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1 Document of The World Bank Public Disclosure Authorized FOR OFFICIAL USE ONLY Report No CY Public Disclosure Authorized STAFF APPRAISAL REPORT Public Disclosure Authorized CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT (PHASE I) Public Disclosure Authorized Regional Projects Department Europe, Middle East and North Africa Agriculture I February 9, 1984 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.

2 CURRENCY EQUIVALENTS (as of September 1983) US$1.00 CL 1.00 = mils 1,000 = CL 0.50 (Cyprus Pound' US$2.00 WEIGHTS AND MEASURES 1 hectare (ha) 2.47 acres 1 kilometer (km) = 0.62 miles 1 meter (m) 3.28 feet (ft) 1 cubic meter (m 3 ) cubic feet (cu ft) 1 metric ton (m ton) long ton (ton) 1 MCM 1 million cubic meter MAIN ABBREVIATIONS ARI Agricultural Research Institute CCB Cooperative Center Bank CCS Cooperative Credit Societies CPMB Cyprus Potato Marketing Board DAO District Agricultural Offices EEC European Economic Community ERR Economic rate of return FEEAP Fourth Emergency Economic Action Plan ICB International Competitive Bidding LCA Land Consolidation Authoritv lcd Liter per capita and day MANR Ministry of Agriculture and Natural Resources MCI Ministry of Commerce and Industry O&M Operation and Maintenance OED Operations Evaluation Department ODA Overseas Development Administration of the UK PAC Project Advisory Committee PIt: Project Implementation Unit POU Project Operation Unit PPCC Project Policy and Coordination Committee SCP Southern Conveyor Project for Water Resources Development VPP Vasilikos-Pendaskinos Project WDD Water Development Department of MANR GOVERNMENT OF CYPRUS FISCAL YEAR January 1 - December 31

3 FOR OFFICIAL USE ONLY CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT (PHASE I) Table of Contents LOAN AND PROJECT SUMMARY I. INTRODUCTION Page No. II. THE WATER SUPPLY SECTOR Water Resources Sector Organization Water Supply and Sewerage Services Sector Objectives. 3 Sector Investment and Cost Recovery Policies Bank Involvement in the Water Supply and Sewerage Sector III. THE AGRICULTURAL SECTOR Agricultural Production Agricultural Exports Export Marketing Land Resources, Use and Tenure Irrigation Development. 6 Northern Cyprus Agricultural Policies and Programs Irrigation Charges and Their Legislation Bank Involvement in the Agricultural Sector IV. THE PROJECT AREA Location Population Soils Water Resources Water Supply Aspects Agricultural Aspects V. THE FULL-SIZE SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT(SCP) AND ITS PHASING Project Concept and Alternatives SCP Objectives SCP Components at Full Development Full SCP Cost Evaluation of Technical and Phasing Alternatives Proposed Phasing of the Southern Conveyor Project This report is based on the findings of a Bank appraisal mission, which visited Cyprus in April/May 1983, comprising Messrs. P. Economides, P.van der Goot, L. Rasmusson, M. Pommier (Bank), and P. Jolly (Consultant). 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.

4 Page No. VI. THE PROPOSED PROJECT Brief Description Detailed Features Water Availability Status of Engineering Consultant Services Safety of Dam Cost Estimates Project Financing Procurement Disbursement Environmental Impact VII. PROJECT IMPLEMENTATION AND ORGANIZATION Implementation Schedule Project Organization Future Protection of the Kokkinokhoria Aquifer Accounts and Auditing.. 32 Billing and Collection Monitoring and Evaluation. 33 International Commodity Agreements VIII. PROJECT BENEFITS, FINANCIAL ANALYSIS, AND JUSTIFICATION Agricultural Production Crop Yields Prices Marketing Farm Incomes Project Beneficiaries Cost Allocation for Domestic and Irrigation Water Use Cost Recovery Policy Water Costs Irrigation Water Charges Irrigation Cost Recovery and Subsidies Domestic Water Tariffs Financing Plan of WDD's Investment Program Future Financial Performance Project Justification Economic Rate of Return and Sensitivity Analysis Other Benefits Macro-Economic Impact Project Risks IX AGREEMENTS REACHED AND RECOMMENDATION

5 Page No. Annex 1 - General Data Table 1 - Cost Estimates - Phase I Table 2 - Cost Estimates - Phase II Table 3 -Water Supply and Use Table 4 - Estimated Schedule of Disbursements Table 5 - Financial Rent and Cost Recovery Indices Table 6 - Estimated Benefits Table 7 - Summary Project Economic Analysis Annex 2 - Water Supply Data Table 1 - Population Projection.60 Table 2 - Water Demand Projection.61 Table 3 - Water Demand and Supply.63 Table 4 - Water Treatment Works Table 5 - Structure of Retail Water Tariffs Annex 3 - Financial Data Table 1 - Water Supply - Project Area, WDD Income Statement Table 2 - Water Supply - Project Area, WDD Source and Application of Funds Table 3 - Water Supply - Non-Project Area, WDD Income Statement Table 4 - Water Supply - Non-Project Area, - WDD Source and Application of Funds Table 5 - Water Supply - Consolidated, WDD Income Statement Table 6 - Water Supply - Consolidated, WDD Source and Application of Funds Table 7 - Irrigation - Project Area, WDD Income Statement Table 8 - Irrigation - Project Area, - WDD Source and Application of Funds Table 9 - Irrigation - Non-Project Area, WDD Income Statement Table 10 - Irrigation - Non-Project Area, - WDD Source and Application of Funds Table 11 - Irrigation - Consolidated, WDD Income Statement Table 12 - Irrigation - Consolidated, WDD Source & Application of Funds 78 Table 13 - Water Supply/Irrigation - Consolidated WDD Source and Application of Funds Table 14 - Water Supply/Irrigation - Combined Balance Sheet Annex 4 - Assumptions Used in Financial Projection Annex 5 - Documents in Project File.83 Graphic Implementation Schedule.85 Graphic Project Organization Chart - Construction Stage Graphic Project Organization Chart - Operation Stage Gp: IBRD 17484, Southern Conveyor Project - Principal features

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7 -i- CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT Loan and Project Summary Borrower: Amount: Terms: Republic of Cyprus US$27 million Fifteen years, including three years grace, at the standard variable interest rate. Project The project is the first phase of a two phase development to Description: harness the Republic of Cyprus' last substantial remaining surface water resources. Different supply options, phasing and technical alternatives were examined. The proposed Phase I project is the least-cost alternative to meet the Republic's priority water needs. The project's primary objectives are (i) to ensure adequate water supplies to three major cities as well as to rural areas and (ii) to maintain vitally important irrigated crop production in an area threatened by aquifer seawater intrusion. The project also aims to rationalize further the utilization of the country's scarce water resources in Cyprus through the establishment of appropriate institutions and the implementation of realistic cost recovery measures for both domestic and irrigation water. The project components include (a) a major dam (115 MCM) and appurtenant structures; (b) a main conveyor (110 km) and connecting pipelines; (c) a pressurized irrigation network; (d) a terminal reservoir; (e) domestic water treatment and conveyance works; (f) establishment of project administration including a central control system; and (g) provision of consultant services. The project would directly benefit nearly 0.6 million domestic water consumers and 10,000 persons in the irrigated farming community who, without the project, would have to discontinue highly profitable irrigated farming. Major risks to the project would arise only if the second phase were not implemented. Without a second phase water for irrigation would have to be gradually curtailed and eventually even eliminated because of increasing domestic water demand. This risk is, however, highly unlikely to be faced since the Government considers the implementation of the entire project (two phases) to be critical to the country's economic well being and has given assurances during negotiations that it will promptly implement the second phase.

8 -1i- Estimated Project Cost: Component Local Foreign Total US$ million Kouris Dam Main Conveyor Akhna Reservoir Kokkinokhoria Irrigation Connection to VPP Domestic Water Supply Works Land Acquisition and Consolidation Central Control System, Bldgs. & Equipment Consultant Services Base Cost Physical Contingencies Price Contingencies Total 1/ Financing Plan: Local Foreign Total US$ million Bank Government European Investment Bank Kuwait Fund Export Credits Total Estimated Disbursements: Bank Fiscal Year US$ million Annual Cumulative Economic Rate of Return: 13% (for Phases I and II) Appraisal Report: Report No. 4756CY, dated February 9, 1984 Map: No.IBRD Southern Conveyor Project -Principal Features 1/ Exclusive of taxes and duties from which public projects are exempt.

9 CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT I. INTRODUCTION 1.01 The Government has placed water resource development among its highest priorities. Most groundwater resources have now already been developed and many aquifers overpumped. Prospects of further development of minor aquifers is limited, and in most instances surface water has been tapped. In light of this situation, shortage of water for domestic and irrigation use is moving steadily close to the danger point. The major cities of Nicosia and Larnaca are already experiencing acute shortages of water, and it is expected that another major city, Limassol, as well as the area of Famagusta will be faced with severe shortages before the end of the decade. Tourist development along the coast is increasingly constrained on account of water shortages. As to irrigation, depleted groundwater resources threaten highly profitable export production in a major production area (Kokkinokhoria). If no surface water supplies are made available before the end of the decade, salt water intrusion into the aquifer will render the area permanently unsuitable for agriculture. In summary, the urgency to provide additional water is evident Preparation of the Southern Conveyor Project for Water Resources Development (SCP) was initiated by the Government of Cyprus in March 1978 with assistance from the Overseas Development Administration (ODA) of the UK. The study was carried out in two stages. Stage one, the prefeasibility study, concentrated on appraising the viability of alternative options. In June 1980, the Council of Ministers decided on the preferred option to be considered in more detail and stage two, the feasibility study, commenced in 1980, for which consultants were appointed by the Government. The overall management of the study was the responsibility of the Director General of the Ministry of Agriculture and Natural Resources (MANR), who was advised by the Southern Conveyor Project Management Committee. The Bank participated actively in the discussions of major issues and the overall concept of the project Though convinced of both urgency and need to augment water supplies, the Bank rigorously examined all possible supply alternatives and project phasing opportunities. The Government of Cyprus has requested a Bank loan to assist in financing the first phase of the SCP. This first phase project aims at reconciling the urgency of early implementation with the need to keep investments within bounds, while maximizing overall economic benefits. Nevertheless, because of the bulkiness of major components, investment in Phase I is considerable. Thorough examination of key parameters leads to the conclusion that neither the balance of payments nor the budget are likely to be unduly strained by the project which is the least cost alternative to meet priority water needs This report is based on the Government feasibility study of 1982, the updated main reports of January and of February 1983 and the findings of the Bank appraisal mission in April/May 1983.

10 -2- II. THE WATER SUPPLY SECTOR Water Resources 2.01 The average annual precipitation in Cyprus ranges from 290 mm in the west to 1,190 mm on the Troodos mountains for a total of about 4,500 million cubic meters per annum (MCM/a) of water on the entire island. Surface evaporation and evapotranspiration from forests and pastures account for about 2,520 MCM/a and from cultivated and irrigated crops about 1,030 MCM/a. An estimated 350 MCM/a infiltrate the ground, resulting in about 600 MCM/a net surface runoff Most of the groundwater resources have already been developed, and the prospect of further development of minor aquifers is limited because of quantity as well as water quality. Therefore, surface water is assuming more importance as the predominant source of water for development. Presently, it is estimated that about 175 MCM/a of surface water are utilized for agricultural and domestic uses, and the remaining 425 MCM/a are lost to the sea during floods The total storage capacity of reservoirs in Cyprus, mostly for irrigation, including the recently completed Asprokremmos dam near Paphos, is 116 MCM. These provide an average water yield of 86.7 MCM/a of which about 5 MCM/a is being used for domestic water supply. The groundwater schemes provide about 20 MCM/a and 360 MCM/a for domestic water supply and irrigation, respectively. The Vasilikos-Pendaskinos Project (VPP), which is presently under implementation, would add about 32 MCM of storage capacity and, on completion, would provide 7 MCM/a for domestic use and 7.4 MCM/a for irrigation of about 1,600 ha. The Khrysokhou Irrigation project will provide 23 MCM of storage capacity at the Evretou dam to serve 2,000 ha of irrigation area. Sector Organization 2.04 Despite efforts to rationalize existing legislative and institutional arrangements related to water resource management there has been little substantial progress in that direction. The existing management of water resources is fragmented at both the policy level as well as at the upper levels of execution. As a consequence there are many instances of inadequate planning and duplication of effort. The Government is aware of the inefficiencies resulting from such divisions of responsibility and favors the establishment of an integrated national water entity, which would be responsible for the development and use of all water resources in Cyprus and for the implementation, operation, and maintenance of all major water supply schemes for both domestic water and irrigation (para 7.03) The responsibility for domestic water distribution is vested in the local Governments for which water boards have been established in Nicosia, Limassol, and Larnaca, and village councils for rural communities. The water boards, which have representatives from the central Government level, function rather independently but budget and tariff increases are subject to approval from the Council of Ministers. Sewerage boards have been established in Nicosia, Limassol, and Larnaca and function in a way similar to the water boards.

11 -3- Water Supply and Sewerage Services 2.06 The water scarcity situation has induced a general awareness of water conservation which has resulted in a comparatively low per capita water consumption. In both urban and rural areas virtually the total population is provided with piped water supply of satisfactory quality. Only Nicosia has a sewerage and sewage disposal system. There are plans of expanding the sewage system coverage in Nicosia and constructing new systems in Larnaca and Limassol. Sector Objectives 2.07 The Government's objectives for the water supply sector could briefly be formulated as follows: (i) optimal utilization of the scarce water resources with domestic water supply given first priority for its use; (ii) development of available fresh water resources in order to maintain a continuous and safe water supply; (iii) improvement of water conservation practices and maintenance of an adequate tariff structure to discourage high water consumption; (iv) introduction of high degree sewage treatment enabling water recirculation for irrigation; and (v) establishment of a national water entity. Sector Investment and Cost Recovery Policies 2.08 An analysis of past and projected sector investments indicates that the domestic water supply sector has consistently received a high priority. Thus, during the Third Emergency Economic Action Plan ( ) the sector investment amounted to CL5.4 million or 3% of total capital investments, which corresponds to an annual investment of CL3.5 per capita. During the current Fourth Emergency Economic Action Plan ( ) sector investments are projected to CL22.4 million or about 6% of total capital investments, which would correspond to an annual investment of CL8.4 per capita Through a decree (no 21023, dated November 12, 1981) by the Council of Ministers, the Water Development Department (WDD) of the Ministry of Agriculture and Natural Resources is obliged to maintain bulk water rates corresponding to actual costs for the water. According to the Water Supply Law of 1951, the water boards have to set water tariffs to cover all operating costs and debt service. These rules also apply to Municipal Departments or Village Councils responsible for the provision of water supply. Water boards and village councils' retail water tariffs are based on a progressive surcharge on the water consumption and a fixed fee for each category of consumer. F'ollowing the September 1983 increase of WDD's bulk water tariffs (para. 8.34), the water boards have consequently increased their own retail tariffs as shown in Annex 2, Table 5. The progressive tariffs structure adopted by the water boards supports the Government policies aimed at ensuring affordabilty for the less affluent domestic customers while creating incentive for water conservation among high domestic, administration, industrial and touristic consumers whose water consumption represents about 40% of the total consumption and is charged at CE 0.55 and above per cubic meter. Bank Involvement in the Water Supply and Sewerage Sector 2.10 Bank involvement in the water supply and sewage sector was initiated in 1971 through the following projects: (i) Nicosia Sewerage Project (Loan 729-CY, US$3.5 million) and (ii) Famagusta Sewerage and Drainage Project

12 -4- Loan 730-CY, US$1.9 million). The projects provided for sewage collection and disposal facilities and were well advanced, when the events of 1974 took place. The Famagusta project was suspended while the Nicosia project was successfully completed in The project performance audit report, which was issued in 1981, recognized the institutional development resulting from the project.

13 -5- III. THE AGRICULTURAL SECTOR Agricultural Production 3.01 In 1982, about 70% of sector value added was generated by the crop subsector, 20% by livestock activities and the balance by fisheries, forestry and hunting. Though irrigated crops occupy only about 10% of the total agricultural land area, these generate nearly 80% of value added in crop production, the balance coming from rainfed, mainly cereal production on 90% of the area. These productivity differentials clearly indicate that, on the physical resources side, development of Cypriot agriculture is severely constrained by scarcity of irrigation water supplies. During the period , value added for irrigated crops increased at about 1.2% p.a., for rainfed crops at about 0.5% p.a., whereas value added in livestock production remained virtually unchanged Long-term sector growth prospects mainly depend on the Government's socio-economic policy objectives. It would appear, however, that, even under very favorable external conditions and Government policies, long-term sector growth, for three primary reasons, is not likely to exceed 2-3% per year. First, growth of crop production will depend mainly on expansion of the irrigated area. This is expected to increase by about 8,000 ha over the next 10 years, or by about 2% per year. Such increase is not likely to result in a corresponding gain in value added because the real cost of inputs in modern irrigated agriculture is likely to increase considerably. Second, though there is still scope for productivity increases, both in irrigated as in rainfed crop production, corresponding value-added increments will be modest for the same reason as stated above. Third, livestock production depends largely on subsidized imported feed. It appears to be undesirable to continue to increase such feed grain imports and subsidies, and hence it is unlikely that the performance of this subsector can be improved. Agricultural Exports 3.03 Agricultural exports play an important role in Cyprus' foreign exchange earnings; in 1982, they accounted directly and indirectly for nearly 25% of all commodity export earnings. The most important commodities in value terms are potatoes, citrus, grapes and wines while in recent years the value of vegetable exports has been increasing steadily. The above commodities accounted for 36%, 24%, 13%, 11% and 8%, respectively, of the total agricultural export earnings in Export prices of most horticultural commodities, citrus, and grapes rose only moderately in current terms and stagnated in real value; only unit export values of vegetables registered a substantial increase (20%) in real terms. Significant increases in future sector export earnings will mainly depend on Cyprus' ability to shift exports to high-value vegetables and exotic fruits (e.g., avocados and kiwis) and to increase exportable volumes of traditional items such as potatoes, citrus fruit and table grapes. Such changes require continued investment in water development projects, on-farm irrigation systems and commensurate attention to applied research and extension coupled with effective export marketing mechanisms.

14 -6- Export Marketing 3.05 Part of Cyprus' agriculture was developed to produce specific fruits and vegetables for the UK market. The realignment of UK trade policies, following UK entry into the European Economic Community (EEC), resulted in Cyprus' loss of preferential entry into that market. Interim policies were replaced in 1978 by the Special Commonwealth Preference for Cyprus which stipulated preferential tariffs for a variety of horticultural products. The UK continues to be the main market for Cyprus' horticultural products (e.g., 85% of potatoes, 50-60% of citrus), though modest diversification to other European countries and the Middle East is in process The main problems facing Cypriot exports of horticultural products are (i) concentration in one particular market, (ii) lack of coordination among exporters on one hand and between exporters and producers on the other, and (iii) absence of a long-term export marketing strategy. These problems are being addressed under the Fruit and Vegetable Export Project (Loan 1988-CY). Land Resources, Use and Tenure 3.07 Of the total land area in Cyprus of 925,000 ha, only 424,000 ha are available for agriculture. Dryland field crops (mainly barley) occupy some 380,000 ha, and only 44,000 ha (about 10%) are under controlled irrigation (excluding spate irrigated areas). Horticultural crops, e.g., citrus, vegetables, potatoes, deciduous fruits and table grapes, are the principal crops grown on irrigated lands Private ownership, in the area under Government control, accounts for 93% of the agricultural land, 1 the balance comprising Government, church and communal lands. Eighty percent of private land is farmed by the owners while rental contracts account for about one quarter of the total farm area. The total number of holdings in the area under Government control is about 44,500, with an average farm size of 4.5 ha. Irrigation Development 3.09 In 1978, the area under systematic irrigation in the Governmentcontrolled area of Cyprus was 43,610 ha. Out of this around 9,040 ha were irrigated by surface water and 34,570 ha by groundwater. In addition there were about 18,000 ha under spate irrigation. The completed Paphos irrigation scheme, when fully developed, would add 5,000 ha to the area irrigated by surface water. The Vasilikos-Pendaskinos project, expected to be completed by the end of 1985, and the Khrysokhou project, expected to be completed by the end of 1986, would add another 1,050 ha and 2,100 ha respectively. Therefore, the surface irrigated area would be increased by 1987 to about 17,200 ha. No substantial change is expected to occur in the area irrigated by groundwater and spate irrigation. Irrigated crops include potatoes, citrus fruit, winter and summer vegetables, table grapes and bananas. I/ 1977 Agricultural Census.

15 -7- Northern Cyprus 3.10 A feasibility study for integrated water development in areas of northern Cyprus was prepared in The events in that year prevented its subsequent execution. The Turkish Government is now reportedly assisting in at least partial implementation of that project. Because this project is located in a different hydrological basin and it would serve other areas, its implementation would not have any effect on the SCP. Agricultural Policies and Programs 3.11 The Government continues to consider agriculture as one of its priority areas. Within an overall framework of actions to maximize production, of improving income levels and of balancing regional growth, the sector objectives of the Fourth Emergency Economic Action Plan (FEEAP), , are (i) to expand irrigation; (ii) to modernize the sector; (iii) to improve the marketing system; and (iv) to restructure price and subsidy controls Because of the high unit cost of investment in irrigation, the FEEAP allocates nearly two-thirds of the total sector investment budget of CL150 million (US$300 million) to water development programs.l/ In addition, the FEEAP includes the provision of about CL25 million (US$50 million) in loans to farmers to facilitate, in conjunction with extension, further modernization of the sector. The Government's strategy of promoting exports is a sensible one considering the constraints imposed by a small domestic market and the various comparative advantages of Cypriot agriculture. Improvement of present export marketing, coordination of producers' and exporters' efforts, and elaboration of a long-term export strategy is a prerequisite for further large increases in agricultural exports The Plan recognizes that the financial and economic cost of a set of price controls and subsidies in the sector has grown substantially, and, as a result, the FEEAP includes, among agricultural policy objectives, "the restructuring of controlled prices and subsidies with a view to increasing the efficiency of the agricultural sector." In 1982, these subsidies corresponded to about 28% of agricultural GDP. By far the most important subsidy was the grain subsidy (CL18.7 million), caused by Government purchases of grain (wheat and barley) at comparatively high prices from farms, coupled with substantial imports of grain which are sold at less than import prices to food-processing industries and feed-mixing firms, hence distorting the monetary value of feed and food in relation to their real value. The wine subsidy is of much lesser importance in aggregate terms (CL4.6 million). Irrigation subsidies amount to about CL3 million. Irrigation Charges and Their Legislation 3.14 Government operates presently 13 irrigation schemes: the smallest delivered, in 1983, 40,000 m 3 water, the largest 15 MCM. Total volume for sale in 1983 amounted to 25.2 MCM. Total weighted average capital cost of these schemes (discounted at 9% over 40 years) is CL 0.085/m 3. Their weighted average of O&M cost amounts to CL 0.017/M 3, making for a total average unit cost of CL 0.102/m 3 (1983 prices). In the same year, the 1/ Cyprus - Current Economic Positions and Prospects for Growth during the Five-Year Plan, IBRD Report No CY (January 19, 1983).

16 -8- average water charge was about CL /m 3 ; hence the average calculated overall cost recovery was about 25% (for the notion of overall cost recovery see paras 3.16 and 3.17 below). The Government, in past years, substantially revised water charges; in 1979 the average rate was only about CL 0.010/m 3. In September 1983, rates were increased to about CL 0.032/m 3. Hence, rates were nearly tripled in real terms over the past four-year period The Government Waterworks Law of 1929 sets out the basic legislation for irrigation water use and charges. The water rates according to this law are decided by the Council of Ministers. For this purpose the Council of Ministers may issue regulations which may include provisions for: (a) "Fixing the maximum fees, rates, and any other money considerations, which may be levied or collected on or from any person by virtue of this Law, such fees, rates, or other money considerations being capable of being fixed either per donum of land, or according to kind of crop, or according to the volume or time of the water supplied or used or according to the benefit accruing or capable of accruing to any person or any property by the water or any waterworks. Provided that in fixing such maximum rates regard shall be had to: (i) interest on capital expended; (ii) adequate provision for a sinking fund and insurance of the works; (iii) cost of repair and maintenance and administration of the works. (b) Establishing a fund wherein shall be deposited all fees, rates, and other monies and monetary penalties in respect of any waterworks, and manner of disposal of such sums and generally the manner of operation and control of such fund" (para 2a and 2b of Section 24)." 3.16 The rates or fees, according to para 3(a) of section 24 of the Law, shall not be more than 40% of the weighted average cost of the water. In special cases, taking into account the heavy expenditure on any waterworks or special economic, technical, and social conditions prevailing in the project area, the aforesaid rate may be increased up to 65% of the weighted average cost of the water. Such cases reflect the conditions of the inhabitants, the kind of crops cultivated, soil fertility, irrigation methods practiced in the area, and other similar and relevant data. The regulations for fixing rates must be published in the Official Gazette of the Republic, and they are effective from the date of publication The Government calculates the capital unit cost of water using the present worth method of analysis. According to this method all capital costs and water quantities that occur during the economic life of the project are transformed (compounded in the case of past expenditure or quantity) into present worth values and volumes accordingly, using a rate of interest presently equal to 9%. This rate has been determined by the Council of Ministers and is the maximum legal rate. In most cases the economic life of the projects is assumed to be 45 years after commencing construction. The

17 -9- capital unit cost of water is calculated by dividing the present worth of the cost by the present worth value of the volume of water, both discounted at the same rate. The O&M cost of the water is calculated using the actual annual cost and the actual amount of water for sale in the year under consideration. The weighted average unit cost is the sum of the weighted O&M unit cost plus the weighted capital unit cost of the projects. It is important to note (i) that the law defines cost recovery ratios in relation to the sum of O&M and of capital costs and (ii) that these ratios are not necessarily economic cost recovery indices. Responsibility for enforcement of the law is with the District Officers who are also responsible for the assessment and collection of water charges. Government reports no default in payment of irrigation water charges. Bank Involvement in the Agricultural Sector 3.18 The Bank has, so far, focused its lending to agriculture primarily on the development of new and more efficient use of existing water resources, the sector's most limiting physical factor. Second in priority has been the increase of the sector's low labor productivity to promote productive employment and to achieve a more equal distribution of economic growth among sectors. The Bank's participation in the sector has also served as a catalyst to attract development financing from other sources The Paphos Irrigation Project (Loan 960-CY, US$14 million), started in 1974 and completed in 1982, provided essential irrigation infrastructure mainly for export production and assisted in financing on-farm investments. An OED project performance audit report was issued in December The project was successfully implemented and farmers' use of the new facilities is increasing rapidly. There were no major problems during implementation. The ongoing Pitsilia Integrated Rural Development Project (Loan 1483-CY, US$10 million), started in early 1977 and essentially completed at the end of 1983, emphasizes productive and social infrastructure investments directed towards the poorest parts of Cyprus. The ongoing Vasilikos-Pendaskinos Project (Loan 1658-CY, US$11 million), started in 1979, is intended to develop water resources for irrigation and to reduce the shortages of domestic water in the areas of Nicosia, Larnaca, and Famagusta. Both these projects are progressing satisfactorily and demonstrate Government's ability to smoothly implement large engineering projects. The Fruit and Vegetable Export Project (Loan 1988-CY, US$14 million), started in 1981, complements previous Bank investments in the sector by initiating a set of institutional and organizational changes in the fruit and vegetable export trade and improving the utilization of scarce water resources, creating further employment opportunities and improving productivity. The marketing components of this project which are coordinated by the Ministry of Commerce and Industry (MCI) have been slow to start, mainly due to the exporters' reluctance to group themselves. However, the project marketing advisor is presently studying alternative organizational arrangements (e.g. marketing boards) and will make concrete proposals in the near future. The latest project undertaken so far, the Khrysokhou Irrigation Project (Loan 2279-CY, US$14 million), will provide irrigation on about 2,100 ha in western Cyprus. Construction is scheduled to start early 1984.

18 -10- IV. THE PROJECT AREA Location 4.01 The area covered by the full-size Southern Conveyor Project for Water Resources Development is shown on map IBRD It extends from the Dhiarizos river catchment in the west, taking in the catchments of all rivers draining the mountains of the Troodos massif eastwards to the Tremithios river, and then extending north-eastwards to the east coast. In the center it extends northwards to embrace Nicosia and its environs. Four administrative districts are involved, Limassol, Larnaca, Famagusta, and Nicosia. Population 4.02 In 1982, the three main towns of the project area, namely Nicosia, Limassol, and Larnaca had a population totalling 310,000. The rural population in the area is estimated to be in excess of 150,000. Therefore, the population living in the project area is about 460,000 representing about 85% of the total population in the Government controlled part of Cyprus. In addition, there are those residing at the two British sovereign base areas within the project area and the large numbers of short-term foreign tourists totalling over 300,000 in 1982 and expected to reach around one million by 2010 in the project area alone. These tourist totals represent a permanent annual equivalent of around 15,000 and 50,000 respectively. Soils 4.03 Although lowland soil textures tend to be on the heavy side, internal drainage is generally good owing to the well developed structure. Except for areas close to salt lakes, the watertable is well below the soil surface and artificial drainage is not necessary. The selection of project irrigation areas was directed towards the most suitable land, and despite the need to delineate reasonably compact blocks for irrigation, class I and II land (according to the US Bureau of Reclamation classification) account for 73% of the total delineated area. Given good management, all land classes suitable for irrigation are capable of producing sustained high yields of a wide range of crops. Water Resources 4.04 There are seven catchments in the project area, the most important being Kouris, Dhiarizos, Khapotami, and Yermasoyia, with a combined mean annual runoff of 140 MCM, of which some 80 MCM will be available to the Southern Conveyor project. In general, the most important catchments are located in the western part of the project area, where there is surplus of water, while the eastern part is much drier with considerable water deficit Within the project area there are three major aquifers each extending over an area in excess of 40 kmz (Akrotiri, Kiti, and Kokkinokhoria), and seven other recognizable aquifers ranging in extent from 1 to 30 km2. Although the water balance of several of the aquifers is rather precarious, with seawater intrusion gradually extending in places, it is the Kokkinokhoria aquifer which is in a dire situation due to overexploitation. Since 1960,

19 -11- when groundwater abstractions commenced on a commercial scale, depletion of the reserves has averaged 10 MCM/a so that now only 15%-20% of the original reserves remain. Due to the decline in watertable, seawater is now intruding around the coastal fringe, thus destroying potential freshwater storage areas. Some 2,500 boreholes, most of them private, are in operation in the Kokkinokhoria aquifer irrigating 7,100 ha with around 25 MCM/a of water of deteriorating quality, pumped from ever increasing (and thus costlier) depths. Water Supply Aspects 4.06 Population projections. Population projections in the project area as prepared by WDD and reviewed and accepted by the Statistics and Research Department of the Ministry of Finance are shown in Annex 2, Table 1, and summarized below: Population Projections Year SCP Towns SCP Villages SCP Total 1/ Cyprus Total 2/ ' The annual population growth rates in the SCP area have been assumed to be 1.6% for the years , 1.1% for , and 0.7% for The population data have been prepared in the light of master plans for urban development and regional statistical analysis, taking into account factors such as growth potential, land availability and touristic, agricultural, and industrial developments Population served and standard of services. The total population in urban and rural areas is served by piped water supplies. Existing water supply systems are shown on map IBRD The water supply in Nicosia and Larnaca has for some years, particularly during the summer season, been intermittent and the rapidly increasing water demand for Limassol is approaching its maximum water production capacity. The village water supply in the Famagusta area is mainly based on groundwater which, because of overpumping, is increasingly turning saline. The Khirokitia water treatment plant is the only existing one, operating since In general, all existing water supply systems are well maintained and operated. 1/ Includes Turkish-Cypriot population in Nicosia and Famagusta, which is estimated to be about 12% of the total population in the project area. 2/ Includes only Greek-Cypriot population.

20 Domestic water demand. The per capita water demand projections are shown in table below: liters/capita/day (lcd) - (i) Urban Areas (Nicosia, Larnaca, Limassol towns) - Household Industry/Commerce Unaccounted for Total (ii) Rural Areas (Nicosia, Larnaca, Limassol areas) - Household Unaccounted for Total (iii) Famagusta Area - Household Unaccounted for Total Water consumption for tourism is added separately and has been assumed to be 500 lcd. The above projections were based on the following considerations: (a) For Urban Areas (i) the feasibility report on household water demand projections had assumed an increase to 180 lcd by 2010, but this figure was subsequently revised to 160 lcd after taking into account the high cost of the water; the assumed increase in water demand would approximate 1% per year, which is reasonable when compared to a projected annual increase of 4% in GNP; (ii) the industrial/commercial water consumption averages about 16% of water consumed and its increase is estimated at about 2.3% per year. This consumption would be less price sensitive than the household water demand; (iii) the unaccounted for water is expected to decrease only gradually from the present level of 25% (which is a reasonable level for countries with similar conditions to those in Cyprus) to about 20% by 2010, through improved operation and leak detection. (b) For Rural Areas (i) The household water consumption, which also includes minor industrial and commercial water use, in the Famagusta area has been assumed to be higher than in the other areas because of the greater impact of tourism on its economic development; (ii) The unaccounted-for-water has been assumed to be maintained at the very satisfactory level of 16%.

21 The projected water demand and water production capacities, existing or under development, (excluding the SCP) are shown on Annex 2, Tables 2 and 3 and summarized below: Agricultural Aspects Projected Water Production Year Water Demand Capacity Deficit MCM/a / / Agricultural use of land In the lowlands the main differentiation relates to water availability and there are four basic categories of land use: (i) rainfed cropping, principally comprising cereals; (ii) seasonally irrigated cropping, often in rotation with rainfed crops and usually including vegetables and potatoes; (iii) perennially irrigated orchards, mostly citrus or table grapes; and (iv) fallow. Specialization in the production of irrigated crops already occurs in many areas. Throughout the lowlands livestock also plays a significant role in the overall economy, but tends to be concentrated in specialized units rather than being integrated in the arable farms Farm structure and tenure Farm holdings throughout the project area are generally small. The average size of holding in the areas likely to benefit from irrigation is around 5 ha, ranging from 2.7 ha in the Akrotiri area to 12.4 ha in the Kiti/Mazotos areas. Without irrigation these small farms are usually insufficient to provide a livelihood to the full-time farming family. In addition to their small overall size, holdings are usually fragmented, consisting on average of five plots or more. Thus, it is difficult to introduce large-scale mechanization, and land consolidation measures are being increasingly adopted Turkish Cypriot land holdings occur throughout the study area except in Kokkinokhoria. The former land use pattern on Turkish Cypriot land differed little from that of the Greek Cypriots. Since 1974, the majority of these holdings has been leased by refugees who grow annual crops, the planting of permanent perennials only being permitted in extraordinary cases; uprooting permanent crops on Turkish Cypriot land is not permitted Existing Irrigation in the Project Area. Since 1966 a number of irrigation schemes have been or are in the process of being developed. These are as follows (Map IBRD 17484): 1/ Year for the commissioning of the VPP. 2/ This signifies a temporary reallocation of water from irrigation to domestic supply.

22 -14- (i) Pissouri project. Completed in 1981, this project provides for late-winter and spring irrigation by portable sprinklers on about 800 ha of table grapes; (ii) Yermasoyia-Polemidhia project. This project includes a pressurized distribution system completed in 1978 and commands some 1,900 ha west of Limassol; (iii) Kiti project. A surface irrigation system of concrete canaletti commanding 660 ha and supplied from Kiti reservoir was completed in Because of irregular flows and leakages, the reservoir principally provides groundwater recharge; (iv) Vasilikos-Pendaskinos project. This Bank-assisted project, in process of implementation, will provide domestic water for Nicosia and develop modern irrigation systems on 1,265 ha Potential Irrigation Development Areas. Irrigation potential exists in all lower elevation southern coastal areas, a guideline being that land at lower elevations should be selected so as to ensure irrigation by gravity, wherever possible. However, since one of the main objectives is to sustain irrigation in the Kokkinokhoria area, priority has been accorded to this region even though some pumping will be involved. The total area identified as suitable for irrigation is about 27,000 ha while, at full development of the Southern Conveyor Project (SCP), there will only be sufficient water to irrigate about one third of this Agricultural Research. Facilities for undertaking agricultural research are reasonably developed and center on the Agricultural Research Institute (ARI) based near Nicosia. There are two research substations especially concerned with irrigated agriculture in southern Cyprus: the 26 ha Akhelia Horticultural Research Station near Paphos and a new 7 ha site, currently under development within the area of the VPP. At these stations there is special emphasis on citrus and other fruit trees and vegetables. The program of work is mainly devoted to applied research. In addition, the Department of Agriculture undertakes trials on farmers' fields, though principally concerned with demonstrations of proven techniques Extension Service. This operates from the three District Agricultural Offices (DAO) responsible for sectors of the delineated SCP areas - Limassol, Larnaca, and Famagusta - backed by 17 specialist sections (e.g. plant protection, soils, water use) operating out of Nicosia. Apart from the officers in charge, there are 40 subject matter specialists based in Nicosia plus a further 18 in the three districts. Each of the districts is divided up into several smaller areas, according to size and intensity of land use; these are termed "beats". Each beat, comprising from four to twenty villages, is served by an agricultural beat officer. The average number of villages and of farmers per beat officer are 13 and 1,500, respectively. There are two beat officers within each of the three DAOs (i.e. six in all) who are specifically responsible for extension within sections of the delineated SCP area. Extension staff operating within the SCP areas include the staffing for the VPP office. Extension methods have recently developed a greater emphasis on personal contacts, in-depth group training at the two farmers' training centers, and more intensive use of bulletins and mass media. Use is made of specialized, short training courses at the village level, field trips, trials, demonstrations, and local lectures.

23 -15- V. THE FULL-SIZE SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT(SCP) AND ITS PHASING Project Concept and Alternatives 5.01 The problem of meeting Cyprus' medium and long term water needs is a complex one. In principle, the objectives are: (i) to meet very urgent domestic water needs and keep up with increasing demand thereafter; (ii) to maintain highly productive irrigation from a mined and threatened aquifer (Kokkinokhoria) and (iii), if feasible, to expand irrigated crop production elsewhere. In economic terms, the net marginal benefits of water in these three applications are estimated to be about CL 0.500/m 3, CL 0.395/m 3 and CL 0.350/m 3, respectively (1983 values)(para 8.45) In principle, these requirements can be met, wholly or partly, from one or more of the following sources; (i) desalinization of seawater; (ii) contraction or elimination of irrigation in the Vasilikos/Pendaskinos Project (VPP) and Kokkinokhoria perimeters; (iii) construction of a single purpose domestic water supply project fed by a small Kouris dam and (iv) construction of a dual purpose, domestic/irrigation supply project fed by a larger Kouris dam The present cost of seawater desalinization (CL 3/m 3, US$ 6/m 3 ) is virtually an order of magnitude larger than the cost of water produced under any of the other alternatives. This effectively rules out the first option. Reallocation of irrigation water in the VPP to domestic uses would not materially relieve the domestic water shortage. Furthermore, irrigation in VPP is economically justified (net marginal product of about CL 0.350/m 3 ), apart from the fact that such reallocation would be unacceptable on social and political grounds As to the Kokkinokhoria aquifer, the cost of groundwater, measured in terms of net economic value of agricultural production foregone, is about CL 0.395/m 3, plus conveyance costs to the urban areas of about CL 0.150/m3, making for a total cost at least 10% above the estimated marginal value of domestic water. Measured in terms of net economic value added foregone, i.e. accounting for the permanent loss of agricultural employment, the cost of transferring that water to urban use would be more than 30% above the marginal value of domestic water. Furthermore, the safe yield of that aquifer is estimated to be only 8 MCM/a, whereas domestic water demand in 1990 is estimated to be as much as 11 MCM/a, and would be doubled three years thereafter Subsequently, the economics of a single purpose domestic water supply project, consisting of a reduced size Kouris dam and conveyor, were analyzed. Such project was found to have a net present value (NPV), discounted at the estimated opportunity cost of capital of 12%, or about CL 3.4 million The economics of the dual purpose project were then examined. Such project captures all surface resources in the Kouris reservoir and produces water in excess of domestic demand, which is therefore available for irrigation. The marginal benefits of such project, measured against those of the single purpose domestic water project, far outweigh its marginal cost;

24 -16- the NPV of the full dual purpose proiect, executed in two phases is estimated to be CL 17.0 million. Of all options summarized above, this one can meet the stated objectives (para 5.01) and maximizes overall net economic benefits. The option thus selected constitutes the Southern Conveyor Scheme for Water Resources Development (SCP); it would supply about 70 MCM/a In turn, within the SCP, various alternative technical and phasing solutions are, in principle, available. The immediate water production objectives are to satisfy medium-term domestic water demand and to preserve irrigated crop production in the Kokkinokhoria area. These priorities are consistent with the estimated net marginal benefits of water in both applications (para 5.01). Meeting these objectives constitutes Phase I of the SCP; this phase would produce about 33 MCM/a The justification for phasing is two fold. First, since net marginal product of domestic water is higher than irrigation water, maximizing the economic benefits of the overall project requires that the development of domestic demand, not irrigation needs, determines the commencement of Phase II. Second, phasing allows to stretch over a longer time the very large investments. By 1992, increased urban demand requires that supplementary Phase II supplies are available. Because of the bulkiness of the works, however, there will be in Phase II for a long time a substantial surplus over domestic requirements. Though of lesser economic benefit per unit of water (para 5.01), this surplus can be beneficially allocated to irrigation expansion along the main conveyor. In summary, the proposed phasing and the timing of Phase II are such as to maximize overall economic benefits Below follows a detailed description of SCP objectives and components. The various technical alternatives examined within the overall concept of the project, i.e. river diversion vs dam, one-stage vs two-stage dam, single vs twin conveyor, phasing of treatment works etc., are summarized thereafter. SCP Objectives 5.10 The Southern Conveyor Project for Water Resources Development (SCP), when fully developed, will collect and store surplus water from the south catchments of the island and convey this water to areas of demand for both domestic water supply and irrigation. An additional source of water for irrigation could be at a later stage the effluents from a proposed tertiary sewage treatment plant for Limassol. In total, SCP will provide an incremental water supply of about 70 MCM/a which ultimately will be allocated to domestic supply and irrigation in varying proportions (Annex 1, Table 3) The main SCP objectives at full development would be: (a) to secure a safe domestic water supply until at least the year 2010 to the four major population areas (Nicosia, Limassol, Larnaca, and Famagusta), which combined represent 72% (435,000) of the present population of the Greek part of the island and which is projected to increase to 80% (589,000) by 2010; water will also continue to be provided to the Turkish Cypriots in Nicosia and Famagusta and their consumption is estimated at 12% of total consumption in the project area;

25 -17- (b) to provide irrigation water in order to maintain present agricultural production in Kokkinokhoria in a gross area of 5,125 ha and to expand irrigated agriculture in four other areas along the southern coast of the island, totaling about 3,000 ha gross; (c) to implement policies and take institutional measures in order to improve overall cost recovery through increased revenues and to further enhance the efficient use of both domestic and irrigation water and to establish an integrated institutional framework so as to ensure the efficient use of water resources and the uniform application of policy measures. SCP Components at Full Development 5.12 SCP at full development will comprise the following components: (a) Kouris reservoir, with a gross capacity of 115 MCM behind the 103 m high earthfill Kouris dam; (b) main conveyor, a 110 km long pipeline, ranging in diameter from 1400 mm to 800 mm, running from Kouris reservoir to Akhna reservoir, including connecion with VPP; (c) Akhna terminal reservoir, with a gross capacity of 5.8 MCM behind the 16 m high Akhna dam; (d) Dhiarizos diversion, conveying water from Dhiarizos river through a 16 km long, pressurized pipeline and tunnel to Kouris reservoir, collecting water from Khapotami river en route; (e) tertiary sewage treatment plant at Limassol, as a source for additional water supply for irrigation; (f) pressurized irrigation distribution networks on about 8,125 ha; (g) domestic water supply works, for urban and rural areas, consisting of water treatment works, river aquifer development, pumping stations, transmission mains, and storage tanks; (h) central control system, operated jointly with the Vasilikos- Pendaskinos project; (i) project administration, buildings, equipment, and workshops; and (j) study, to determine the appropriate structure for the establishment of the water entity. Full SCP Cost 5.13 The full Southern Conveyor Project for Water Resources Development requires an implementation period of about ten years. The cost of the full project, estimated at 1983 prices 1/, including physical contingencies, is CL127 million (US$254 million) of which CL43 million (US$86 million) are local cost and CL84 million (US$168 million) foreign cost. Cost estimates are given separately for Phase I (1984 prices) in Annex 1, Table 1 and for Phase II (1983 prices) in Annex 1, Table 2. if Cost estimates for Phase I were later updated to 1984 prices.

26 -18- Evaluation of Technical and Phasing Alternatives 5.14 Different alternatives regarding technical solutions and the phasing of major project components have been subjected to a least-cost analysis. This is summarized below Diversion at Kouris with full-size conveyor. This alternative considered the maximum possible delay in the construction of the Kouris dam. In an "average year" the divertable water from Kouris was estimated at 21 MCM which is considerably lower than the demand of 33.4 MCM for water supply and irrigation projected for in year 1992 (Annex 1, Table 3). Even if the irrigation demand for Kokkinokhoria is reduced to 9 MCM (to assure irrigation of just the winter crop of potatoes in part of the area) the water demand for the year 1992 will be 25.4 MCM. This alternative was rejected since (i) the "average year" flow is inadequate to satisfy the demands, is subject to significant variations, and does not provide satisfactory reliability; and (ii) operational difficulties could occur because of seasonal high sediment-laden water Phasing of the construction of the Kouris dam. The full-size dam with a storage capacity of 100 MCM (net) was designed to store the annual flows of the Kouris river and its tributaries, as well as those of two other western rivers that would be captured later via the construction of Dhiarizos diversion. Since the net mean annual inflow at the damsite (without the Dhiarizos diversion) is 40 MCM, it was considered that for Phase I a dam of a storage capacity of MCM would be sufficient to provide the safe annual supply of 40 MCM. However, it was found that the investment cost for a reduced-size dam would be only 7% less than for a full-size dam, while the dam, if built in two stages, would cost 28% more than if built in one stage only. Since by the year 1993 it will be necessary to have on stream the Dhiarizos diversion and the full-size dam, the alternative of a reduced-size dam for Phase I is not economically justified Phasing of the construction of the conveyor. A possible phased extension of the main conveyor to match the gradual increase in the water demand was evaluated. Because of the soil and topographic situation the conveyor could feasibly be twinned only on a length of about 55 km. Because of the progressive and rapid increase in water demand the full conveyor capacity should be operational not later than A cost comparison based on present values of relevant investment and operational items showed that a phased conveyor would be about 13% more expensive (at a discount rate of 12%) than a non-phased conveyor Water treatment works and their phasing. Treatment works were initially proposed to be constructed for the areas of Limassol, Larnaca and Nicosia, and Famagusta (Ormidhia) to supplement the existing Khirokitia plant and the Kornos plant presently under construction. Based on a cost comparison analysis it was decided to omit the Ormidhia plant and the future domestic water demand in the Famagusta area would instead be covered by the extended Khirokitia plant The Limassol water supply is presently partly based on water infiltration and subsequent extraction from the Yermasoyia river bed. This arrangement is proposed to be extended and the timing for the need of a water

27 -19- treatment plant will partly depend on the operational experience to be obtained. The extension of a water treatment plant has been concluded to be deferred to a later stage The Tersephanou treatment plant will be located in the Larnaca area but will also serve the Nicosia area. A comparative cost analysis has shown the feasibility to extend the Khirokitia treatment works and also to provide for river bed infiltration and extraction arrangements similar to those for the Limassol area. This would enable a postponement of the construction of the Tersephanou treatment works to a later stage The Khirokitia water treatment works are currently receiving water from existing dams. At the time the VPP will be commissioned the water will instead be provided from the Kalavassos dam (VPP) and later by the SCP. The Khirokitia treatment works will be extended in a first phase, and two booster pumping stations along the existing transmission main to the Famagusta area will have to be provided at a later date. Proposed Phasing of the Southern Conveyor Project 5.22 Phase I would include the full-size Kouris dam, the full-size conveyor, the irrigation system for Kokkinokhoria, the extension of the Khirokitia treatment works, intermediary arrangements for river aquifer infiltration and extraction for the Limassol and Larnaca areas and extensions of rural water supply works on a priority basis. All other works would be postponed to Phase II. Phase I, which would be the subject of the proposed Bank project, would be executed over a six-year period, , while the remaining works would be included in Phase II and be executed over a five-year period with a two-year overlapping with Phase I.

28 -20- VI. THE PROPOSED PROJECT Brief Description 6.01 The proposed Bank project will include Phase I of the SCP and would consist of the following components: (a) Construction of the Kouris dam to its ultimate capacity of 115 MCM (gross) to store flows from Kouris, Zyghos, and Kryos rivers. (b) Construction of the main conveyor to its ultimate capacity of a total length of 110 km, to convey water from Kouris dam to the demand points along the southern coast, up to Akhna reservoir. (c) Construction of the Akhna terminal reservoir to regulate water deliveries for irrigation in Kokkinokhoria. (d) Construction of pressurized irrigation distribution networks at Kokkinokhoria, covering a gross area of 5,125 ha. (e) Construction of a connecting pipeline 2 km long from the main conveyor to the VPP to increase operational flexibility through the integration of the VPP and SCP systems. (f) Development of the Yermasoyia river bed aquifer for a capacity of about 10 MCM by the construction of a subsurface dam, boreholes with pumping plants, chlorination facilities, and transmission mains. (g) Development of the Tremithios riverbed aquifer at Larnaca for a capacity of about 3 MCM with the same arrangements as under (f). (h) Extension of the Khirokitia water treatment works and village water supply works mainly consisting of transmission mains and storage tanks and to improve the water supply for a rural population of about 100,000. (i) Establishment of a central control system, to be operated jointly with VPP with telemetric transmission for monitoring and control. (j) Land acquisition including resettlement for villagers displaced by the construction of Kouris dam. (k) Land consolidation in part of the Kokkinokhoria area. (1) Project administration, including office buildings, workshops, office equipment, and vehicles. (m) Consultant services for construction supervision and project management and for final design of Phase II. (n) Study to review existing organization and management of Cyprus' water resources and to determine and recommend an appropriate structure for an entity with responsibility for the development, management and allocation of all water resources as well as the operation and maintenance of all major water supply schemes for both domestic water and irrigation.

29 -21- Detailed Features 6.02 Kouris Dam. The earthfilled dam will be 103 m high with 560 m crest length having a volume of about 8.3 million m 3. The gross storage capacity of the reservoir is 115 MCM of which 15 MCM will be left for dead storage to provide for siltation over the life of the project. The dam will be constructed with a central clay core and upstream and downstream shells of river gravel. The spillway will be of the open channel type with a design flood of 1,500 m 3 /s and a probable maximum flood of 2,600 m 3 /s 1'. The draw-off arrangements designed for a peak discharge of 3.77 m 3 /s consist of the intake tower and a 1,200 mm diameter pipe laid in the diversion tunnel. The inflow to the reservoir will be from the 300 km 2 catchment area upstream the dam which covers the Kouris, Kryos, and Zyghos rivers watersheds. The Kouris dam will be the largest dam ever constructed in Cyprus. Installation of a small hydropower plant was found to be uneconomical Main Conveyor. This pressurized 110 km pipeline, with a diameter varying from 1,400 mm to 800 mm, will connect the Kouris reservoir with the Akhna terminal reservoir including along the way several branch pipelines for water supply. The conveyor, which has been designed to enable gravity flow, will generally follow the coastline and will be buried throughout its length. The peak flow of the conveyor is about 3.8 m 3 /s at the outlet of Kouris dam, reduced progressively to 0.5 m 3 /s in its last section supplying water to the Akhna reservoir. In order to avoid excessive static head and water hammer pressure, break-pressure tanks have been provided at four different locations. Two pipe materials, steel and ductile iron, have been evaluated and, according to the present assessment, ductile iron would be the most economical. However, at the tendering stage the option will be left open for both materials with the final decision to be made at tender evaluation Akhna Reservoir. This reservoir is required to balance the water supplies from the Kouris dam with the irrigation demand of the Kokkinokhoria area. The 16 m high dam, creating a reservoir capacity of 5.8 MCM, will be a homogeneous earth embankment with impervious fill material. After deduction of evaporation and seepage losses, the usable storage capacity of the reservoir will be 5.3 MCM, which is adequate to balance the supply and the requirements for the irrigation of Kokkinokhoria The VPP Connection. Water will be diverted from the main conveyor to a balancing reservoir of 100,000 m 3 of the Vasilikos-Pendaskinos project through a 2 km gravity pipeline of 600 mm in diameter. This water, estimated at about 6 MCM/a will be used for the irrigation of the Vasilikos area. In exchange an equal amount of water from the Kalavassos dam will be diverted for domestic use in Nicosia and Famagusta through the Kornos and Khirokitia treatment plants. 1/ The spillway is designed as a service spillway to accommodate the inflow design flood of 1,500 m 3 /s; an emergency spillway will also be added to accommodate the total inflow flood of up to 2,600 m 3 /s in case this maximum probable flood will occur. 2/ Southern Conveyor Project; Hydroelectric Power, MANR, November 1981.

30 Kokkinokhoria Irrigation. About 17 MCM/a of water from the SCP will be used for the irrigation of a gross area of 5,125 ha in Kokkinokhoria. It is estimated that groundwater underlying the delineated area will yield safely an additional 1.5 MCM/a. The total available water of 18.5 MCM/a is considered sufficient to sustain present agricultural production in the area. Water will be supplied throughout the year from the main conveyor and seasonally from Akhna reservoir to 48 central distribution points (CDP), each comprising an operational reservoir. Groundwater from selected, licensed, and metered boreholes, operated either by their owners or by farmers organizations (Irrigation Divisions) will be pumped to the CDPs and mixed with the SCP water. A small pumping station will be constructed at each CDP which will boost the water through the downstream network and provide sufficient pressure for operation of the on-farm systems The distribution network downstream of the CDPs will consist of asbestos pipes up to the irrigation hydrants. Each hydrant will serve a number of farmers who will irrigate on rotation using the whole flow delivered at the hydrant. Project water supplied to CDPs will be measured upstream of the distribution reservoirs, but the management and distribution of water downstream of the CDPs will be the responsibility of the farmers. To this effect Irrigation Divisions would be formed (according to the Irrigation Division Law) which will be based in the villages. Land consolidation will be applied only in the Larnaca district on an area of about 1,800 ha since Famagusta district cannot be covered (the deeds are under custody of the Turkish-Cypriot administration) Land Acquisition and Compensation for Resettlement. Land acquisition will be required for the construction of Kouris dam, main conveyor, Akhna dam, and the Kokkinokhoria irrigation networks. Assurances were obtained at negotiations that the Government will take the necessary action to acquire all land required for carrying out the project by December 31, Compensation for resettlement will be paid to the inhabitants of the small Khalassa village which will be inundated by the Kouris reservoir. The resettlement cost has been calculated on the basis of the present market value of the land and houses that will be lost. The number of households which will be affected by the inundation in Khalassa village is 55. The Department of Agriculture has already identified the resettlement site and plans for site development have been designed and undertaken in close consultation with the villagers. The training of affected farmers for employment in other sectors will be considered within the framework of the overall training program of the Government Assurances were obtained at negotiations that the Government will make arrangements satisfactory for the Bank for the relocation of the residents of the Khalassa village not later than December 31, 1984 and that affected people will be adequately compensated. Water Availability 6.11 The reservoir inflows from the Kouris catchments will yield on average 44.5 MCM/a. Evaporation and seepage losses from the reservoir are estimated at an average of 4.4 MCM/a. Therefore, the net amount of water that will be available from Kouris reservoir during Phase I of SCP will be on

31 -23- average 40.1 MCM/a. The construction of Kouris dam will significantly affect the replenishment of Akrotiri aquifer, where the safe yield will be reduced from 14 MCM/a to 6 MCM/a. In addition, the Mavromata springs with a 2 MCM/a yield will be flooded by the Kouris reservoir and the spate irrigation downstream the Kouris river will also be affected. In total about 11.4 MCM/a, representing compensation for riparian rights, should be provided from SCP. This would reduce the net amount available for SCP from the Kouris dam to 28.7 MCM/a. On the other hand, the possibility of storing a considerable amount of water in the Kouris reservoir will allow a more efficient operation of the Yermasoyia reservoir. It is expected that the average yield from this dam will increase from the current 11.5 MCM/a to 15 MCM/a immediately after the commission of the Kouris dam. Thus, the incremental net amount of water that will be available from Kouris and Yermasoyia dams combined (without the Dhiarizos diversion) to cover domestic and irrigation demands during Phase I of the SCP will be on average 32.2 MCM/a (Annex 1, Table 3). Domestic and irrigation demands from SCP during Phase I are estimated at 13.3 MCM/a in the year 1989 and will progressively increase to 33.4 MCM/a in the year 1992 (Annex 1, Table 3). The comparison of the projected supply and demand figures during this period shows that, on average, the demand can be met. Assuming that impoundment of the dam will start in the wet season, the probability of meeting all yearly demands during Phase I is estimated at 95% After completion of the Dhiarizos diversion and the Limassol tertiary sewage treatment plant (Phase II) the net incremental amount of water from SCP will be 59.5 MCM/a in 1993 and will increase gradually to 69.5 MCM/a in The domestic and irrigation demand from SCP is estimated at 43.1 MCM/a in 1993 and will progressively increase to 68.6 MCM/a in Thus, in average rainfall years the future water demand can be met. However, in the rare event that 3-4 consecutive dry years occur at the later period of the life of the project, when the demand is high, water shortages might occur. Raising the Kouirs dam to increase its storage capacity and prevent water shortages is not considered to be an economic solution, since it will involve substantial investments at the early implementation stage of the project. If water shortages were to occur they could be alleviated by temporarily using the water stored in the main aquifers of Akrotiri, Yermasoyia and Kokkonokhoria (the latter is expected to be restored by that time). To this effect, Government agreed to carry out studies and engineering design for the recharging of the aquifers during water spills from Kouris and Yermasoyia dams and to prepare emergency plans and operating rules for the joint use of surface and ground water (including mining of the aquifers for short periods) during water shortages. Assurances on the above were obtained at negotiations. Status of Engineering 6.13 Final design and tender documents for the Kouris dam have been prepared by SOGREAH Consultant (France) and approved by the Government and the Bank. Final design and tender documents for the main conveyor, Akhna reservoir, Kokkinokhoria irrigation systems, and connection of main conveyor with the Vasilikos-Pendaskinos scheme have been prepared by the Water Development Department in collaboration with Sir William Halcrow and Partners Consultants (UK). Design for the extension of the Khirokitia water treatment works for village water supply and for the Yermasoyia and Tremithios aquifer works, will be prepared in due course by the Water Development Department with consultant assistance, as needed.

32 -24- Consultant Services 6.14 Provision is made in the project for consultant services as follows: (a) Project management during implementation period: Two project managers, one for Kouris dam and the other for the Main Conveyor and Kokkinokhoria Irrigation will be recruited, to assist the government in the coordination of activities related to the implementation of the project. Both managers will stay for a period after completion of works to assist in the commissioning, initial operation, and management of the project. Consultants for these posts have already been prequalified. (b) Construction supervision: Government will recruit one resident engineer and two assistant engineers for the supervision of the Kouris dam and one resident engineer and three assistant engineers for the supervision of the Main Conveyor, Akhna dam, and irrigation networks at Kokkinokhoria. The resident and assistant engineers will be provided from the consulting firms which carried out the design i.e. for Kouris dam from SOGREAH (France) and for Main Conveyor, Akhna dam, and irrigation networks from Sir William Halcrow Ltd.(England). Agreements for the provision of consultants for the construction supervision have already been signed with both the consulting firms. (c) Design for Phase II: Provision was also made for consultant services for the preparation of design and tender documents for Phase II. (d) Short-term specialists: Provision also was made for short-term specialists who may be required to solve particular technical problems In total it is expected that some 444 man months of expatriate consultants and 288 man months of local consultants will be required for the implementation of the project. Expatriate consultants' average cost was estimated at US$8,250 per month including fees, overhead, international travel and subsistence. The consultants will be supported by a team of Cypriot technicians and by sufficient administrative accounting and secretarial staff. Terms and conditions of the appointment of consultants will be subject to Bank's approval. Assurances were obtained at negotiations that consultants as above will be appointed by the Government according to the Bank Guidelines. Safety of Dam 6.16 The panel of experts, which was designated by the Government to review the plans and designs and provide guidance during the construction of the Vasilikos-Pendaskinos dams (Loan 1658-CY), was also assigned to review the designs of the Kouris dam and for review and inspection of the Kouris dam construction. Assurances were obtained from the Government during negotiations that this panel of experts which is acceptable to the Bank, will be retained for the Kouris dam to inspect the dam at least twice a year during construction; once on the completion of the dam, annually for the next five years, and, thereafter, every five years.

33 -25- Cost Estimates 6.17 Cost estimates for Phase I are based on the quantities of work for each component computed by the consultants and the WDD and reviewed during appraisal. The unit costs were based on detailed cost analysis and information obtained of similar works recently tendered in Cyprus as of January 1984 A factor of 10-15% was used for physical contingencies for various civil works components depending upon the level of design and the complexity of construction works. Price contingency estimates assume an increase in local currency costs of 6% per annum (based on expected domestic inflation) and in foreign exchange costs of 7.5% in 1984, 7Z in 1985, and 6% per annum thereafter. Total costs thus estimated are CL million (US$202.3 million) including physical and price contingencies. The foreign exchange component has been estimated at CL69 million (US$138 million) or 68% of the total costs. The project costs are free of taxes and duties as these are not levied on goods and services destined for public projects. The cost estimates are summarized below and shown in detail in Annex 1, Table 1. Summary Cost Estimates Foreign Local Foreign Total Local Foreign Total Exch. % CL million US$ million ---- Kouris Dam Main Conveyor Akhna Reservoir Kokkinokhoria Irrig Connection to VPP Yermasoyia Aquifer Works Tersephanou Aq.Works Village Water Supply and extension of Khirokitia plant Project Central Control Land Acquisition Land Consolidation Admin.Bldgs. & Equipmt Consultant Services Base Cost Physical Contingencies Subtotal Price Contingencies TOTAL Project Financing 6.18 Cyprus will be the borrower for loans required to finance the project. The Government will provide from its own resources funds for financing the local expenditure component estimated at US$64.3 million. A World Bank loan of US$27 million will finance part of the foreign exchange component, estimated at US$138 million. This leaves a financing gap of US$ 111 million for which co-financing assistance was sought by the Government. In this connection a co-financier's meeting was held in Paris in December 1983 in which the Kuwait Fund for Arab Economic Development and the European Investment Bank (EIB) participated. The Kuwait Fund agreed in principle to provide an amount of US$ 10 million equivalent. It was also agreed that Cyprus will take the necessary steps to

34 -26- obtain a contribution of about US$28 million equivalent to the project under a protocol agreement with EIB. Government plans to finance the remaining foreign exchange gap of US$73 million mainly through suppliers' credits (US$68 millionl). The relatively small amount of the remaining gap (US$5 million) would be readily covered through the Government's regular borrowing from the international financial markets. A condition of effectiveness of the Bank loan is that (i) all conditions for the effectiveness of a co-financing agreement in an amc,unt of US$28 million for the Kouris dam have been fulfilled, and (ii) the Kuwail. Fund Agreement for about US$10 million has been signed. Assurances were obtained at negotiations that the Government will conclude co-financing agreements (including export credits) amounting to about US$40 million by December 31, 1984 and for the remaining financing gap by December 31, 1985 and that such agreements will become effective by June 30, These dates were selected to ensure timely availability of funds in accordance with the project implementation schedule. The financing plan as presented by the Government to the Bank at negotiations is as follows:: Procurement Amount CL million US$ million Percent - Bank Government European Investment Bank Kuwait Fund Suppliers' Credits Total The Bank loan of US$27 million will be used for financing the foreign cost for Kouris Dam (partly), Akhna reservoir, consultants and office equipment. Procurement of these components will be carried out in accordance with the current Guidelines for Procurement under World Bank loans. Domestic preference will apply to goods manufactured locally. Contracts exceeding US$350,000 for equipment and US$1,000,000 for civil works will be subject to ICB, and bidding documents will be sent to the Bank for prior review. For other contracts local competitive bidding will be accepted. Bank financed contracts and procurement arrangements are shown below: (figures include physical and price contingencies): Project Element ICB LCB Other Total US$million Kouris dam (civil works) (19.30) - - (19.30) -Akhna Dam (civil works) (2.40) - - (2.40) -Consultants _ - (5.25) (5.25) -Office Equipment (0.05) (0.05) Total (21,700) (0.05) (5.25) (27.000) Note: Figures in paranthesis are the respective amounts financed by the Bank.

35 -27- Assurances on the above procurement procedures were obtained at negotiations Procurement of equipment and services financed by other financiers will follow their respective procurement procedures. Disbursement 6.21 The Bank loan of US$27 million will be disbursed over a period of seven years as follows: Amount of Loan Expenditures Category Allocated (US$) to be Financed 1. Civil Works (a) Kouris Dam 17,300,000 26% (b) Akhna dam 2,250,000 64% 2. Consultants 4,800, % 3. Office Equipment 50,000 95% 4. Unallocated, 2,600,000 Total 27,000,000 An estimated schedule of disbursement is summarized below and is detailed in Annex 1, Table 4: Bank Fiscal Year US$ million Annual Cumulative The Bank's historical disbursement profiles for Cyprus, covering the period FY71-81, were considered in formulating the aforementioned estimates. Disbursements for the proposed project are expected to be faster than the historical ones because (i) the nine and a half year country average disbursement profile includes the year 1974 when, due to the events in Cyprus, activities were seriously affected for at least two years; (ii) the tender for Kouris dam was issued in October 1983 and the award of the contract is expected to take place in June 1984, therefore, disbursements could start immediately after the loan effectiveness; (iii) the consultants for supervision of construction have already been selected. The closing date of the loan will be December 31, Environmental Impact 6.23 The construction of the Kouris dam will not have any serious negative effect on the environment. On the contrary, the artificial lake will provide an attraction to people and could be developed to an important recreation center. There are no archeological monuments in the area to be covered with water. The inhabitants of the few village houses that will be submerged will be fully compensated for their loss (para 6.09). Increase of water supply implies increased sewage disposal, which could impose a

36 -28- problem but only in densely populated urban areas where on-site excreta disposal and infiltration arrangements are inadequate. However, this matter will be handled through the extension of the Nicosia sewerage and sewage disposal system and through the proposed implementation of such systems in Limassol and Larnaca.

37 -29- VII. PROJECT IMPLEMENTATION AND ORGANIZATION Implementation Schedule 7.01 Phase I of the project would be implemented over a six-year period starting from June The tender for the construction of the Kouris dam was issued in October Award of the contract is expected in May Construction of the dam would begin in September 1984 and be completed by April The impounding of the dam would commence during the wet season. Tenders for the main conveyor will be issued in March 1984 and contracts are expected to be awarded in August Construction of the conveyor would begin in October 1984 and be completed by April Tenders for the construction of the Kokkinokhoria irrigation systems will be issued in June 1984 and contracts are expected to be awarded in August Works would begin in January 1985 and be completed by April Tender for the construction of the Akhna reservoir will be issued in October 1985 and contract is expected to be awarded in February Construction would begin in April 1986 and be completed by October All other project works will be constructed before April The contractor's maintenance period and, hence final payments, would extend into Details on the implementation schedule of the project works are shown in Chart IBRD Phase II of the Southern Conveyor Scheme will be executed over a five-year period with a two-year overlapping with Phase I. Full economic and productive use of the investments included in the project can be made only if Phase II is timely implemented. To this effect, assurances were obtained at negotiations that Government will prepare not later than June 30, 1986, in consultation with the Bank, a schedule and plan for the implementation of Phase II of SCP and will start its construction not later than January 1, Project' Organization 7.03 Present institutional arrangements for water development and works operation are described in paras 2.04 and The Government plans to establish a suitable entity which would be responsible for the development and management of all water resources, as well as water allocation between different uses. The establishment of such an integrated institutional framework is considered as essential to the proposed project. Government will carry out a study to assess the existing organization and management of its water resources and put forward proposals for the design of a new legally and financially autonomous public entity to manage those resources. Government agreed to start the study for the Water Entity not later than July 31, 1984 and to submit it for Bank's review by June 30, Draft terms of reference for this study have been reviewed and agreed at negotiations. Furthermore, the Government agreed to take all measures necessary for the establishment of such entity not later than December 31, 1985 taking into account the Bank's views. Assurances on the above were obtained at negotiations As an intermediate step the following organizational arrangements are proposed for the Southern Conveyor Project, which, at a later stage, could readily be integrated into the newly created entity.

38 Project Organization During Construction Period. An adequately staffed Project Implementation Unit will be established within the WDD of the Ministry of Agriculture and Natural Resources for the implementation of the Southern Conveyor Project (Chart 25461). This unit will be responsible for all project construction works and should be functioning by July 31, On-farm works will be designed and their construction supervised by the Department of Agriculture of the Ministry of Agriculture. In charge of the Project Implementation Unit will be the Project Director, assisted by two Project Managers, one for Khouris dam and one for the main conveyor and Kokkinokhoria irrigation networks. The Unit will be supported by consultants as described in paras 6.14 and In order to coordinate the activities of the Project Implementation Unit with those of the other departments involved, a high level Project Policy and Coordination Committee (PPCC) will be set up by July 31, 1984 under the chairmanship of the Director-General of the Ministry of Agriculture and Natural Resources. Other members of the Committee will be the Directors- General of the Ministries of Finance, Interior, Commerce and Industry, and Planning Bureau, Director of WDD and the Project Director who will act as Secretary. PPCC would review the annual programs of work and progress in project execution and coordinate the activities of the implementing agencies. It will meet as and when necessary but not less than once a year In addition, two Project Advisory Committees (PAC) will be established by July 31, 1984, to advise the Project Director on domestic water supply affairs (PAC-DWS), and on affairs related to the irrigation in Kokkinokhoria (PAC-IRR). The PAC for domestic water supply affairs will be chaired by the Director of WDD and will include the Project Director and the District Officers for Famagusta, Larnaca, Limassol and Nicosia. The PAC for Irrigation will also be chaired by the Director of WDD, and will include the District Officers for Famagusta and Larnaca, the District officers of WDD and of the Department for Agriculture, and three farmers' representatives Organization During Operation Period. A Project Operation Unit will be established within the Water Development Department not later than. June 30, 1985 and will be integrated into the Entity upon its establishment. The POU will be located in Nicosia and will be responsible for the operation and maintenance of all facilities constructed under the VPP and the facilities constructed under the project. Its responsibilities shall include: (a) the billing and collection of all irrigation charges and all bulk domestic water charges related to the facilities constructed under the VPP and under the project; and (b) the establishment and maintenance of a separate accounting system for the joint operation of said facilities. The Project Director assisted by a deputy will be in charge of the Project Operation Unit (Chart 25462) The same Project Policy and Coordination Committee (PPCC) and Project Advisory Committees (PAC), described in paras 7.06 and 7.07 will continue to function during the operation stage. PPCC in addition to the functions described will be responsible to rationalize water allocations and charges and to ensure that Government funds are timely available for the operation and maintenance of project works. The proposed organizational arrangements during the implementation and operation phases are similar to other Bank financed irrigation projects in Cyprus and have proved to be satisfactory.

39 Assurances on the organizational arrangements for implementation and operation as discussed above were obtained at negotiations. Furthermore, the Government indicated that they will take steps to establish the above units and committees before the agreed dates. Future Protection of the Kokkinokhoria Aquifer 7.11 As mentioned in para 4.05, the Kokkinokhoria aquifer, being overexploited, has undergone depletion during the last twenty years at an increasing rate. The Hydrology Section of WDD estimates that the safe yield of the aquifer is only 8 MCM/a, while present extraction amounts to 25 MCM/a. Therefore, there is an immediate need to supply the area with 17 MCM/a surface water and to limit extraction to the safe yield of 8 MCM/a, as otherwise the aquifer would be irreversibly damaged For the protection of the Kokkinokhoria aquifer, the Government will take the following action: (i) during the period, when water from SCP is not yet available, the aquifer will be monitored regularly and adequate measures will be taken to ensure protection of the aquifer once it becomes evident that saltwater intrusion is imminent. These measures will be introduced not later than December 31, 1985 and will include the establishment of safety thresholds beyond which salt water intrusion is likely to endanger the aquifer and the drawing up of contingency plans to put into immediate effect in the event that there is any indication that salt water intrusion is approaching the safety thresholds referred above; (ii) WDD will carry out, before completion of the project, the necessary studies to determine number, locations, and extraction rates of boreholes to be used in the Kokkinokhoria area and will subsequently supervise, from the technical point of view, the application of extraction rules. The administrative supervision of the irrigation divisions will be carried out by the district officers; (iii) in the area of 5,125 ha which will receive SCP water the use of groundwater will be limited to 1.5 MCM/a, while in the remaining area of Kokkinokhoria, which will not receive SCP water, the use of groundwater will be limited to 6.5 MCM/a. Such volumes will be pumped by means of selected licensed and metered boreholes; (iv) in order to assume equal charges of water to all farmers in Kokkinokhoria the area will be divided in a number of irrigation divisions. The irrigation divisions may include areas irrigated both with SCP water and groundwater. All farmers in each irrigation division will be charged a uniform volumetric water rate which will cover the charges for SCP water and the pumping cost of groundwater. The selected wells will be operated either by the divisions or by their owners. In the second alternative the owners will be reimbursed for their pumping expenditures by the irrigation division.

40 Assurances on the above measures were obtained at negotiations. Accounts and Auditing 7.14 As a department of the Ministry of Agriculture, WDD maintains its accounts within the framework of its recurrent and investment budgets. Consolidation of all budgetary proposals is the responsibility of the Ministry of Finance, with final approval requiring legislative action. Accounting information is limited to commitments and does not register payments. This reduces the usefulness of the budget accounting system, but WDD does maintain manually its own internal system of cost accounting to control payments. Due to the large number of data to be compiled by WDD for each irrigation and domestic water supply scheme, the manual accounting procedures are very cumbersome and are proposed to be upgraded to a computerized system The present cost accounting provides information on annual maintenance performed for each irrigation and domestic water supply scheme. However, a more detailed cost breakdown should be required in order to have a useful management tool. Assurances were obtained during negotiations that: (i) separate detailed accounts will be kept for each scheme by WDD; and (ii) these accounts will be presented in such detail to assess whether the requirements set forth in the maintenance program, in the billing and collection program and in the debt service charges are met. These arrangements would lay the groundwork for the establishment of the proposed national Water Entity (para 7.03) Such- accounts will be audited annually by the office of the Auditor General of the Ministry of Finance, whose accounting and auditing procedures have proven to be adequate under other Bank-financed projects. Audit reports will be submitted to the Bank not later than six months after the close of the Cypriot fiscal year and will expressly include an opinion on the use of funds disbursed for works executed under the SCP project. Assurances on the above were obtained at negotiations. Billing and Collection 7.17 Irrigation and domestic water supply charges are based on water consumption, and WDD's customers (water boards or village councils for domestic water and district officers for Irrigation) are billed on a rotating basis every two months. The district officers, who at the regional level represent the farmers' committees, are in charge of dividing WDD irrigation water bills in accordance with each farmer's water consumption. They are also responsible for revenue collection and for its transmission to the Treasury. The domestic water supply charges are collected directly by WDD. Collection by WDD and the district officers need to be improved. As of December 31, 1982, accounts receivable 1/ from water boards amounted to about 3.6 months of billing, while those from irrigation water consumers amounted to about 4.7 months of billing. Agreement was obtained during negotiations that the necessary measures will be taken to ensure payment of irrigation and domestic water bills within 90 days of their issuance. 1/ After deduction of outstanding balance for non-government controlled areas for which no collection can be anticipated under the present circumstances.

41 -33- Monitoring and Evaluation 7.18 This activity will be carried out by the Monitoring and Evaluation Unit to be established in the Ministry of Agriculture not later than January 1, Routine records will be kept on project actions, programs, budgets, and expenditures. The responsible staff will collect and analyze technical and financial data to evaluate the effects of the project and to follow its progress against the project implementation schedule. The Monitoring and Evaluation Unit will submit periodically progress reports to the concerned financing agencies through the Ministry of Agriculture as well as a final report on completion of the project which will include an expost economic and technical evaluation of the project as it was actually implemented. Assurances on the above were obtained at negotiations. International Commodity Agreements 7.19 None of the commodities to be produced under the proposed project is governed by international commodity agreements, and hence the Bank's Economic Analysis and Projects Department has advised that consultation with international commodity organizations is not required. It should also be noted that the increments are relatively small. Consequently, the project's output of commodities is not likely to affect international prices.

42 -34- VIII. PROJECT BENEFITS, FINANCIAL ANALYSIS, AND JUSTIFICATION Agricultural Production 8.01 Land and water use. The primary purpose of the project's irrigation component is to maintain irrigated agriculture in the Kokkinokhoria area by substituting SCP surface water for rapidly declining local groundwater supplies. Consequently, the project will, in general, not augment production but merely prevent the progressive elimination of irrigated crop production on about 4,735 ha net. This includes the area which can be safely irrigated by withdrawing 8 MOM/year from the aquifer. However, since the cost of SCP water to the producer will be about 50% higher than present average private pumping costs, it is reasonable to expect, within the constraints imposed by markets, labor availability and agronomy, some further change in cropping patterns towards crops with comparatively high returns per unit of water consumed, i.e. towards winter crops. In the without-project situation, on the other hand, the entire 4,735 ha would by 1989 be either abandoned or planted to rainfed crops (cereals) (para 8.45). The net value of such rainfed wheat production would only be about 3% of the net value of production in the with-project situation. In other words, the value of production in the with-project situation is virtually all incremental. Present and expected with-project land and water use, as well as crop yields, are tabulated below. Kokkinokhoria Area Land and Water Use Present With Project Gross Water Cross Water Gross Water Yield Requirements Area Requirements Area Requirements Crop (ton/ha) (m 3 /ha) (ha) ('000 m 3 ) (ha) '000 m 3 ) m AND - Cereals 1.9-1,225-1,075 - IRRIGATED A. Winter - Fodders , Potatoes ,200 3,015 9, ,015 9,648.0 Veget. (covered) , Veget. (open) , Others n.a. 4, Subtotal 3,195 10, ,505 11,339.0 B. Summer - Veget. (open) , , , Colocasia , , , Potatoes , , ,000.0 Subtotal 795 5, ,596.2 C. Permanent - Citrus , , Others n.a. 10, Subtotal 160 1, ,065.0 D. Fallow TOTALS 4,735 17, ,735 17,000.2

43 -35- It is to be noted that the cropping pattern includes composite groups, i.e. citrus, vegetables, the latter including about 20 different species and hence the variety of the cropping pattern is much larger than is at first apparent. With many alternative options available in the face of changing constraints and with new introductions being made available regularly through the extension service, farmers' decisions until the year 2000 and beyond can, evidently, not be predicted with any precision. Given the main constraints, the with-project crop mix is considered a probable initial development, at the time when SCP water becomes available. Crop Yields 8.02 It is possible that present crop yields in parts of the project area are suppressed on account of too high groundwater salt concentrations. However, as this matter is not well documented and researched, it is assumed here that current and with-project crop yields are essentially identical. Prices 8.03 As nearly 80% of project output is expected to be exported, both farmgate as well as export prices (FOB) have been considered. These are tabulated below. Both sets are expressed in 1983 values and the produce prices shown there are identical to those applied in the project financial analysis. Different margins between the two price sets reflect unequal export marketing costs as well as differing shares of produce destined for export relative to their total production. Produce and Export Prices 1/ Produce Price (US$/ton) (CL/ton) Export Price (FOB) (US$/ton) (CL/ton) Potatoes Vegetables, early Vegetables, summer Citrus Colocasia n.a. 2/ n.a. Cereals n.a. n.a. 1/ Discrepancies due to rounding. 2/ "n.a." means not applicable Potato exports will continue to account for more than two thirds of the project area's gross value of production. With the exception of two years, 1976 in which unusually high export prices were realized following a bad harvest in western Europe and 1980 in which Cypriot export prices were low on account of adverse weather which delayed the crop, Cypriot potato export prices in past years remained essentially constant in real terms. In fact, in recent years real prices have actually increased somewhat, following the expansion of very early varieties with an export price premium; the scope for further plantings of such varieties in future years is considerable.

44 With respect to vegetables and citrus, the above prices are based on historical Cypriot price series, adjusted upward or downward to reflect anticipated changes in export prices or seasonal specifics of project output. It should be noted that the prices adopted for the two vegetable categories represent the weighted average export price of about ten different vegetables. In all instances, it was assumed that Cyprus' position regarding EEC import tariffs would remain the same. It is considered that the above price sets are conservative and, in general, reflect the price outlook for the commodities concerned. Marketing 8.06 Potatoes evidently constitute the project's major export commodity but the project will not generate any increment relative to the present situation. In principle, therefore, no marketing problems are expected to arise. The Cyprus Potato Marketing Board (CPMB) organizes and coordinates all production and exports and is generally considered to efficiently adjust production to demand as regards quality and quantity. In most years, about 80% of all exports were to the UK, but the CPMB is now rapidly increasing exports to West Germany in an effort to improve its bargaining position in general and in the UK market especially. Cyprus' closest competitor, particularly in the UK market, is Egypt. The CPMB considers that improvements in Egyptian export marketing strategy would be beneficial to both exporting nations, for an early high quality Egyptian product would accelerate the shift in western European markets from domestic to imported new potatoes The project's estimated incremental export volume of winter vegetables is estimated between 4,000 and 5,000 tons. Measured against present or projected imports into the European and Middle Eastern markets, such volume is very small. No market absorption problems are expected to arise for the project's incremental production because of (i) the relative insignificance of expected incremental export volumes, (ii) the earliness of production, and (iii) the flexibility to respond to changing demand conditions for vegetables. The main problem concerning fruit and vegetable marketing in general is one of export coordination and strategy, and this is being addressed in the Fruit and Vegetable Export Project, Ln CY, (para 3.19). Farm Incomes 8.08 Without the project, the net value of crop production in the Kokkinokhoria project area would fall from a present level of about CL6.2 million to less than CLO.3 million by 1989 (constant 1983 prices). Because an irrigated area of about 4,700 ha would revert to rainfed cereal production, agriculture would cease to be the main economic activity of that area's population. Below are compared the present average farm incomes for typical farm-size groups, with the expected average incomes in the with-project situation. Farm incomes in the with-project situation are expected to fall somewhat below present levels (real terms) on account of the increased cost of water. However, it has also been assumed that for the same reason farmers will switch cropping patterns, within the constraints operating, towards crops which maximize returns to water (para 8.01). The proposed project area is very close to a major, and expanding, tourist zone. The slack period in agriculture coinciding with the tourist season, it is reasonable to expect that part of the area's population will continue to earn

45 -37- supplementary incomes in the tourist industry. However, no data on such present or expected non-agricultural incomes are available. The estimated agricultural income distribution in the present and with-project situation is shown below: Agricultural Income Distribution 1/ (1983 prices) Farm Size Number of Farms Average Farm Income Total Area Income ha No. X Present With Present % With X CL CL ' A. under B ,050 1, C ,630 3,280 2, , D. over ,575 5,845 2, , , , , / irrigated areas only. Source: Agricultural Census and Mission Estimates. It can be seen from the above that overall agricultural area income is estimate(d to go down by about 10%, on the smallest farms by about 15%, on the others somewhat less, principally because the former have virtually no room for crop substitution. Project Beneficiaries 8.09 Irrigation Beneficiaries The total number of direct beneficiaries in the Kokkinokhoria area is about 2,000 families or 10,000 persons. About 85% of these depend on the project in the sense that without it they would not be able to continue irrigated crop production; 15% will benefit from the improved distribution system in areas directly adjoining that of the former category Domestic Water Beneficiaries The project will benefit by 1990 about 495,000 inhabitants or about 76% of the total Greek Cypriot population, and the Turkish Cypriot population of Nicosia and Famagusta. Cost Allocation for Domestic and Irrigation Water Use 8.11 The cost allocation of this dual purpose project to irrigation and to domestic water, respectively, has been made using the separable cost/remaining benefits method. The general principles underlying this method can be summarized as follows: (i) all costs incurred for one purpose only should be allocated wholly to that purpose; (ii) no project purpose should be assigned a cost that is in excess of the value of its benefit, and (iii) no purpose should be assigned a cost that is any greater than would be incurred if that function were to be supplied by the most economic alternative single-purpose project. Domestic water benefits are valued at CL 0.500/m 3, the same value as used in the project economic analysis. Irrigation benefits are based on the net economic value of incremental agricultural production (para 8.45).

46 -38- The alternative costs are the discounted capital costs of a single purpose domestic water or irrigation project. For the purpose of joint cost allocation, which is based on economic criteria, project costs and benefits were discounted at the estimated opportunity cost of capital. Assuming this to be 12% p.a. and a project life of 40 years, the determining parameter estimates fcr the full project are as follows: Project Cost Allocation Domestic Water Irrigation Total CL million Benefits Alternative costs Justifiable expenditure Separable costs, construction O&M Remaining justifiable expenditure Joint cost allocation 57% 43% 100% Cost Recovery Policy 8.12 Because of the magnitude of the proposed project and the present state of water use, one of the main objectives of the project is to gradually implement a cost recovery policy for both domestic and irrigation water which aims at maximizing rational use of SCP water, as well as of non-scp water and which increases overall Government revenues Cypriot law stipulates that, for the purpose of computing cost recovery in irrigation, system capital and O&M costs must be discounted at a rate not exceeding the legal maximum interest rate in the country. The current legal maximum nominal rate is 9% p.a. (para 3.17). In view of this requirement, all irrigation cost recovery computations in the following paragraphs are based on a 9% p.a. discount rate; the corresponding cost recovery indices have been termed the legal cost recovery indices. The real cost recovery indices are, of course, those derived from discounting costs at the opportunity cost of capital, i.e. 12% p.a. The real subsidies to irrigation, i.e. the difference between real costs and actual water charges, have been summarized in para Water Costs 8.14 The application of the joint cost allocation percentages, established in para 8.11, to the capital cost of the Phase 1 project, yields the following unit cost estimates, expressed in 1983 values. Discounted Unit Cost Estimates (CL/m 3 ; rounded figures) Capital Cost O&M Total Capital Cost O&M Total at 9% p.a at 12% p.a Domestic water Irrigation water All water

47 -39- Irrigation Water Charges 8.15 Farmers in public schemes are presently charged rates which correspond on average to about 25% of the combined capital and O&M cost of the system-'. At CLO.024/m 3 (US$0.05/m 3 ) such water is comparatively cheap measured against the estimated returns to water. Cypriot irrigated agriculture is technically advanced; sophisticated on-farm delivery systems are common and water losses in a technical sense are minimal. Nevertheless, because of present low water charges, an estimated 75% of all water is used on crops which return less than CLO /m 3 on average, and there is considerable scope to shift cropping patterns towards more remunerative crops, thus enhancing the overall productivity of the sector. The most important constraints operating against such changes are (i) export marketing problems and (ii) seasonal labor constraints. Fruit and vegetable marketing problems arise from the highly fragmented structure of the export firms. These problems are being addressed in the Fruit and Vegetable Marketing Project (Loan 1988-CY). Labor constraints will call for further mechanization and can to some extent be circumvented through staggering of production. Provided farmers are given time and means to switch their cropping pattern towards more remunerative commodities, overall sector efficiency can be greatly enhanced through a policy of realistic water charges. Because SCP irrigation water is estimated to be about three times as expensive as non-scp water, it is necessary to formulate separate water charge policies for the beneficiaries of various sources of water SCP Water Charges The average present (1983) private cost of pumping in the Kokkinokhoria area is estimated to be about CL 0.120/ M 3. Whereas for the majority of farmers, pumping costs are at least CL 0.100/m 3, more than one-third have an estimated average pumping cost of only CL 0.085/m 3 or less. There are no data which permit the differentiation of farms by size and/or cropping pattern with private unit pumping costs. In addition, the dynamics of aquifer behavior and the corresponding swings and changes in private pumping costs, render meaningless an analysis of farm budgets for varying pumping cost classes. Consequently, farm budgets for four farm types were prepared, based on an average present (1983) private cost of pumping of CL 0.120/m 3 (Annex 1, Table 5) On the basis of the farm cost and revenue estimates and having carefully examined the implications regarding rent recovery, it is concluded that a water charge of CL 0.180/m 3 (US$ 0.36/m 3 ), in 1983 prices, would be reasonable. Such charge would correspond to a legal rent recovery index of 55% to 65%, depending on the farm size (Annex 1, Table 5). As all farms will be equipped with water meters, the imposition of a volumetric charge will be technically feasible. Considering the degree of control over production and the relative stability of potato export prices, the range of rent recovery indices appears reasonable. The rate of CL 0.180/m 3 compares to the estimated average private pumping cost at about CL 0.120/m 3, and which could well further increase in the years before The cost of SCP irrigation water (at 9% p.a.) being estimated at CL 0.280/m 3, in 1983 prices (para 8.14), the legal cost recovery index is about 65% and corresponds to the legal maximum level. Though the law defines cost recovery ratios only in relation to the sum of O&M and of capital costs (para 3.17), the charge would cover all O&M costs as well as about 60% of the capital cost of the irrigation component. 1/ This includes the September 1983 rate increase (para 3.14).

48 The 1.5 MCM/year which will be extracted from the aquifer is, once the project is operational, just as much a renewable resource as is SCP surface water. Furthermore, such water will be mixed with SCP surface water. In view of the above, the same charge will apply to the 1.5 MCM/year groundwater supply In order to allow farmers, particularly those who have presently low private pumping costs, to adapt their field distribution systems and cropping patterns to the proposed SCP irrigation charge of CL 0.180/m 3 (1983 prices), it appears both necessary and desirable to impose the full increase in a gradual manner over a period of three years upon first delivery of SCP water to the project area (1989). More specifically, water charges during the first, second and third as well as all further consecutive years should be set at 45%, 55%, and 65% of the total cost of SCP irrigation water (O&M cost plus capital cost discounted at 9% over 40 years) Assurances were obtained during negotiations that (i) the Government will undertake the appropriate studies to determine the proposed water charges for the 1989 season (first year of irrigation in the project area) and communicate these to the Bank for its review no later than December 31, 1988; (ii) upon the availability of irrigation water, an irrigation water charge will be collected from project beneficiaries so as to recover in the first, second and third as well as consecutive years, 45%, 55%, and 65%, respectively, of the full 0 & M plus capital cost of water distributed for the purpose of irrigation in the project areas, discounted at 9% p.a over 40 years; and (iii) the proposed water charge will be applied equally to both surface and groundwater delivered to the project area Non-SCP Water Charges. Whereas SCP surface irrigation water supplies will amount to 17 MCM/a by the beginning of the next decade (Phase 1), present non-scp supplies are about 25 MCM/a and will reach more than 60 MCM/a by the beginning of the next decade. With exception of one, the partially developed Bank-assisted Paphos Irrigation Project (PIP) (Ln 960-CY), all twelve schemes presently in operation, are comparatively small, do not generally deliver pressurized water to the farm gate and have nearly all been financed by Government. Excluding the PIP, the schemes sold in 1983 about 12 MCM of irrigation water On the other hand, there are three large-scale Bank assisted irrigation projects; the PIP mentioned above, the Vasilikos/Pendaskinos Project (VPP) (Ln 1658-CY) and the recently approved Khrysokhou Irrigation Project (KIP)(Ln 2279-CY), all of which have or will have sophisticated farm delivery systems. Of these, presently only the PIP is partly operational; 1983 water sales were 15 MCM out of 32 MCM at full development in The VPP is under construction and construction of the KIP will commence in early Between them, the three schemes are expected to produce about 54 MCM/year at full development (1992) Because of the important difference in delivery systems between the fully operational schemes on one hand, and the three large Bank-assisted ones on the other, as well as difference in farm productivity, it appears reasonable that the cost recovery policy for non-scp irrigation water reflects such differences. The validity of this distinction is further enhanced by the fact that some of the smaller schemes were designed specifically to alleviate rural poverty.

49 (A) Small operational irrigation schemes The average annual equivalent capital cost of these projects, discounted at 9% p.a. over 40 years, is about CL 0.085/m3, whereas their average O&M cost is about CL 0.012/m 3 making for a weighted overall cost of about CL 0.097/m 3. In 1983, the weighted average water charge in these schemes was about CL 0.024/m 3, corresponding to an overall legal cost recovery of about 25% 1/ In view of the fact that the schemes which are already operational generally did require private investment in distribution works which the other category of new schemes does not require, it appears reasonable to conclude that irrigation water in schemes already operational cannot be qualified as being exceptional as defined under the law (para 3.16). It follows that the maximum legal water charge for these schemes cannot exceed 40% of the national weighted average cost (O&M plus capital cost) of such schemes. Within that constraint, the Government may wish to continue, for practical reasons, levying differential charges in the various individual schemes. (B) Large incomplete irrigation schemes 8.26 Three schemes comprise the group of incomplete projects and projects under construction. Whereas these presently sell about 15 MCM/a 2/, this will increase to about 40 MCM/a by 1988 when all of them are expected to be physically completed and to reach a maximum of nearly 55 MCM/a by The average annual equivalent cost of these projects, discounted at 9% p.a. over 40 years, is about CL 0.125/m 3 in 1983 prices, CL 0.015/m 3 of which is the O&M cost 3/. In 1983 the average water charge in the scheme presently in operation was CL 0.025/m 3, corresponding to an overall cost recovery about 24% 1/ In order to further enhance efficient use of water (para 8.15) and decrease the burden on the National Budget, water charges for these three schemes should be raised in such a way that (i) in any scheme, at a date not later than six years following its physical completion, the full water charge for that scheme be applied i.e. 65% of the weighted average unit cost (O&M cost plus capital cost discounted at 9% over 40 years); (ii) that in the preceding five years the charge be increased in the first, second, third, fourth and fifth so as to recover not less than 30% to 40%, 45%, 50% and 60% of the weighted average unit cost respectively. The six-year period reflects (a) the time required by farmers to adjust themselves from rainfall farming to irrigation farming conditions and (b) the fact that cropping patterns include perennial crops (trees) which require several years to reach full productivity. Within these provisions, Government can, of course, continue to have different rates for the various individual schemes. 1/ This includes the September 1983 rate increase (para 3.14). 2/ Only the Paphos Irrigation Project is presently in operation. 3/ The estimated unit costs of the schemes are (1983 prices); Paphos Irrigation Project CL 0.105/m 3, Khrysokhou Irrigation Project CL 0.135/m 3, and Vasilikos-Pendaskinos Project CL 0.190/m 3.

50 Such charge would amount to about CL 0.080/m 3 (1983 prices), six years after completion of the last project in this category, which is 1994, and would correspond to a real rate increase of 150%, or CL 0.048/m 3 (US$0.10/m 3 ) in 1983 prices. Crop and farm budget studies in the SCP Feasibility Report 1/ indicate that, for the areas involved, such average cost recovery level is fully feasible; furthermore, it may be emphasized that the charge of CL 0.080/m 3 (1983 prices) is less than half the charge proposed for SCP water Assurances were obtained during negotiations that (i) the Government will undertake the appropriate studies to determine the proposed water charges for both categories of non-scp schemes and communicate these for the Bank's review no later than December 31, 1984; (ii) irrigation charges will be collected from beneficiaries in all schemes so as to recover (a) for the ten small schemes already in operation, in 1984, 1985, 1986 and thereafter, not less than 28%, 35% and 40% respectively of their combined average unit cost (O&M cost plus capital cost discounted at 9% over 40 years); and (b) on average in the Paphos, Vasilikos-Pendaskinos and Khrysokhou schemes, at a date not later than six years following physical completion of any of these, 65% of the total unit cost (O&M plus capital cost discounted at 9% over 40 years) of all water sold in such scheme and its predecessor(s), it being understood that charge increases during the first, second, third, fourth, and fifth year would correspond to 30%, 40%, 45%, 50% and 60% of the total unit cost Assurances were also obtained during negotiations that all water charges for both SCP and non-scp schemes will be reviewed annually before the end of the Cypriot fiscal year to ensure that the charges be adjusted for inflation and that the new charges be implemented in the month of March of the following year taking into account the Bank's comments. Irrigation Cost Recovery and Subsidies 8.31 The anticipated impact of the proposed water charge policy on revenues and the estimates of legal and real cost recovery percentages in the various categories are tabulated below. The year 1994 is when all schemes presently or shortly under construction, will be operational. Irrigation Water; Costs, Charges and Subsidies (1983 values) non-scp All SCP fully dev. in dev. non-scp Irr.Water Volume sold (MCM) Unit cost (mi1s/m 3 )a/ Unit cost (mils/m 3 )b/ Average charge (mils/m 3 ) Legal Cost Recovery ( %) Total receipts (CL million) Real Cost Recovery ( %) Total Subsidies (CL million) Differences are due to rounding. a/ Discounted at 9% p.a. b/ Discounted at 12% p.a. 1/ SCP Feasibility Study; Vol. 16; July 1982.

51 It can be seen that revenues are expected to increase more than tenfold (in constant prices), one-third of the increase being on account of increased walter sales and two-thirds due to water rate increases. The overall real cost recovery index is expected to increase from 20% in 1983 to about 50% in Real economic subsidies, as contrasted to financial subsidies, are expected to increase overall by about CL 5.6 million between 1983 and On the other hand, export earnings from irrigated crop production are expected to double about to CL 80 million, an increment of CL 40 million (1983 prices). In as much as this will give rise to an equal increase in imports, on which an average duty of 15%-20% is charged, the net overall impact of the subsidies is unlikely to be cause of much concern. Domestic Water Tariffs 8.33 One of the objectives of the proposed project is to ensure full implementation of the Government's cost recovery policy for domestic water supply which requires full recovery of O&M costs and capital costs. The existing and projected water supply systems for the Nicosia, Limassol, Larnaca and Famagusta areas (project area) including the SCP as well as VPP which will be interconnected, have to be considered as one integrated operational unit for which a unified bulk water tariff will be applied. The remaining systems which represent less than 5% of the total supplies of bulk water, would continue to have their own individual tariffs. Water tariffs would be set according to the following principles: (i) for both project area and non-project area domestic water supply scheimes, the Government would review annually the bulk water tariffs to ensure that they are maintained at a level which would cover at least the full O&M costs including appropriate contingencies to cover working capital requirements together with depreciation and interest plus any loan and government advances repayments in excess of depreciation. Government advances are to be amortized over 40 years at 9% interest per annum 1/; and (ii) Government would ensure that the water boards and village councils adjust regularly their retail water tariffs according to the same cost recovery policy. During negotiations, it was further agreed that the annual bulk water tariffs' review will include comparisons with and consideration of long run marginal cost of providing bulk water. Assurances on the above were obtained at negotiations In March 1982, the Government bulk water supply tariffs were increased in the project area by 115% in real terms and the related revenues in FY 1982 were sufficient to cover the O&M costs, the working capital requirements, and about 38% of the debt service. The water boards and village councils increased their retail tariffs accordingly which, because of the tariff structure, affected mainly industrial, touristic, and high domestic 1/ No Government equity contribution is involved. Instead, to ensure full recovery of costs, all Government contributions towards the project would be considered as advances to be amortized in the above defined terms.

52 -44- consumption (Project File, C. 13). In September 1983 the Council of Ministers decided a new increase on WDD's average bulk water tariff of about 62% in real terms corresponding to CL 0.154/m 3 on average With the latest tariff increase sufficient revenues would be generated to meet WDD's cost recovery objectives during FY84 and FY85 plus a portion of its capital expenditures. No further increase before 1986 would be required. For the period required tariff increases are projected to be about 16% on average per year in current terms or 9.5% in real terms. Financing Plan of WDD's Investment Program 8.36 WDD's sources and applications of funds statements appear in Annex 3. Those for the project disbursement period ( ) are summarized below: Water Supply Irrigation Total Total Requirements CL million US$ m % Proposed Bank Project - SCP Capitalized interest - SCP Other capital expenditures Capitalized interest - others Working capital TOTAL REQUIREMENTS Sources of Funds Internal cash generation Less debt service Net internal cash generation 3.02 (28.42) (25.40) (50.80 (13) Government grant (irrigation) Proposed IBRD loan - SCP Other loans - SCP Government advances - SCP Total Aorrowings - SCP Other existing loans Other Government advances TOTAL SOURCES OF FUNDS During the project implementation period total financing requirements would be provided as follows: various loans for SCP 29%, Government advances for other projects 35%, other existing loans 9%, Government advances for SCP 17%, the proposed IBRD loan 7%, and the Government grant 16% to offset the negative net internal cash generation (13%) and the working capital requirements 3% of the irrigation component. This financing plan supports the Government and WDD's cost recovery objectives. Assurances were obtained during negotiations that the Government will provide all local fund requirements for the implementation of the project including possible cost overruns. Future Financial Performance 8.37 Forecast financial statements appear in Annex 3, Tables 1 to 14. Financial assumptions have been summarized in Annex 4, and a detailed computer

53 -45- printout for each domestic water supply and irrigation scheme is presented in the Project File. A tentative investment program ( ) discussed with WDD assumes investments of the order of CL83 million (US$166 million), in current value, for domestic water supply and of CL103 million (US$206 million) for irrigation (SCP and non-scp projects). This program would eventually be augmented between 1988 and 1992 by the construction of SCP phase II which is estimated at CL25.1 million (US$50.2 million) for domestic water and CLl9 million (US$38 million) for irrigation. This objective is realistic and aims at maintaining the service level for irrigation and improving the level for domestic water supply Up to the end of 1992, WDD's revenues for all water supply schemes are expected to grow from CL1.7 million in 1983 to CL18.7 million in 1992 (current terms), while its operating expenses before depreciation would grow from CL1.5 million to CL4.1 million, leaving gross margins sufficient to cover all of its projected debt service and working capital requirement. After the project implementation period (1989) its operating ratio will gravitate around 35, while its debt service coverage ratio would not drop below During the period , WDD's overall irrigation revenues, which have been planned in such a way as to meet the irrigation cost recovery objectives, would grow from CL 0.66 million to CL13.1 million (current terms). After deduction of its operating expenses which, during this period, would increase from CL 0.54 million to CL3.1 million, the irrigation component would generate a gross margin covering 2% of its debt service in 1984, 25% in 1986, 43% in 1989, and 61% in The government will cover through grants the remaining portion of debt service together with working capital requirements Overall, for both domestic water supply and irrigation, WDD's operations would generate a gross margin covering 13% of its debt service in 1984, 54% in 1986, 82% in 1989, and 87% in 1992, while the Government grant for irrigation would represent 85% of sources in 1984, 30% in 1989, and 23% in Since the revenues for irrigation water are deposited at the Treasury, assurances were received at negotiations that the Government will provide sufficient funds to cover all project maintenance and operation expenses There is a possibility that the recent and projected tariff increases may produce a reduction in domestic water demand. Detailed calculations showed that a 5% lower level of water demand by 1990 would have a negligible impact on WDD's future financial performances. The volume of water not used for municipal consumption, i.e million cubic meters, could partly be stored in the dams to maintain a better long-term reliability or it could be used for irrigation in the same year. If the volume of domestic water "saved" is allocated to irrigation, the potential shortfall in WDD's operating revenues is estimated at CL236,390 or about 1% of total WDD's revenues. Given the cost recovery policy stated in para 8.33, this potential revenue shortfall would be offset by a marginal increase in bulk water tariff. Project Justification 8.42 Bank support for the project is important. The cost of the project is very large indeed relative to the country's economy, and Bank's participation in its funding has contributed to facilitate co-financing. Furthermore, Bank participation is expected to facilitate implementing the cost recovery

54 -46- measures for both domestic and irrigation water which are of vital importance to Government finances as well as to promote water conservation The concept of the proposed project and the rationale for selecting it from a number of alternatives, are described in paras That presentation leads to the conclusion that the proposed project constitutes the most sensible solution towards meeting Cyprus' water needs, in that it tends to maximize the total net present value of the least-cost project alternative which can meet the objectives. In addition, the resulting integration of a multitude of supply sources and storage points into one system, will greatly enhance its flexibility and make it possible to further rationalize water use. (para 8.50). Economic Rate of Return and Sensitivity Analysis 8.44 In the first phase of the SCP both the Kouris dam and the conveyor will be build to full capacity. Because of considerable sunk costs, the marginal net benefits of the full project will be substantially above those of the first phase only. Also, from a water use point of view, the first phase cannot be considered in isolation from the full SCP. Without a second phase, irrigation supplies to the Kokkinokhoria area would have to be gradually curtailed starting in the third year following completion of the first phase because of increasing domestic water demand, and would be completely eliminated about a decade thereafter. Such scenario would be entirely inconsistent with the objectives and investment decisions of the proposed SCP. Consequently, as the economics of the first phase cannot be meaningfully determined, only the economic rate of return (ERR) of the full project has been estimated The following facts and assumptions underlie the ERR estimate: (a) Government has stated that, in the absence of alternative water supplies to the Kokkinokhoria area, it is not in a position to enforce existing water legislation and to compel farmers there to reduce or stop pumping from existing private boreholes, as long as these are not severely contaminated by seawater intrusion. Hence, it is assumed here that farmers would continue to mine the aquifer and that the existing trend of losing areas of irrigated land at an increasing rate would continue. Consequently, the without-project situation is that one in which present irrigated agriculture on about 4,000 ha in the Kokkinokhoria area, using 17 MCM/a, would be eliminated by 1990 and would at best be replaced by rainfed cereal production. The economic benefits attributable to the 17 MCM/a made available to that area in Phase I and thereafter are, therefore, equal to the net economic value of irrigated crop production from that annual volume of water less the net economic value of the rainfed cereal crop which would be grown if the project were not to take place (para 8.01). In terms of net incremental benefit per unit of water supplied this is estimated to be CL 0.395/m 3 (1983 prices). (b) Irrigated crop production in Phase II would probably much resemble that of the Vasilikos-Pendaskinos and Khrysokhou projects, presently under construction. These Phase II irrigation benefits are, of course, very far removed from the present date and many changes in

55 -47- production and marketing can be expected to occur in the intervening period. It was considered appropriate, therefore, to estimate the benefits in a prudent, approximate manner, rather than presenting detailed crop specific projections for which presently no ground exists. The net benefits per unit of water consumed, therefore, were estimated to lie halfway between those of the cropping patterns of the two projects mentioned above (CL 0.350/m 3, US$0.70/m 3 ); the project specific values are estimated at CL 0.325/m 3 and CL 0.375/m 3, respectively (1983 prices). All incremental production and farm input utilization were phased in accordance with the anticipated build-up of the areas irrigated and projected yield developments. It has been assumed that, for annual crops, final yield levels would be attained after four years; for perennial crops final yields have been assumed to be reached after 15 years for the entire project area. (c) All benefits and costs were calculated in constant mid-1983 values and adjusted for future changes in real prices wherever appropriate or feasible. Investments in public enterprises are exempt from taxes and duties; there is no reason to assume shadow exchange rates different from the market rate. Tradable production inputs in the project area carry no subsidies; hence market prices approximate economic values. Border prices of tradable outputs were derived from the Bank's commodity price data (citrus), from Cyprus export data (potatoes), or EEC import prices (vegetables). Employment in agriculture is highly seasonal. In the off-season, many find temporary employment in other activities, e.g. tourism, construction. On balance, there is little structural unemployment. Hence the economic wage rate was considered to correspond to the actual wage rate structure for male and female labor in the project area which is very close to national averages. Other non-tradables, e.g. transport, were costed at market prices. (d) The benefits from domestic and industrial water can conservatively be estimated through an analysis of the consumers' willingness to pay 1/. The price that the consumers actually pay at the retail level provides a lower bound for the estimate. However, the SCP would provide bulk deliveries of water and thus, to measure the consumers' willingness to pay for bulk water the retail tariff needs to be adjusted downwards to reflect losses in the distribution system and the costs for building and operating this system. At present, the water tariffs in Nicosia (the main consumption center) range from CL 0.20/m 3 to CL 0.80/m 3. Already today some 38% of the water is sold to consumers that pay between CL 0.55 and CL 0.80/m 3. However, Nicosia is experiencing water shortages and especially during the summer season the supply has been rationed. Consequently, the tariff does not fully reflect the consumers' willingness to pay. Furthermore, the cost recovery policy stated in para 8.33 would result in gradual increases in the future in the retail tariffs to 1/ Such an estimate is conservative because it measures only private benefits and neglects the important social benefits of domestic water. For commercial and industrial consumers, the willingness to pay is a more accurate measure of benefits.

56 -48- reflect the cost of providing SCP water. Taking all these considerations in account, it was judged that a bulk rate of CL 0.50/m 3 would adequately reflect the consumers' future willingness I/ to pay for domestic and industrial water. (e) Alternative projections for domestic demand indicate that the highest expected possible increase in retail tariffs could cause demand to be about 15% below the projected base values. The water not used for municipal use could partly be stored behind the dams to maintain a better long-term reliability, or it could be used for irrigation. The net decrease in overall project benefits would be, if this were to happen, about 5%. (f) The analysis was based on a project life of 45 years. Specific investments (e.g. water treatment equipment, on-farm irrigation equipment) were assumed to be replaced, when necessary, at the end of their useful life. No salvage values were imputed Based on these criteria and the data summarized in Annex 1, Table 7 the basic ERR of the full project ig estimated at The sensitivity analysis shows the following ERR values for deviations from baseline project performance: (1) Base value 12.8% (2) Irrigation & Domestic Water Benefits down 20% 10.6% (3) Investment & Operating Costs up 20% 11.0% (4) Irrigation & Domestic Benefits lagging one year 11.7% (5) Irrigation & Domestic Benefits lagging two years 10.8% (6) Costs up 20% and benefits lagging two years 9.3% (7) Costs up 20%, benefits lagging two years, lowest expected increase in domestic water demand 8.8% (8) Costs up to 20%, all benefits down 20%, and lagging two years 7.3% 8.47 Switching Values. In addition, the switching values for key variables have been calculated. For example, a decrease of about 5% in net benefits or an increase of about 10% in investment costs would cause the ERR to equalize the estimated opportunity cost of capital in Cyprus (12%). The Net Present Value (NPV) was estimated at CL 7.0 million or about 8% of present value costs, discounted at 12% At the estimate of the value of domestic water used here, about 55% of all benefits are due to that component. About 30% of the remaining 1/ Given the social importance of an adequate supply of quality drinking water, the estimated economic rate of return is only indicative (para 8.46). However, estimates of the benefits derived from domestic and industrial water are needed for the resolution of certain project design issues and determination of cost allocations between municipal and agricultural uses.

57 -49- benefits are attributable to maintaining potato exports, a comparatively risk-free enterprise. The balance of expected benefits, 15X, is on account of additional fruit and vegetable productions and their exports in Phase II. Export prices, a decade from now, cannot be estimated with confidence, and a decline in real export prices is a definite possibility. The proportion of total benefits which is susceptible to a decline, however, appears to be modest. On the cost side, detailed designs and cost estimates render unlikely the occurrence of large cost overruns, provided the implementation schedule is kept. Ample resources have been set aside for construction supervision. Furthermore, the substantial experience gained in Cyprus during the last decade in the area of large dam and other hydraulic construction, renders plausible a reasonable adherence to the projected implementation schedule. Possible technical and other risks are discussed in paras 8.53 to 8.56 below. Other Benefits 8.49 The implementation of a water tariff policy for SCP and non-scp domestic and irrigation water which is closely related to the cost of producing water is expected (i) to significantly increase Government revenues from public schemes (paras ); (ii) to further induce water conservation practices, and (iii) to cause farmers to gradually shift production patterns towards higher returns to water, hence enhancing overall sector efficiency Implementation of the SCP will be a major step towards achieving a very high degree of integration of different sources of supply and of storage reservoirs. This will make possible the formulation of a set of operating rules for the entire system which would help to reduce the marginal cost of water development as well as the average cost of operating the system. The formulation and continued refinement of such a set of operating rules for the project area will be the core of water planning and conservation. Macro-Economic Impact 8.51 Budget Impact: During the six-year construction period, the average annual expenditure on the project will be CL million. Assuming that the foreign exchange component of the project is financed from external borrowing, the internal budget requirement will be between CL 5 million and CL 6 million annually. This is about 0.5 percent of GDP and can be accommodated in the investment budget, which in turn represents a small part (about 16 percent in 1983) of the total Government expenditures. Investment in the SCP therefore is not a decisive factor which determines the success or failure of the Government's efforts to remove its budget deficit which currently stands at about 8 percent of GDP Foreign exchange amounts to be borrowed from external sources to finance Phase I of the project represent about 16% of the 1982 external debt of CL million (US$845 million) outstanding including undisbursed principal. The peak repayment will be around CL 14 million (US$28 million) per year or about percent of the debt service burden of the without project situation. This additional burden, however, will be totally covered by the continued potato exports. The entire Kokkinokhoria area currently produces about CL 22 million (US$44 million) in foreign exchange from potato exports. While not all this amount would be affected in the without project situation, it is estimated that, if SCP were not implemented potato exports would decline for all time by CL 15 million (US$30 million) per year, starting

58 -50- in about The imports needed for this project, about US$23 million per year during construction, will add to the total imports. This amount, however is relatively small - about 1.6 percent of total imports of goods and services in and would not become a significant burden on the balance of payments. Project Risks 8.53 The project has been well prepared and the availability of detailed designs makes it possible to proceed early with project execution. There are no unusual technical risks associated with the project, and those which are normally related to benefits, costs, and development period have been evaluated in the sensitivity analyses Continued overpumping of the Kokkinokhoria aquifer in the period could result in seawater intrusion on such scale that parts of the proposed project area would be irreversibly damaged. Therefore, the entire aquifer needs to be monitored regularly and during negotiations assurances were obtained from the Government that strict measures will be applied to prevent saltwater intrusion, regardless of whether or not water is already available from the project (para 7.12) If a number of conscutive dry years were to occur, water shortages would be envisaged, particularly if this happened during the later period of the life of the project. Such shortages could be alleviated by temporarily using the aquifers. During negotiations assurances were obtained from the Government that studies and plans will be prepared for the recharge of aquifers during water spills and for the joint use of surface and groundwater during water shortages (para 6.12) Because in Phase I both the dam and the conveyor will be built at full size, the marginal investments required to implement Phase II are relatively small while generating disproportionately large benefits. Assurances were obtained during negotiations that Government will prepare plans and start construction of Phase II before January 1, 1988 (para 7.02). In the unlikely event that Phase II would not be executed, the Phase I ERR might fall to a value between 10% and 11%.

59 -51- IX. AGREEMENTS REACHED AND RECOMMENDATION 9.01 During negotiations the following main assurances were obtained: (a) Government will carry out before December 31, 1985 studies and prepare plans (including engineering design) for the recharge of the aquifers during water spills and for determining operating rules for the joint use of surface and groundwater during water shortages (para 6.12). (b) Government will prepare not later than June 30, 1986, in consultation with the Bank a schedule and plan for the development of Phase II of SCP and will start construction under Phase II not later than January 1, 1988 (para 7.02). (c) Government will carry out a study to review the existing organization and management of its water resources and to determine the structure for the national Water Entity, exchange views with the Bank on the findings of the study before June 30, 1985, and will take all measures necessary for the establishment of such Entity not later than December 31, 1985 (para 7.03); (d) Government will establish not later than July 31, 1984, a Project Implementation Unit, a Project Policy and Coordination Committee, and two Project Advisory Committees as proposed (paras 7.05 through 7.07); (e) Government will establish not later than June 30, 1985 a Project Operation Unit responsible for the operation and maintenance of all facilities constructed under the Vassilikos-Pendaskinos Project and later under SCP. This unit will be integrated into the Water Entity upon its establishment (paras 7.08 and 7.09); (f) Government will retain the panel of experts assigned to review the design of Kouris dam for periodic review and inspection of the dam during and after construction, as proposed (para 6.16); (g) Government will take the proposed measures for the protection of the Kokkinokhoria aquifer (para 7.12); (h) WDD will establish and maintain separate accounts for each irrigation and water supply scheme as proposed, which will be annually audited, and furnish to the Bank audit reports and financial statements of the project accounts not later than six months after the end of each Government fiscal year (paras 7.15 and 7.16); (i) Government will take the necessary measures to ensure payment of irrigation and domestic water bills within 90 days of their issuance (para 7.17). (j) Government will establish a Monitoring and Evaluation Unit within the Ministry of Agriculture not later than January 1, 1985 to carry out monitoring and evaluation activities as proposed and submit periodically progress reports and a final report on completion of the project (para 7.18);

60 -52- (k) Government will undertake studies to determine irrigation charges for SCP and non-scp water, collect these charges as proposed (paras 8.20 and 8.29), and review them annually to ensure that they be adjusted for inflation (para 8.30); (1) Government will apply the proposed water tariff system for domestic water and review annually the bulk water tariffs to ensure that they are maintained at a level which would cover the full O&M cost and working capital requirements together with depreciation and interest plus any loan and Government advances' repayments in excess of depreciation. Also the Government will ensure that the water boards and village councils adjust regularly their retail water tariffs to reflect bulk water tariff increases (para 8.33);and (m) Government will conclude co-financing agreements amounting to US$40 million by December 31, 1984 and for the remaining financing gap by December 31, 1985 and that such agreements will become effective by June 30, 1986 (para 6.18) Conditions of effectiveness are (a) that all conditions for the effectiveness of a co-financier's agreement providing for an amount of not less than US$28 million for the project have been met and (b) that the Kuwait Fund loan agreement has been duly signed (para 6.18) Agreement having been reached on the above conditions, the proposed project is suitable for a Bank loan of US$27 million to the Republic of Cyprus for a term of 15 years including 3-year grace at the standard variable interest rate.

61 CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT (PHASE I) Cost Estimates (1984 prices) (CL million) All Years Local Foreign Total Local Foreign Local Foreign Local Foreign Local Foreign Local Foreign Local Foreign Kouris Dam Main Conveyor Akhna Reservoir Kokkinokhoria Irrigation Connection with VPP Yermasoya Aquifer Works Tersephanou Aquifer Works Village Water Supply and Extension Khirokitia Plant Project Central Control Land Acquisition Land Consolidation Admin.Building & Equipment Consultants Base Cost Physical Contingencies 1/ Subtotal Price Contingencies 2/ TOTAL / 15% of investment cost for civil works except main conveyor and 6 10% for main conveyor and all other items. 2/ Calculated on the following basis: (a) local cost, general inflation rate 6%. (b) foreign cost, years %, %, and 6% thereafter.

62 CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT (PHASE II) Cost Estimates (1983 prices) (CL million) All Years Local Foreign Total Loc. For. Loc. For. Loc. For. Loc. For. Loc. For. Loc. For. Loc. For. Loc. Por. Loc. For. Dhiarizos Diversion Kiti irrigation Mazotos Irrigation Parekklisha irrig Akrotiri irrigation Limassol WST Tersephanou WST Villages WS works Tersephanou/Nicosia pipeline Limassol sewage plant Land acquisition Land consolidation Project admini Engineering for design Supervision 1/ Basic cost Phys.conting. 2/ TOTAL / 4% of investment cost of civil works. 2/ 15% of investment cost of all items. - r' {D >

63 -55- CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT ANNEX 1 lable M Water Supply and Use SCP Incremental Water Supplies(MCM) SCP Demand (MCM) Kouris Limassol Year Dam (net) Yermasoya Dhiarizos Sewage Plant Total Domestic Irrig. Total

64 ANNEX 1 Table 4 CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCE DEVELOPMENT (PHASE I) Estimated Schedule of Disbursements Disbursements per Cumulative Bank FY and Semester Semester Disbursements % US$ million FY st Semester nd Semester FY st Semester nd Semester FY st Semester nd Semester FY st Semester nd Semester FY st Semester nd Semester FY st Semester nd Semester FY st Semester Closing date: December 31, 1990.

65 CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVFLOPMENT (PHASE I) Financial Rent and Cost Recovery Indices Farm Model A 1/ Farm Model B 2/ Farm Model C 3/ Farm Model D 4/ With With With With Present Project Present Project Present Project Present Project CL I. Net Farm Income ,650 2,865 4,450 4,550 8,350 8,61< 2. - depreciation family labor ,600 1, management & risk / ,670 1, int. & return on capital private pumping6/ 155 n.a. 600 n.a. 820 n.a. I,775 n'.a. 7. Return to Land L/ S5 0(o Q 8. Rent ,405 1,350 2,220 2,335 4, Rent as % of Income /.P 2P 10 Water Charges8/ n.a. 225 n.a. 910 n.a. 1,220 n.a. 2, Financial Rent Recovery Index n.a. 59 n.a. 65 n.a. 55 r.a Cost of Water2/ n.a. 360 n.a. 1,455 n.a. 1,950 n.a. L, Financial Cost Recovery Index n.a. 63 n.a. 63 n.a. 63 n.a Farm Income (1-6-10) ,050 1,955 3,630 3,330 6, Water Requirements (m 3 ) 1,280 1,280 5,000 5,100 6,850 6,960 14,800 1),220 Note: in 1983 prices; where appropriate discounted at 9% p.a. 1/ about 0.4 ha potatoes 2/ about 1.2 ha potatoes, 0.2 ha summer vegetables 3/ about 2.0 ha potatoes, 0.2 ha winter vegetables 4/ about 3.7 ha potatoes, 0.5 ha summar vegetables 5/ at 20% of net farm income 6/ at 120 mils/m 3 7/ rental value of rainfed land is about CL 25/ha/year 8/ at 180 mils/m 3 9/ at 280 mils/in 3 Sources: Feasibility Study and Mission Estimates. a' z Xl t V] F

66 CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATFR RESOURCES DEVFT.OPMFNT Estimated Benefits Domestic'/ Irrigation Irrigation Domestic2/ Irrigation!/ Trrigation All Water (Phase I) (Phase TI) Water (Phase I) (Phase IT) Irrigation Year (CLO.475/m 3 ) (CLO.395/m 3 ) (CLO.350/m 3 ) MCM _ CL million O b c F G / Gross bulk delivery 2/ Corresponds to CL 0.500/m 3 net delivered 3/ Project file for details. 1 m

67 CYPRUS SOUTHiERN CONVEYOR PROJECT FOB WATER RESOURCES OFVFlTOPMFNT Summary Project Fconomic Analvres (Constant 1983 Prices) (CL million) oq OP ?0 Incremental Inv _ Incremental O&M and Replacement Cost Irrigation Domestic Water Total Incremental Costs Q Incremental Benefits Domestic Water _ Irrigation ERR: 12.8X Source: Project Cost Tables and data in Annex 1, Table 8. M1

68 -60- ANNEX 2 Table 1 CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT Population Projection /1 ('000) SCP /2 Towns Nicosia-Greek-Cypriot Turkish-Cypriot Total Limassol Larnaca Famagusta / Sub-Total SCP Villages Nicosia Area Limassol Area Larnaca Area Famagusta Area Sub-Total Total SCP Population -Greek-Cypriots Turkish-Cypriots Total Cyprus Population (Greek-Cypriots) SCP Population (Greek-Cypriot) as a % of total /1 Based on data as approved by the Statistics and Research Departments of Ministry of Finance. Population growth rates assumed: Cyprus 0.9% 0.7% 0.6% SCP Area 1.6% 1.1% 0.7% /2 SCP refer to areas covered by the Southern Conveyor Project (Map IBRD 17484) /3 Estimated population for Famagusta which is located in the Turkish-Cypriot part but which is provided with water under the project.

69 cyrrus STOUTERN * ORTE! OR PROJECT FOR WATER RESOOURCES DEOT! OPMENT PMaerD Oeaad Peojettlon _ t Per Per Per Per Pee ota-i R Pr Total Per Par Papa- Total Papa Total Papa- Total Pope- Total Pop- Papu Papa- Per TotaL POPe- TPeot Ppa- Rot Capita Danood t-rtoo Capita -a-d-o lato. Capita -e-ad te apo lari-o CEaiea D-endU3 taeio- CapiLa Retand tatioo Capita nemand tartal Capita Rraod taitto Cartra D-eeat latent a /I D-eatd/2 D-ea-d Demand Doand D-t-ad Rtm-nd D-eand Oc-a-d De-aod N11osLA AREA/4 o orateia City I bl bc 13.0 Nicoaia Vollage or oa Tora DS Seb-Tatal i ii aa 10.1 LIMA66DL ARrA Limassol Clp It! LU d0 9.d L-oa-aal VtIlage Sn t.7 T,,r,,-, I.e I.b Inda9tty R.9-0.Y - - U.9 Wottera taat - - 0~~ 9 ~ ~ - ~ ~~ - ~~~ 00 ~ -9 ~ ~ ~~~~ ob-Total l CARNACA AREA LaRajrna City t t t Lattoaa Pltapee to aa 1.J Toar.s U.S _ D.e U.- _ a.7 MOe Ttda-itealaa _ - L Sob-Total 57 4.i 57 4C D 44 D b.9 b 7.3 FAROAtUSTA AREA OaaguaoE Ctt (rtokish) I., 27 Ia 1.3 t! dv 1.. Famata-ta Villa.eo S U 2.5 al tl S Taaeol U q I O - L.L ES--aBa.s - - D D.4 - _ - U.S 0.4 -,a6,pt-l A 52I3. TOTAL /1 Papaaetlatol lootatinaehauatado. /2 Per Capota Water Dtm-ad in m fpt 11 total Dtm ad to milliao m 3 /year (RcE). 74 Caa- bath thee Creek aad the T-rkai,b sea fat -oas bhlth the peapactoace art. aba-t 75:25 e e

70 CYPRUS SOUTHERN CONVEYOR PROJECT POR WATER RESOURCES DEVELOPMENT WateR Demad Ptrauttipn Popo- Per Total Papa- Per Total PopI- Per Total Papa- Per Tota Papa- Per Total Popo- Pa Total Papa- Pet TatL1 Papa- Per Total lotion Capita De-and lation Capita Demand lotion Capita Demand lotion Capita Demand lotion Capita Demand lation Capita Demand latioa Capita Demand Iatio- Capita Demand Dem.nd D-mand Demand D.m..d U-man-i Demand Damand Demand NICOSIA AREA Ni-onia City Niaoaia Villagen o4 3.6 Toorian d Industry _ Sob-Total 23S LR i LIMASUOL 0000 Limoanol City R b Lianso-l Villag-n Tooriam _ I Induty Wlonnoo Boan _ _ Sob-Total LARNACA AREA Larnoaa City , ' d Carnnco Yillooeg , , T'ourism Mori Indot Zi.l.Zone _ Sob-Tonal h , FAMAGUSTA AREA F.magnnta City (T-nkihl) i.5 I d FPoagoal Villa.g , Tourism ,5 - - I Eatrn Be O Sob-Total TOTAL

71 O D DDDl:. 0WWO ow I _.O O 2 O2D C.0 C C C 'OC Dk C 0 v l od~~~ ~ ~ OF22C0C0C0$$$$$$$$$ OFq 0 _1--C r 0 S. $2FAOF<.FF$2F <FC.,. 0 I 00e f1,, FF.10r O3 <00.OFO $2222C$$$22$ $ $2 O D _ C Q 0 2 -~ _ F I r0 : o g g Y ~~~~~~~~~~~~0 $2 O2 O O J~ $ 2 ;0 0 _FF DDC ) n OC C-F W 0 O, r,,,, -_ -_ - O _.- 0. ' 0 oco_~r<_3l.j 0. a $2 1:$2 _ * o..,,,,, I I I C I I I.,F._ F o~~~~~~~~~~~~~~~~~~~ _222$$$$$22.. o0 'C Fl ~ $2 I<$ I< 2 I rfcl OF W2 W $2o ~ ~ ~ ~, D. H I <.0 F F FFF FIIII.rw _.A$0 $2 D. - t -F.0O$ X-O r Vs > r r W > _ DF< r D oc r s.fdrec;c O $F O _ g~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ I a$2 Fo _ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~. 1e CS _~~~~~~~~~~~ 0.$2

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74 -66- ANNEX 2 Table 5 CPIUS SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT STRUCrURE OF RETIL hxter TARIFFS Nicosia Area Larnaca Area- Consunption Tariffs Ci/iT3 Volunes Tariffs Cl/m3 Volnues in m3 As from As frcon As frern As fron per nmth 03/ /01/84 MQI _ 03/01/82 01/01/84 WN1 % Dcestic Fixed Fee D Over Commerce & Adm. Fixed Fee Over Hotel & Industries Fixed Fee *.250.4C Over Ships Per m

75 CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT WATER SUPPLY-PROJECT AREA W. D. D. -INC0ME STATDEnNT/RECURRENT BUDGET (ACTUAL ,PROJECTED ) (L THOUSANDS FISCAL YEAR ENDING LECB2IBER 31 BULK WATER WVLUMES (MCM) Z AVERAGE TARIFF (MILS/CM) OPERATING REVENUES BULK WATER SALES OPERATING EXPINSES PERSONNEL ENERGY CHEMICALS PURCHASE OF WIATER MAINTENANCE u6 ADMINISTRATION SUB-TOTAL LEPRECIATION i TOTAL OPERATING EXPNSFES NET OPERATING INCOME INrEREST NETr NCOME (241.01) (452.56) (314.95) (285.50) WORKING RATIO 72% 89% 86% 66% 48% 50% 44% 25% 27% 21% 22% OPLRATING RATIO 82% 98% 92% 92% 54% 59% 52% 39% 44% 35% 35%

76 CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT later SUPPLY-PPOWECr AREA W. D. D. -SOURCE& APPLICATION OF FUNDS/DEVELOPmENT BUDGET (ACTUAL PROJECTED ) CL TiUKANDS FISCAL YEAR ENDINS DECENBER 31 SOURCE OF FUNDS INTEJAL SOURCES NET OPERATINS INCC4E ADD DEPRECIATION TOTAL INrERNAL SOURCES GOVIRNNE GRANT BORROWINGS _ PROPOSED IBRD LOAN-SCP _ OHER LOANS-SCP SOV.ADVANCES-SCP EXSTINS LOANS-OTHER SOV.AWVANCES-CTHER TIOAL BORROWRlS T0TAL SOURCES OF FUNDS APPLICATIONS OF FUMS CAPITAL EXPEDrITURES PROPOSED PROJECT (SCP) _ CAPITALIZED INTEREST-SCP abher CAPITAL EXPENDTWRES CAPITALIZED INTEREST-N0N SCP TOTAL CAPITAL EXPENDITURES INCREASE (DECREASE) IN WCRKING CAPITAL (393.86) (448.60) (484.15) (10.33) DEBT SERVICE INTEREST AM0RTIZATION TAL DEBT SERVICE TUTAL APPLICATION OF FUDSD DEiT SERVICE COVERASE (TIMES)

77 CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT WATER SUPPLY-NON PROJECT AREA W. D. D. -INCOME STATEMENT/RECURRENT BUDGET (ACIUAL PROJED ) (a. lhusands FISCAL YEAR ENDING DECEMBER 31 BUIX WATER VOLUIES (MCM) AVERAGE TARIFF (MILS/ICM) OPERATING REVENUES BUIX WATER SALES OPERATING EXPENSES PERSONNEL ENERGY CaEmICALS PURCHASE OF WATER MA]UrENASCE ADMINISIRATION SUB-TOTAL i DEPRECIATION TA]. OPERATING EXPENSES b NET OPERATING INCONE (20.05) (24.18) INTEREST NET INCCOME (47.47) (51.60) (.83) WNPING RATIO 133% 145% 60/ 61% % 68% 70%/ % 76% 7 UPERATI,NG ATIO 166% 178% % 73% 75% 76% 78% 79% 81% 82%

78 SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT ' SIPPILY-Ia PRaOEtCr AREA W. D. D. -SCURCE & AI'LLCATION OF FltIEEJfDEMENT MIxTr (ACLUAL ,PEalB:I: ) C. THWUSANI FISCAL YEAR ENDTN LB21ER 31 SOURCE OF FUNDS INlmRNAL SotsCES NEr OPERATD1N INOL1IE (20.05) (24.18) ADD DEPRECATIAON IUDAL INTERNAL SOIJRCES (9.96) (14.09) moverot CWNr _ ICZNIGS aoim1 LOANS-OTHIR COV.ADVANES-01ER _ TOTAL 1RXNGS TDTAL SOURCES OF UNLDS Z APPLICATIONS OF FUNDS CAPrrAL EXPENDITURES PROJrT CCMWNERr fl82xest ItRTNC UCXIlONCIc _ OIHER CAPrrAL EXPENDITURES T1EAL CAPITAL EXPENDITURES INCREASE (DECREASE) IN WORKIU CAPITAL (.83) DEgr SERVICE INITREST AMORTIZATION TOTAL DEBT SERVICE t IUTL APPLICATION OF FUNDS u DEBT SERVICE analrace (TIMES) (.27) (.38)

79 CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT WATER SUPPLY W. D. D. -INCCME STATEMENT/RECQIENT BU1XGE (ACMAL ,PROJBZTl ) FISCAL YEAR ENDING DECMBER 31 BUIK WATER VOLUMES (MCM) AVERAGE TARIFF (MILS/CM) OPERATING REVENUES BUlY WATER SALES i8688.b3 OPERATIG FXPElSES PERSONNEL ENIRGY CHEJICALS PURCHASE OF WATER u NKI2IaNCE AlrMINISTRATION SUB-TOTAL DEPRECIATION TUTAL OPERATING EXPENSES NET OPERATING INC(ME INrEREST NEr INCOME (288.48) (504.16) (315.78) (283.72) WCKING RATIO 73% 90% 85% 85% 48% 50% 44% 26% 27% 21% 22% 7 w OPERATING RATIO 84% 99% 92% 91% 54% 59% 52% 40% 44% 35% 35%

80 SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT WATER SUPPLY W. D. D. -SOURCE& APPLICATION (F FUJNDS/DEVEMOPtUT Bv1Ix (ACIMAL ,PRWlECIED ) CL THOUSANDS FLSCAL YEAR ENDIWG DECEIlfER 31 SOURCE OF FUNDS INrERENAL SOURCES NET OPERATING INIE ADD DEPRECIATION TPrAL rilnal SOURCES GOVERNMENT G8ANT PROPOSEID 1RD.LOAN-SCP alms LOANS-SCP OV.ADhVANCES-SCP EXISTID LOAUN-S(IER COV.ADVANCES-01RiR YomLL BawwilwAS IOTAL SOURCES OF FUNDS APPLICATIONS OF FUNDS CAPITAL EXPENDMrRES PROPOSED PROECT (SCP) - _ CAPITALIZED INrEREST-SCP UOIR CAPITAL E DXPEDrLE CAPITALIZED fnomeft-nln SCP TOTAL CAPITAL EXPEDrURES linxease (DECRFASE) IN WCRK8 CAPITAL (384.56) (449.43) (482.37) (9.26) LENT SERVICE NIRrREST AAlRTIZATION TOUAL DEBT SERVICE a TrAL APPLICATION OF FUSD DEBT SERVICE COVERAGE (TIfES)

81 CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT IRRIGATION-PROJECI AREA W. D. D. -INCOME STATFMENT/RECIET BuIXT (ACIUAL ,PROJECTED ) CL TUDEANDS FISCAL YEAR ENDING DECEMBER 31 '- BULK WATER VOLUMINE (MCM) AVERAGE TARIFF (MLS/CM) OPERATIU REVENUES BUIX WATER SALES OPERATING EXPENSES PERSONNE ENERGY MAINENAINCE ADMINISTRATION SUB-TOAL DEPRECIATION TOAL OPERATING EXPENSES NET OPERATINGE Th(XJME (366.19) UINERESr NET INCOME ( ) ( ) ( ) (623.23) X WaIiKNC RATIO % 18%. 15% 16% w OPERAT1ING RATIO % 56% 46% 44%

82 SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMFNT ]RRIGTTION-PRQJBCr AREA U. D. D.- SOURCE & APPLICATION OF FUSND/DEVENT Ti0Er (ACiuAL ,PFRuJCTED ) Ca TUISANDS FISCAL YEAR ENDIN DE315BER 31 SOURCE OF FUNDS N11fHNAL SOURCES NET OPERATING INOlME (366.19) ADD DEPRECIATION TOTAL internal SOURCES (1) (OVERNfIfh GRANr (2) KBOROWINS PROPOSED IBRD ILAN-SCP OrrER IDAS-SCP GOV.LQAN-SCP GOV.ADVANCES-DEBT SERVICE IOTAL BORROWIGS TUAL SOURCES OF FUNDS APPLICATIONS OF FtNDS CAPrrAL EXPENDITURES PROPOSED PRIO.E-SCP CAPITALIZED INrREEST-SCP OlIER CAPITAL. EXPENDTRES U TOTAL CAPITAL EXPENDITURES INCREASE (DEaREASE) IN WCRKING CAPITAL DEMT SERVICE INTEREST AMORTIZATION TUTAL DEEr SERVICE TOTAL APPLICATION OF FUNS L.,4 7754,'.' q TIR5 36? DET SERVICE COVEAGE (TIMES) Z GOVER1#4ENT GRANT AS A % OF LINES (1) PLUS (2) - _ 100o 77/ 63% 49% 46%

83 Cans SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT IRRIG(TION-NJN FROJECT AREA W. D. D.-UEGIE STATEMDET/RE2URRENT BJDGET (ACIUAL ,PlWECTED ) CL THOEANDS FISCAL YEAR EtID1 IEGD 2IBER 31 WATER SALES (IflS): EKISTING SCHEMES ()lning SCHaIEs AVERAGE TARIFF (MILS/CM) EXISTING SCHEMES CNODING SCHEMES OPIRATING REVENS EIrmiw SamIES tuoninz SaHIEIS TOTAL REVIENUS OPERATIC EXPENSES PERSONNEL I2NERGY MAIN4TENANCE AMIINISTRATION SUB-TOTAL DEPRECIATION ITUAL OPERATING EXPENSES NET OPERATING INCOME (484.57) (449.20) (558.80) (130.43) INTEREST NEr INCOME ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) WCRIlING RATIO 93% 82% 94% 66% 56% 48% 44% 36% 32% 31% 29% OPERATING RATIO 212% 168% 163% 109% 97% 85% 81% 64% 62% 57% 59%

84 CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT IRRICATION-NON PROJECT AREA W. D. D. -SOURCE& APPLICATION OF FUNDS/DEVELOPNT BUOLEE (ACTUAL ,PROJTED ) CL THOUSANIS FISCAL YEAR ENDING DEIaBER 31 SOURCE OF FUNDS INISRNAL SOURCES NET OPERATING INCOME (484.57) (449.20) (558.80) (130.43) ADD DEPRECIATION TOTAL INTERNAL SOURCES (1) GOVI4ERN GANf (2) BORROWINGS EXISTING BANK LOAMS IIJER EXISTING LOANS GDV1R*48ffT ADVANCES _-_-_-_ -_-_-_- - -_-_-_ -_-_-_- -_ - -_-_ -_-_-_- -_-_- -_-_ -_ -_- -_-_-_- -_-_-_--_-_-_-_ - -_- _-_-- _- _- _- _ -_ - -_-_- _- _-_-_-_-_-_- - -_-_-_- - _- _- -- _-_-_-_-_-_-_-_- _- _-_-_-_-_-_-_- _- _- TOAL BCRROWINGS TOTAL S0URCES OF FUNDS APPLICATIONS OF FUNDS CAPITAL EXPENDlTURES PROJECTS EXPENDrURES INrIIRESr DURING CatS1IYON OJll2 CAPITALI.EXPENDITURES _ TOEIL CAPITAL EXPEND1IEES INCREASE (DECREASE) IN W(FKING CAPITAL (78.73) DEBT SERVICE INiTFEST AMORTIZATION TOTAL DEBT SERVICE , T;rAL APPLICATION OF lfnds hebt SERVICE COVERACE (TIMES) o GDVENKIET GRANT AS A % OF LINS (1) PLUS (2) 93% 95% 98% 83% 79% 72% 64% % 40/. 39% 0

85 CYPUs SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT IRRIGATION W. D. D.-INCOME STAT EMERECURRENT BUDGET (ACTUAL ,PROJECTED ) CL THOUSANDS FISCAL YEAR ENDING DECEMBER 31 BULX WATER VOLUMES (MC1) AVERAGE TARIFF (MILS/CM) OPIFATING REVENUES BULK WATER SALES OPERATING EXPENSES PERSONNEL ENERGY ARlTrENANCE AIrINISTRATION SUB-TOTAL DEPRECIATION TOTAL OPERATING EXPENSES NET OPERATING INCOME (484.57) (449.20) (558.80) (130.43) ITEREST NET INCOME ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) -~. = C Wa<KI RATIO 93% 82% 94% 66% 56% 48% 44% 35% 27% 25% 24% OPERATING RATIO 212% 168% 163% 109% 97% 85% 81% 76% 6(0Z 53% 53% ~

86 CYPUS SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT IRRIGATION W. D. D. -SOURCE& AnLCATICN (F FIUSS/DEVELOPW124 WPIfT (ACnAL 1982-l983,, EM D ) _ --- -_---_ CL THU)ISANIDS a FISCAL YEAR ENDING DEMBER 31 SWRCE OF FUNS INRl*AL S9RCES NFr OPEEATIPE INOE (484.57) (449.20) (558.80) (130.43) ADD DEPRECIATION _ _ -- _ _ _ _ _ - TIAL na.l SOURCES (1) % GOVERNMPNr GRANr (2) PEOPOSED IERD LOAN-SCP ODIER ULOA-SCP Z GoV.ADvANcES-SCP EISTING L4i& -raer ODV.ADVANCES-OTtlER W _ _ TUrAL BOCRREWUS ITUAL S9URCES OF FUNDS APPLICATIONS OF FUNDS CAPITAL ESEYDrUARES PROPOSED PR3flT (SCP) CAPITALIZD INREST-SCP CIMIER CAPITAL ESPENITURE CAPITALIED INrEREST-NN SCP _ _ _ LTC CAPITAL EXPENDrIRES INCREASE (LDECEASE) IN WCR3JNG CAPITAL (78.73) DEBT SERVICE INIrEREST AMORTIZATION , TUrAL DEBT SERVICE IlIAL APPLICATION OF FUNDS DEFY SINVICE C)ERAC-E (111iS).Q S.25 ' GOVERNMENr GRANr AS A 7 OF LINES (1) PLUS (2) 98% 95% 98% % % 59% % 42%

87 SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT IRRIGATION4TER SUPPLY U. D. D. OONSOLLkTED -SOURCE& APPLICATIW OF nlnds/developpent K=ET (ACIUAL ,PRQJTED ) Q TtiIEANDS FISCAL YEAR ENDIE LECEB8 31 SOURCE OF FUNDS airnal SOURCES NET OPERATING INEE (255.59) (436.90) (363.12) ACD DEPRECIATION TOTAIL al SOURCES (1) GOVLlUlfNT GRANT (2) u PROPOSED IBRD LOAN-SCP OTHER IOAM-SCP GOV.ADVANCES-SCP EXISTIWN LaNS-OTHER GWV.ADVANCES-OTHER TOTAL B(REWINGS T1TAL SOURCES OF FUNDS APPLICATIONS OF FUNDS CAPITAL EXPENDITURES PROPSED PROJr (SCP) CAPITALIZED INTEXEST-SCP t arher CAPITAL EXPENDITURE CAPITA.IZED INTEREST-NON SCP TOTAL CAPITAL EXPENDITURES _ INaLEASE (DEUlEASE) IN WCURKD CAPITAL (112.37) (528.16) (356.55) DEBT SERVICE NTERESI AMCRTIZATION TOTAL DEBT SERVICE TOTAL APPLICATION OF FUNDS DEBT SERVICE ODVERAGE (TINES) LUVERNMEINP GRANr AS A % OF LINES (1) PLUS (2) 85% 89% 85% 74% 52% 48% 40/ 30%. 35% 24% 23% w

88 CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT WATER SUPPLY AND IRRIGATION COMBINED BALANCE SHEET Fiscal Year Ending December Ci Thousands ASSETS Fixed Assets Assets in Operation 69, , , , , , , Lessa: Depreciation 6, j , Net Fixed Assets in Operation 63, , , , , , , Work in Progress , Total Net Fixed Assets 152, , Current Assets Cash , , X Receivables 1, , , , , , , Inventories _ 4_ Total Current Assets , ,]14L19 TOTAL ASSETS 1A 5 8 8? 1 Do Z 2.63 EQUITY & LIABILITIES Equitv 46, , , , , , , Government Grant (Irrigation) 3, , , , , , , Retained Earnings.4).04) ( ( X ( ) (21388) Total Equity , , _7.Z Long-Term Debt IBRD Loan SCP 3, , , , , , , Other Loans SCP 15, , , , , , , Government Advances SCP 18, , , , , , , Existing Loans - Other 22, , , , , , , Government Advances - Other 40, , , , Total Long-Term Debt 100, Current Liabilities Accounts Payable Suppliers 2, , , , Current Maturities ,55 7, , , , , Total Current Liabilities , , Po TOTAL EQUITY & LIABILITIES.D8A 4 3 Debt Equity Ratio 67:33 71:29 74:26 73:27 71:29 67:33 62:38 4-

89 ANNEX 4 Page 1 CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT - ASSUMPTIONS USED IN FINANCIAL PROJECTION PHASE I 1. Operating revenues Revenues from water supply and irrigation tariffs over the projection period are assumed to meet the proposed financial covenants, i.e. water supply tariffs would be sufficient to cover operating expenses, debt service or depreciation, whichever is higher, and working capital requirements; SCP irrigation tariffs would be set to recover during the first, second, and third as well as all further consecutive years 45%, 55%, and 65% of the cost of SCP irrigation water (O & M plus capital costs discounted at 9% over 40 years); for the ten small irrigation schemes already in operation, the charges should be set so as to recover 28% by 1984, 35% by 1985 and thereafter not less than 40% of their weighted average unit cost; charges for each of the large irrigation schemes currently under construction would increase progressively from the first year following physical completion of each project to the sixth year so as to recover 30%, 40%, 45%, 50%, 60% and 65% of the respective cost. 2. Operating Expenses All operating expenses have been inflated at an annual rate of 6% during the period In addition, salaries have been increased by 1.5% per year representing a productivity bonus, and the recent government decision to increase the tariff for electricity by 15% was taken into account to calculate the energy cost. Assets were depreciated on a straight line basis. Interest during the construction period has been capitalized. 3. Cash Flow Statements and Balance Sheet Government advances include advances to the WDD investment program as well as advances on WDD's debt service to various lenders. It was assumed that: (i) during the implementation of the on-going projects (Paphos, VPP and Khrysokhou) and of the SCP, the Government would advance 100% of WDD's debt service; (ii) after the takeover of projects' works by WDD the proportion of advances by the Government would decline proportionally to the increase in the volume of water sold in each scheme and would be determined when each project's facilities have reached full development capacity (i.e., 1987 for Paphos, 1990 for VPP and 1992 for Khrysokhou and SCP); (iii) during these first two periods, Government advances on debt services would be capitalized; and (iv) during the period thereafter, Government advances on debt services would be amortized in forty equal installments at a 9% interest rate per annum.

90 ANNEX 4 Page 2 The onlent proceeds of the Bank loan of US$27 million are assumed to carry an interest rate of 10.08% p.a., a commitment charge of 0.75% on the undisbursed balance and would be repayable over 15 years including a three-year grace period. The Government would pay directly the front-end fee of 0.25%. Other loans for the project were assumed to be made by the Kuwait Fund (US$10 million, interest rate 4.5%, amortization 17 years including 4 years grace period), the European Investment Bank (US$28 million, interest rate 10%, amortization 15 years including 5 years grace) and export credits or unidentified other loans (US$73 million, interest rate 10%, amortization 12 years including 2 years of grace). All Government advances carry an interest of 9% p.a., and are amortized over 40 years. Inventories are estimated at the equivalent of six months of supplies for maintenance and chemicals. Accounts receivable were assumed to represent an average of about three months of total sales. Cash on hand has been forecast at levels sufficient to cover normal operations. Accounts payable was estimated to be equivalent to three months of energy, chemicals, and purchase of water. Suppliers represent the provision for retention money which was estimated to represent about 15% of total proceeds. The values of the existing irrigation and water supply schemes are provided for at their aggregated historical costs in These are based on the Government current capital expenditures from 1963 to 1982 plus the forecasted expenditures from 1983 to The net value of the existing schemes at CL million in the opening balance of 1986 has been treated as equity on the assump'tion that the systems would be transferred to the Water Entity free of charge. The project assets were not revaluated and the following depreciation rates were used: Civil works 2.5% Mechanical & electrical equipment 6.6% Dams 1.0% Irrigation networks and pipes 2.5%

91 -83- ANNEX 5 page 1 CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATER RESOURCES DEVELOPMENT Documents in Project File A. Documents Related to Project Preparation (in EMENA files) A- 1 SCP Feasibility Study, July 1982 (Volumes 1-19) A- 2 SCP Feasibility Study - Phase I, January 1983 (Volumes 1-2) A- 3 SCP Feasibility Study - Phase 1, February 1983 (Volumes 1-2) A- 4 SCP The Runoff of the Rivers within the Vasilikos-Pendaskinos Region, February 1981 A- 5 SCP Guidelines for Computing Irrigation Water Demand and the Reduced Crop Production in Years of Water Shortage (Project Report 80) 1979 A- 6 SCP Analysis of the Alternative to Provide the Domestic Water Demand for the Famagusta Area Through the Khirokikia Systems, July 1983 A- 7 SCP Kouris Dam - Tender Documents Volume III, December 1982 A- 8 SCP Supplementary Report on Domestic Water Demand by M.W. Young, Balfours, February 1983 A- 9 The Government Waterworks Law 1929 A-10 A Preliminary Study into the Merit of Setting Up a National Water Agency for Cyprus Commonwealth Secretariat UK, October 1982 B. Documents in Project File Related to Project Appraisal B- 1 Kouris Dam - Spillway Capacity by P., Jolly Hydrologist B- 2 Kouris Dam - Sedimentation Analysis by P. Jolly, Hydrologist B- 3 Kouris Dam - Reservoir Operation Study by P. Jolly, Hydrologist

92 -84- ANNEX 5 page 2 C. Tables in Project File Related to Project Appraisal C- 1 Investment Cost for a Domestic Water Supply Project Only C- 2 Investment Cost for an Irrigation Project Only C- 3 Division of Investment Cost (Phase I & II) Between Domestic Water Supply and Irrigation. C- 4 O&M and Replacement Cost for Irrigation C- 5 Irrigation, Net Returns per m 3, Kokkinokhoria C- 6 Non-SCP Schemes, Unit Costs of Charges C- 7 Domestic Water - Project Area, Financial Working Paper C- 8 Domestic Water - Non Project Area, Financial Working Paper C- 9 Irrigation - Project Area, Financial Working Paper C-10 Irrigation - Non Project Area, Financial Working Paper C-ll Incremental Cost Calculation C-12 SCP Domestic Water Bulk Tariffs (Phase I) C-13 Structure of Retail Tariffs C-14 TOR for Study on National Water Entity.

93 CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATERESOURCES DEVELOPMENT Implementation Schedule ACIMlY i _t_4_ L JZ 2i 3±! Kouris Dam -- ~ i i Main Conveyor & Connection VPP IE EL EEE.IIE-- u i Akhna Reservoir MMfl H- Kokkinokhoria lit ig. Systems (~EmEEmhEE--- ~u Villages DWS Works & Extension Khirokitia Plant---- Project Central Control Aquifer Works 2~~ National Wafer Entity (Study) ()Issuing of Tender Award of Contract Q Beginning of Warks ()Completion mii BII III Maintenance Petlad Wqild Bank-25460

94 CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATERESOURCES DEVELOPMENT Project Organizafion Chat Construction Stage PROJECT PO[CY & COORDtNAtION COMMfIIEE Director General MANR... Chairman Director General of Hnance... Members Director General of Commerce & Industry... k Mrmbe DireDrto General Planning Bteu... WD..C.. Member Directoc a WMee d... M e drrber Minst Prrotect M Director... Seer CVS Agriculture Director Won.China WCFter Dr TDent Deparcm o Mnt PltQtECT ADVtSORY COMMIITEE (DWS) metarcutr a,3 DiructorrW.D.D... Chairrman LI District Officer Nicosia... MeOc tr... remr stictocr odistrict ca... Ocr WOOFainaca Memr,ber_ District Officer tfanmaeusdo... M. Dep-t-tisrit strct.fficr.d... OficrrIOmurJto amumer.errbe Director Waterrt Board of Nicosia... MOtenb3ef Projoct Director... Meamber PROJECT ADVtSORY COMMIITEE (IRRIG-) DirederWD... Chcillnon Project Director Mrrfbe Cticer t mogrusto... Memrb3r... Project Director Prowd Drer ta _ Drsin Offcr Lamo rraa... Disrict Onk er WDD Fouanigit... MemTber Merniber ~~~~~District & District Officer Dep. Agr. Laurac..... Memrber Thm3e tfmrmnrs... Cvepresentetrves &.. M oslat Pr)c aae AdiiVto. PM l Mag Kouris Dom & A/Cunts Mai Corwa Ctrwetnts Project De"rt ProjedC t Recovefy d ~~~Manogo MonogJer Project Charges Ernginveerig! AaricuttrL t $ ~~~~~Depurty Woi,t prc,-25,161

95 CYPRUS SOUTHERN CONVEYOR PROJECT FOR WATE RESOURCES DEVELOPMENT Project Organization Chart Operation Stage (Incorporating VPP) PROJECT POLICY & COORDINATION COMMITTEE Agriculture & Director General MANR Chairmon Director General of Finance Members Director General of Commerce. & Industry...,.. Member Director General Monitoring & Director General Pianning Bureau..... Member Agriculture & Evaluation Director of WDD... Member Natural Resources Unit Project Director... Secretary Director Director Water C Department of Development Dept. Agriculture & Project Director W D.D Division of Operation & PROJECT ADVISORY COMMITTEE (IRRIG) I PROJECT ADVISORY COMMITTEE (DWS) DirectorWDD.Chaimaon l Director... 1 j DChairman Prolect Director.. M Cier b... cosi... Chmer= n Project Director... fierfaagst Member District Officer Larnaca... District Officer Lanicsa...Member Member Project Director District Officer Famagusta.Member District Officer Larnaca...Membe District Officer Famagusta... Member District Officer WDD Famagusta.Member Director Water Board of Nicosia... Member District Officer Dep. Agr. Famagusta... Member ~~~~~DisrictOffcrWN Project Director...,,... Member District Officer Dep. Agr Larnaca.Member Deputy Project Three Farmers Representatives.. Members Director Agricultural Operation tenan & Water Resource Admin & Services Maintenance Distribution Studies Accounts Civil Engineers Mechanical Engineers World Bankr-25462

96

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