, within the twin goals of poverty reduction and shared prosperity, to which improved environmental conditions, better infrastructure and protection of environmental resources fundamental for tourism and other economic activities development are so important. Expected outcomes of the new CPS 2012-2015 include improved infrastructure and basic services, sustainable infrastructure development, reduced river pollution of Neretva, Bosna and Miljacka river basins, and improved wastewaters management. Therefore, the proposed activities to be financed under the Project have been selected in line with these expected outcomes and to foster cooperation with the EU and leverage EU financing. C. Higher Level Objectives to which the Project Contributes 20. Consistency with the GEF Strategic Priorities and Programs and Linkage to Broader Programmatic Objectives. The Project is in line with the GEF International Waters Focal Area which seeks to reduce nutrient over-enrichment and oxygen depletion from land- based pollution of coastal waters in large marine ecosystems. It is also consistent with the Global Program of Action (GPA). To this end, it will support collective management of the Adriatic transboundary water system through water quality monitoring and policy recommendations for nutrient control, incorporating ICZM principles. 21. Alignment with National Action Plans (NAPs) under the Mediterranean Strategic Action Plan (SAP MED) for these two countries. The proposed Project seeks to accelerate the implementation of the Mediterranean Strategic Action Plans (SAPs, SAP BIO and SAP MED) adopted under the Barcelona Convention in the Adriatic, as well as the implementation of Croatia’s and Bosnia and Herzegovina’s National Action Plans (NAPs), in accordance with EU accession policies and directives. The project also aims to strengthen synergies with EU investment facilities and UNEP MAP policy work. 22. Linkages between the Project and the Regional Program. Although the proposed project was approved by the GEF Council as a stand-alone operation, its design, approach and objectives follow those agreed to for ASEP by the Bank, GEF and the countries in the region upon the completion of the assessment of hotspots. Therefore, the Project has to be viewed from the Program’s perspective, since its main broader programmatic objective is precisely to launch ASEP’s implementation through technical assistance to support preparation of investment proposals, policy development and two demonstration investments. Within this programmatic approach, the Project encompasses activities for both the Republic of Croatia and BiH, as set forth in the respective Grant Agreements. 23. The Project and the Program of which it is part are therefore essentially designed to accelerate and enhance the Strategic Action Program for pollution reduction implementation, in full synergy with requirements and targets of relevant EC Directives and Barcelona Convention and its Protocols. As indicated above, it is also in synergy with MAP’s recently adopted Ecosystem Approach (EcAp). 5 24. Without GEF support the process of implementing EcAp would be in jeopardy and at best seriously delayed. This would have implications on the compliance with EC Directives and Barcelona Convention Protocols, as well as on the capacity to mobilize available funds that are required urgently to address hotspots; otherwise there is the risk of losing these funds. Acceleration of the implementation of these policy instruments and investments, together with the important lessons learned and models to be developed and tested, are critical to expand the Program into other parts of the Mediterranean, an opportunity that would be lost without GEF’s support. II. PROJECT DEVELOPMENT OBJECTIVES (PDO) A. PDO 25. Within the broad programmatic objective of supporting the launching of ASEP described above, the Project’s specific objectives are: (a) to reduce the discharge of pollutants with transboundary importance, particularly Nitrogen, in selected hotspots of the eastern Adriatic Sea; and (b) to improve the capacity in the Republic of Croatia and Bosnia and Herzegovina to prepare pollution control projects in selected localities of Dalmatia and Herzegovina and to strengthen the capacity to monitor the sea water quality. Project Beneficiaries 26. The primary Project beneficiaries are the people directly dependent on the Adriatic Sea waters for their livelihood and recreation, such as those involved in fisheries and tourism. In addition, institutional development and knowledge sharing facilitated through the Project would contribute to strengthening institutions and/or agencies responsible for environmental management in Croatia and BiH and for implementing the required reforms. These institutions include local and central governments (including urban planning departments/institutes and water resources institutions), NGOs, water and sanitation companies/municipal departments, and solid waste management operators. PDO Level Results Indicators Achievement of the PDO will be monitored and measured through the following indicators:  Nutrient load reduction (Nitrogen-N) achieved in the demonstration investments financed under the project (Kg/year);  Number of investments proposals prepared and presented to the EU for funding; and  Number of sea water quality measurements reported annually by the Croatian Ministry of Environment and Natural Resources from the new monitoring system. III. PROJECT DESCRIPTION A. Project Components 27. The Project has the following three components (see Annex 2 for detailed description of these investments and for the financing mix of GEF and co-financing funding): 6 Component 1 – Demonstration investments to reduce nutrient discharges and improve sea water quality monitoring capacity (US$ 27.77 million, of which US$ 4.98 million is GEF financing): This Component will finance: (i) Design, supply, and installation of equipment for the reduction of nutrient discharges, including, inter alia, upgrading the leachate treatment plant in Mostar’s landfill in BiH6, (ii) Design, supply and installation of equipment for upgrading the leachate collection and treatment plant in Zadar’s landfill in Croatia, and (iii) Provision and installation of equipment, to strengthen regional capacity to monitor the sea water quality. The quality monitoring equipment will be installed on a vessel that will be provided and adapted for this purpose by the Ministry of Environment and Natural Resources in Croatia. Component 2 – Technical Assistance (US$ 1.98 million, of which US$ 1.60 million is GEF financing): This Component will finance consultant services to: TA activities in Croatia: (i) Carry out an assessment of sources of nutrients, including point and non-point sources in two sensitive areas/hotspots (Northern Dalmatia’s Zadarska County and northern part of the Sibensko-Kninska County and Neretva Delta area), as well as to provide an analysis of the policy, legal and/or institutional reforms that are needed to address related water quality problems (ii) Technical assistance for the preparation of preliminary designs and project documentation, including preparation of tender documentation to access European Union funds, for investments in leachate treatment and management to comply with EU requirements in selected localities in Dalmatia. TA activities in Bosnia and Herzegovina: (iii) Prepare preliminary designs and project documentation, including preparation of tender documentation to access European Union (“EU”) funds, for investments in leachate and wastewater treatment and management to comply with EU requirements in selected locations in Herzegovina and Neum. 6 The proposed investments for new leachate treatment plants in Mostar and Zadar landfills, envisaged to apply high-load activated sludge, have been selected for three main reasons: (i) their demonstration potential on the efficiency and sustainability of such treatment, currently rare in the region; (ii) the impact on two of the priority hotspots identified in the Hotspot Assessment (the Zadar Channel and the Neretva Delta) through karstic groundwaters and the Neretva River; and (iii) the priority given by the Hotspot Assessment to the adequate treatment of solid waste leachate as a source of pollution for the Adriatic Sea. Although these two demonstration investments have been selected because of their relation to hotspots and priority interventions identified in the Assessment, their impact on overall pollution reduction is necessarily limited given the available financing, especially when compared with the overall challenges and investment needs of the region. 7 Component 3 – Project Management and Dissemination (US$ 0.22 million, of which US$ 0.19 million is GEF financing). This component will finance incremental operating costs for project management as well as monitoring and evaluation for the Project Management Team (PMT) in BiH. It will include about 1% of grant funds specifically reserved for evaluation and dissemination under IW-Learn related activities. This component will also finance BiH’s PMT office expenses related to the Project management, including translations, communications, local and abroad travels, banks fees, audit reports, office supplies and equipment as well as repair and maintenance of office equipment. B. Project Financing Lending Instrument 28. The lending instrument would consist of a Specific Investment Loan7 (SIL) in the form of a GEF grant to Croatia and BiH totaling US$ 6.77 million, under respective Grant Agreements. Of this, US$ 4.33 million would be allocated to the Republic of Croatia, to be passed on through a subsidiary agreement to the Environmental Protection and Energy Efficiency Fund (Fond za zaštitu okoliša i energetsku učinkovitost - EPEEF), and US$ 2.44 million to the Government of BiH, to be implemented by the State Ministry of Foreign Trade and Economic Relations (MoFTER). 29. The Project includes direct co-financing from the Republic of Croatia in the amount of US$ 22.78 million and US$ 0.41 million from the Government of BiH. Of the Project’s total cost of US$ 29.97 million, 77 percent is counterpart funding, while the remaining 23 percent (US$ 6.77 million) is from the GEF Grant. Co-financing consists of monetary contributions by the governments for the closing of Zadar landfill, adapting the vessel on which the proposed monitoring equipment will be installed, designing the monitoring system, and from VAT refunds. All these funds have already been committed for activities that currently are or will be under implementation; therefore, the risk for their unavailability is low. 30. The project will also benefit from parallel financing for complementary activities. This operation complements the construction of a new waste management center in Zadar (expected to be carried out with EU funding), and builds on the construction of the new disposal site in the landfill in Mostar, closing the current one (satisfactorily carried out under a Bank financed project), and on additional TA for project preparation under the proposed new Bank operation in Croatia for EU preparedness (for a total of US$ 64.69 million, resulting in a total Project co- financing of US$ 87.89 million, with an overall co-financing ratio of 13:1). 31. Co-financing estimates do not include the significant additional financing that the Project is expected to leverage through its TA component, which have been estimated at 24.5 million US$, nor those related to launching of the ASEP. 7 The financing is technically a grant facility and not a loan. 8 Project Cost and Financing 32. The estimated costs for the Project, including contingencies, are summarized in the table below (in US$ million). Project Components Project cost GEF Financing % GEF Financ. Component 1 - Demonstration Investments 27.77 4.98 18 % to Reduce Nutrient Discharges and Monitor the Sea Water Quality Component 2 - Technical Assistance 1.98 1.60 81 % Component 3 - Project Management and 0.22 0.19 85 % Dissemination Total Project Costs 29.97 6.77 Interest During Implementation - - Total Financing Required 29.97 6.77 23 % C. Program Objective and Phases 33. As indicated above, the Project has been designed under the umbrella of the Adriatic Sea Environment Program, aimed at reducing pollution and strengthening the institutional framework for protection of the ecology of the Adriatic Sea, particularly at “hotspots” along the Adriatic Sea’s east coast. 34. The follow-up project that completes ASEP with specific investments for Montenegro and Albania, currently under preparation for submission to GEF, will include a regional activity for Knowledge Management, dissemination and replication. It will also include technical assistance for the drafting of an ambitious Regional Framework Agreement for pollution reduction in the Adriatic Sea, to be submitted to all the relevant countries, as well as regional activities related to the implementation of EcAp in cooperation with MAP. 35. Through the proposed policy recommendations that will be developed under the Project and the said Regional Framework Agreement, the Program aims to improve regional management capacity for trans-boundary pollution control as a part of a larger programmatic effort to restore ecologic balance in the Adriatic Sea. Complementing this effort, the proposed monitoring equipment will provide improved capacity to monitor and manage sensitive coastal areas for the whole region (an agreement in this respect has been confirmed from the country that will manage such equipment), responding to the threats identified in the NBSAP8 for these countries. Through these mechanisms, the Project also aims to support national plans for implementation of ICZM protocol to Barcelona Convention and EU Marine Framework Directive. 8 National Biodiversity Strategic Action Plans (NBSAPs) are the principal instruments for implementing the Convention on Biological Diversity at the national level. The Convention requires countries to prepare a national biodiversity strategy (or equivalent instrument) and to ensure that this strategy is mainstreamed into the planning and activities of all those sectors whose activities can have an impact (positive and negative) on biodiversity 9 D. Lessons Learned and Reflected in the Project Design 36. The following lessons are drawn from projects involving similar activities elsewhere, from the broader GEF International Waters portfolio, and from the region.  For trans-boundary projects, it is critical to involve and get buy-in of all stakeholders from the different countries and regional entities as early on during project identification and design. Key stakeholders have been engaged from the identification stage, within the context of consultations conducted for the broader ASEP, under which the current project was conceived and forms an integral component. The consultations involved two roundtable meetings, a workshop, and bilateral meetings conducted in September and October 2011 and in May 2012, bringing together different stakeholders, including representatives of national Environment Ministries, Donors and Bilaterals, regional agencies involved in the sector, such as MAP, the Strategic Partnership for the Mediterranean Sea (MedPartnership), UNEP, and others. Stakeholders endorsed the concept and activities proposed under the ASEP, including the proposed Project.  Integrating Project Management Units within existing Government entities, particularly those implementing Bank or donor projects, enhancing the efficiency. In the case of Croatia, the Project will be implemented through EPEEF, currently responsible for implementation of several EU financed projects in the sector. In the case of BiH, the Project will be implemented through the PMT in MoFTER, which is successfully implementing two GEF/World Bank project9.  Clear identification of investments to be financed during Project preparation and the capacity to monitor results are essential elements of successful implementation. During preparation the team has confirmed all details of the two physical investments to be financed in both SWMC in Zadar and Mostar, from a technical and financial point of view, to avoid the problems encountered in other comparable operations. Similarly, the type of investment proposed, which involves piped transfer of influent and effluents, allows for adequate monitoring of the indicators selected (nitrogen reduction) avoiding the problems encountered when non-point reduction is to be assessed.  Monitoring of Nutrient discharges has to be feasible and respond to Project objectives. The Project focuses on point-source discharges that allow easy measurement of concentrations and flows, thus facilitating the monitoring of Project impact, avoiding the problems presented by non-point-sources. It also focuses on nutrients since these are the main transboundary pollutant identified by GEF, the national SAPs and the hotspot assessment. 9 The Neretva and Trebisnjica River Basin Management Project and the Sarajevo Waste Water Project. 10 IV. IMPLEMENTATION A. Institutional and Implementation Arrangements 37. The Project will be implemented between 2014-2017 by a well established PMT in each country. In BiH, the PMT is part of MoFTER; in Croatia, the PMT will be in EPEEF. MoFTER and EPEEF will manage project implementation and be responsible for procurement, financial management, monitoring and evaluation and reporting. The fiduciary functions would be conducted by civil servants already employed in MoFTER and EPEEF. 38. The two PMTs will contribute: (i) staff with prior experience in the implementation of Bank-financed projects (in BiH, the Urban Infrastructure and Service Delivery project and the GEF Neretva and Trebisnjica River Basin Management project, and in Croatia an extensive experience in implementing IPA projects and involvement in Bank projects), and (ii) in the case of BiH, experience in preparing withdrawal applications, IFRs, and annual project financial statements. 39. The Project would be implemented through two parallel grant agreements, one each for Croatia and BiH. In Croatia the funds will be transferred to EPEEF through the Ministry of Finance; in BiH the funds will be transferred to MoFTER through the Ministry of Finance and Treasury. Two separate Designated Accounts (DA) in US$ will be opened respectively by MoFTER and EPEEF for the Project proceeds. The DAs will be opened in commercial banks acceptable to the World Bank. Grant funds will flow from the World Bank to the DAs and then from the DAs to contractors on the basis of the approved invoices (see Annex 3 – Disbursement section). Project design foresees retroactive financing for consultant services in support of project management by BiH PMT delivered prior to project approval and consultant services in EPEEF for the TA component. 40. In Croatia, EPEEF will take the overall responsibility for project implementation, including procurement and financial management, as it is currently doing for several EU financed projects. EPEEF is a Croatian financial institution established according to the provisions of the 1999 Environmental Protection Act10 to finance the preparation, implementation and development of programs and projects in the fields of preservation, sustainable use, protection and improvement of the environment, energy efficiency and use of renewable energy sources. 41. In BiH, as indicated before, MoFTER will take the overall responsibility for project implementation, including procurement and financial management, following the same approach used in the GEF Neretva-Trebisnjica project. 42. MoFTER and EPEEF will each sign an Implementation Agreement, satisfactory to the Bank, with the respective Solid Waste Management Company (SWMC) and Municipalities no later than twelve (12) months after the Effective Date which shall: (i) regulate and describe the support provided by the SWMC during the design phase and works supervision; (ii) set forth 10 EPEEF was established pursuant to the provisions of Article 60 paragraph 5 Environmental Protection Act ("Official Gazette", no. 82/94, 128/99) and Article 11 Energy Act ("Official Gazette", no. 68/01); the Law on Environmental Protection and Energy Efficiency was published in the "Official Gazette" no. 107/03) and is in effect since 2004. 11 the procedure for the acceptance of final works and handing over the leachate treatment plant to the SWMC; (iii) set forth a plan for operating procedures upon completion of the works for the leachate treatment plant, including compliance with the EMPs and ESMF; and (iv) set forth requirements and mechanisms for ensuring the financial sustainability of the SWMC to ensure coverage of the operation and maintenance costs for the leachate treatment facility. Upon completion of the works for the upgrading of the leachate treatment plants, EPEEF and MoFTER will transfer ownership of the plant and related assets to the respective SWMC under contractual arrangements satisfactory to the World Bank, which shall include the details of the requirements set forth above. 43. Before the Project can become effective, the Project Operations Manual, satisfactory to the World Bank, must be finalized and adopted by each of the Implementing Entities (MoFTER and EPEEF), and these must have entered into contractual arrangements with the respective SWMC and municipalities, satisfactory to the World Bank, to ensure access rights to the landfill. 44. At the transboundary level, a technical Project Steering Committee (PSC) will be set up within three months of effectiveness by each PMT nominating appropriate members. The PSC will be responsible for coordinating and monitoring joint activities and sharing knowledge and lessons learnt. The PSC will be composed of one member for each PMT and chaired alternately by each country’s PMT every six months. Upon request, the PSC will be supported by technical expertise on a temporary basis dealing with specific issues. Each PMT will cover the costs of their own staff participating in the PSC. As part of Component 3 for BiH, incremental operating expenses related to IWLearn activities will also be financed by the Project to guarantee their implementation (about 1% of Grant funds are reserved for this purpose). 45. All arrangements for implementation and model agreements will be consolidated in a Project Operation Manual, to be adopted prior to effectiveness, with specific chapters for each implementing PMT as well as for overall coordination and monitoring. B. Results Monitoring and Evaluation 46. The PMTs in EPEEF in Croatia and in MoFTER in BiH would be responsible for monitoring project performance and achievement of project outcomes and results. These two entities are already implementing similar ongoing projects in Croatia and BiH respectively, and have adequate capacity to carry out the M&E function under the Project. For all project indicators shown in Annex 3, biannual reports will be submitted to the Bank to monitor project progress and identify and respond in a timely manner to any problems that might emerge. Baseline data on key indicators will be collected for the coastal zone near the pollution hotspots, as part of the EIA and FS studies. The Project also includes financing for setting-up a monitoring system to monitor sea water quality and strengthen regional capacity to protect sensitive areas from accidental pollution discharges. 12 C. Sustainability 47. The long-term sustainability of the Project will depend, among other things, on the following:  Financial sustainability of the two demonstration investments for solid waste leachate treatment, which would depend on the ability of the operating entities to operate efficiently and to cover operations and maintenance costs. As part of project preparation a technical and financial analysis was carried out for both municipal solid waste management companies which confirmed the capacity of these companies to operate these facilities and cover their incremental operating costs.  Sustainability of the sea water quality monitoring program will depend on the capacity built at the regional and national levels and on the establishment of a mechanism to provide continued financial support to operate and maintain the equipment financed under the Project and the monitoring vessel on which it will be installed. Such a mechanism already exists and has efficiently provided the required financing for the operation and maintenance of the monitoring system of coastal waters in Croatia, as part of the arrangements of the Coastal Cities projects financed by the Bank. V. KEY RISKS AND MITIGATION MEASURES A. Risk Ratings Summary Table Stakeholder Risk Rating11 Implementing Entity Risk - Capacity Moderate - Governance Moderate Project Risk - Design Moderate - Social and Environmental Low - Program and Donor Subst/Low - Delivery Monitoring and Sustainability Moderate Overall Implementation Risk Moderate 11 These ratings are estimated as average for both implementing entities, which present different conditions and risks. In the Operational Risk Assessment Framework (ORAF) table a disaggregated assessment is made and separate mitigating measures presented, as appropriate. 13 B. Overall Risk Rating Explanation  Implementing Entity Risk: Insufficient capacity to develop project proposals for EU financing (Moderate). Although both PMTs have previous experience, the complexity of the proposed program and the need to adapt to new procedures and requirements might pose a risk for the TA component. This risk will be mitigated by the involvement of key stakeholders working with experienced consultants to develop investment proposals with continuous support from specialists from other EU countries. The procurement for several contracts has already been initiated during preparation to increase both PMT capacity and speed up implementation. Implementation capacity is also considered similar in both countries given the limited demands the Project presents (3-4 contract for each country).  Similarly, no risks are expected with regards to financial capacity to provide counterpart financing since in the case of BiH the Project will finance 100% of costs and in Croatia EPEEF has adequate resources to cover all planned counterpart funding needs. Additionally, EU funding is already available.  Social and Environmental: Public reaction against investments financed or designed under the Project (Low). It has been confirmed in both Zadar and Mostar that the demonstration investments will be carried out within the perimeter of existing facilities, not requiring land acquisition or resettlement nor affecting the amenities of adjacent activities. Social and environmental risks may only occur in specific investment projects for which designs and project documentation will be prepared as part of the TA component. Following the procedures agreed under the ESMF carried out during Project preparation, environmental assessments will be conducted to identify and mitigate any potential risks. Similarly, an analysis of social issues potentially affecting individual projects will also be carried out during the preparation of designs and project documentation.  Program and Donor: Co-financing may not fully materialize for the program (Substantial, related to the Program) / or for the project (Low, related to the Project). The demonstration investments can be completed with Project support only. Donor/government co-financing for the Project is secured to a great extent. Funding for proposals prepared under the TA component for the overall Program cannot be assured. This risk can be mitigated by seeking EU buy-in during preparation, and will continue through implementation.  Delivery Monitoring and Sustainability: Project implementation and results will not be adequately monitored (Moderate). This risk will be mitigated by ensuring that adequate resources are allocated for monitoring (including IWLearn) and by the design of the demonstration investments that facilitate the measuring of selected monitoring indicators. 14 VI. APPRAISAL SUMMARY A. Economic and Financial Analyses 48. The results of the project-level economic analysis carried out are summarized below. Also summarized are the results of the financial analysis of the two solid waste utilities (Zadar and Mostar) that will implement investments (rest of the Project is comprised of technical assistance). The traditional economic evaluation method, based on the comparison of benefit and cost flows between the situation “with” and “without”, and the capacity of these two companies to guarantee the financial sustainability of the investments are used to derive conclusions for accepting/rejecting the investment prospects. The analysis confirms the positive benefits of the Project and the financial viability of the utilities that will operate both demonstration investments. The project-level analysis clearly indicates that this is a set of financial investments worth carrying out, and that the institutions will be capable of guaranteeing their sustainability. Economic Analysis. 49. A Project-level cost-benefit analysis has been prepared for the two demonstration investments on the basis of the standard value assigned to Nitrogen12, the total reduction to be achieved by the demonstration investments, and their cost. Using this approach the Net Present Value (NPV) of expected benefits has been estimated at US$ 6.21 million and the Internal Rate of Return (IRR) of the demonstration investments at 24%, for a total cost of US$ 4.58 million and an O&M equivalent to 12% of the investment cost per year. The demonstration investments are also the most cost-effective for this type of waste, and the cost of removal is well below what is considered the cost-effective marginal cost of removing Nitrogen (3.2 US$/kg of N removed in these two demonstration investments versus 53 US$/kg average for nine Baltic countries13). 50. It has been indicated above that the proposed Project is a regional project that was conceived as part of a broader Adriatic Sea Environment Program. Its design, approach and objectives follow those agreed for ASEP. As such, the Project has to be viewed from Program perspective since its main broad programmatic objective is precisely to support the launch of ASEP’s implementation. To be consistent with this approach, a Program-level economic analysis was also conducted to estimate the benefits of the broader Program (see Annex 6). Financial Analysis. 51. The Project will finance investment in only two municipal utilities, Zadar in Croatia and Mostar in BiH SWMCs, which will receive grant resources for physical investments (the two demonstration investments for leachate treatment), while the rest of the utilities participating in 12 See Hernandez et al. (2010) for the “Economic valuation of environmental benefits of wastewater treatment processes”, where shadow prices for Nitrogen and other pollutants discharges (reflecting the environmental damage avoided) are presented for discharges into different receiving waters, 4.6 and 16.3 Euro per kg respectively for discharges into river or sea environments. These are similar to those included in the recent European Nitrogen Assessment, 5 and 20 Euro per kg (Sutton and van Grinsven, 2012). 13 See Gren (2008) “Cost effectiveness and fairness of the Helcom Baltic Sea action plan against eutrophication” where these figures are presented. 15 the Project will only be receiving technical assistance for investment proposals preparation. For these two utilities, financial statements were analyzed to determine their current financial standing to assess their capacity to ensure adequate funding for operations and maintenance expenditures (investments costs are provided as a grant). 52. Zadar, Croatia. The study reviewed Zadar’s SWMC capacity to cover the incremental operations and maintenance costs of the leachate treatment facility. Financial projections were undertaken based on a series of assumptions (given the lack of data): i) 0% population growth based on current IMF estimates; ii) inflation rates estimates from the most recent IMF calculations through 2018, then constant for 2019 and 2020; iii) cost of capital of 5%; iv) no additional tariff increase (See Annex 6). The results indicate that the utility will incur negative cash balance once the plant is in operation under these assumptions. Unless the company considerably reduces the current operating expenditures, the operation and maintenance costs for the leachate treatment facility will have to be covered through other sources such as: i) an increase in tariffs, ii) transfers from the municipalities, iii) a subsidy from EPEEF, iv) improvements in efficiency and/or v) incurring debt14. All of these options have been considered and a proposal that guarantees the financial capacity of this utility will be submitted to the Bank before negotiations and included as part of the commitments under the Implementation Agreement. 53. Mostar, BiH. The situation in Mostar is slightly different as this is a newly established company and it is not in full operation. As such, there are no current financial statements. Financial projections were done based on some preliminary data generated by the utility on expected expenses and income. These projections were undertaken on the following assumptions: i) 0% population growth based on current IMF estimates; ii) inflation rates estimates from the most recent IMF calculations through 2018, then constant for 2019 and 2020; iii) cost of capital of 5%; iv) no additional tariff increase. Mostar’s financial sheet maintains a positive cash flow for a few years, primarily due to the fact that it will benefit from generating additional income from the sale of recycled materials obtained in the waste separating plant. As such, it has a strong financial position. Assuming it does not incur any large fixed costs (increase in personnel, etc) it would have the capacity not only to breakeven but also to generate profits. The financial analysis of the two utilities is a difficult exercise, and necessarily limited, since the one in Mostar is not fully operational and is not yet in a position to provide financial statements. In that regard, the capacity of that utility to finance O&M might be difficult to establish at this stage, and therefore proper institutional arrangements to ensure adequate financing of O&M costs are included as part of the Implementation Agreement to be signed within one year of Effectiveness between the Implementing Entity, the utility and the City of Mostar. B. Technical 54. The Project is financing two demonstration investments to design, supply and install equipment for solid waste leachate collection and treatment. The objective of these investments is to demonstrate the viability of the proposed technology and the capacity of local 14 In order to assess the utility’s capacity to incur debt, the debt ratio was also calculated (total liabilities, short and long term, over total assets). Table 12 in Annex 6 presents the results of the debt ratio for Zadar’s SWMC, which confirms that this utility has a strong ratio and therefore possess the capacity to incur debt 16 utilities to properly operate and maintain them to reduce nutrient discharges into the Adriatic Sea. The main pollutant to be reduced is Nitrogen, given its solubility and transportability into ground waters and ultimately into the Adriatic Sea (as indicated before, nutrients and particularly Nitrogen represent the major pollutant with transboundary importance for the Adriatic Sea). The technology under consideration is high load activated sludge with anaerobic phases, of which some examples are already under operation on a pilot basis. 55. The investments are designed to meet standards established under EU legislation for effluent discharge and the protection of underground water. It is also to demonstrate the potential for replication, to assess the relative importance of nutrient sources, develop policy recommendations (including incentives), and prepare investment proposals under this approach. The investments and TA complement those financed through the Croatia Coastal Cities (second under implementation and third currently under preparation) and the GEF Bosnia and Herzegovina Second Solid Waste Management projects financed by the Bank. These projects are financing technical assistance to improve coastal water quality, which will be complemented by the proposed sea water quality monitoring system, and a new disposal site in the landfill (Mostar), whose leachate treatment will be upgraded under the proposed Project. C. Financial Management (FM) 56. In BiH, the PMT in MoFTER employs a financial manager with extensive prior experience in implementing Bank-financed projects, having gained knowledge in attending financial management training and on-the–job learning. The PMT also employs one accountant with the relevant accounting and finance background and strong experience in Bank FM policies and procedures. In addition there is one professional assistant for project implementation. Quarterly IFRs for the ongoing project financed from WB funds have been submitted to the Bank on a regular basis in the negotiated formats. The latest reports cover Q2 2013. Such reports were delivered within the agreed deadline for submission of the IFRs and are considered acceptable. 57. In Croatia, the Unit for EU funds within EPEEF will be responsible for FM arrangements. The EU financial management manager has extensive experience in implementing IPA funds. The EU funds department has a staff of 25 people out of which two are responsible for FM of IPA funds. Its capacity is considered adequate. 58. Overall the FM arrangements for the project are satisfactory and there are no FM pending actions to be completed prior to the negotiations or effectiveness. D. Procurement 59. There are two levels of procurement risks: (i) Country Level; and (ii) Project level. Country Level is based on country public procurement legislation and overall procurement environment. Project level is based on current risks in the country portfolio. The Procurement Risk is Moderate for Croatia and Substantial for Bosnia-Herzegovina at both country and project levels. In accordance with P-RAMS, the Project procurement risk will fall under the “Moderate” risk category for both countries after mitigation measures. Since this is a new project, the Procurement Guidelines dated January 2011 and Consultants Guidelines dated 17 January 2011 shall apply. Therefore, all Standard Bidding Documents and Standard Request for Proposals applicable under this project shall follow new and revised formats available at www.worldbank.org. Since these new documents were recently revised there is only limited capacity available in using these documents and further training would be needed. A procurement capacity assessment was carried out during project preparation for both PMTs and found to be satisfactory. 60. Acceptable procurement plans covering the first 18 months of project implementation have been prepared by both Project Implementing Entities and agreed with the Bank. Its final version will be published and disclosed without cost estimates. More details are provided in Annex 3. E. Social (including Safeguards) 61. One proposed investment is in the county landfill, near the City of Mostar in BiH. Mostar county consists of 43 local communities. The last official census of 1991 shows Mostar's population was 125,000. However, according to estimates provided by the Statistics Agency of the Federation of BiH from the year 2009 the City of Mostar alone has a population of 111,186. The landfill, located within the area of the local community of Vrapcici, approximately 12 km from Mostar’s city centre, receives in the order of 30,000 tons of solid waste per year. According to the most recent official census from 1991, Vrapcici has a population of 3,450, with 985 households. Settlements in the proximity of the landfill are Livac, Kuti and Budevac. The first two settlements are 500 m away from the landfill, while the nearest houses in part of the settlement Budevac are approximately 300 m away, which is considered safe enough. In the wider area of the landfill, there are no cultural or natural heritage sites. 62. The other proposed investment is in Zadar county landfill in Croatia. This landfill receives waste from two large cities (Zadar and Nin) and 13 municipalities of the Zadar County (Bibinje Galovac, Ugljan, Novigrad, Poličnik, Posedarje, Over, Privlaka, Ražanac, Sukošan, Škabrnja, Vir and Zemunik), representing more than 110,000 residents (80% of the total amount of municipal waste produced in Zadar County). Zadar’s landfill is located about 4.5 km north-west of the center of Zadar, on the road Zadar-Kožino, and has been operating since 1963. The landfill area is about 18,000 m2, with an average of five to six meters high. The landfill is secured by a two-meter high fence and 24 hours security guard. The land is owned by the City of Zadar and operated by the communal company Čistoća d.o.o., Zadar. The landfill receives about 35,000 tons of waste per year. Nearest settlement to the landfill is Diklo, located on the coast, about 1 km southwest. As is the case also in Mostar’s landfill, there are no residents in the landfill and no scavengers on its premises. In summary, the landfill is a secure site, located at safe distance from the nearest community. 63. Impacts on local population during the construction may therefore only be expected in the early phases of construction and be of only minimal importance and easily avoided with adequate project management practices. These impacts include:  Pollution and deterioration of the soil from harmful substances spilling (fuel, oil, etc.); 18  Air pollution due to dust due to construction works, and gases from the machinery and vehicles used during the construction;  Noise and vibration from the construction machinery during the construction and during the deployment period of the plant;  Traffic disturbances due to temporary and partial or complete closing of access roads for vehicles and pedestrians;  Pollution of ground water due to spillage and trickling of fuel, oil and other pollutants; and,  Health and safety hazard for construction workers from open channels and trenches deposited and temporarily stored materials, maneuvering with the construction machinery. 64. Impacts on the local population during the operation are expected to be significant and positive, as leachate treatment plants generally create positive social benefits. The major identified positive impact includes the elimination of discharged leachates to ground water and the river Neretva, which is of crucial importance to human health, and the elimination of any potential dangers/risks to potable water in individual water wells used by the local population, as well as to agricultural land and crops in the proximity of the landfill. 65. For both demonstration investments –as mentioned above– there is no land acquisition, no scavengers in the landfills, no residents, and the landfill areas are properly fenced. Also, during preparation the Project team confirmed that the ownership of these areas has not been contested. Therefore, the Project would not trigger OP 4.12 (involuntary resettlement). Also, no potential beneficiaries of the TA Component can participate in the Project if they do not comply with the ESMF requirements, particularly if land acquisition would be needed for the investments for which design and project documentation are requested to be supported under this Project. This limitation also applies if land was obtained before the grant signing for the specific purpose of the investment for which TA is requested under the Project. 66. Rehabilitation and reconstruction (which could involve demolition of un-suitable structure and construction of a new one) of existing buildings within the same footprint would be permissible. If reconstruction would exceed the footprint of existing structure in any way, the PMT and municipalities must ascertain that any additional land used is unencumbered (i.e. no squatters or encroachers and not requiring the eviction of anyone resident in such property) and provide proof in form of pictures and ownership titles. The PMTs should verify for each TA proposal the unencumbered status of the property prior to approving any TA assistance which could raise such issues. F. Environment (including Safeguards) 67. At Project Concept Note stage the Project was, as a precaution, classified as Category A because the specific nature and size of the investments to be financed and prepared were not known. As further information became available the Project has been reclassified as environmental category B – partial assessment. The Project focuses on nutrient reduction to the Adriatic Sea, and, as explained, will finance two demonstration upgrades of landfills in the 19 Adriatic Sea basin through construction of leachate treatment systems. The preparation of technical documentation (intended for improving absorption of EU funds) will focus on the same type of investments (leachate treatment systems and upgrades of existing wastewater treatment plants to tertiary treatment for nutrient reduction) and on the supporting documentation required to make such project proposals eligible for financing (policy analysis, Strategic Environmental Assessments –SEAs–, etc.). The Project will also finance monitoring equipment in Croatia to improve the quality of sea monitoring required by EU. 68. OP/BP 4.01 (Environmental Assessment) is triggered. The Project Implementing Entities in BiH and Croatia have prepared separate Environmental and Social Management Frameworks (ESMFs). These ESMFs define the environmental screening and assessment procedures for the Project, both for the demonstration investments and for those to be supported under the TA Component. According to the ESMF, the municipalities will be required to carry out adequate environmental assessments of the proposed investments according to the World Bank safeguards procedures and to obtain environmental permits as prescribed by the national legislation. The respective ESMFs along with an announcement of the public consultation workshop were disclosed on June 14, 2013 on the website of the EPEEF and MoFTER and hard copies are available on solid waste municipal companies’ information boards in Mostar and Zadar (sites of the two demonstration investments the Project will finance). Public consultations of these ESMFs were held on June 27, 2013 in Sarajevo and Zagreb. 69. Only EA Category B and C investments will be eligible for TA assistance; therefore, investments having large scale environmental impacts (Category A) would be excluded as described in the ESMFs prepared for the Project. The environmental due diligence procedures identified in the ESMF comply with both national and Bank environmental safeguards procedures. The ESMF calls for preparation of Environmental Impact Assessments (EAs) or updates of existing ones for all financed wastewater or leachate treatment investments as well as for all TAs that will be prepared for EU financing. Specific site EAs / Environmental Management Plans (EMPs) would be prepared for the category B investments for which TA would be financed. 70. For other type of TA (analysis, reports, etc.), where environmental impacts are expected to be negligible, the Terms of Reference (ToRs) for each sub project would have strong emphasis on improving environmental quality and sustainability of the assignment. G. Other Safeguards Policies Triggered 71. The Project triggers two other safeguard policies: Physical Cultural Resources and Projects in International Waters. Issues associated with triggered policies do not pose serious risks that are difficult to address, as they are, and will be, managed systematically, using local experience, local and EU standards and guidance from the Bank. 72. OP/BP 7.50 on Projects on International Waterways is triggered since the Adriatic Sea and its tributaries, including the Neretva, Krka and Cetina Rivers are international waterways. Through the United Nations Environment Program – Coordinating Unit for the Mediterranean Action Plan (which performs diplomatic, political and communications roles on behalf of the 20 22 Contracting Parties to the Barcelona Convention), the Governments of the Republic of Croatia and BiH notified the Government authorities of all the riparian countries around the Adriatic Sea (Albania, Montenegro, Italy, Greece and Slovenia) regarding the proposed project and its beneficial impact. The notification confirmed the team's assessment of the Project’s positive impact and that it would neither cause appreciable harm to the other riparians nor adversely change the quality or quantity of the water flows. Comments were requested within 45 days from the date of notification. The notification period concluded on July 25, 2013. No responses had been received from any of the riparian countries by that date or since. 73. OP/BP 4.11 (Physical Cultural Resources) is triggered as the Project recognizes that the historical richness of Croatia and BiH creates a higher than usual likelihood of cultural “chance finds” in any construction activity. All investments to be supported by the Project will comply with local legislation, including advance consultation with the Ministry of Culture and following the local permitting process, which have been reviewed and found adequate. The EMSFs include provisions on chance finds. 74. OP 17.50, (Disclosure Policy) is triggered with reference to the EMSF and EAs/EMPs for all investments to be financed or for which TA support will be provided. EMPs for both Mostar and Zadar leachate treatment plants have been disclosed as part of the ESMF. 75. All safeguard policies triggered by the Project can be adequately dealt with given the good practice in Croatia and BiH, the experience of both PMTs, and the institutional capacity to enforce it. 21 ANNEX 1: RESULTS FRAMEWORK AND MONITORING . Country: South Eastern Europe Project Name: GEF Adriatic Sea Environmental Pollution Control Project (I). Croatia and Bosnia and Herzegovina (P143921) . Global Environmental Objective Indicators Cumulative Target Values Data Source/ Responsibility for Unit of End Methodology Data Collection Indicator Name Core Baseline YR1 YR2 YR3 YR4 Frequency Measure Target Nutrient load reduction (Nitrogen- PMTs for both PMTs for both N) achieved in the Kg per year 135,000 0 0 60,000 130,000 130,000 Quarterly EPEEF and EPEEF and demonstration MoFTER MoFTER investments financed under the project Investments proposals PMTs for both PMTs for both prepared and Number 0 0 0 4 6 6 Annual EPEEF and EPEEF and presented to the EU MoFTER MoFTER for funding Number of sea water quality measurements reported annually by Number of the Croatian Ministry measurements 0 0 2,000 2,000 3,000 3,000 Annual EPEEF PMT EPEEF PMT of Environment and per year Natural Resources from the new monitoring system PMTs for both Direct project Last official Number 0 0 0 235,000 235,000 235,000 Annual Census EPEEF and beneficiaries MoFTER Percentage PMTs for both Last official Female beneficiaries Sub-Type 0.00 0.00 0.00 50.00 50.00 50.00 Annual Census EPEEF and Supplemental MoFTER 22 . Intermediate Results Indicators Cumulative Target Values Data Source/ Responsibility for Unit of Methodology Data Collection Indicator Name Core Baseline YR1 YR2 YR3 YR4 End Target Frequency Measure Analysis of the policy, legal and/or institutional Croatian reforms Text No No No Yes Yes Yes Annual Ministry of EPEEF PMT conducted and Environment draft report completed per TOR. Approval of the Strategic Environmental Croatian Ministry of Text No No Yes Yes Yes Yes Annual EPEEF PMT Environment / EPEEF Assessment for leachate management plan Leachate PMTs for both PMTs for both EPEEF treatment plants Number 0 0 0 1 2 2 Annual EPEEF and and MoFTER completed MoFTER Feasibility studies for the rehabilitation of PMTs for both PMTs for both EPEEF leachate and Number 0 0 0 2 4 4 Annual EPEEF and and MoFTER wastewater MoFTER treatment plants completed Monitoring Number 0 0 40 40 60 60 Annual EPEEF PMT EPEEF PMT stations sampled 23 . Global Environmental Objective Indicators Indicator Name Description (indicator definition etc.) Nutrient load reduction (Nitrogen-N) achieved under the This indicator measures nitrogen load reduction due to the two demonstration project in the two demonstration investments investments financed under the project. The baseline for this indicator is the nitrogen load at the start of the project produced in both landfills (Zadar and Mostar). Number of Investment Proposals prepared Under the Component 2, investment proposals will be prepared and the two Recipients will then seek EU funds to co-finance those proposals Number of sea water quality measurements reported Results from the system to monitor sea water quality for transboundary pollutants, annually by Croatian Ministry of Environment and particularly nitrogen and hydrocarbons Natural Resources from the new monitoring system Direct project beneficiaries Direct beneficiaries are people who directly derive benefits from the intervention. In this case, people served by solid waste landfills with upgraded leachate treatment plants financed by the Project. Female beneficiaries Based on the assessment and definition of direct Project beneficiaries, percentage of the beneficiaries which are female. Intermediate Results Indicators Indicator Name Description (indicator definition etc.) Leachate treatment plants Number of leachate treatment plants upgraded to achieve effluent concentrations in compliance with EU Standards Number of feasibility studies for the construction of Under the Component 2, feasibility studies part of investment proposals prepared to leachate and wastewater treatment plants completed seek EU funds to co-finance those proposals Number of monitoring stations sampled Improvement of monitoring system which will allow real-time capacity to monitor sea water quality potentially affected by trans-boundary pollution 24 ANNEX 2: DETAILED PROJECT DESCRIPTION Croatia & Bosnia & Herzegovina GEF Adriatic Sea Environmental Pollution Control Project (I) (P143921) The Project has the following three components: Component 1 – Demonstration investments to reduce nutrient discharges and improve water quality monitoring capacity (US$ 27.43 million, of which US$ 4.98 million are GEF financing). This Component will finance: In Bosnia and Herzegovina: (i) Design, supply, and installation of equipment for the reduction of nutrient discharges, including, inter alia, upgrading the leachate treatment plant in Mostar’s landfill. The current disposal site in the landfill in Mostar is expected to be closed and replaced by a new one recently completed, which includes adequate lining and leachate collection, but no leachate treatment, thus offering an excellent opportunity to demonstrate the potential for leachate treatment. The new disposal site in the landfill will be operated by a newly created municipal company (J.P. Deponija Mostar, d.o.o.). Mostar county, served by the landfill, consists of 43 local communities. According to the last official census from the year 1991, Mostar's population was 125,000, although according to the estimates provided by the Statistics Agency of the Federation of BiH from the year 2009, the City of Mostar alone has a population of 111,186. The landfill is located within the area of the local community of Vrapcici, approximately 12 km from Mostar’s city centre. The site receives about 30,000 tons of waste per year from the City of Mostar (increasing from about 23,000 tons per year in 2009), but is designed to receive about 150,000 tons once collection is extended to the whole county. Although a final decision on the technology to be used will depend on the design phase, it is estimated that the leachate treatment plant will be designed as a high load activated sludge, for an estimated flow of about 120 m3/day. In Croatia: (ii) Design, supply and installation of equipment for upgrading the leachate collection and treatment plant in Zadar’s landfill. The landfill in Zadar is operated by a municipal company (Cistoca d.o.o.) and serves a population of approximately 150,000 people from Zadar county, including two large county cities (Zadar and Nin) and 13 municipalities15. The landfill is located about 4.5 km north-west of the center of Zadar, on the road Zadar-Kožino, and has been operating since year 1963, occupying an area of about 18,000 m2, with an average height of five to six meters. The site receives a load of about 35,000 tons of waste per year, operating six days per week. The landfill does not have a liner, thereby allowing leachate to percolate to the Karst without any type of control. As part of regular operation of the landfill a cover consisting of construction material is distributed over the waste once spread and compacted. The porous nature of the cover does not prevent 15 Bibinje Galovac, Ugljan, Novigrad, Poličnik, Posedarje, Over, Privlaka, Ražanac, Sukošan, Škabrnja, Vir and Zemunik 25 rain from getting into the waste pile, thereby increasing leachate quantities. This landfill site is scheduled for closing in 2018, to be replaced by a new waste management plant. Similarly to the case in Mostar, although final a decision on the technology to be used will depend on the design phase, it is envisaged that the Zadar landfill leachate treatment plant will be designed as a high load activated sludge for an estimated flow of about 135 m3/day, and include a new leachate collection network. Although the overall impact on pollution in the Adriatic of the two demonstration investments will be very small when compared with other sources on nitrogen16 and necessarily given the funding available under the Project and overall investment needs, the proposed investments in leachate treatment in Mostar and Zadar have been selected for three main reasons17: (i) their demonstration potential on the efficiency and sustainability of such treatment, currently rare in the region; (ii) the impact on two of the priority hotspots identified in the Assessment (the Zadar Channel and the Neretva Delta) through karstic groundwater and the Neretva River; and (iii) the priority given by the Assessment to the adequate treatment of solid waste leachate as a source of pollution for the Adriatic Sea. Efficiencies in nitrogen removal for this type of treatment plants are usually very high given the elevated concentrations of organic substances that are available for denitrification (acetic and butyric acids, primarily), reaching 99% in some cases, for normal leachates with nitrogen concentrations in the order of 1,500 to 1,800 mg/l in the influent (CODs in the order of 21,000 to 27,000 mg/l). (iii) Provision and installation of equipment to strengthen regional capacity to monitor the sea water quality. Under the proposed supply and installation contract the Project will partially finance the purchase of monitoring equipment for the sampling and analysis of sea water to measure transboundary pollutants, particularly nitrogen and hydrocarbons. This equipment will be installed in a vessel provided and adapted for this purpose by the Ministry of Environment and Natural Resources in Croatia. Component 2 – Technical Assistance (US$ 1.98 million, of which 1.60 million are GEF financing): This Component will finance consultant services for (i) the preparation of proposals for funding by the EU, including all related analysis required by the EC, such as a Strategic Environmental Assessment of the overall program for leachate treatment; and (ii) the assessment of relative sources of nutrients to derive policy recommendations. Such TA is intended to reinforce the potential for replication of the demonstration investments and contribute to the launching of the overall regional Program for the Adriatic. These consultant services will be grouped in the following three activities: TA activities in Croatia: (iv) Consultant services to carry out an assessment of sources of nutrients, including point and non- point sources in two sensitive areas/hotspots (Northern Dalmatia’s Zadarska County and northern part of the Sibensko-Kninska County and Neretva Delta area), as well as to provide an 16 Assessing the relative importance of different sources of nitrogen is precisely the objective of the study to be financed under component 2 of the Project. It has been indicated in the main text that current nitrogen loads to the northern Adriatic Sea are estimated to be in the order of 120,000 to 260,000 tons per year, depending mostly on the River Po flows, which are orders of magnitude higher than the current estimated total nutrient reduction in the proposed leachate treatment plants (130 tons per year). 17 In early phases of project preparation one of the proposed demonstration investments was the upgrading of a wastewater treatment plant to tertiary treatment in Croatia. This investment was replaced as part of the Project financing by the leachate treatment in Zadar’s landfill because the previously proposed investment has already been undertaken under the Coastal Cities project and for consistency among both countries to allow for comparison and better analysis of results. 26 analysis of the policy, legal and/or institutional reforms that are needed to address related water quality problems (v) Consultant services for the preparation of preliminary designs and project documentation, including preparation of tender documentation to access European Union funds, for investments in leachate treatment and management to comply with EU requirements in selected localities in Dalmatia. During Project preparation some of these activities have already been initiated and procurement is well advanced for some items (ie. preparation of a strategic environmental assessment of regional leachate treatment plans). TA activities in Bosnia and Herzegovina: (vi) Consultant services to prepare preliminary designs and project documentation, including preparation of tender documentation to access European Union (“EU”) funds, for investments in leachate and wastewater treatment and management to comply with EU requirements in selected locations in Herzegovina and Neum. The Government of BiH confirmed that Trebinje and Gacko in Eastern Herzegovina, Lise Livno, Glamoc and Posusje in Western Herzegovina, and Neum, on the Adriatic coast, would be eligible for this Project preparation facility, upon confirmation of availability of base documentation and compliance with requirements defined in the ESMF. Component 3 – Project Management and Dissemination (US$ 0.22 million, of which US$ 0.19 million are GEF Financing): This component will finance for BiH PMT incremental operating costs incurred by the PMT on account of Project implementation, management, monitoring and supervision (as such expenditures are set forth in the PMT annual budget), including office supplies, office equipment maintenance, communications, evaluation and dissemination of technical solutions, Project results and lessons learned (through publications, web-supported instruments and workshops), travel and per diem, translation, audit reports, bank fees, vehicle operation and maintenance and salaries of the PMT staff (but excluding salaries of civil servants of the Recipient). Overall Benefits. GEF funding will support Croatia and BiH in reaching the following two major global environmental benefits: a) accelerating MED SAP and NAPs implementation by facilitating environmental infrastructure investments in the Adriatic basin by the EU, WB and others; and b) expanding their scope to support compliance with EU Directives, Barcelona Convention Protocols, the GPA, in synergy with MAP strategies and approaches. Without GEF funding, the above benefits may not materialize or may not materialize as quickly, resulting in continued discharge of large volumes of untreated or inadequately treated wastewater in the Adriatic Sea. The GEF support will provide incremental financing for the construction of pollution reduction municipal infrastructure, with replicability potential, in adherence with relevant EU, Mediterranean, and global priorities and policies (Component 1), and will also create conditions for sustained flow of investments in the future (Component 2). The activities of the Project are coordinated with the activities of the World Bank-MAP GEF Strategic Partnership for the Mediterranean Large Marine Ecosystem (the MedPartnership), especially with regard to the implementation of SAP and NAPs in the Adriatic Region. The benefits this Project is expected to 27 bring to the local communities in the Adriatic will make it an attractive catalyzing factor for similar investments in the future. As indicated above, the specific impact of the two proposed demonstration investments is to comply with EU legislation in terms of effluent discharges and protection of underground waters through the reduction of nitrogen in the effluents, but the real project impact has to be seen from the potential for replication of these two investments. This potential is particularly significant if considered in conjunction with the TA also proposed under the project to assess the relative importance of nutrient sources, develop policy recommendations (including incentives) and prepare projects under this approach that could be eligible for EU or other donor financing. A summary table with investment costs, co-financing by sources and distribution among components and categories in included below for additional information. 28 Financing Sources Direct Funding (US$) Contract Total Other Cofinancing for Baseline Investment Cofinancing Cofinanciers Activity/Contract GEF Gov. Concept Agency VAT Value Gov. contr. MUS$ Concept Source Total Ratio Loan FZOEU HR MoE HR Mun. BiH Gov. BiH Mun. Grants A1 Technical  assistance and  0.190 VAT EPEEF 0.048               0.238                   0.048             8.75 Feasibility studies EPEEF              8.80 46.30 6.56 2.19 0.05 financing for the assessment  of nutrient contribution in  selected areas of Croatia's  coast of transboundary  importance. A2 Treatment to reduce  2.060 13.28 VAT and  Municipality of Zadar and  3.835             19.175                 17.115           21.50 Investments in the   EPEEF/EU             38.62 18.75 10.75 21.67 6.19 nutrient discharges into the  HV/EPEEF  EPEEF contribution to  construction of county solid  (50/80%) +  Adriatic from hot‐spots in  contribution total  cost of 12.272  waste management center EPEEF  Croatia (Zadar landfill). million Euro, including  (50/20%) closing of landfill A3 Equipment for monitoring.  0.920 4.08 VAT and  EPEEF and MoE  1.250               6.250                   5.330             7.13 CCCP2 TA for design of  EPEEF (75%) +             12.46 13.54 1.34 11.12 EPEEF  contribution to total  cost  monitoring systems and  HR Gov MoE  contribution of 4 million Euro,  platforms for data sharing,  EPEEF (25%) including retrofiting of  plus direct counterpart  vessel financing from EPEEF A4 Technical  assistance for  1.160 VAT Municipalities of Skradin,  0.290               1.450                   0.290             9.38 Project preparation and  CCCP (75%) +               9.67 8.33 7.03 2.63 0.00 preparation of funding  Novigrad Zadarski, Zadar,  technical assistance under  HR Gov EPEEF  requests for investments to  Split, Ploce and  CCCP3 in related counties HV (25%) comply with EU requirements  Dubrovnik A5 Technical  assistance for  0.250 VAT               0.250                   0.043 VAT reimbursed and invested              0.04 0.17 0.04 0.00 preparation of funding  requests for investments to  comply with EU requirements  in BiH WWTPs.                           A6 Landfill  leachate  2.000 VAT               2.000                   0.340           11.64 Construction of the sanitary  EC IPA grant             18.28 9.14 0.34 0.00 11.64 treatment to reduce transfer  landfill and VAT of pollution to the Sea  through karstic groundwater  systems in BiH.             2.80 Construction of the sanitary  SIDA 2.80 landfill             3.50 Construction of the sanitary  BiH Gov. 3.50 landfill A7 Project Management and  0.190 VAT               0.190                   0.032 VAT reimbursed and invested              0.03 0.17 0.03 Monitoring support to BiH  PMT, including IWLearn  Totals                6.770                 17.36           29.553                  23.20         64.69           87.89 12.98         29.18         37.61           0.05           6.19           0.41             ‐         14.44 Component GEF % Total Contracts Gov. Country GEF Direct Total Categories GEF % Component 1                4.980 17.9%                  27.77               27.43                   22.79 Croatia                   4.33            22.78 69.53 1a. Croatia Inv and TA          4.330 80% Component 2                1.600 80.8%                    1.98                 1.94                      0.38 BiH                   2.44              0.41 18.35 1b. BiH Inv and TA          2.250 100% Component 3                0.190 85.5%                    0.22                 0.19                      0.03 Total                   6.77            23.20             87.89 2. IOC          0.190 100% Total                6.770 22.6%                29.97              29.55                  23.20 Total           6.77 29 ANNEX 3: IMPLEMENTATION ARRANGEMENTS Croatia & Bosnia & Herzegovina GEF Adriatic Sea Environmental Pollution Control Project (I) (P143921) A. Project Institutional and Implementation Arrangements The Project will be implemented during FY14-17. The Project will be implemented by one PMT for each country already established by project preparation. In BiH, the PMT will be in the State Ministry of Foreign Trade and Economic Relations (MoFTER); in Croatia, the PMT will be in the Environmental Protection and Energy Efficiency (EPEEF). MoFTER and the EPEEF will manage project implementation and be responsible for functions such as: procurement, financial management, monitoring and evaluation, and reporting separately each for its part of the Project. The fiduciary functions would be conducted by civil servants already employed in MoFTER and EPEEF. The financial management arrangements include: (i) availability of staff with prior experience in the implementation of Bank-financed projects (in BiH, the Urban Infrastructure and Service Delivery Project, the Second Solid Waste Management Project, and the GEF Neretva and Trebisnjica River Basin Management Project, and in Croatia an extensive experience in implementing IPA projects and involvement in Bank projects), and, (ii) the PMT in BiH has experience in preparing withdrawal applications, Interim un-audited Financial Reports (IFRs), and the annual project financial statements from the previous project. The Project would be implemented through two parallel grant agreements, one each for Croatia and BiH. In Croatia the funds will be transferred to EPEEF through the Ministry of Finance; in BiH the funds will be transferred to MoFTER through the Ministry of Finance and Treasury. Two separate Designated Accounts (DA) in US$ will be opened respectively by MoFTER and EPEEF for the Project proceeds. The DAs will be opened in commercial banks acceptable to the World Bank. Grant funds will flow from the World Bank to the DAs and then from the DAs to contractors on the basis of the approved invoices. Project design foresees retroactive financing for consultant services in support of project management by BiH PMT delivered prior to project approval and for consultant services for EPEEF under the TA component. (a) Implementing Arrangements in Croatia: EPEEF will take the overall responsibility for project implementation, including procurement and financial management, as it is currently doing for several EU financed projects. EPEEF is a Croatian financial institution established according to the provisions of the Environmental Protection Act18 in order to finance the preparation, implementation and development of programs, projects and similar undertakings in the field of preservation, sustainable use, protection and improvement of the environment and energy efficiency and use of renewable energy sources. (b) Implementing Arrangements in Bosnia and Herzegovina: MoFTER will take the overall responsibility for project implementation, including procurement and financial management, following the same approach used in the GEF Neretva-Trebisnjica and Water Quality projects. 18 EPEEF was established pursuant to the provisions of Article 60 paragraph 5 Environmental Protection Act ("Official Gazette", no. 82/94, 128/99) and Article 11 Energy Act ("Official Gazette", no. 68/01); the Law on Environmental Protection and Energy Efficiency was published in the "Official Gazette" no. 107/03) and is valid since 2004. 30 MoFTER and EPEEF will each sign an Implementation Agreement, satisfactory to the Bank, with the respective Solid Waste Management Company (SWMC) and Municipalities no later than twelve (12) months after the Effective Date which shall: (i) regulate and describe the support provided by the SWMC during the design phase and works supervision; (ii) set forth the procedure for the acceptance of final works and handing over the leachate treatment plant to the SWMC; (iii) set forth a plan for operating procedures upon completion of the works for the leachate treatment plant, including compliance with the EMPs and ESMF; and (iv) set forth requirements and mechanisms for ensuring the financial sustainability of the SWMC to ensure coverage of the operation and maintenance costs for the leachate treatment facility. Upon completion of the works for the upgrading of the leachate treatment plants, EPEEF and MoFTER will transfer ownership of the plant and related assets to the respective SWMC under contractual arrangements satisfactory to the World Bank, which shall include the details of the requirements set forth above. Before the Project can become effective, the Project Operations Manual, satisfactory to the World Bank, must be finalized and adopted by each of the Project Implementing Entities (MoFTER and EPEEF), and these must have entered into contractual arrangements with the respective SWMC and municipalities, satisfactory to the World Bank, to ensure the access rights at the landfill for the implementation of the demonstration investments under the Project. At the transboundary level, a technical Project Steering Committee (PSC) will be set up within three months of the effectiveness. The PSC will be responsible for coordinating and monitoring joint activities and sharing knowledge and lessons learnt. The PSC will be composed of one member for each PMT and chaired alternatively by each country every six months. Upon request, the PSC will be supported by technical expertise on a temporary basis dealing with specific issues. Each PMT will cover the costs for their own staff. B. Financial Management, Disbursements and Procurement The overall financial management risk for the Project is moderate. The Inherent Risk and Controls Risk are also rated as moderate and as a result the overall project risk has been rated moderate. As part of Project preparation the team carried out a financial management assessment that concluded that FM arrangements in both countries are acceptable to the Bank. Budgeting and Counterpart Funding Arrangements. In BiH, annual budgets as well as budgets for 3 years are prepared by MoFTER. However the trust funds are not being included in the state budget, only the counterpart funding if any are being included. As result, the Project budget is prepared by the PMT in MoFTER and it is used for the implementing projects only. Such plans are in compliance with the Project procurement plan. The budgets are revised when the Project management assesses that the revision is necessary. Furthermore the budgeted data are entered in the accounting software that generates automatic quarterly IFRs. Actual versus planned data is regularly monitored by the Project management and variances examined. Budget was finalized and approved by the PMT management. Budgeting and accounting capacity is satisfactory. In Croatia EPEEF is preparing regular annual and medium term (three years) budgets in compliance with budgeting for budget users. The budgets are approved by the Ministry of Finance and Parliament. The Ministry of Finance is informed on a monthly basis on the budget outturns. Actual versus planned data is regularly monitored by the Project management and variances examined. 31 The Project includes contributions from the Republic of Croatia in the amount of US$ 22.78 million and US$ 0.41 million from BiH. Therefore, over the Project’s total cost to US$ 29.97 million, 77 percent are counterpart funding, while the remaining 23 percent (or US$ 6.77 million) is GEF Grant. Accounting and Maintenance of Accounting Records. Accounting policies to be applied to the Project and implemented by the PMT in MoFTER include the following major assumptions: (i) Cash accounting as the basis for recording transactions; (ii) Reporting done in the currency of the grant, and (iii) IFRs prepared for all project funds. The Project financial statements will be prepared on a cash basis, i.e. invoices are recognized when received and registered in a document evidence module in the accounting system, and expenditures are recognized only after payment. The Project accounting policies are described in the financial management chapter of the draft Operational Manual. The PMT uses computerized accounting software (FMS.XP), which is also capable of generating the IFRs automatically. Accounting policies to be applied to the Project part implemented by EPEEF include the following major assumptions: (i) modified accruals basis of accounting (ii) reporting done in Croatian Kunas (iii) IFRs prepared for all project funds. The Project financial statements will be prepared on a modified accruals basis meaning that the expenses will be recognized when incurred and revenue will be recognized when paid. The quarterly reports will follow the methodology applied to prepare the financial report for FINA. EPEEF uses computerized accounting software called Konto, which is also capable of generating the quarterly FINA reports automatically. Therefore the Bank finds FINA report acceptable and the Project reports should be prepared on the same basis, involving however only the GEF Adriatic project funds (both GEF and any government or EPEEF contribution). Internal Controls and Internal Audit Internal Controls. Both PMTs have adequate internal controls for the Project including adequate segregation of duties with appropriate involvement of the technical project personnel as well as engineers from the utilities. Regular reconciliations of accounting data with the data stored in the client connection web site as well as bank statement reconciliations are being documented. Authorization levels are well defined. Sufficient and appropriate supporting documentation is maintained which is easily retrieved when required. Automatic controls within the accounting software used for the regular quarterly reporting provides timely reports for management decisions and regular quarterly reporting for the Bank purposes. Monthly reconciliations of accounting data with the data available in Client Connection are performed (SDR – EUR). Authorization procedures are well defined and established within the PMTs. Before payment, every single invoice has to be approved by project director. There is also monthly reconciliation of designated account with project accounting records, monthly reconciliation of Statement of Expenditures (SOEs) with project accounting records and monthly reconciliation of local bank accounts with project accounting records. The review of the reconciliations did not identify any inconsistencies. There is an asset register on the level of PMTs for the assets held by the PMTs. However the assets obtained from the grant funds are registered only be the beneficiaries. For all construction works an independent professional supervisory company is selected which is monitoring progress of construction works and also authorizes invoices if the percentage of works completion agrees to quantities and amounts claimed by the supplier. The Project manager will not 32 provide payment authorization if the invoice is not approved by the independent supervisor. The technical staff also checks accuracy of the invoices issued, compare work delivered with what was actually contracted and also give their approval of the invoice and delivers it to the accounting department. Internal controls relating to purchases of goods are the same as for construction works except for the fact that no supervisory company is engaged. For consultancy services the Project coordinator reviews products of consultancy work (i.e. reports) and prepares a short report. The report and invoice is given to the project procurement officer who reviews the documents and compares it with the contract for consultancy services. Prior to final payment authorization by project director, the procurement officer and financial manager sign the invoice. EPEEF procedures are described in the internal manuals as well as also available in excel forms containing various checklists with steps that need to be conducted for any type of contract concluded with suppliers. Financial Management Manual. The PMT in MoFTER has an acceptable financial management manual (FMM) for the ongoing projects. It contains details about the accounting procedures applicable, internal key controls performed (i.e. reconciliations, authorizing procedures), budgeting, fixed assets records, details pertaining to the accounting software (i.e. back up procedures, restricted access, transaction recording). The FMM is being regularly updated. The latest update was done in April 2013 and there were no changes in the meantime which would require updating of the FM manuals. For EPEEF no separate FMM will be required as EPEEF’s own written procedures can be used for this project. Internal audit departments exist in both MoFTER and EPEEF. The internal audit department in MoFTER is not reviewing externally funded projects. However the internal audit department of EPEEF reviews all EU IPA funded projects, reports the findings to management. Back up. In the PMT in MoFTER the back-up of financial information is done monthly on a USB drive and kept in a vault located in the FM manager’s office. A copy is also saved on the FM manager’s computer hard drive. In EPEEF the back-up is done daily and weekly. The weekly back up is kept on DAT tapes and sent to a distance secure location. Periodic Financial Reporting. Both PMTs shall prepare and furnish to the Bank not later than forty five (45) days after the end of each calendar quarter, interim unaudited financial reports for the Project covering the quarter, in form and substance satisfactory to the Bank. The IFRs will include Sources and Uses of Funds, Uses of funds by project activity, SOE Withdrawal Schedule, Balance Sheet, and Designated Account Statement. The PMT in MoFTER will be using the existing FM software to produce IFRs, and these will be prepared on cash basis. The PMT has been up to date with the submission of the quarterly IFRs for all projects currently implemented with WB funding. The IFRs have been submitted on time to the Bank and were acceptable. The IFRs prepared by EPEEF will be prepared on a modified accruals basis and will include the following reports: report on income and expenses, revenue and expenditure, cash flow, functional classification of expenses, report on changes of value and amount of liabilities and assets, balance sheet, liabilities statement, report on income and expenses of a budget user. The reporting will be done in Croatian Kunas with regular reconciliation of the US$ with Croatian Kunas reporting. 33 External Audit. Both PMTs will be responsible for the timely compilation of the annual project financial statements for the independent external audit. Project financial statements (including SOE and DA activities) for each sub-grant will be audited by independent auditors acceptable to the Bank. Each audit of the Financial Statements shall cover the period of one (1) fiscal year of the Borrower, commencing with the fiscal year in which the first withdrawal was made under the Grant. There will be separate audit arrangements for BiH and Croatia for their respective components. The terms of reference for the audit have been agreed with the Bank, and will be attached to the Minutes of negotiation. In addition, the auditors are expected to deliver management letters in relation to the Project. Each management letter will identify internal control deficiencies and accounting issues, if any. The audit reports, audited financial statements and management letter will be delivered annually to the Bank, within six months of the end of each fiscal year. The audited Project Financial Statements will be made publicly available in a timely fashion, and in a manner acceptable to the Bank. The audited Project Financial Statements will be published on a governments and/or EPEEF’s web site one month after the Bank has sent official audit acknowledgement letter. All project audits in BiH are currently covered by an umbrella agreement with one audit firm. There were no delays in submitting the audit reports and audited Project Financial Statements for the entire BiH portfolio for FY 2012. The audit reports and management recommendations letters for the project implemented by the PMT were delivered to the Bank and were found acceptable. All opinions provided were unmodified. Since there is no Bank funded project implemented by EPEEF’s, there are no related audit reports. The entity audit of the entire EPEEF will not be required by this Project, only the audit of Project accounts will be forwarded to the Bank. Contracts monitoring The PMT in MoFTER has in place an automatic system that supports contract monitoring. The contract monitoring system provides the required information, such as contracted and budgeted amounts, payments made so far, contract value, list of payments in the local and contract currency and remaining amount to be paid. EPEEF has also an appropriate system for contract monitoring. It is monitored both in the system as well as in an excel table where all contracts and annexes can be viewed and compared to the payments made so far. Any deviations can therefore be identified properly and accordingly acted upon. Disbursements As indicated above, there will be two separate DA for the Project proceeds opened by the BiH Ministry of Finance and Treasury on behalf of MoFTER, in the case of BiH, and by EPEEF in the case of Croatia. The DAs will be opened in commercial banks acceptable to the World Bank. Grant funds will flow from the World Bank to the DAs and then from DAs to contractors on the basis of the approved invoices. There will also be a possibility to use direct payments methods from World Bank to contractors for larger payments as indicated in the Disbursement Letter. The entire procedure is described in detail in the FM chapter of the Project Operational Manual and in the FM manuals (PMT FM manual) Disbursement from the Trust Fund Account will follow the traditional method, either through reimbursement, direct payment to suppliers, payments from and replenishment of the DA with the use of 34 SOEs or with full documentation. Withdrawal applications for the replenishments of the DA will be sent to the Bank directly by the BiH Ministry of Finance and Treasury, as per the usual procedure for the WB funded projects, while withdrawal applications for the replenishments of the funds assigned to Croatia will be sent to the Bank directly by EPEEF, based on the need for grant funds. Supporting documents for SOEs, including completion reports and certificates, will be retained by both PMTs and made available to the Bank during project supervision. Disbursements for expenditures above the SOE threshold levels will be made against presentation of full documentation relating to the expenditures. The reimbursement of expenditures from the DAs may be made on the basis of certified SOEs, based on the SOE thresholds defined in detail in the Disbursement letter. The ceiling and authorized allocation for the DAs will be defined in the Project Disbursement Letter. The DAs will be denominated in US$. Withdrawal of the Proceeds of the Grant for BiH Percentage of Expenditures to be Amount of the Grant Category Financed Allocated (expressed in USD) (inclusive of Taxes) (1) Goods, works, non- $2,250,000 100% consulting services, and consultants’ services under the Project in BiH (2) Incremental Operating Costs $190,000 100% (including audit) TOTAL AMOUNT $2,440,000 Withdrawal of the Proceeds of the Grant for Croatia Amount of the Grant Percentage of Expenditures to be Category Allocated (expressed in USD) Financed (exclusive of Taxes) (1) Goods, works, non- $4,330,000 100% consulting services, and consultants’ services under the Project in Croatia TOTAL AMOUNT $4,330,000 Financial Management Conditions and Covenants The PMT in MoFTER and EPEEF will continue to maintain a project financial management system acceptable to the Bank. The project financial statements will be audited by independent auditors acceptable to the Bank and on terms of reference acceptable to the Bank. The annual audited statements and audit report will be provided to the Bank within six months of the end of each fiscal year. Quarterly IFRs will be forwarded to the Bank no later than 45 days after the end of each quarter. There are no Financial Management related conditions for negotiations or project effectiveness. 35 Use of country systems The project will use elements of country systems, such as staffing for the BiH part of the project because of the limitations on the borrower side. However, for the Croatian part of the project almost all FM country systems existing in the EPEEF will be fully utilized (except for audit which will be conducted by a private audit firm since the Croatian SAI has limited capacity). Retroactive financing Retroactive financing will be available for payments for eligible expenditures made prior to the date of Grant Agreement, on or after June 1, 2013, up to an aggregate amount not to exceed US$ 60,000 and US$ 100,000, for BiH and Croatia respectively. This provision is useful to meet any immediate financing needs. Supervision Plan As part of its Project supervision, the Bank will conduct risk-based financial management supervisions, at appropriate intervals, in the following ways: (a) review the project’s quarterly financial reports, the project’s annual audited financial statements, the auditor’s management recommendation letters and remedial actions, if any; and (b) during the Bank’s on-site supervision missions, review the following key areas: (i) project accounting and internal control systems; (ii) budgeting and financial planning arrangements; (iii) disbursement management and financial flows, including counterpart funds, as applicable; and (iv) any incidences of corrupt practices involving project resources. C. Procurement General Procurement for the Project will be carried out in accordance with the World Bank’s "Guidelines: Procurement of Goods, Works and Non-consulting Services Under IBRD Loans and IDA Credits & Grants" dated January 2011 (Procurement Guidelines); and "Guidelines: Selection and Employment of Consultants Under IBRD Loans and IDA Credits & Grants by World Bank Borrowers" dated January 2011 (Consultant Guidelines) and the provisions stipulated in the Grant Agreement (GA). The various procurement actions under different expenditure categories are described in general below. For each contract to be financed under the GA, the various procurement or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame have been agreed between the Recipients and the Bank in the respective Procurement Plans (PP). The PPs will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. A General Procurement Notice (GPN) will be published in July 2013 in UNDB on- line and in its printed version. Specific Procurement Notices (SPN) will be published for all ICB procurement and Consulting contracts per Guidelines, as the corresponding bidding documents and RFPs become ready and available. Procurement Implementation and Arrangements Goods: Goods and equipment estimated to cost US$ 200,000 or more per contract will be procured through International Competitive Bidding (ICB). Goods and equipment estimated to cost less than US$ 200,000 per contract will be procured through National Competitive Bidding (NCB). Readily available off-the-shelf goods estimated to cost less than US$ 100,000 per contract each may be procured through Shopping on the basis of three written quotations obtained from qualified suppliers. The World Bank sample for Invitation to Quote shall be used. Direct Contracting method for goods consistent with 36 justifications per Procurement Guidelines will be also specified in the Legal Agreement and it will be subject to the World Bank prior review. Works: Works estimated to cost US$ 2,000,000 and more per contract will be procured through International Competitive Bidding (ICB). Works estimated to cost less than US$ 2,000,000 per contract will be procured through National Competitive Bidding (NCB). Smaller works estimated to cost less than US$ 200,000 per contract will be procured through Shopping procedures on the basis of three written quotations obtained from qualified contractors. The World Bank sample for Invitation to Quote shall be used. The World Bank sample for Invitation to Quote shall be used. Direct Contracting method for works consistent with justifications per Procurement Guidelines will be also specified in the Legal Agreement and it will be subject to the World Bank prior review. Consultant Services and Training: Consultancy services to be provided by consultancy firms estimated to cost US$ 300,000 or more per contract will be procured through Quality and Cost Based Selection (QCBS) method. Consultancy services to be provided by consultancy firms estimated to cost less than US$ 300,000 per contract may be procured through Consultants’ Qualifications (CQ) method. The consultancy firm for project audit will be selected through Least Cost Selection (LCS) method. Other methods such as Fixed Budget Selection (FBS), Quality Based Selection (QBS), and Least Cost Selection (LCS) shall be made available through legal agreement irrespective of the amount. Individual Consultants (IC) will be selected in accordance with Section V of the Consultancy Guidelines. Single Source Selection method for firms and individuals consistent with justifications per Consultant Guidelines will be also specified in the Legal Agreement and it will be subject to the World Bank prior review. The PP shall specify the circumstances under which such methods may be used. Operating Expenses: Incremental operating costs for the PMT in MoFTER may be needed and may cover inter alia such expenditures as (i) maintenance and operation of office equipment procured or used for the management of the Project, (ii) fees paid to short-term consultants hired for the purposes of the Project, other than civil servants’ salaries, (iii) travel costs and per diems, (iv) consumables office supplies, (v) communication, printing and publications, (vi) costs of translation and interpretation, and (vi) audit of the Project. All such costs would be disbursed on the basis of annual budgets to be prepared by the PMT in MoFTER and agreed with the Bank. Procurement Plan The Project Implementing Entities have developed a Procurement Plan (PP) for at least the first 18 months of the Project. It will be reviewed and confirmed upon between the Recipients and the Bank at negotiations, and will be available at the Project Implementing Entities’ project database and will be published on the Bank’s external website time in accordance with paragraph 1.16 of Procurement Guidelines and paragraph 1.24 of the Consultants Guidelines. The PP will be updated in agreement with the Bank annually or as required to reflect the actual project implementation needs and improvements in the Project Implementing Entity institutional capacity. Procurement thresholds will be reflected in the PP. The PP foresees the financing of two ICBs and four consultancies in the case of Croatia and one ICB and four consultancies (one under QCBS, three small under CQ procedures) in the case of BiH. Contracts not subject to Bank’s prior review (currently all contracts are expected to be prior reviewed by the Bank) will be post reviewed by Bank’s supervision missions and/or during regular post-reviews by PAS. D. Environmental and Social (including safeguards) The Project Implementing Entities in both Croatia and BiH have formed PMTs or are using existing PMTs. The PMT for implementation of Croatian project was established in the Environmental Protection and Energy Efficiency Fund (EPEEF). Staff in EPEEF has previous experience in implementation of WB 37 projects thorough Energy Efficiency project and Inland Waters Project. For BiH projects an existing PMT for several WB projects will be used. This PMT is based in MoFTER. The PMTs prepared individual ESMFs, which include detailed EMPs for both demonstration investments in Mostar and Zadar. The mechanism of environmental screening, review, approval, and supervision of investments to be supported as part of the TA Component, including roles and responsibilities of all agencies involved in it, is described in the ESMF. According to the ESMF, the Environmental Screening will be carried out by the EPEEF and MoFTER at an early stage in the review of each investment to be supported through the TA Component to determine the appropriate environmental due-diligence documents required for the proposed investment. Based on the outcome of screening, the scope of an Environmental Assessment (EA) will be determined for these investments. The municipalities/municipal company will be responsible for preparing the required EA and for confirming that any clearances necessary for the proposed investments are obtained from the relevant authorities as prescribed by the national legislation and that is in line with the World Bank procedures as described in this document. The municipalities/municipal company will firstly comply with the national legislation and then based on the gap analysis update the documents to align with WB safeguards procedures described in this EMSF. Once the EA is performed, public consultation done and recommendations incorporated into the sub project, the PMTs at EPEEF and or MoFTER will appraise the proposed investment package and allow the financing of the proposed TA. The EMPs will be implemented by the contractor and supervised directly by municipalities/municipal company supervising engineer. The implementation of the EMPs will also be monitored by the both PMTs, which will be in charge for review, approval, and supervision process. In the course of an investment implementation the municipalities are responsible for carrying out their daily activities in compliance with the recommendations of the environmental assessment reports and for applying mitigation measures as prescribed by EMPs. Municipalities will be expected to monitor compliance with EMPs and report to EPEEF or the PMT in MoFTER on the environmental performance as an integral part of their regular reporting. The Bank will assist both PMTs and municipalities/municipal companies in screening procedures. Both PMTs will be responsible for overall quality of environmental due-diligence documents including ToRs, environmental analysis, EIAs, etc. and its compliance with the WB safeguards policies. EPEEF and the PMT in MoFTER will inform the Bank on the environmental due diligence applied through the general reporting on the Project progress. E. Monitoring & Evaluation EPEEF in Croatia and MoFTER in BiH would be responsible for monitoring project performance and achievement of project outcomes and results. These two entities are already implementing the ongoing projects in Croatia and BiH respectively, and have adequate capacity to carry out the M&E function under the Project. For all project indicators shown in Annex 3, biannual reports will be submitted to the Bank to monitor project progress and identify and respond in a timely manner to any problems that might emerge. Baseline data on key indicators will be collected for the coastal zone near the pollution hotspots, as part of the EIA and FS studies. The Project also includes financing for setting-up a specific monitoring system to monitor sea water quality and strengthen regional capacity to protect sensitive areas from accidental pollution discharges. F. Role of Partners The Project would involve several stakeholders at the global, sub-regional, national, and local levels, consistent with its regional scope. In designing the Project, the World Bank aims to leverage key partnerships, especially with the GEF, the EU, and MAP. In addition to these, this initiative seeks to build 38 upon and bring together the key civil society organizations based in the Adriatic region, such as major NGOs in both countries. In Croatia, major stakeholders are: Ministry of Environment and Nature Protection (GEF political and operational focal point), Ministry of Agriculture, Ministry of Physical Planning and Construction, Ministry of Regional Development, Croatian Waters, and municipal authorities where activities are planned. In BiH these include State, Federal, Cantonal ministries and municipalities. The above mentioned stakeholders will be at the heart of the governance structure of the Project and relevant GEF policies in that respect will be followed. 39 ANNEX 4: OPERATIONAL RISK ASSESSMENT FRAMEWORK (ORAF) Croatia & Bosnia & Herzegovina GEF Adriatic Sea Environmental Pollution Control Project (I) (P143921) . Project Stakeholder Risks Stakeholder Risk Rating Moderate Risk Description: Risk Management: The proposed approach could potentially face resistance The team has ample experience in developing similar initiatives, from its involvement in or skepticism from some stakeholders, including not just MAP to the more recent Black Sea-Danube Partnership, and would build on these the donor, regional agencies, and national/government experiences and established contacts and cooperation to address the proposed Program entities, but also communities, NGOs, private sector issues. Broad-based consultations have been initiated to foster discussion and buy-in from parties affected, etc. In addition, reliance on multiple stakeholders, through the initial roundtable workshop, as well as working group meetings donors for complementary funding could compromise and workshops held with key stakeholders during preparation to agree on program design the speed of agreement preparation and implementation and the ASEP Framework. The EU and other partners have expressed support for the of the program. Program, of which the current project would be a part. Finally, communication and consultations with various stakeholders, including communities, NGOs and the private sector will continue throughout preparation and implementation of the individual projects under the program, through implementation of a comprehensive Communications Strategy and through other formal processes, including consultations carried out in fulfillment of the Bank’s Safeguards requirements. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both Not Yet Due Preparation 40 Implementing Agency (IA) Risks (including Fiduciary Risks) Capacity Rating Moderate Risk Description: Risk Management: Implementation Agency capacity may pose a Moderate To mitigate the Agency capacity risk, implementing agencies with adequate capacities risk, where not all required skills and resources may be and experience with implementation of Bank projects have been selected. Furthermore, readily available. Implementation Agency capacity assessments will be carried out in countries, and where necessary technical support would be provided by training and/or hiring experienced staff from a regional or international pool in the interim, while building local capacity Resp: Status: Stage: Recurrent: Due Date: Frequency: Both Not Yet Due Preparation Governance Rating Moderate Risk Description: Risk Management: In the case of BiH the political and administrative The team has established cooperative relationships with the Fund and MoTER and with organization could have posed challenges due to a municipalities involved. Responsibilities have been clearly agreed upon during project possible non-cooperation spirit between the Federation preparation and will be closely supervised during implementation support missions. There and the Republika Srpska, and between these and the are several Bank-funded water and pollution control related operations in which the State government because of the diffused responsibilities entities and the state-level ministries have cooperated well. Additionally, as mentioned for pollution control management and planning and lack above, the team agreed early during implementation a simple and focused project scope, of clarity on responsibilities and accountability, which with a limited number of contracts, which in the case of BiH would all be managed by can affect project implementation. MoTER, therefore reducing risks associated to governance failures. Resp: Status: Stage: Recurrent: Due Date: Frequency: Risk Management: At the Project and portfolio level: World Bank fiduciary staff (Procurement and FMS) will ensure adherence with the World Bank policies. CMU (CM and field based Sr. Operations Officer) will assist the Project team in resolving any political issues that may affect project preparation, its effectiveness, and implementation. Additionally, the Bank’s team has worked out during preparation a detailed process for prior-review of contracts and also agreed on a consolidation of small contracts into larger ones that would simplify and facilitate the review and quality assurance process and increase competition and 41 transparency in the procurement and implementation phases, thus reducing significantly this risk. It must also be noted that In these two countries the implementation of past projects shows that these risks in World Bank-financed projects are well mitigated. In addition, as the Project scope is limited to a small number of contracts, which can be easily monitored, the overall risk is deemed moderate after the decisions made during preparation and the precautions put in place for implementation. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both Not Yet Due Both CONTINUOUS Project Risks Design Rating Moderate Risk Description: Risk Management: There may be a risk of program complexity and/or The program structure has been designed to ensure that coordination between the Bank inadequate coordination due to too many institutions and national agencies is optimized. The Bank will maintain overall oversight over the being involved at the program, project, regional and Project at the regional level, and will also support implementation at the Project level. In national levels, especially in Bosnia which has a both countries, Government has an oversight role, while relevant experienced technical complex governance structure. implementation agencies will be responsible for day to day implementation. The roles of each party will be agreed upon during preparation and will be clearly outlined in the Project documents. The Project design will allow for flexibility in technical options, and a team of highly qualified technical experts will be hired to support technical review and guidance of project facilities. The Project area in Croatia has been limited to only four counties, and one in Bosnia, to reduce dispersion that would reduce the impact of individual activities and increase overall complexity. Resp: Status: Stage: Recurrent: Due Date: Frequency: Bank Not Yet Due Preparation Social and Environmental Rating Low Risk Description: Risk Management: Social and environmental risks may occur in specific Environmental management procedures will be conducted in line with Bank Safeguards investment projects. policy (OP 4.01) requirements to identify and mitigate any potential risks during project preparation and implementation. Analysis of social issues affecting individual projects 42 will also be carried out during preparation. Risks in this regard are expected to be limited because demonstration investments financed treatment under this project will be implemented on existing facilities or not requiring land acquisition. Resp: Status: Stage: Recurrent: Due Date: Frequency: Client Not Yet Due Preparation Program and Donor Rating Substantial Risk Description: Risk Management: Reliance on multiple donors for complementary funding The Bank is consulting closely with GEF, which has expressed support in principle for the could compromise the speed of agreement preparation ASEP under its International Waters program. Opportunities for co-financing for the and implementation of the program. Project would require support from key donors such as the EU, and this support has been expressed by the EU in consultations with it and other agencies, organized by the Bank. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Preparation Delivery Monitoring and Sustainability Rating Moderate Risk Description: Risk Management: Risk that project implementation and results will not be Both PMTs which has experience in monitoring activities of a similar nature will be adequately monitored and that result once completed will responsible for this activity, and adequate resources will be earmarked and qualified staff not be sustainable since operating agencies would not provided for this activity. As part of project preparation the team conducted a detailed have adequate instrument or capacity to assure it. technical and financial analysis for the operators that will receive the demonstration investments to confirm that there is adequate capacity to guarantee their sustainability. Additionally, the team has reached out during preparation to assure the involvement of important stakeholders, particularly the EU, the support to reforms that is required to assure their sustainability is assured and their sustainability risk greatly reduced. Resp: Status: Stage: Recurrent: Due Date: Frequency: Client Not Yet Due Implementation Overall Implementation Risk: Rating Moderate Risk Description: The overall risk for the project during implementation remains moderate, even after implementation of mitigation measures 43 ANNEX 5: IMPLEMENTATION SUPPORT PLAN Croatia & Bosnia & Herzegovina GEF Adriatic Sea Environmental Pollution Control Project (I) (P143921) 1. The Implementation Support Plan (ISP) describes how the Bank in collaboration with other development partners such as the EU, will support project implementation, with a particular emphasis on provision of needed technical advice to the Borrowers and the implementing entities to facilitate achievement of the PDO, timely implementation of the risk mitigation measures identified in the ORAF, and meet the Bank’s fiduciary obligations. The ISP in this case takes into account the Project design, which covers two countries, with one Project Management Team (PMT) for each country: the State Ministry of Foreign Trade and Economic Relations (MoFTER) in BiH; and the Environmental Protection and Energy Efficiency Fund (EPEEF) in Croatia. Specific responsibilities of these entities are discussed in more detail under Annex 3. Implementation Support Strategy (ISS) and Approach 2. The ISS recognizes and takes into consideration the following issues pertaining to the Project. a) General project design risks, including regional complexity: The ISS recognizes the fact that the Project is a regional project carried out in two countries, Croatia and Bosnia-Herzegovina, with multiple implementation entities and project areas, hence the need for close supervision and coordination of activities in both countries. Supervision missions will be arranged to allow activities in both countries to be reviewed at least twice a year by the Bank supervision team, accompanied by representatives of the respective implementation entities in the two countries. Missions, which would be supported as needed by the relevant Country Offices, will focus on overall progress with respect to planned activities, and the entities’ performance in managing contracts, procurement, financial management, M&E, and addressing any arising implementation issues, to support progress towards the PDO. b) Implementing Entity Capacity and Coordination: The use of existing structures for implementation of the Project at the country level, based on entities responsible for similar donor funded projects will ensure leveraging of existing capacity in the sector to implement the Project. The two implementing entities (EPEEF and MoFTER) have adequate experience managing donor funded projects and it is expected that they would be able to implement the Project in a satisfactory manner. The team will nonetheless provide close supervision and backstopping as needed, and will maintain close contact with the entities on a day to day basis through the country based staff. c) Safeguards issues, including adherence to environmental, social and other safeguard policies will be closely supervised under the Project with support of the Bank’s Environmental and Social safeguards specialists, who will be included in all supervision missions to ensure smooth implementation and compliance with relevant policies. Implementation Support Plan 3. Based on the above strategy, the ISP builds on the following elements to ensure adequate technical support and due diligence: 44  General Resource Inputs: The World Bank will devote about 35 staff weeks per year and a total of about 155 staff weeks through FY17 to help the respective Governments implement the Project and supervise progress.  Supervision missions: Twice yearly formal implementation support missions will be carried out, however ongoing support and dialogue will be maintained throughout to monitor progress and address pertinent issues.  Procurement Support: The procurement specialist will play a central role in supporting the implementation entities in implementation of sound procurement practices in accordance with the Bank’s fiduciary requirements.  Safeguards Support: Bank Safeguards staff will provide needed support in respect of environmental and social safeguards as needed. They will conduct staffed missions to project areas with investments at least once a year.  Monitoring and Evaluation: The Bank will support the Project Implementing Entities in establishment of sound M&E arrangements. The initial project implementation phase will need support on confirmation of baselines for M&E purposes. Support for M&E from an experienced Bank Specialist will specifically be sought during appraisal to ensure that sound M&E practices are in place, following which ongoing M&E support will be provided from Headquarters during implementation as needed.  Mid-term review: The MTR mission will require participation of the entire spectrum of specialists having participated to appraisal. 4. Resource Requirements: The following skills mix and resources needs are estimated: Time Focus Skills Needed Resource Partner Role Estimate First twelve Start-up phase: Technical and Environmental 95,000 months Preparation of TORs Specialists, Procurement, and selection of Financial Management consultants/contractors Specialists, M&E for TA and project preparation work and design, supply and installation of leachate treatment systems Until MTR Implementation of Technical and Environmental 75,000 (yr. 2) investments; Specialists, Procurement and Preparation of Financial Management proposals Specialists Following Completion of Technical and Environmental 85,000 MTR (yr.3) investments; Specialists, Procurement and sustainability of Financial Management reforms, and Specialists investments ICR and Assessment of results, Technical and Environmental 35,000 final replicability and Specialists, M&E 45 evaluation lessons learnt of project results (yr. 3.5) Total (3.5 290,000 years) Skills Mix Required Skills Needed Number of Staff Weeks Number of Trips Comments (for duration of Project) Procurement 25 CO-based Twice yearly missions for start-up phase, then yearly Financial 25 CO-based Participate to yearly Management implementation support missions Technical and M&E 45 CO and HQ-based Ongoing team support Program Assistants 20 CO-based/ HQ- Ongoing team support based Environmental/Social 20 CO-based Participate in yearly safeguards implementation support missions and MTR Social safeguards 5 CO-based Participate in yearly implementation support missions and MTR Disbursement 10 Hub-based Staff weeks for Task Team support Total 155 The ISP will be reviewed at least once a year to ensure that it continues to meet the implementation support needs of the Project. 46 ANNEX 6: ECONOMIC ANALISIS OF THE PROGRAM AND FINANCIAL ANALYSIS OF THE IMPLEMENTING UTILITIES Croatia & Bosnia & Herzegovina GEF Adriatic Sea Environmental Pollution Control Project (I) (P143921) 1. The proposed GEF Adriatic Sea Environmental Pollution Control Project (I) for Croatia and Bosnia and Herzegovina (ASEPCB) is a regional project that was conceived as part of a broader Adriatic Sea Environment Program (ASEP). As such, an economic analysis was conducted to estimate the benefits of the broader Program. This document presents those results and also the financial analysis of the two solid waste utilities (Zadar and Mostar) that will implement the two demonstration investments (rest of project is comprised of technical assistance). Economic Analysis 2. For this Program, the traditional economic evaluation method, based on the comparison of benefit and cost flows between the situation “with” and “without” the Project, is used for the financial and economic analysis for accepting/rejecting investment prospects. The Discounted Cash Flow (DCF) presents several attractive features, in that it takes into account two alternative scenarios (with and without the Program), and assigns plausible weights to present and future flows through a discount factor that weighs progressively less the flows as their distance from now increases. Furthermore, DCF does not have to tackle with the often complex and arbitrary imputations that are common in accounting and budgeting because it is based on cash flows and the value of wealth is defined as the Net Present Value (NPV equals to the difference between the discounted sum of benefits and costs) of future earnings. 3. For the assessment of the Program, a baseline scenario “without” and a scenario “with” were considered for the purpose of this analysis. For a total cost equal to 4.28 Billion Euro, the analysis identifies benefits stemming from fisheries, tourism, and improvements in health conditions. The NPV calculated over a 30 years analysis with a discount rate of 6% is for these assumptions 6,037 Million Euro, while the IRR is 16% (see Table 6 in Annex 6 for details). The analysis also looked at Program risks arising from the uncertainties surrounding both costs and benefits, under three different scenarios, with double and triple standard deviations of the values, based on a Monte Carlo simulation (10,000 trials). The risk analysis confirms the soundness of the study (there is less than a 5% probability that the Program will have a negative net present value). 4. To assess the Program in terms of its indirect effect a macroeconomic model based on a Social Accounting Matrix (SAM) was also developed. Given data limitations, the SAM was only developed for Croatia, with the estimation of flows based on Global Trade Analysis Project (GTAP) economic data, National Institute data and Eurostat. The analysis shows that (i) it is expected that in the absence of the Program, the amount available for expenditure is reduced by 20% and the net impact is positive with a consistent growth of industrial production; and (ii) the impact of the Program for the short (investment period) is a contribution to growth equal to 0.9% of GDP for Croatia, while for long term (operating period) the fiscal impact, direct and indirect, of the annualized benefits from the tourism and fisheries sectors and the annual contribution to growth is equal to 0.09% of Croatia’s GDP (see Table 10 in Annex 6 for details and methodology). Economic evaluation of alternatives and Cost Benefit Analysis (CBA) 5. Estimating regional investments. The cost side of the cost-benefit analysis assumes two investment scenarios: a baseline scenario without the Project and a scenario with the Project. For the 47 purpose of this analysis, it has been assumed that the Investment Program would be implemented over a 30-years horizon at that the social rate of discount of 6%. The investment needs and costs are estimated in accordance to the Adriatic Sea Program (World Bank, 2011), otherwise they have been estimated using population parameters. 6. To realize the Program scenario five categories for investment costs have been identified: (I) Water Waste Management; (II) Solid Waste Management; (III) Environmental Remediation; (IV) Industry; (V) Coastal Management System. 7. The total cost is equal to 6.8 Billion Euro and over 50% of these costs are incurred in Italy, primarily for the environmental remediation program of Venice. This investment cost scenario is based on the Adriatic Sea Program data from the World Bank. The investment costs for countries and /or hot spots not included in the original figures have been estimated by using the same proportions of the countries included multiplied by the population size of the countries excluded. This analysis also includes investment costs for the Coastal Management System, estimated at 10€ per coastal inhabitant. 8. Investment cost description. A more complete set of cost types has been estimated by parameterizing investments according to the typical cost pattern for Public Projects in Italy. As a benchmark, data was used from the World Bank projects Nutrient Reduction Project in Hungary and the Baltic Sea Regional Project in Estonia, Latvia, Lithuania, Poland and the Russian Federation. Costs included were: a) The costs for wastewater management that were not included in the World Bank’s 2011 study for the Adriatic Sea, have been estimated using a simulation model quoted by USEPA (2004) and have been disaggregated as follows: (i) Equipment Costs; (ii) Installation; (iii) Piping; (iv) Instrumentation and Controls; (v) Engineering; and (vi) Contingency. b) Costs for solid waste management have been disaggregated as follows: (i) Demolitions and Excavations; (ii) Item for Lift stations; (iii) Cabin, electric and telephone conduits and associated services; (iv) Domestic water supply and sewerage networks and associated services; (v) Equipment Costs; and (vi) Other Costs. c) The costs for the Reduction of non-Point source pollution have been disaggregated into the following categories: (i) Engineering Costs, (ii) Equipment Costs; and (iii) Other Costs. d) The environmental remediation components have been disaggregated into costs for: (i) Excavation or dredging; (ii) Dig and dump; and (iii) Pump and treat. 9. All the investment costs, except the Grado Marano and Venice Lagoon projects have been calculated as incurred over a 3 years horizon (see Table 1). 48 Table 1: Total Investment cost by year (millions Euro) Operation and maintenance cost description. In accordance to the Italian Structural Fund Data Bank, maintenance costs are estimated to be equal to the 5% per year of investment cost. Operation costs are estimated, using data from similar projects in Italy and World Bank Project files to be equal to 15% per year of investment cost. An additional cost equal to the 10% of investments is also assumed to be needed every ten years. Benefits. The analysis identifies benefits stemming from fisheries, tourism, and improvements in health conditions. Benefits from improvements in fisheries have been estimated based on increases in the catch value of the fish; tourism benefits have been calculated from changes and increases in tourists’ consumer surplus. Fishery benefits 10. Future estimates of fishery production. The relation between an increase in pollution with a reduction of the fish population is discussed in a very large collection of scientific (WB, Caddy 2000 Hondrop et al. 2006) and technical work (European Commission Documents, ISPRA, Regional bulletin for Apulia, Veneto and Emilia Romagna and other). As such, and for the analysis performed in this study, it is assumed that an increase in pollution of the Adriatic waters, and particularly the increase of 49 eutrophication is linked to a gradual decrease of the fish stock in the Adriatic basin. Following Hondrop, Breitburg and Davias (2010), this study uses the increase of eutrophication to the pelagic-to-demersal ratio (P/D), which is the ratio of small pelagic fish to benthic and demersal fish and crustaceans (Caddy 1993, 2000; Caddy et all. 1998; de Leiva Moreno et all. 2000). While nutrient additions to oligotrophic systems might initially increase production of both pelagic and benthic–demersal species, enrichment of mesotrophic and especially eutrophic systems was predicted to result in degradation of benthic habitats, reduced landings of benthic–demersal species, and fishery landings with elevated P/D ratios. 11. The P/D ratio used is based on a projection of moving average of the last ten years adjusted in accordance to results by Caddy (2000) to relate the reduction of white fish, crustaceans and mollusks with the growth of eutrophication as measured by the TRIX index. The Projection of the TRIX index has been obtained using data from regional files in Italy (Apulia region 2006, ISPRA Veneto 2008 and Emilia Romagna Region 2006). For this analysis, it is assumed that if the trend in eutrophication continues, the amount of fish caught will be reduced by approximately 30% in 30 year time (see Figure 1). Figure1: Fish caught in Adriatic 2012-2041 Fish catch value. The price of fish was estimated using the Italian fish market prices, observed in 2012 on annual scale. The data show that the market price of fish production in the Adriatic is € 12.12 / kg for crustaceans, 7.10 € / kg for Mollusks, 1.41 € / kg for bluefish and 5.71 € / kg for other types of fish. To estimate the value of fish in other countries, a conversion factor equal to 0.80 has been applied. To estimate future prices in a situation without the Program, as represented in the previous sections a price elasticity of supply equal to 1.4 (FAO 2005) has been used. 12. To estimate future prices in a situation without the Program, as represented in the previous sections a price elasticity of supply equal to 1.4 (FAO 2005) has been used. The results are shown in 13. Figure 2. . 50 Figure 2: Fish price in Italy 2012-2041 Source: own estimations Benefits for the fishery sector. Finally, in order to effectively evaluate the effects of the program on the fishery sector, two situations, “with” and “without” the Program have been compared. More specifically the “situation with the Program” is stipulated to be the level of fishing and prices between now and 2016, i.e. at the end of the expected period of Program implementation. The results lead to an estimated discounted benefit for fishery of approximately 400 M€. Higher benefits would also derive from the conservation and protection of biodiversity that would allow the fishing of species other than blue fish, which have also a higher price. The contribution of benefits deriving from demersal species is estimated to be approximately 300 M€, while the remaining € 100 million may be shared among Crustaceans, Blue Fish and Shellfish. The effects of the Program for the fishing of crustaceans, Blue Fish and Shellfish from the point of view of the value of fish, would be evident only in the medium to long term, because in the first period the increase of prices against a partial reduction of the quantity caught would produce higher revenues in the situation without the Program (see Figure 3). Figure 1: Revenues with Program 51 Tourism benefits 14. To estimate benefits from nutrient reduction on tourism, data was used from the Italian National Institutes of Statistics and from the World Tourism Travel Council Annual Report (see Table 2). According to these estimates, the contribution of tourists in the Adriatic area amounts to approximately 210 Million Euro per year. The Value Added per day per Tourist is 45€ and the Present Value for Tourism benefits is equal to 13 Billion €. Table 2: Visitors per country Source: World Tourism Travel Council 15. The economic literature estimates average expenditure per tourist in OECD countries at 90€ per day, with a value added per consumer of about 45€ per tourist. For Croatia, Montenegro, Slovenia and Albania, tourists are estimated to spend 72€/day with a value added of 36€/day. In accordance with the Danube Study by the World Bank and Brown (1996), it is possible to estimate changes of tourism growth, as a function of water quality measured by a reduction in the level of nutrients. The benchmark of the model was calibrated with data from the EEA for 1999, but after validation with estimated quota of loads from Palmeri et al. (2005) for the period 2001 – 2008, and the updating of the loads values for 2012. Water quality estimates are associated to the percentage of change in the nutrients loads over two times for both scenarios. The scenarios analysis has been conducted to estimate the amounts of nutrients that will be removed through the Program with the construction and the implementation of the waste water treatment plants, the implementation of solid waste management projects, and landfill reclamation. 16. For the estimation of yearly tourist flows, the work of Brown (1995) for the World Bank was used. A survey conducted during the study asked tourists if they would have decided to go to the Black Sea beaches in case of a decreased quality of marine waters of 5%, 10%, 15% and 20%. As expected, the survey results showed that with the decrease in water quality the tourists demand for the same vacation areas decreased. Specifically, water quality deterioration percentages were associated with 25%, 29%, 33% and 44% decreases in the annual number of visits to the Black Sea coasts. In making these estimations, Brown assumed that the value lost due to the water quality decrease was of 5%, 10%, 15% and 20%. These estimates have been considered indicative of the scale of tourism losses due to the deteriorated marine water quality for nutrients pollution. Hence, a change in tourism is estimated in relation to the increase or the decrease of the water quality (see Table 3). Table 3: Brown relation between Water quality and Tourism 52 Source: Adapted from Brown 17. Finally it was possible to define the change in tourism, in relation with the increase or the decrease of the water quality. The benefits related to the change in tourism have been determined according to the P abatement scenarios and have been renamed “with the Program” and “without the Program” to make an easy – to – read scheme. Table 4 shows the situation with and without Program. Table 4: Change in tourism related to the quality of water Health benefits 18. Tourist health benefits have been estimated using a study from Machado and Mourato (2002) and calculated over a willingness to pay equal to 10€ per beach visit per tourist. Local population health benefits have been estimated by considering a willingness to pay equal to 50€/year per inhabitant willing to reduce pollution. It is showed how the results obtained, based on the hypothesis that 29% of tourists spent around 40% of their time on the beach (see Table 5). Table 5: Health benefits 53 Source: work group estimation Results The Net Present Value (NPV) calculated over a 30 years analysis with a discount rate of 6% is 6,037 Million Euro, while the Internal Rate of Return (IRR) is 16% (see Table 6). Table 6: The Program Cash Flow (in million Euros) year 1 2 3 4 5 … 13 … 22 … 30 Economics Benefits Fishery Benefits 0,00 0,00 0,00 0,00 0,38 … 18,11 … 75,33 … 179,27 Crustaceans 0,00 0,00 0,00 0,00 -0,61 … -1,53 … 1,07 … 4,90 Marine fishes 0,00 0,00 0,00 0,00 -0,12 … 10,79 … 60,45 … 155,23 Blue fish 0,00 0,00 0,00 0,00 -0,37 … 0,67 … 0,63 … 0,92 Molluscs 0,00 0,00 0,00 0,00 1,49 … 8,18 … 13,18 … 18,21 Tourism Benefits 0,00 0,00 0,00 1.208,68 1.210,51 … 1.225,14 … 1.232,46 … 1.232,46 Health Tourist Benefits 240,00 240,00 … 240,00 … 240,00 … 240,00 Health Local Benefits 483,64 483,64 … 483,64 … 483,64 … 483,64 Total 0,00 0,00 0,00 1.932,32 1.934,53 … 1.966,89 … 2.031,42 … 2.135,36 Operating and Maintenance Costs Wastewater Management (WWM) Maintenance 0,00 0,00 0,00 0,00 0,00 … 0,00 … 0,00 … 0,00 Solid waste management (SWM) Maintenance 0,00 0,00 0,00 0,00 0,00 … 0,00 … 0,00 … 0,00 Reduction of non-point source pollution (RNSP) 0,00 0,00 0,00 0,00 0,00 … 0,00 … 0,00 … 0,00 Maintenance Environmental remediation Maintenance 0,00 0,00 0,00 0,00 0,00 … 0,00 … 0,00 … 0,00 Wastewater Management (WWM) 0,00 0,00 0,00 284,65 284,65 … 284,65 … 284,65 … 284,65 Solid waste management (SWM) 0,00 0,00 0,00 121,80 121,80 … 121,80 … 121,80 … 121,80 Reduction of non-point source pollution (RNSP) 0,00 0,00 0,00 156,21 156,21 … 156,21 … 156,21 … 156,21 Environmental remediation 0,00 0,00 0,00 221,98 221,98 … 366,99 … 366,99 … 366,99 Coastal management System 0,00 0,00 0,00 58,04 58,04 … 58,04 … 58,04 … 58,04 Total 0,00 0,00 0,00 842,69 842,69 … 987,7 … 987,70 … 987,70 54 Investment Costs Wastewater Management (WWM) Demolitions and Excavations 0,00 262,55 262,55 Item for Lift stations 0,00 112,65 112,65 Cabin, electric and telephone conduits 0,00 106,15 106,15 domestic water supply and associated services 0,00 53,79 53,79 Equipment Costs 194,19 0,00 0,00 Other Costs 0,00 79,40 79,40 Solid waste management (SWM) Demolitions and Excavations 0,00 152,26 152,26 Item for Lift stations 0,00 30,45 30,45 Cabin, electric and telephone conduits 0,00 15,23 15,23 domestic water supply and associated services 0,00 15,23 15,23 Equipment Costs 0,00 60,90 60,90 Other Costs 60,90 0,00 0,00 Reduction of non-Point source pollution (RNSP) Engineering Costs 106,86 126,00 252,00 Equipment Costs 33,16 63,00 126,00 Other Costs 74,05 0,00 0,00 Environmental remediation Excavation or dredging 205,34 205,34 140,48 140,48 129,18 … 0,00 … 0,00 … 0,00 dig and dump 154,00 154,00 105,36 105,36 96,88 … 0,00 … 0,00 … 0,00 pump and treat 154,00 154,00 105,36 105,36 96,88 … 0,00 … 0,00 … 0,00 Coastal management System 96,73 0,00 0,00 0,00 0,00 … 0,00 … 0,00 … 96,73 Total 1.079,23 1.590,94 1.617,79 351,19 322,94 … 0,00 … 0,00 … 96,73 Cash flow -1.079,23 -1.590,94 -1.617,79 738,44 768,9 … 979,1 … 1.043,7 … 1.050,9 Risk Analysis 19. In order to analyze Program risks arising from the uncertainties surrounding both costs and benefits, three different scenarios, based on a Monte Carlo simulation (10,000 trials) was run. The following assumptions were made: Scenario 1 o Investment Costs: normal distribution with mean equal to the value observed in the base scenario, standard deviation equal to the 10% of the mean. The distribution has been truncated at the left of the mean; o Operation and Maintenance Costs: normal distribution with mean equal to the value observed in the base scenario, standard deviation equal to the 10% of the mean. The distribution has been truncated at the left of the mean; o Average price of fish: normal distribution with mean equal to the value observed in the base scenario, and standard deviation equal to the 10% of the mean; 55 o Projection trend of capture per species and country: normal distribution with mean equal to the value observed in the base scenario, and standard deviation equal to the 10% of the mean; o Annual decrease of catch without the Program, annual loss of tourism: normal distribution with mean equal to the value observed in the base scenario, standard deviation equal to the 10% of increase yearly; o Share of tourists imputable to the Program, expenditure per tourist: normal distribution with mean equal to the value observed in the base scenario, standard deviation equal to 10% of the mean. The distribution has been truncated at the value of +20% of the mean. Investment Costs are jointly distributed according to a correlation coefficient equal to 0.2. Fishery Benefits are jointly distributed with Tourism Benefits according to a correlation coefficient equal to -0.2 The results of first scenario show an average NPV equal to 2.2 billion Euro with a minimum equal to -6.5 billion and a maximum of 12.8 billion. Figure 4 presents the distribution of NPV. Figure 4: The distribution of NPV (scenario 1) Source: Risk analysis software estimation Table7 summarize NPV statistics and percentiles. Table 7: Statistics and percentiles of NPV in scenario 1 Scenario 2 – same hypothesis of scenario 1 with a standard deviation twice the one for scenario 1. The results of second scenario show an average NPV equal to 480 Million Euro with a minimum equal to - 10,9 Billion Dollars and a maximum of 12,8 billion dollars. Figure 5 depicts the distribution of NPV. Figure 5: The distribution of NPV (scenario 2) 56 Table8 summarize NPV statistics and percentiles. Table8: Statistics and percentiles of NPV in scenario 2 57 Scenario 3 – same hypothesis of scenario 1 with a standard deviation 3 times the standard deviation of scenario 1. The results of second scenario show an average NPV equal to -2 Billion Euro with a minimum equal to -327,6 Billion Dollars and a maximum of 174 billion dollars. Figure 6 represents the distribution of NPV. Figure 6: The distribution of NPV (scenario 3) Source: Risk analysis software estimation Table 9 summarizes the NPV statistics and the percentiles. Table 9: Statistics and percentiles of NPV in scenario 3 In conclusion, the three scenarios for risk analysis show projected Program performance for different levels of probability percentiles. The gap separating the three scenarios tends to shrink as we move from 58 more unfavorable (more uncertainty in costs and benefits) to more favorable situations, only to explode at the last level of percentiles, because of a disproportionate presence of a very low probability cases. Figure 7: The three risk analysis scenario Direct and indirect effects: the Social Accounting Matrix 20. To evaluate the Program in terms of economic impact and indirect effect a macroeconomic model based on a Social Accounting Matrix (SAM) was developed. Given data limitations, the SAM was only developed for Croatia. The estimation flows are based on a GTAP economic Data, National Institute Data and Eurostat. Impact of Investment period In this estimation, the impact of the investment cost was calculated by adjusting these costs from a Cost- Benefit analysis into a productive sector classification. The counterfactual analysis is performed comparing the investment cost with a historical investment cost with a hypothesis of 20% of crowding out. With this hypothesis it is expected that in the absence of the Program, the amount available for expenditure is reduced by 20%. The net impact is positive for the Program with a consistent growth of industrial production. Fiscal Impact of the Program in short and long period The last analysis aims to assess the impact of the Program in terms of tax revenue. It was first conducted for the short (investment period) and long terms (operating period). In the short period the values represents the impact on the national economy of the investment program (first 3 years of Program) and the results show an contribution to GDP growth of the Program equal to 0.9% for Croatia. In the long term valuation the values represents the fiscal impact, direct and indirect, of the annualized benefits from the tourism and fisheries sectors. The annual contribution to GDP growth is equal to 0.09% for Croatia. Table 10 shows the results for Croatia. 59 Table 10: Croatia SAM impact Financial analysis 21. The majority of the utilities will be receiving technical assistance resources; only two utilities, Zadar in Croatia and Mostar, in BiH, will receive grant resources for investments. For these two utilities, financial statements were analyzed to determine their current financial standing. Main issue of concern is the capacity to ensure adequate funding for operations and maintenance expenditures (investments costs are provided as a grant). This analysis will increase the likelihood that the Program facilities will be operated and maintain in order to guarantee their sustainability. Zadar, Croatia. For the purpose of the program and given the characteristics of the support to Zadar (grant resources which will impose some financial pressure for Operation and Maintenance costs), the basic and current financial statements present fairly the financial position of the utility. The finalization of the leachate treatment facility will impose greater costs and it is important to determine whether there is a potential financing gap in the utility. The utility has had a strong balance sheet with increasing operating income stemming for tariffs and other charges and has generated profits throughout the reporting period. Table 11: Statement of Cash Flow (in millions of Kunas) 2008 2009 2010 2011 2012 Operating income 57,896,038.94 56,144,467.75 51,002,129.53 51,382,957.23 55,527,068.95 Operating expenditures 57,360,501.48 55,777,522.82 50,667,738.52 50,726,156.60 54,743,075.70 Financial income 175,377.71 212,571.75 184,342.51 222,874.37 168,950.52 Financial expenditures 35,699.13 198,943.49 368,435.86 665,105.44 473,602.63 60 Extraordinary income 64,986.36 9,564.00 11,000.00 71,500.00 17,466.66 Extraordinary expenditures - - - - - TOTAL INCOME 58,136,403.01 56,366,603.50 51,197,472.04 51,677,331.60 55,713,486.13 TOTAL EXPENDITURES 57,396,200.61 55,976,466.31 51,036,174.38 51,391,262.04 55,216,678.33 Profit before taxation 740,202.40 390,137.19 161,297.66 286,069.56 496,807.80 Profit tax 210,519.29 149,162.63 56,002.10 99,294.42 173,013.20 PROFIT IN PERIOD 529,683.11 240,974.56 105,295.56 186,775.14 323,794.60 ASSETS 25,947,638.90 32,233,936.14 32,994,950.81 36,163,799.23 37,769,718.07 Share (paid-in) capital 9,239,600.00 9,239,600.00 9,239,600.00 9,239,600.00 9,239,600.00 Capital and reserves 18,703,855.21 18,944,829.77 19,050,125.33 19,236,900.47 19,560,695.07 22. The main concern is to determine Zadar’s capacity to cover the incremental operations and maintenance costs of the leachate treatment facility. Financial projections were undertaken based on a series of assumptions (given the lack of data): i) 0% population growth based on current IMF estimates; ii) inflation rates estimates from the most recent IMF calculations through 2018, then constant for 2019 and 2020; iii) cost of capital of 5%; iv) no additional tariff increase (See Annex 1). The results indicate that the Utility will incur negative cash balance once the plant is in operation. Unless the company considerably reduces the current operating expenditures, the operation and maintenance costs for the leachate treatment facility will have to cover through other sources such as: i) an increase in tariffs, ii) transfers from the municipalities, iii) a subsidy from the National Environmental Fund, and/or iv) incurring debt. All of these options are currently being considered and a proposal will be submitted to the Bank in the early stages of implementation of the grant. 61 FINANCIAL PROJECTIONS FOR ZADAR Population growth (IMF Statistics) 0% Inflation rate estimate (IMF Statistics) Assumed constant after 2018 3.163 2.252 2.359 2.521 2.5 2.558 EXPENSES 2010 (actuals) 2011 (actuals) 2012 (actuals) 2013 (est.) 2014 (est.) 2015 (est.) 2016 (est.) 2017 (est.) 2018 (est.) 1 4 5 6 Expenses for materials and raw materials 922,781.37 806,176.35 917,437.37 946,455.91 967,770.10 990,599.80 1,015,572.82 1,040,962.14 1,067,589.95 Spare parts 879,374.42 1,029,296.55 1,205,872.99 1,244,014.75 1,272,029.96 1,302,037.15 1,334,861.51 1,368,233.05 1,403,232.45 Gas expenditures (disel.mot.gas) 3,154,701.82 3,579,199.82 3,915,362.37 4,039,205.28 4,130,168.18 4,227,598.85 4,334,176.62 4,442,531.03 4,556,170.98 Energy (electrical, natural gas) 101,401.88 103,857.94 109,469.74 112,932.27 115,475.50 118,199.57 121,179.38 124,208.87 127,386.13 EXPENSES FOR MATERIALS AND RAW MATERIA 5,058,259.49 5,518,530.66 6,148,142.47 6,342,608.22 6,485,443.75 6,638,435.37 6,805,790.33 6,975,935.09 7,154,379.50 Ferry costs (transport from islands) 2,385,662.76 1,773,890.29 1,512,750.06 1,560,598.34 1,595,743.02 1,633,386.60 1,674,564.27 1,716,428.38 1,760,334.62 Services for maintenance of landfill 579,939.69 1,010,247.91 1,137,347.32 1,173,321.62 1,199,744.82 1,228,046.80 1,259,005.86 1,290,481.01 1,323,491.51 Services for sanitation 63,750.00 Services for drilling and controling of underground waterson wastefield lDiklo" 252,070.00 260,042.97 265,899.14 272,171.70 279,033.15 286,008.98 293,325.09 Other services 1,407,410.29 1,469,848.58 1,779,367.42 1,835,648.81 1,876,987.62 1,921,265.76 1,969,700.87 2,018,943.39 2,070,587.96 Vehicle registration 312,260.34 338,519.94 368,915.48 380,584.28 389,155.03 398,335.20 408,377.23 418,586.66 429,294.11 Technical assistance 119,450.00 Technical assistance for personnel 412,613.20 624,313.90 466,548.47 481,305.40 492,144.40 503,754.08 516,453.72 529,365.07 542,906.22 Other costs 1,557,958.42 1,003,929.20 1,117,013.54 1,152,344.68 1,178,295.48 1,206,091.47 1,236,497.04 1,267,409.46 1,299,829.80 OTHER COSTS (5-14) 6,839,044.70 6,220,749.82 6,634,012.29 6,843,846.10 6,997,969.51 7,163,051.61 7,343,632.14 7,527,222.95 7,719,769.31 MATERIALS 11,897,304.19 11,739,280.48 12,782,154.76 13,186,454.32 13,483,413.27 13,801,486.99 14,149,422.47 14,503,158.03 14,874,148.82 PERSONNEL 21,702,369.61 22,905,300.44 24,003,702.26 24,762,939.36 25,320,600.76 25,917,913.73 26,571,304.33 27,235,586.94 27,932,273.26 AMORTISATION 7,304,661.91 6,478,518.52 5,148,397.73 5,311,241.55 5,430,850.71 5,558,964.48 5,699,105.97 5,841,583.62 5,991,011.33 Value adjustment of short-term assets 5,217,119.01 5,632,016.35 8,669,350.56 8,943,562.12 9,144,971.14 9,360,701.01 9,596,684.28 9,836,601.39 10,088,221.65 Other operating expenditures 552,934.94 30,211.99 65,434.77 67,504.47 69,024.67 70,652.96 72,434.13 74,244.98 76,144.17 Other operating expenditures (bank costs, provisions gifts) 3,993,348.86 3,940,828.82 4,074,035.62 4,202,897.37 4,297,546.62 4,398,925.74 4,509,822.66 4,622,568.22 4,740,813.52 OPERATING EXPENDITURES 50,667,738.52 50,726,156.60 54,743,075.70 56,474,599.18 57,746,407.16 59,108,644.90 60,598,773.84 62,113,743.19 63,702,612.74 NEW OPERATING EXPENDITURES (WWT) Energy, water, etc 1,300,000.00 1,330,667.00 1,364,213.12 1,398,318.44 1,434,087.43 Personnel 500,000.00 511,795.00 524,697.35 537,814.79 551,572.09 Amortization 200,000.00 204,718.00 209,878.94 215,125.91 220,628.84 TOTAL NEW OPERATING EXPENDITURES 2,000,000.00 2,047,180.00 2,098,789.41 2,151,259.14 2,206,288.35 FINANCIAL EXPENDITURES 368,435.86 665,105.44 473,602.63 488,582.68 499,585.56 511,370.79 524,262.44 537,369.01 551,114.90 TOTAL EXPENDITURES 51,036,174.38 51,391,262.04 55,216,678.33 56,963,181.87 60,245,992.72 61,667,195.69 63,221,825.69 64,802,371.34 66,460,015.99 INCOME 2010 2011 2012 2013 2014 2015 2016 2017 2018 Ooperating income 51,002,129.53 51,382,957.23 55,527,068.95 57,283,390.14 58,573,412.09 59,955,158.88 61,466,628.43 63,003,294.14 64,614,918.41 Financial Income 184,342.51 222,874.37 168,950.52 174,294.42 178,219.54 182,423.73 187,022.64 191,698.20 196,601.84 Extraordinary income 11,000.00 71,500.00 17,466.66 18,019.13 18,424.92 18,859.57 19,335.01 19,818.39 20,325.34 TOTAL INCOME 51,197,472.04 51,677,331.60 55,713,486.13 57,475,703.70 58,770,056.54 60,156,442.18 61,672,986.08 63,214,810.74 64,831,845.60 REVENUES 161,297.66 286,069.56 496,807.80 512,521.83 -1,475,936.18 -1,510,753.51 -1,548,839.61 -1,587,560.60 -1,628,170.40 NPV 37,295.96 23. In order to assess the utility’s capacity to incur debt, the mission calculated the debt ratio. This ratio is estimated as total liabilities (short and long term) over total assets. The higher this ratio, the greater risk will be associated with the utility’s operation. In addition, high debt to assets ratio may indicate low borrowing capacity of the utility, which will lower their financial flexibility. Table 12 below presents the results of the debt ratio for Zadar. The utility has a strong ratio although this has been increasing. But it has the capacity to incur debt which could assist, if needed, to cover some of the costs associated with the leachate treatment facility. 62 Table 12: Debt Ratio Product 2008 2009 2010 2011 2012 Total Liabilities 5,857,800.23 10,023,507.75 9,722,871.58 12,816,587.47 14,210,942.03 Total Assets 25,947,638.90 32,233,936.14 32,994,950.81 36,163,799.23 37,769,718.07 Debt Ratio 0.23 0.31 0.29 0.35 0.38 Mostar, Bosnia. The situation in Mostar is slightly different as this is a newly established company and it is not in full operation. As such, there are no current financial statements. Financial projections were done, based on some preliminary data generated by the utility on expected expenses and income. These projections were undertaken based on a series of assumptions (given the lack of data): i) 0% population growth based on current IMF estimates; ii) inflation rates estimates from the most recent IMF calculations through 2018, then constant for 2019 and 2020; iii) cost of capital of 5%; iv) no additional tariff increase (See Annex 2). Mostar’s financial sheet maintains a positive cash flow for a few years, primarily due to the fact that it will benefit from generating additional income from sales from separating waste. As such, it has a strong financial position. Assuming it does not incur any large fixed costs (increase in personnel, etc) it would have the capacity not only to breakeven but also to generate profits. FINANCIAL PROJECTIONS FOR MOSTAR Population growth (IMF Statistics) Inflation rate estimate (IMF Statistics) Assumed constant after 2018 1.8 1.8 1.9 2 2.2 2.2 2.2 EXPENSES 2013 (est.) 2014 (est.) 2015 (est.) 2016 (est.) 2017 (est.) 2018 (est.) 2019 (est.) 2020 (est.) 1 Energy (electrical, natural gas, telecom, water, etc) 60,000.00 61,080.00 62,179.44 63,360.85 64,628.07 65,920.63 67,370.88 68,853.04 Machinery and vehicles 131,000.00 133,358.00 135,758.44 138,337.85 141,104.61 143,926.70 147,093.09 150,329.14 Recycling plant and related equipment 192,000.00 195,456.00 198,974.21 202,754.72 206,809.81 211,359.63 216,009.54 220,761.75 Maintenance of current facilities 52,000.00 52,936.00 53,888.85 54,912.74 56,010.99 57,243.23 58,502.58 59,789.64 Personnel 1,013,800.00 1,032,048.40 1,050,625.27 1,070,587.15 1,091,998.89 1,116,022.87 1,140,575.37 1,165,668.03 Amortization 500,000.00 509,000.00 518,162.00 528,007.08 538,567.22 550,415.70 562,524.84 574,900.39 Loan installment 132,000.00 134,376.00 136,794.77 139,393.87 142,181.75 145,309.74 148,506.56 151,773.70 Other operating expenditures (waste covering) 114,000.00 116,052.00 118,140.94 120,385.61 122,793.33 125,494.78 128,255.66 131,077.29 Control, auditing, monitoring 36,000.00 36,648.00 37,307.66 38,016.51 38,776.84 39,629.93 40,501.79 41,392.83 TOTAL EXPENDITURES 2,230,800.00 2,270,954.40 2,311,831.58 2,355,756.38 2,402,871.51 2,455,323.21 2,509,340.33 2,564,545.81 INCOME 2013 2014 2015 2016 2017 2018 2019 2020 Dumping Fee (50K tons/year @40KM/t 2,000,000.00 2,036,000.00 2,072,648.00 2,112,028.31 2,154,268.88 2,201,662.79 2,250,099.38 2,299,601.56 PET and other plastics 240,000.00 244,320.00 248,717.76 253,443.40 258,512.27 264,199.54 270,011.93 275,952.19 Income from papers 50,000.00 50,900.00 51,816.20 52,800.71 53,856.72 55,041.57 56,252.48 57,490.04 Scrap iron 100,000.00 101,800.00 103,632.40 105,601.42 107,713.44 110,083.14 112,504.97 114,980.08 Other metals 100,000.00 101,800.00 103,632.40 105,601.42 107,713.44 110,083.14 112,504.97 114,980.08 Other waste 30,000.00 30,540.00 31,089.72 31,680.42 32,314.03 33,024.94 33,751.49 34,494.02 Other income 15,000.00 15,270.00 15,544.86 15,840.21 16,157.02 16,512.47 16,875.75 17,247.01 TOTAL INCOME 2,535,000.00 2,580,630.00 2,627,081.34 2,676,995.89 2,730,535.80 2,790,607.59 2,852,000.96 2,914,744.98 REVENUES 304,200.00 309,675.60 315,249.76 321,239.51 327,664.30 335,284.38 342,660.63 350,199.17 NPV 61,060.22 63 Scientific and Technical Advisory Panel The Scientific and Technical Advisory Panel, administered by UNEP, advises the Global Environment Facility (Version 5) STAP Scientific and Technical screening of the Project Identification Form (PIF) Date of screening: May 13, 2013 Screener: Lev Neretin Panel member validation by: Jakob Granit Consultant(s): I. PIF Information (Copied from the PIF) FULL SIZE PROJECT GEF TRUST FUND GEF PROJECT ID: 5269 PROJECT DURATION : 3 COUNTRIES : Regional (Bosnia-Herzegovina, Croatia) PROJECT TITLE: Adriatic Sea Environmental Pollution Control Project (I) GEF AGENCIES: World Bank OTHER EXECUTING PARTNERS: Hrvatske Vode, Croatia; Ministry of Environment and Natural Resources, Croatia; Ministry of Foreign Trade and Economic Relations of Bosnia and Herzegovina; and City of Mostar. GEF FOCAL AREA: International Waters II. STAP Advisory Response (see table below for explanation) Based on this PIF screening, STAP’s advisory response to the GEF Secretariat and GEF Entity(ies): Consent III. Further guidance from STAP 1. STAP welcomes this project with a focus on scaling up investment into reducing nutrient flow to the transboundary Adriatic Sea. Agreements and approaches to reduce nutrient flow are identified in the in the regional TDA (MAP, 2005) and the preparatory work of for the Adriatic Sea Environment Program (ASEP). The Project is further in alignment with the WB's Country Partnership Strategies (CPS) and coordinated with the activities of the World Bank-MAP GEF Strategic Partnership for the Mediterranean Large Marine Ecosystem (the MedPartnership). The overall Barcelona convention and its instruments act as a generic framework for the protection and the sustainable management in the region. Of critical importance to Croatia and Bosnia and Herzegovina will further be the transposition and implementation of the EU Acquis which this project will support (e.g. the Marine Strategy Directive, ICZM policy and other freshwater directives). With Croatia due to accede to the European Union 1 July 2013 all activities that can support this transition in 64 the area of sustainable development will be of critical importance. The scaling up of investments and seeking coherence with other agreed regional governance and management frameworks are described as the two key global environmental benefits. 2. The Project is straightforward and consists of two major components that are described in the Project framework: (i) construction and upgrading of two wastewater and solid waste treatment plants and provision of equipment for monitoring, serving as pilot projects fostering innovation and subsequent replication and (ii) conducting assessments, preparing project tender documentation for waste water and solid waste treatment plants in order to access additional financing. STAP recommends that the Project considers including one additional project component(3) that would address project management and coordination with other actors seeking policy coherence and building capacity for implementation of joint governance and implementation frameworks including leveraging investment into the reduction of nutrients flow. 3. STAP recommends that the selection of the two specific hotspots for improved treatment in Croatia is carefully justified in the full proposal from technical, institutional, social, financial and broader sustainability perspectives. While local benefits of these actions could be tangible, the long-term impact of reducing nutrient discharge at the two selected sites may not have a significant impact on the coastal environment in the Adriatic Sea. However, the lessons learned from these two pilot projects in Croatia may justify their choice if properly captured in component two. The choice of anaerobic bio-treatment of high-load activated sludge from a solid waste landfill in Bosnia and Herzegovina is justified. STAP recommends that project proponents carefully consider and present a strategy for utilizing potential multiple benefits of the proposed anaerobic digestion technology as well as address potential environmental risks. 4. STAP recommends that project component two is further detailed during the full proposal development phase specifically in relation to EU Directives that needs to be met. The PIF provides little information about specific policy approaches to address nutrient pollution including analysis of policy, legal and institutional reforms to address nutrient discharge, ICZM principles, and EU Marine Framework Directive. 5. Project proponents are recommended to explore lessons learned and recommendations of the recently completed European Nitrogen Assessment (2011) and latest global report "Our nutrient world: The challenge to produce more food and energy with less pollution" (2013). Both assessments argue that focus of the integrated nutrient management should be on the improved full-chain nutrient use efficiency (NUE). In the European context there are three key needs for future policies including reducing nutrient surpluses and increasing NUE in agriculture, recycling of N &P in waste water, and reducing per-capita over-consumption of animal products. 6. Finally STAP recommends the Project proponents to explore the utility of tools and guidelines being currently developed by the GEF project ID4212 "Global foundations for reducing nutrient enrichment and oxygen depletion from land-based pollution, in support of Global Nutrient Cycle" executed by UNEP and UNESCO. 65 STAP advisory Brief explanation of advisory response and action proposed response 1. Consent STAP acknowledges that on scientific or technical grounds the concept has merit. However, STAP may state its views on the concept emphasizing any issues where the Project could be improved. Follow up: The GEF Agency is invited to approach STAP for advice during the development of the Project prior to submission of the final document for CEO endorsement. 2. Minor revision STAP has identified specific scientific or technical challenges, omissions or opportunities that should be addressed by required. the Project proponents during project development. Follow up: One or more options are open to STAP and the GEF Agency: (i) GEF Agency should discuss the issues with STAP to clarify them and possible solutions. (ii) In its request for CEO endorsement, the GEF Agency will report on actions taken in response to STAP’s recommended actions. 3. Major revision STAP has identified significant scientific or technical challenges or omissions in the PIF and recommends significant required improvements to project design. Follow-up: (i) The Agency should request that the Project undergo a STAP review prior to CEO endorsement, at a point in time when the particular scientific or technical issue is sufficiently developed to be reviewed, or as agreed between the Agency and STAP. (ii) In its request for CEO endorsement, the Agency will report on actions taken in response to STAP concerns. 66 IBRD 40289 CROATIA POTENTIAL PROJECT SITES FOR: LANDFILL LEACHATE TREATMENT GSDPM Map Design Unit CITIES AND TOWNS MAIN ROADS This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, COUNTY (ZUPANIJA) CAPITALS RAILROADS denominations and any other information shown on this map do not imply, on the part of The World NATIONAL CAPITAL COUNTY (ZUPANIJA) BOUNDARIES Bank Group, any judgment on the legal status of any territory, or any RIVERS INTERNATIONAL BOUNDARIES endorsement or acceptance of such boundaries. 14°E 15°E 16°E 17°E 18°E 19°E To AU US AU STRIA TR I A STR Zalaegerszeg To MEDIMURSKA To Graz Kaposvar Cakovec To Varazdin VARAZDINSKA KOPRIVNICKO- HUNGARY HUNGA RY Ljubljana Koprivnica KRIZEVACKA Krapina KRAPINSKO- Durdevac To 46°N Baja 46°N ZAGORSKA To SLOVENIA SLOVENI S LOVEN I A To ZAGREBACKA Bjelovar Pecs To Pecs To Ljubljana ZAGREB Virovitica Sombor Ivanic BJELOVARSKO- ZAGREBACKA GRAD Grad BILOGORSKA OSJECKO- VIROVITICKO- To To To ZAGREB Daruvar PODRAVSKA BARANJSKA To Sombor Trieste Trieste Ljubljana Osijek K up a Sisak Karlovac Sav POZESKO-SLAVONSKA Nasice a Novska ˘ Pozega Vukovar un D ISTARSKA Rijeka ay ( Glina Danube) Pazin Vinkovci SISACKO-MOSLAVACKA BRODSKO- Slav ˘ Porec To PRIMORSKO- KARLOVACKA POSAVSKA Brod VUKOVARSKO- Novi Sad GORANSKA SRIJEMSKA To Dvor To To To Stalije Krk Bihac Prijedor Banja Luka Ruma 45°N 45°N Senj To Doboj To To Pula Doboj Tuzla Otocac To Bihac Cres Rab LICKO- Jablanac SENJSKA Un a Losinj Karlobag Gospic Pag Udbina SERBIA Gracac To BOSNIA A ND BO SNIA AND Zadar ZADARSKA Glamoc HERZEGO VINA HERZEGOVINA Pasman 44°N Dugi 44°N Knin Dinara Otok (1830 m) Vodice To Sibenik Livno SIBENSKO- Sinj Adr iat ic KNINSKA Trogir Split Sea Imotski To Mostar SPLITSKO- I TA LY DALMATINSKA Brac Makarska To Mostar Hvar 43°N Vis Ploce Metkovic 43°N Korcula Peljesac DUBROVACKO- MONTENEGRO Mljet To NERETVANSKA Trebinje Dubrovnik CROATIA Gruda To Podgorica 0 20 40 60 Kilometers 0 20 40 Miles 42°N 14°E 15°E 16°E 17°E 18°E 19°E SEPTEMBER 2013 IBRD 40288 BOSNIA AND HERZEGOVINA POTENTIAL PROJECT SITES FOR: LANDFILL LEACHATE TREATMENT WWTP UPGRADES GSDPM Map Design Unit TOWNS MAIN ROADS This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, NATIONAL CAPITAL RAILROADS denominations and any other information shown on this map do not imply, on the part of The World MAIN RIVERS INTER-ENTITY BOUNDARY LINES Bank Group, any judgment on the legal status of any territory, or any INTERNATIONAL BOUNDARIES endorsement or acceptance of such boundaries. To Zagreb 16°E 17°E To Bjelovar 18°E 19°E To Osijek CROATIA To Un a Karlovac ˇ Bosanska Gradiska Sa Bosanski Brod Bosanska Novi ˇ (Srp. Gradiska) va (Srp.Brod) To Belgrade (Novi Grad) as 45°N Prijedor 45°N Vbr Cazin Derventa Derventa Derventa sna Sava Bo Bosanska ˇ Brcko Bihac´ Krupa Banja ˇ District Brcko a Sanski Most Luka Bijeljina Drin Gracanica ˇ To Belgrade To S Sveti Rok U an na a Bosanski Varoˇ Kotor Varos s Petrovac ´ Teslic Teslic Tuzla Tuzla SERBIA Kljuc ˇ Maglaj REPUBLIKA SRPSKA CROATIA ˆ Spreca To Medak Drvar rvar Drva r ´ Mts. Vlasic Kri va ja To Valjevo Jajce Travnik Travnik Zenica D To Obrovac Kladanj Vlasenica Vareˇ Vares s i Vr s Bosna ba Srebrenica n Glamoc Bugojno Visoko Visoko REPUBLIKA a 44°N D ri 44°N na FEDERATION OF SRPSKA r To Kraljevo i To Zadar BOSNIA AND SARAJEVO c Livno Pale HERZEGOVINA ˆ Visegrad Visegrad Jablanicko jezero A ˇ Gorazde Jablanica Konjic im l L To Sjenica Ne p ˇ Foca retv (Srbinje) s a Posusje Lise Mostar Ta ra Gacko Piv Stolac a 43°N 43°N Neum ´ Bileca MONTENEGRO Trebinje Trebinje To Podgorica BOSNIA and HERZEGOVINA Ad r iat i c Sea To Shkodër 0 10 20 30 40 50 Kilometers ALBANIA 0 10 20 30 Miles 16°E 17°E 18°E 19°E SEPTEMBER 2013