Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Report No.

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1 Project Name Region Sector Project ID Borrower Report No. PID5636 Croatia-Regional Water and Wastewater Europe and Central Asia Water Supply and Sanitation HRPE48984 Government of Croatia, with a portion of funds onlent to Government of Bosnia and Herzegovina (BiH) on IDA terms Implementing Agencies Hrvatske Vode (HV) Vodoprivreda Bosnia and Herzegovina (VBH) Ulica grada Vukovara 220 H. Cemerlica Zagreb, CroatiaSarajevo, Bosnia and Herzegovina Tel: (385 1) Tel: (387 71) Fax: (385 1) Fax: (387 71) Mr. Miroslav Steinbauer, Mr. Faruk Sabeta, Head of Reconstruction Managing Director Sector Environment Category Unassigned Date This PID Prepared 9/30/97 Projected Appraisal Date 02/01/98 Projected Board Date 04/16/98 Country and Sector Background 1. Objectives. Primary development objectives are to: (i) encourage refugees and displaced persons to return to their homes, (ii) improve living conditions for persons in areas not directly affected by the war and (iii) protect the Mali Ston Bay--an important resource for tourism and shellfish industries--from pollution due to direct discharge of untreated sewage. These objectives will be met by reconstructing and extending water and wastewater systems shared by Croatia and BiH to provide piped water supply in southern Croatia and southwestern BiH and wastewater collection along the Mali Ston Bay. 2. Sector Issues. The Bank has not carried out a formal study of the water and wastewater sector in Croatia. Two issues however are suggested in HV's "Regional Planning Strategy for Water Management" (January 1995):(i) Prior to the recent war, 63 percent of Croatia was connected to public water supply. About 10 percent of Croatia's water supply system was damaged or destroyed during the war. Croatia should give priority to extending the water supply system to unserved areas, including reconstruction of war-damaged infrastructure to facilitate resettlement of displaced households.(ii) Wastewater collection and treatment in Croatia is more limited than water supply. Although many towns and municipalities have sewerage, not all communities with piped water supply have a sewerage system; and most smaller villages rely on

2 individual septic tanks. Where sewerage exists, treatment of collected wastewater often is inadequate, with direct discharge to streams or underground karst formations not uncommon. About 35 percent of all wastewater receives any degree of treatment and reduction of the total load is about 25 percent. Croatia should provide more extensive wastewater collection and treatment, particularly in environmentally sensitive areas. 3. Government Strategy. The strategy for the Croatian water sector, as promulgated in HV's planning document mentioned above, is to: -- achieve harmonious physical and social development across all of Croatia -- improve citizens' quality of life and health through provision of satisfactory water supply -- provide the necessary infrastructure to enable economic development based on principles of a market economy -- create the basic conditions for settlement and employment in areas where the lack of water leads to economic decline and depopulation Description 4. Project components: The project consists of five water supply components and one wastewater component. 1. Water Supply: Neum-Ravno-Slano. The proposed facilities consist of 12.8 km of 110 to 225 mm pipeline, two pumping stations and four service reservoirs that will extend two water distribution systems in Croatia and BiH. The water source for the existing system in BiH is a well-field in the Neretva River Valley in BiH with sufficient capacity to supply the proposed facilities. The distribution system in Croatia will be connected to Visocani reservoir. Future connection of these two systems is foreseen. 2. Water Supply: Zupa Dubrovacka-Ivanica. The proposed facilities will tap into an existing reservoir "Barbara" at Gornji Brjat on the Zupa Dubrovacka system in Croatia, and supply five liters per second northward to Ivanica in BiH through a 150 & 200 mm, 3.4 km long pipeline. 3. Water Supply: Opacac. The proposed facilities consist of 30 km of pipelines, five reservoirs and one pumping station that will extend the water supply system in Imotski, Croatia. The water source is the Opacac spring in Croatia, which has a yield in excess of one cubic meter per second. 4. Water Supply: Josip Jovic-Arzano. The proposed facilities will connect networks in Croatia and BiH to optimize water supply. The water source in Croatia is the Opacac spring and in BiH drilled wells near the reservoir Busko Jezero. Because of large elevation differences in the service area, a pumping station and three reservoirs connected by 15 km of 300 & 350 mm pipeline are required. 5. Water Supply: Tribistovo. The proposed facilities consist of a 90 liters per second water treatment plant to treat the water from Tribistovo barrage (BiH), rehabilitation of the intake structure, two reservoirs and -2 -

3 12.3 km of pipelines. These facilities will serve the areas around Posusje (BiH) and communities east of Imotski (Croatia). 6. Sewerage: Klek-Neum-Mljetski Channel. The proposed facilities are in two sections. The Komarna-Klek section consists of 3.6 km of 250 mm gravity sewers, 1.1 km of 200 mm pressure pipes, three pumping stations, and collector systems for the towns of Duboka and Komarna (Croatia). The Klek-Neum section consists of 1 km of 300 mm gravity sewers, 1.1 km of pressure pipes and a pumping station. This section will connect the Croatian communities to Neum (BiH) sewerage, which discharges into the Mljetski Channel (Adriatic Sea). Financing 5. It is currently estimated that project costs will be financed US$20 million IBRD and US$20 million Croatia and BiH. Implementation 6. Onlending. Croatia represented by its Ministry of Finance will be the borrower of the Bank loan. Project investments will be made in Croatia and in BiH. For facilities to be located in BiH, Croatia will onlend funds to BiH under IDA-equivalent terms. IBRD Articles of Agreement (Article III, Section 4) require that when a member in whose territories the project is located is not itself the borrower, the member must guarantee loan repayment. The Bank's Legal Department has determined this Article requires BiH to provide a guarantee to the Bank for financed investments in BiH. As the member borrower, Croatia would be obligated to the Bank for repayment of the full loan and the Bank would have first recourse to Croatia before exercising the BiH guarantee. 7. Implementation. HV and VBH have agreed (July 1996) to establish a joint implementation team. Project implementation, including procurement and supervision of construction, will be managed by a joint team composed of representatives from HV, VBH and municipal beneficiaries. HV will lead the implementation team. HV is well-staffed and fully capable of guiding project implementation and VBH staff also have direct experience in implementing Bank Group-supported projects for the Bosnian water sector. 8. Operations and Maintenance. Operations and maintenance will be conducted by existing water/wastewater companies. For some components, one water/wastewater company will be responsible for investments in both Croatia and BiH. All companies will be supervised by HV (in Croatia) or by VBH (in BiH) and by the respective municipal governments. Under the terms of loan between Croatia and BiH, the companies will be responsible for ensuring investments are properly operated and maintained and tariffs are sufficient to cover operating and maintenance expenses plus debt service. Sustainability 9. The project is designed to provide sustainable water and wastewater systems, emphasizing financial viability at the company level. The critical factor for project sustainability is continued peace in the region. Municipal beneficiaries have strong incentive - 3 -

4 for project implementation--they want decent water supply/wastewater systems in their communities. The project will not require government budgetary support beyond the portion of initial investments not financed by end-users via cost-recovery. Lessons learned from past operations in the country/sector 10. The project will incorporate lessons learned from the Emergency Reconstruction Project and other Bank-supported projects in Croatia: all agreements on utilization of funds among government ministries, enterprises, agencies, and where applicable, end-users should be drafted and agreed to as early as possible; implementing agencies should be directly responsible for all implementation phases of their respective project components, including procurement and disbursement; entities established for project implementation should be fully staffed as early as possible; and an interim review of the project, including reallocation of uncommitted funds, should be made. More generally, the project incorporates lessons learned throughout the Bank regarding the importance of realistic assumptions in demonstrating and ensuring the financial viability of water and wastewater enterprises. Poverty Category 11. The project is not a targeted poverty intervention. Environmental Aspects 12. Major: The project will result in significant positive environmental impacts: (a) improved drinking water quality; (b) increased availability of drinking water; and (c) improved water quality in Mali Ston Bay, used for oyster-culture and recreation. The project intrinsically involves international waterways as water supply components are based on sharing water resources across the Croatia/BiH boundary. Both countries are project participants and no other countries are affected by the project's water use or discharge; therefore no notification is required under OP7.50, Projects on International Waterways, beyond Managing Director notice (memo to Mr. Koch-Weser, 21 June 1996). 13. Other: Potential negative environmental impacts are: (a) an increase in sewage production due to improved water supply and (b) increased discharge of sewage at the Mljetski sea outfall. Adequate treatment of wastewater generated by water supply components will be required. HV will demonstrate the sea outfall can handle increased flow without negative environmental impact. 14. All project components are proposed for environmental screening category "B" as impacts are largely beneficial and potential negative impacts are restricted in scope; mitigation measures will be incorporated to control negative impacts. Proposed actions under the project will not require involuntary resettlement or have adverse impacts to known archeological or historic sites. 15. To mitigate potential negative impacts from increased sewage - 4 -

5 production, beneficiaries will be required to maintain existing or provide new septic tanks in accordance with regulations of Croatia and BiH that are monitored by HV and VBH. The sewerage component will increase sewage discharged at the existing sea outfall to about 10,000 PE. An environmental study by HV shows no significant negative impact up to a discharge rate of 30,000 PE. HV has established a monitoring program for both seawater near the outfall and ground- and surface-water in the catchment area. A protection zone and protection measures are defined and will be monitored for each water source in the project. Program Objective Categories 16. In terms of the Bank's targeted areas of special operational emphasis, the project would foster environmentally sustainable development and encourage development of the private sector. Contact Point: Brian S. Smith, Task Manager The World Bank 1818 H Street N.W. Washington, D.C Telephone No.: (202) Fax No.: (202) Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending October 3,