Turkey - Antalya Water Supply

 ICRR 11805 Report Number : ICRR11805 ICR Review Operations Evaluation Department 1. Project Data: Date Posted : 06/28/2004 PROJ ID : P009093 Appraisal Actual Project Name : Antalya Water Supply Project Costs 244.6 205.3 US$M ) (US$M) Country : Turkey Loan /Credit (US$M) Loan/ US$M ) 100.0 72.6 Sector (s): Board: WS - Water supply Cofinancing 46.5 40.1 (51%), Sewerage (43%), US$M ) (US$M) Sub-national government administration (5%), Flood protection (1%) L/C Number : L3893 Board Approval 95 FY ) (FY) Partners involved : EIB Closing Date 06/30/2003 06/30/2003 Prepared by : Reviewed by : Group Manager : Group : John English George T. K. Pitman Alain A. Barbu OEDST 2. Project Objectives and Components a. Objectives The project was undertaken in Antalya, a city with an estimated population of 700,000 in 2000, located on the Mediterranean coast of Turkey . Its objectives were to: meet, at least cost, the demand for water supply, sewerage and stormwater drainage; develop new institutional arrangements for the management of municipal water supply, sewerage and stormwater drainage, and to introduce private sector participation in the operation of services; implement appropriate cost recovery policies to enhance self -financing of water and sewerage services; postpone the need to develop costly new water resources by improving the efficiency of utilization of existing sources and by reducing the volume of non -revenue water which is presently too high (46%); and improve and sustain environmental conditions and reduce health hazards that threaten the local population and the tourism industry by: (i) eliminating deficiencies in the collection and disposal of municipal sewage; and (ii) improving stormwater drainage in areas suffering from seasonal flooding . b. Components As appraised the project had four components : Water supply. Renovation, rehabilitation and extension of the existing water supply network, including immediately rehabilitating about 25 km of unsatisfactory sections of the existing network, drilling 24 new wells and replacing pumps at 8 existing stations. constructing about 40,000m3 of distribution reservoir capacity, and replacing and extending about 500 km of the existing distribution network . Sewerage. Provision of a new sewerage network and a preliminary wastewater treatment plant on the western part of the municipality, and to improve the operation of septic tanks in the eastern part of the city . Stormwater. Upgrading the stormwater drainage system in flood areas and establishing a comprehensive master plan. Technical assistance. Provision of technical assistance for project implementation (engineering services and project management) and institutional development (particularly training and preparation of the lease and management arrangements for the provision of water and sewerage services ). A key element of the project was the institutional arrangements, that were described in the President's report as follows. "The project comprises water supply, sewerage and stormwater drainage, with Antalya Water Supply and Sewerage Authority (ASAT) as borrower. While leaving the legal authority with the borrower, administrative and financial management of the services would be consolidated within a company (Sirket), owned by ASAT, Antalya Metropolitan Municipality (AMM) and the District municipalities (DMs) and incorporated under Turkish trade law . The creation of the Sirket, which will oversee the operation of the services under lease and management arrangements is a condition of loan effectiveness . The Project Management Unit (PMU), which is already in place and reporting to the AMM mayor, will assist the Sirket as well as the AMM, ASAT and DMs in implementing the project for about one year after the signing of the contract with a private firm for the operation of the water supply and sewerage services ." The Antalya Commercial Project Management Company (ALDAS) was established as the Sirket (a form of legal entity under Turkish law). Antalya Water (ANTSU) was the private company established by a consortium (Lyonnaise des Eaux and ENKA a Turkish company ) to undertake the operating contract . c. Comments on Project Cost, Financing and Dates The total project cost was estimated as US$ 244.6 million. Unfortunately the data in the appraisal documents do not permit one to know exactly the breakdown of cost as between the components . The cost distribution was roughly 43% for water supply, 45% for sewerage, 12% for consultant services and less than 1/2% for stormwater. During implementation a small wastewater treatment plant was dropped . Also, ASAT built the first stage of a secondary wastewater treatment plant, but this was financed from operational surpluses of ASAT . Due to cost savings a total of US$23.9 million of the loan was canceled in two stages in 2001 and 2003. A further US$3.6 million was canceled by the Bank in April 2003. 3. Achievement of Relevant Objectives: . The project fully met the objective of meeting, at least cost, the demand for water supply, sewerage and stormwater drainage, with only minor shortcomings . The physical performance indicators were all met or exceeded (except for the number of groundwater wells to be drilled ) at a cost below the appraisal estimate . Performance in the development of institutional arrangements is disputed . The ICR judges that the objective was not met. Private sector participation was introduced through the contract between ASAT and ANTSU, but the contract lasted only half the ten -year contract period and the parties are now in litigation . ASAT is now operating the system and appears to be doing so satisfactorily . The Borrower disagrees with the ICR assessment. OED judges that the objective was substantially achieved, albeit with significant shortcomings . Cost recovery policies. The ICR rated this objective as unmet . The tariff policy proposed by ASAT and approved by AMM provided performance incentives to ANTSU and generated substantial cash flow to ASAT to enable it to undertake its large investment program (see 2 (c)) On the negative side, ASAT failed to meet all its financial obligations since it failed to pay the debt service to the Bank and to EIB on time, and the national Treasury had to step in and cover the payments . ASAT has subsequently reimbursed the Treasury . OED judges this objective as having been partially achieved, with some shortcomings . Improving efficiency of utilization of water . The ICR rates this as not fully met . The project did increase the efficiency of use of the existing well -field and avoided the necessity of moving to an expensive surface water scheme. However, the ICR claims that it did not meet the second part of the objective, reducing the level of non-revenue water, which was 46% at appraisal. AMM disputes this conclusion, claiming that at the end of the project non-revenue water had fallen to 39%, not 63% as reported in the ICR. AMM claims that the ICR did not compare like with like. OED rates this objective as partially achieved with some shortcomings Improving environmental conditions . The ICR and OED agree that this objective was fully achieved with no shortcomings. The project improved all three elements of this objective; delivering potable water, safe for consumption, collecting waste water and treating it outside the urban area, and collecting and treating the wastewaters and disposed of in an environmentally sustainable fashion . Monitoring of sea water quality offshore of Antalya has shown that it is satisfactory and that the beaches are safe and not subject to any restrictions on use because of wastewater related problems . 4. Significant Outcomes/Impacts: The project has had a number of significant outcomes : ASAT was established to undertake the overall management of water resources and services in the municipality, with the responsibility for (a) the development and operation of public water supply, sewerage and storm water drainage services, and (b) the monitoring and control of liquid waste discharges and for the enforcing of water pollution control regulation. It established ALDAS as a commercial entity to implement this large project . This it has done successfully. While the outcome of the legal dispute between ALDAS and ANTSU is not certain, the ability of ALDAS to hire the appropriate legal expertise to argue its case allowed ALDAS and the local authorities to stand their ground and not to agree to substantial increases in payments to manage the operation . The project was completed on time and within the budget, while meeting all of its physical indicators, maintaining an adequate supply of potable water and ensuring environmental sustainability of the water supply and waste management system within a rapidly expanding metropolitan area . Appropriate standards of construction and operation have been maintained . Antalya is a major tourism center, depending heavily on its environment, particularly on coastal attractions, including beaches and bathing . As a result of the project, monitoring has shown that, despite rapid growth of the city and of tourist numbers, "there is no serious pollution in the study area, both in offshore and nearshore locations " 5. Significant Shortcomings (including non-compliance with safeguard policies): There were two significant shortcomings in project design and performance . The first was that ASAT remained an arm of the municipality . As a result of this lack of autonomy ASAT was pressured on two occasions to make "loans" to the municipality, totalling US$20 million. Parenthetically, the fact that this was possible is a reflection of the considerable cash flow generated by ASAT and its ability to cover its project obligations. The municipality has only repaid about US$ 1 million of these "loans". This precedent could undermine the ability of ASAT to meet its future financial obligations . Thus, ASAT failed to pay the initial debt service to the Bank and the EIB. The payment was made by the Turkish Treasury and it has subsequently been reimbursed by ASAT. The second was that, when the project was prepared and appraised Bank policy was to promote private sector participation in infrastructure operations, particularly in water and sewerage . The Turks agreed to this, but the ICR makes clear that there was never wholehearted support for the idea . The private contractor (a Turkish/French consortium) carried out its functions satisfactorily but had tendered an unrealistically low bid . As a result it lost money and the Turkish partner pulled out of the consortium, which made it a purely foreign operator . The contract provided for an adjustment of remuneration after five years . The consortium applied for what was more than a doubling of rates. ASAT refused to consider such an adjustment and the consortium withdrew from the contract . Counterclaims between the parties are now being adjudicated in court . The likelihood of reaching this unsatisfactory situation might have been reduced if the Bank had devoted more time to explaining and analyzing the choice of a private sector participation approach with the Borrower . 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Unsatisfactory Moderately Satisfactory [the ICR's 4-point scale does not provide for a "moderattely sat." rating] Based on the data presented in the ICR, it appears that the project did achieve most of its major relevant objectives efficiently, albeirt with some significant shortcomings (see section 3). For example, while the ICR states that the objective of cost recovery was not met, it assesses financial sustainability as likely since the substantial operating surpluses that are being generated by relatively high tariffs and that have led to ASAT's "working ratios" being only about one-third, i.e. only one third of collections is expended to operate and maintain the system . This is a very good ratio in comparison with most water/ sewerage utilities. Institutional Dev .: Modest Substantial Private sector participation in the water supply/sewerage sector was introduced, but the private partner withdrew after five years. However, the project did result in the creation of ALDAS, the commercial entity now charged with operating the water/sewerage systems in Antalya. It successfully implemented a large project within budget and the time-frame allotted. It took over the staff and operations of ANTSU, after the latter's withdrawal and, with the support of ASAT is operating the systems in a fully satisfactory manner . This is a significant accomplishment . Sustainability : Likely Likely Bank Performance : Satisfactory Satisfactory Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Satisfactory NOTE: NOTE ICR rating values flagged with ' * ' don't comply with OP/BP 13.55, but are listed for completeness. 7. Lessons of Broad Applicability: The risk analysis and allocation of private operator contracts in the water supply and sanitation sector must be improved and, in particular, selection criteria for private sector participants carefully analyzed . Local utilities, may not be suitable entities to bear the foreign exchange rate risk of a loan where there is a high risk of devaluation and where the revenue stream is in local currency . 8. Assessment Recommended? Yes No Why? 1. To reassess the ratings of the project given the divergence of views among the Bank and the utility about what was achieved ..  2. As part of any review of the outcomes of efforts to support private sector participation in the operation and management of utilities . 9. Comments on Quality of ICR: The ICR provides a good overall description and discussion of the outcome of the project . In particular, the review of achievement of project objectives is exemplary (this was greatly acilitated by the very clear statement of objectives in the PAD). On the other hand, one shortcoming of the ICR is that some of the ratings are at variance with the data and commentary in the report, leading to the disagreements noted in section 6.