Greece - Salonica and Volos Sewerage Project

Document of x<-,,, CIRCULATING COPFy Document of TO BE RETURNED TO REPORTS DESK FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-1942-GR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE HELLENIC STATE FOR THE SALONICA AND VOLOS SEWERAGE PROJECT November 15, 1976 This document has a restricted distribution and may- be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Unit Drachma The Greek Drachma is now defined in terms of a basket of currencies including the US dollar and those of its other major trading partners, and is floating. For this report the following currency equivalents were used: Dr. 1 US$0.03 US$ 1 Dr. 35 Dr. 1,000 US$28.57 Dr. 1,000,000 US$28,571 Fiscal Year January 1 to December 31 Abbreviations ETVA Hellenic Industrial Development Bank IOKAE Institute of Oceanographic and Fishing Research MCP Ministry of Coordination and Planning MI Ministry of Interior MPW Ministry of Public Works SSA Salonica Sewerage Authority SWA Salonica Water Authority UNDP United Nations Development Program VMWSA Volos Municipal Water and Sewerage Authority VWSO Water and Sewerage Municipal Organization for the Greater Volos Area (Volos Water and Sewerage Organization) WHO World Health Organization  FOR OFFICIAL USE ONLY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE HELLENIC STATE FOR THE SALONICA AND VOLOS SEWERAGE PROJECT 1. I submit the following report and recommendation on a proposed loan to the Hellenic State for the equivalent of US$36 million, to finance the foreign exchange cost of a sewerage project. The loan would have a term of 15 years including 3 years of grace, with interest at 8.7 percent per annum. The equivalent of $29.5 million and $6.1 million would be provided, respectively, to the Salonica Sewerage Authority and to the Volos Water and Sewerage Organi- zation on the same terms as the Bank Loan. The remaining $0.4 million will be used for related studies and training. PART I - THE ECONOMY 2. A report entitled "Country Economic Memorandum - Greece" dated September 30, 1976 was distributed to the Executive Directors on October 12, 1976 and its conclusions are summarized below. Country data sheets are attached as Annex I. Recent Developments 3. Following the Cyprus crisis in July 1974, the seven-year old mili- tary regime was replaced by an interim civilian Government. In November 1974, an elected Government, backed by a large parliamentary majority, was estab- lished. In December 1974, the Greek people voted to establish a republic. A new constitution establishing a parliamentary system with a strong presidency was approved in June 1975. The new Government has been concerned with the re-establishment of democracy. On economic issues, it is addressing the need to restore and broaden international economic relations, especially with the EEC. It has taken measures to revive economic activity, reduce price inflation, and correct a growing balance of payments deficit. Substantive negotiations with the EEC are expected to begin early next year for accession to full membership. 4. Throughout the 1960's and up to 1972, the Greek economy enjoyed rapid GDP growth averaging 7.9 percent per year in real terms, and relatively stable prices. However, by the end of 1972, as the economy reached full employment, supply constraints began to develop and domestic prices came under increasing inflationary pressure which was reinforced by the termination of price controls in 1973, increases in import prices (particularly petroleum after October 1973), higher agricultural support prices and increased Govern- ment expenditures. Consumer prices, which had increased by less than 3 percent per annum on average during 1968-72, rose 16 percent in 1973 and 27 percent in 1974. The restrictive policies that the Government adopted to combat inflation and the worldwide recession, together with the impact of the Cyprus crisis and domestic political uncertainties, severely affected economic growth, causing a decline of 2.7 percent in the GDP (at market prices) in 1974. This document has a rstricted distribution and may be used by recipients only in the performance of their official dutis. Its contents may not otherwise be disclosed without World Dank authorization.  - 2 - 5. Economic performance in 1975, however, was much better. Preliminary estimates indicate that real GDP (at market prices) increased by 5.6 percent. Agricultural output increased by 3.0 percent, industrial output by 4.3 percent, and output of services by a moderate 3.7 percent. The revival of economic activity picked up momentum towards the end of 1975 and has continued through early 1976 and was led by a recovery in demand, particularly in consump- tion, both public and private. Economic growth was accompanied by a signifi- cant decline in the rate of inflation estimated at 14 percent in 1975, only half the rate in 1974. 6. As the signs of economic recovery began to emerge and the inflation seemed to be abating, the Government adopted an expansionary policy whose major elements were: (a) a liberal incomes policy which permitted increases in wages including those of public sector employees; (b) an expansionary fiscal policy which significantly strengthened aggregate demand through public expenditure; (c) an exchange rate policy involving the devaluation of the drachma; and (d) an accommodating monetary policy which ensured enough liquidity in the economy to permit the growth in output that occurred in 1975. The authorities nevertheless remain acutely aware of the competing policy prescriptions that inevitably emanate from the priorities of economic manage- ment, viz. growth, controlling inflation and limiting the deficit in the balance of payments. 7. Agriculture and industry are the key economic sectors. Agriculture still accounts for about 19 percent of GDP, 35 percent of employment and 37 percent of exports: Growth continues to be hampered by the small size and fragmented nature of farm holdings, insufficient development of irrigation and inadequate extension services. Industry, including construction, has been the most dynamic sector, with an average annual growth of nearly 10 percent in real terms since 1960, and its share in GDP increased from nearly 26 percent in 1965 to 30 percent in 1975. The share of manufactured goods in total exports nearly doubled, from 25 percent in 1968 to 48 percent in 1975. Despite rising productivity, Greek industrial growth is still restricted by a small domestic market, limited export orientation, inappropriate plant size and heavy dependence on capital goods imports. The Government's policy for indus- trial investment has been influenced significantly by these considerations, especially by the need for better export performance and to face competition from European manufacturers following entry into the European Economic Com- munity (EEC). In pursuit of this policy, the Government is encouraging industries which may have a competitive edge and are preferably based on indigenous resources. The Government is keen to develop the mining sector, especially energy-related subsectors such as oil and lignite, in view of its foreign exchange earning or saving potential. 8. The balance of payments showed a slight improvement in 1975 with a current account deficit of $1.0 billion compared to $1.2 billion in 1974. The improvement occurred because of substantial gains in invisible earnings, a 10 percent increase in exports and a marginal increase in import value. The  - 3 - volume of imports actually declined due to the low level of economic activity and considerable destocking of inventories. Exchange rate policy seems to have contributed significantly to the improvement of the balance of payments. From mid-year to late 1975, the drachma was adjusted downwards against major currencies amounting to a depreciation of 22 percent, which restored, at least in part, the loss in competitiveness of Greek exports due to the infla- tion in 1974. Tourism earnings increased significantly, workers remittances also showed a strong upturn and revenues from shipping remained at a fairly high level. Total net invisible receipts were $1.9 billion and provided a major offset to the negative trade balance of $2.9 billion. 9. Greece's balance of payments has shown persistent deficits over many years, which have risen sharply since 1973. This imbalance reflects a high degree of dependence on imports of capital goods and machinery to sup- port development activities and a high income elasticity of import demand for consumer goods. The production structure of the economy has not been ade- quately geared to meet the rising demand for sophisticated capital equipment and certain kinds of high quality consumer goods. Export expansion, while significant, has not been sufficient to cover the rising import bill. Heavy capital inflows have, therefore, been needed to cover the large deficits on the current account as well as to provide for debt servicing, movements in reserves and related items. According to official estimates, total capital inflows in 1975 were $1,600 million; of this amount, $965 million were on private account, and $635 million on Government account, all borrowed largely on commercial terms due to limited access to long-term capital markets. Greece continues to face difficulties in obtaining long-term capital and the need to borrow abroad on commercial terms has added to the balance of payments problems through the increased debt burden. Prospects 10. The prospects in 1976 are for GDP to grow by 5 percent based on sustained output increases in manufacturing and services. W4hile the pace of revival in private investment activity remains a concern, growth in aggregate demand would be sufficient to lead to 5 percent growth provided there is a reasonable degree of price stability. It is expected that the rate of price increase may well be held around 10 percent provided: the Government is successful in containing wage increases to moderate levels, sufficient imports are available to supplement domestic supplies of a broad range of products and existing controls on monetary expansion continue. The current account deficit is likely to increase to $1.2 billion compared to $1.0 billion last year. This is based on a projected growth of 15 percent in exports and 12 percent in imports. Imports of capital goods and raw materials are particularly volatile, and if private investment activity picks up, imports may increase faster than anticipated, leading to a higher current account deficit. The Government will need to borrow nearly at the same level as in the last year, again mostly from commercial sources.  - 4 - 11. Assistance from the EEC over the next five years is expected to be at a rate of $65-70 million a year after a new financial protocol is finalized with the European Investment Bank (EIB), perhaps by early next year. Over the long term, Greece stands to gain significantly from full membership in the EEC mainly by hastening changes in its economy towards a more developed and effi- cient production structure. A net financial inflow of about $360 million a year is expected after full membership outside the new financial protocol with the EIB, mostly for agriculture and regional development. In the interim, significant infrastructure investment will have to be undertaken to conform with European standards, and there will be considerable problems of adaptation largely due to the structural differences between the economy of Greece and those of the EEC. Besides, the administrative requirements of implementing European policies and directives, such as the Common Agricultural Policy (CAP), are likely to be considerable. The benefits, however, may in- clude greater inflow of foreign investment and technology and more efficient management. Membership is expected to bring greater rationalization and hence competitiveness of production and export activities, and may help the Government overcome institutional rigidities in enacting and implementing far-reaching socio-economic reforms which otherwise would be difficult to undertake. 12. The Bank's assessment indicates that GDP growth of about 5.5 percent is likely in the medium-term, but the problems of inflation and the balance of payments are major constraints on future growth. The current account deficit is expected to increase somewhat from $1.0 billion in 1975 to about $1.4 billion in 1980. To finance this deficit and to allow for increased amortiza- tion payments and improvements in reserves, the Government will have to borrow annually, at roughly the same level as in 1975. However, in view of Greece's limited access to long term concessionary finance, the Government will need to continue to borrow on commercial terms. 13. Public external debt outstanding (including undisbursed) at the end of 1975 amounted to $2.96 billion compared to $2.7 billion at the end of 1974. Debt service payments in 1975 reached $442 million (of which $11.3 million was for World Bank loans), and represented 9.7 percent of exports of goods and non- factor services and workers' remittances. Based on reasonable expectations regarding export growth and future borrowing, the debt service ratio would be about 11 percent by 1980. About 2.6 percent of total service payments would be due to the Bank. In view of the good prospects for future economic growth, even if at a lower rate than in the past, Greece remains creditworthy for Bank lending. PART II - BANK GROUP OPERATIONS IN GREECE 14. Bank lending to Greece started in 1968, after disputes in connec- tion with the country's pre-war external debt had been substantially settled. Greece has received twelve loans totalling $303.9 million (net of cancella- tions), of which $271.3 million was held by the Bank as of September 30, 1976. These include five loans totalling $96.6 million to the National Investment  Bank for Industrial Development (NIBID), three loans for education ($82.3 million), three loans for irrigation ($95 million) and a highway loan ($30 million). The execution of Bank-financed projects has generally been satis- factory, although slow and subject to significant cost overruns due to both domestic and international inflationary pressures. Annex II contains a summary statement of Bank loans and IFC investments as of September 30, 1976. 15. Bank assistance to Greece has the following objectives: supporting institutional reform and essential infrastructure in key sectors, including irrigation, sewerage and wastewater disposal, and highways; modernizing key sectors such as agriculture and education; and reducing regional income and social disparities through support for selected regional or rural develop- ment programs. A project for the development of one of Greece's rural pro- vinces and a fruit and vegetable export project, both stressing institutional objectives, are under preparation as is fourth education project, designed to support new reforms initiated by the Government as well as to consolidate those begun in connection with earlier projects. 16. Although Greece has a much higher average per capita income than that enjoyed by most other developing countries, continued Bank lending for a limited time is justified in view of the following considerations. First, given the magnitude of its external capital requirements, it will be difficult for Greece to meet its borrowing needs for development on reasonable terms entirely from market sources. Continued Bank lending will not only provide some modest direct concessionary assistance, but also facilitate Greece's access to capital markets. Second, Greece still has large pockets of poverty and serious regional imbalances in incomes and development, and needs assist- ance in modernizing some of its key sectors. Third, the country is poorly equipped institutionally and administratively to take full advantage of its impending membership in the European Economic Community as well as to develop key sectors like agriculture. The Government particularly wishes the Bank to help strengthen selected institutions, for which the Bank is probably the only available source of external funds, to meet these challenges. It is, however, anticipated that Greece will be able to finance its development program without resort to Bank funds within a few years. 17. IFC has made investments totalling $16.1 million in six Greek com- panies. An equity and loan investment of $0.6 million was made in a fertili- zer factory in 1962 and sold in 1970. An equity investment of $0.7 million was made in NIBID in 1965 and reduced to $0.1 million in 1974. Loan and equity investments totalling $8.7 million were made in an aluminium company in 1970 and 1972. In early 1975, IFC invested $1.1 million in an agro-industry project in Larisa for processing of tomatoes from the area of the Groundwater Development Project assisted by the Bank (Loan 754-GR). IFC recently contri- buted another $0.1 million to expansion of this project to include the growing and harvesting of tomatoes as well as the canning of apricots and peaches. Other operations are under consideration.  - 6 - PART III - THE SEWERAGE SUB-SECTOR Introduction 18. The sewerage sub-sector in Greece has failed to keep pace with the requirements of rapid urbanization and industrialization. It faces problems in three major areas: inadequate technical standards and pollution control policies, weak local and national institutions, and unsatisfactory financial policies and practices. Sewer system construction is based upon outmoded technical standards and is undertaken with scant regard to economic criteria. The operation of sewer systems is not related to the quality requirements of receiving waters and controls over industrial wastewater discharges do not exist. National institutions do not as yet have the capacity for developing appropriate policies and providing leadership to the sub-sector, while local institutions are weak and often fragmented, with a number of municipal authorities servicing an urban area when a single system is needed. Financial policies are inappropriate for securing the resources needed for the sector, and beneficiaries are not bearing a reasonable share of costs. There is thus a pressing need to develop the needed policies, institutions and skills at both the national and local levels. The Government is aware of the shortcomings of its institutions in the sewerage field and has requested assistance not only from the Bank but also from UNDP and WHO. WHO has already conducted a preliminary study of the institutional aspects of the establishment of a national environmental protection agency. UNDP has offered financial assistance for the feasibility studies of the Athens sewerage system and WHO has been assisting in selecting consultants for this work. Background 19. Intensive urbanization (4 percent p.a.), rapid industrial growth (10 percent p.a.) and uncontrolled discharge of industrial liquid wastes have caused severe pollution of rivers and coastal waters, with attendant adverse effects on fisheries, recreation, tourism and public health -- fragmentary evidence suggests the incidence of waterborne disease in the heavily polluted urban areas is much higher than for the country as a whole. Most Greek cities are located on the coast and depend on simple sewer systems discharging at the shore into surface waters. Only parts of Athens and Salonica have integrated networks discharging through submarine outfalls, but without treatment. In- land communities depend mainly on septic tanks and percolation pits and only recently have started construction of sewer systems, which usually discharge without treatment into the nearest body of water. Although new facilities are being built with separate waste and storm water sewers, most of the existing facilities are combined, increasing the health hazard. Sea water pollution in Greek coastal waters also contributes to the larger Mediterranean pollution problem. Greece is one of the governments in the region which have committed themselves to address this problem under the recent Barcelona agreement. 20. Major sewer projects are prepared by the Ministry of Public Works (MPW), usually with the assistance of private consultants. They are approved  - 7 - on their technical merits by MPW's Hydraulic Division, which has only a small technical staff. Designs are governed by outdated specifications and proce- dures, and neither financial nor organizational analysis is presently under- taken. As a result, systems are over-designed, phased construction is not used, and the absorptive capacities of the receiving waters and water quality requirements are ignored. However, the quality of construction, which is carried out by private contractors supervised by the regional offices of MPW, is generally good. 21. Water supply and sewer systems have traditionally been operated by the municipalities under the overall supervision of the Ministry of Inte- rior (MI). However, urban development crossing municipal boundaries has already led in Athens and Salonica to the creation of regional water and sewerage authorities, and regionalization is being considered in other urban areas. Systems are presently financed by government grants, loans and local revenues and taxes. Following construction with government funds, major works are presently handed over to the local authorities without provision for repayment. Sewerage tariffs are not generally set in relation to costs; but often as a fixed proportion of water tariffs. In some cities, taxes collected on the rental values of property have been assigned to sewerage construction. Present revenues are too low to finance the required investments in sewerage systems. Both the technical and financial policy frameworks are as yet unsuitable for autonomous operations, and the existing regional authorities are presently subject to detailed control of all aspects of their operations. They also lack the technical and financial expertise to be more independent, and accounting and financial control systems suitable for semi-autonomous organizations need to be developed. 22. Salonica. Greater Salonica, the location of the largest project component, is the second largest city of Greece with a population of about 700,000, the effective capital of northern Greece and a natural gateway to the Balkans and Central Europe (Map 12213). The metropolitan area includes 22 townships and extends for about 60 km along the shores of Salonica Bay. Three industrial zones are located northwest of the city, and a fourth is under development. The downtown area of the city was sewered during the 1930's with a combined network discharging to the inner Salonica Bay through a submarine outfall. This system has been gradually extended but is now in- adequate. Because of discharges of raw sewage into the surface waters, there have been frequent fish kills. A high incidence of water-borne disease has forced the closing of several beaches and the prohibition of fishing. 23. Topography dictates that the greater Salonica area be sewered eventually by two systems. The Axios system will serve the city, the poorer suburbs which presently are not sewered, and all three existing industrial zones. This system includes the structures needed to intercept and treat the sewage, followed by discharge of the effluent into the Axios river. The Mega Emvolon system, which is proposed to be built at a later stage, will serve the southeastern sector of the metropolitan area, and discharge into the Thermaikos Gulf.  - 8 - 24. The Salonica Sewerage Authority (SSA), a regional authority under MPW, will operate the project facilities. It began operations in January 1976 and presently serves six municipalities and 13 townships. SSA is con- trolled by a Board of five members plus a chairman, who are appointed by various Government departments and the Salonica municipality. The day- to-day operations are supervised by a Director-General reporting to the Board. The authority is expected to be fully staffed with about 135 administrative, professional and technical staff and about 130 manual workers by the end of 1976. Among the key staff, only a Financial Director remains to be appointed. The law establishing SSA sets out its duties and responsibilities in considerable detail, with most decisions of any importance subject to ap- proval by various government departments, principally MPW. Sewerage charges are collected by the separate Salonica Water Authority for SSA, and the present computerized billing system is satisfactory. 25. Volos. Volos, other project city, is also located on a bay, on the eastern coast of central Greece (Map 12212R). Although it has a population of less than 100,000 inhabitants, it is the fourth largest city in Greece, and provides a typical example of the sewerage problems faced by smaller cities. Less than 10 percent of the existing population is served by sewers, the rest relying on septic tanks. Present contamination is modest, but a new indus- trial estate and the growing population pose dangers for the future. The long- range sewer program provides for the expansion of the sewer system to serve the metropolitan area and adjacent industrial estate. It will include facili- ties for collection, pretreatment and disposal into the Pagasitikos Gulf. The Greater Volos area is presently served by several water and sewerage authori- ties, of which the principal one is the reasonably well operated Volos Municipal Water and Sewerage Authority (VMWSA). In order to operate the project facili- ties, the Government has prepared draft legislation to create a regional water and sewerage authority covering the greater Volos area based upon the present municipal authority. 26. Sectoral Reform. The principal reforms required in the organization and management of the sewerage sector are threefold: first, the present national authorities responsible for the sewerage subsector need strengthening to enable them to develop and implement appropriate policies; second, the present fragmented local authorities need to be strengthened with adequately trained staff and a better policy framework and, where appropriate, combined into regional authorities; and third, there is need for better coordination of water supply and sewerage development. In Athens and Salonica, the Government at first opted for separate regional authorities for water supply and for sewerage, under the administrative supervision of MPW, but it now favors the merger of water supply and sewerage under combined authorities for each urban area. For the smaller cities, the government proposes to create new semi- autonomous authorities under the administrative supervision of MI, since the latter is more familiar with the problems of municipal administration and has the appropriate expertise in administrative matters. Technical assistance to these authorities for major projects and policy guidance on technical matters will, however, be MPW's responsibility.  -9- 27. National Water and Wastewater Authorities. The technical focus of the sewerage sub-sector is thus the Ministry of Public Works (MPW) where struc- tural and essential procedural improvements will be undertaken. MPW intends to expand the present small technical sewerage unit within its Hydraulics Division's Water and Wastewater Directorate into a Wastewater Department with additional staff and responsibilities. The Directorate will also include a new Project Appraisal Department. MPW is expected to move away from its present detailed involvement in specific projects toward providing general policy guidance to the sub-sector and technical assistance on specific problems (e.g. wastewater disposal) to the regional and local authorities. 28. The Watewater Department will specifically be responsible for issuing and maintaining up-to-date guidelines and specifications for design and construction of sewerage systems; reviewing and approving feasibility studies and designs of major sewerage projects and all treatment and disposal facilities; preparing draft regulations on water quality criteria and indus- trial wastewater discharges; providing technical assistance, guidance and training to sewerage authorities; establishing, with the Institute of Oceano- graphic and Fishing Research (IOKAE), the program for oceanographic work in the sector; and advising on water pollution aspects of industriaL investments. The Project Appraisal Department will review proposals for major sectoral investments and advise on their financial, economic and operational feasi- bility; advise on costs of pollution control regulations and provide guidance on financial policies, accounting procedures and tariffs. The last function will also be provided by the Ministry of Interior (MI) for the authorities under its jurisdiction and both MPW and MI staff will be trained accordingly. The Loan Agreement sets out the broad features of these arrangements and pro- vides that before June 30, 1977, the Government will provide the Bank with its specific proposals for staffing and training in the expanded MPW Directorate and for the training of the relevant MI staff (Section 3.06 and Schedule 5). The MPW Directorate is intended to be fully staffed by June 30, 1978. 29. Regional Authorities. As a complement to the above developments, more independent municipal water and sewerage authorities are expected to be established with broader powers than present municipalities and municipal enterprises and with regional jurisdiction where this is appropriate. These authorities will be given increased technical and financial capability so as ultimately to construct and operate their own water and sewerage systems. The project specifically provides for development of technical expertise in the two project authorities through training by MPW in the supervision of construction (see paragraph 46 below). 30. As a first step, which is also needed for operation of the project facilities, the Government is in the process of extending the geographical jurisdiction of SSA and plans to pass legislation to modernize its tariff powers to base future tariffs on costs, and, in addition, plans to pass legislation to establish a regional Volos Water and Sewerage Organization (VWSO) also with appropriate tariff powers. VWSO will serve the area, larger than the project area, lying within the administrative boundaries of the Municipalities of Volos and Nea Ionia and the Commune of Dimini including its industrial estate (Map 12212R). The Loan Agreement makes enactment of appro- priate legislation for at least one city a condition of effectiveness of the loan; the enactment of legislation for the other city by June 30, 1978 would be a condition of disbursement for that component (see also paragraph 56,  - 10 - Loan Agreement Section 6.01(b) and Schedule 1). The Government plans to use the VWSO law to establish a legal framework for semi-autonomous water and sewerage organizations which can be extended to other cities in Greece. The law is considered a model for other cities and contains a specific provision that organizations following its framework may be established by decree for other cities without Parliament having to pass a law in each case. The draft legislation, incorporating the Bank's suggestions, has been reviewed by the Ministries and municipalities concerned and is expected to be presented to Parliament shortly. 31. To ensure adequate staffing for the two authorities, the Loan Agree- ment provides that SSA will be staffed with qualified personnel, including an experienced financial director, the only key position not yet filled, and that VWSO will appoint a competent general manager within six months of its estab- lishment and will otherwise be adequately staffed (Loan Agreement Section 3.03). To provide for a better coordination of water supply and sewerage development, a merger of SSA and the Salonica Water Authority (SWA) is envisaged. To prepare for this, the accounting study and improvements under the project (paragraph 32 below) will also cover the SWA. In addition, the Loan Agreement provides that no merger will take place until completion of the studies and then only on satisfactory terms and conditions (Loan Agreement Section 4.06). 32. Financial Policies and Practices. The introduction of sounder financial policies and practices in the water and sewerage sub-sector is needed to ensure adequate resources for the sector and better management of them. The primary means of achieving this will be through the development of authorities which earn adequate financial returns and are able to contribute towards their own expansion. Existing accounting methods, financial controls and tariff structures will be reviewed by consultants provided under the project and specific proposals developed for the establishment of appro- priate improved systems. The Loan Agreement provides that promptly following review of the studies' recommendations, changes satisfactory to the Government and the Bank will be introduced in all three authorities with the assistance of consultants acceptable to the Bank (Loan Agreement Section 4.03(c)). To move towards self-financing regional authorities, the Government proposes to introduce a policy of repayment for Government funds provided for construc- tion, together with a cost-based tariff policy providing revenues sufficient to meet expenses and a reasonable contribution towards future investments. To ensure a smooth introduction of the new system, phased increases in tariffs are envisaged. 33. For SSA in Salonica, the Loan Agreement provides that promptly after entering into the Salonica Agreement with the Government, SSA will set sewerage tariffs so that total revenues from operations will be sufficient to cover all expenses plus a contribution towards capital investments equal to 4 percent of the net fixed assets in operation and under construction in each fiscal year through 1981, and 2 percent thereafter (Loan Agreement Section 4.09). This covenant differs from the usual rate of return covenant in that, to ensure adequate cash flow for the Authority, expenses are defined to include a number of items which are a drain on cash but are not normally classified as expenses, such as debt service. The expected rate of return, using tariffs set to meet this cash coverage covenant, will be higher than the figures  - 11 - indicated above (see paragraph 50). Within three months after entering into the Salonica Agreement, an initial increase to an average tariff of 4.00 Drachmas ($0.11) per cubic meter of water supplied, equivalent to an increase of about 30 percent in combined water and sewerage tariffs, will be put into effect by SSA (Loan Agreement Schedule 6). 34. For VWSO in Volos, the Loan Agreement provides that promptly after entering into the Volos Agreement with the Government, combined resources from water and sewerage operations should meet the same test as for SSA, except that the percentage of net fixed assets test should be 1.5 percent after 1981, reflecting the differences in the future construction program of the two authorities and their differing asset and capital structures (Loan Agreement Section 4.10). Within three months after entering into the Volos Agreement, both water and sewerage tariffs would be increased by 45 percent by VWSO. 35. A number of users are not presently paying for sewerage services. Thus the Loan Agreement provides that, by December 1977, both SSA and VWSO will extend their tariff systems to all users of sewerage services including those supplied from private wells, and in Volos, those located in the indus- trial estate (Sections 4.09 and 4.10). Under the above tariff formula, average sewerage tariffs by 1982 would be about $0.37/m3 in Salonica and $0.40/m3 in Volos, about six times current levels. In 1976 constant prices, these tariffs would be equal to about $0.23/m3 in Salonica and $0.25/m3 in Volos, or about four times current levels and reasonable in terms of the users capacity to pay. The Loan Agreement also provides that based upon the results of an industrial wastewater study (paragraph 39 below), appropriate surcharges will be put into effect by the two authorities by December 31, 1979 (Loan Agreement, Sections 4.09(c) and 4.10(c)). 36. Since water and sewerage tariffs are interlinked, water tariff structures are outdated, and a number of water users are receiving free water, it was agreed that, in both Salonica and Volos, following the completion of the review of tariff structures under the project, the relevant authorities will implement more appropriate water tariff structures and will begin to meter present free water supplies (Loan Agreement Section 4.08). The objec- tive is to develop a tariff system under which the users pay the costs, but which does not unduly burden low-income consumers nor discourage the rational use of water. 37. Technical Policies and Pollution Control. The introduction of better technical procedures and pollution control policies are two of the major improvements needed in the sub-sector. Considerable technical progress has already been achieved during project preparation. The preliminary ocean- ographic surveys conducted by the Institute of Oceanographic and Fishing Research (IOKAE) for the MPW in Salonica and Volos were the first attempt made in Greece to evaluate the environmental impact of sewerage projects. These surveys, made in accordance with the terms of reference prepared by the Bank proved so successful that MPW has requested IOKAE to conduct similar surveys for other sewerage projects presently under study. To ac:complish this work, IOKAE is expanding its laboratory and recruiting additional staff.  - 12 - Since adequate monitoring of the receiving waters is a basic requirement for any water pollution control program, the Government also intends to develop IOKAE's expertise on monitoring of fresh and ocean waters. In preparing the project, oceanographic data was used for the first time to determine the need for and level of treatment, the location of facilities and other design parameters; and cost effectiveness criteria were applied to determine the size of the proposed facilities. Supervision of the project bidding and construction under Bank guidance are expected to introduce further technical and procedural improvements, but the main impact is expected from the studies and training provided, which are expected to contribute to more general improvements and to the development of country-wide pollution control policies. 38. An oceanographic study of the Thermaikos and Pagasitikos Gulfs, carried out by IOKAE, will provide the oceanographic data needed for the final designs of the second stage investments of both the Salonica and the Volos sewerage programs, and determine parameters for future monitoring of the receiving waters in the project areas. The project also provides for as- sistance in undertaking a review of the proposed treatment and disposal procedures for the Mega Emvolon system, the second stage of the Salonica construction program. This system is expected to be a pilot project for the use of reclaimed wastewater for irrigation purposes in Greece, of particular interest because of the limited water resources of the country. It will also provide for the adequate protection of bathing beaches and shellfish beds. 39. Present industrial wastewater management is inadequate and MPW lacks the expertise to develop and implement reasonable and effective policies. An industrial wastewater survey will be carried out to provide data on present and future flows and wastewater characteristics, in both Volos and Salonica. On the basis of this data, recommendations will be made covering the need for treatment and disposal facilities, wastewater discharge guidelines for the removal of noxious substances by industry, and a monitoring program for industrial wastewater discharges. The monitoring program will provide for the staff and equipment requirements, points and frequency of measurement and parameters to monitor. 40. The existing Volos Municipal Water and Sewerage Authority (VMWSA) is presently carrying out an expensive investment program for new water sources started because of possible contamination of the city's aquifer. The Loan Agreement provides that appropriate monitoring of the aquifer will be under- taken to more accurately determine the extent of any contamination before further major investments are initiated (Loan Agreement Section 4.12). PART IV - THE PROJECT Project History, Concept and Description 41. The Government of Greece has been aware for some years of the tech- nical, administrative and financial weaknesses of the institutions serving the sewerage sub-sector at the national and the local levels, which are  - 13 - described more fully in Part IIi above. In July 1972 the Bank was asked to help identify and prepare a sewerage project. Detailed preparation of the project was carried out by consultants hired by the Government, by the Institute of Oceanographic Studies and Fishing Research (IOKAE) and by the Hellenic Industrial Development Bank (ETVA). The Bank provided technical assistance at various stages of project preparation. The project was appraised in February 1976, and negotiations were held in Washington in October 1976. The Greek delegation was led by Mr. Petros Papadakis, Director-General of the Ministry of Coordination. 42. The report, "Appraisal of the Salonica and Volos Sewerage Project, Greece" (No. 1224-GR), dated November 12, 1976 is being distributed separately. A loan and project summary is provided as Annex III. The primary objective of the proposed project is to assist Greece in implementing the needed institu- tional improvements in the sub-sector, including reforms in technical and financial policies and practices and better organizational arrangements, through priority pilot investments in Salonica and Volos. The broad features of these reforms' are described in Part III above. The proposed project consists of: (a) final engineering and construction of the first stage, 1977 to 1981, of the Greater Salonica Area sewerage program including the Axios system serving the city of Salonica and its existing industrial zones and partial rehabilitation of the existing Salonica network, involving construction of about 65 km of secondary sewers, 18 km of trunk and force mains, 6 pumping stations, 8 km of gravity interceptors and about 25 km of the main interceptor, as well as a primary treatment plant and sewer inspection and main- tenance equipment; (b) final engineering and construction of the first stage, 1977 to 1981, of the Greater Volos Area sewerage program, including the infrastructure to serve the projected 1995 population, pre- treatment facilities for wastewater, about 113 kms of related secondary sewers, 18 kms of trunk and force mains, 6 pumping stations, a pre-treatment plant, a 8 km interceptor and an ocean outfall; (c) technical assistance for: (i) a feasibility study for the Mega Emvolon Sewerage system in the Greater Salonica Area; (ii) industrial wastewater surveys in the Greater Salonica and Volos areas to determine appropriate industrial wastewater policies and tariffs; (iii) oceanographic studies of the Thermaikos and Pagasitikos Gulfs to minimize pollution of the project receiving waters, and (iv) studies of the systems of accounting and financial control of the responsible water and sewerage authorities and of their tariff structures; and (d) training for MPW and MI senior staff.  - 14 - 43. The proposed project provides for 220 man-months of consultant ser- vices, including 20 man-months of foreign consultants, to assist in carrying out studies. An additional 1,200 man-months, including 250 man-months for foreign consultants, are provided to assist in final design and supervi- sion of construction of the two components which is reasonable for a project of this type. Project Costs and Financing 44. The total estimated cost of the project is $113.5 million, with a foreign exchange component of $36 million. Including physical and price con- tingencies, the Salonica component is estimated to cost $87.7 million, with a foreign exchange component of $29.5 million, with the costs for the the Volos component $24.8 million and $6.1 million respectively. Studies and training will cost an additional $1.0 million, of which $0.4 million is expected to be in foreign exchange. Details are given in Annex III. The cost estimates assume that the civil works contracts will be won by local contractors. An average physical contingency of 11 percent and an average price contingency of 58 percent have been provided (51 percent on foreign costs and 61 percent on local costs). The average costs of consulting services used are about $4,800 per man-month for foreign consultants and $2,100 for Greek consultants. 45. The proposed loan of $36 million equivalent will finance the for- eign costs of the project and cover 32 percent of the total project costs. The loan would be to the Hellenic State for 15 years including a three-year grace period. The financing plans for the two sub-projects are shown below: Amount US$ (Million) % Salonica Internal Cash Generation and Other 14.9 17.0 Borrowings IBRD Loan 29.5 33.6 Government Loan 43.3 49.4 Total: 87.7 100.0 Volos Internal Cash Generation 2.9 11.6 Borrowings IBRD Loan 6.1 24.6 Government Loan 7.9 31.9 Government Equity 7.9 31.9 Total: 24.8 100.0 The Government will also provide $0.6 million equivalent for the local costs of the studies and training. As can be seen, substantial funds are expected to be provided from the authorities' own sources, particularly in Salonica  - 15 - where an existing system broadens the revenue base. In any case, the Govern- ment has agreed to provide, or cause to be provided, all the funds needed to carry out the project under terms and conditions acceptable to the Bank (Loan Agreement section 3.01). Upon completion, all the project works will have been transferred to the local sewerage authorities. The authorities will repay the Government for the Bank funds under the same terms and conditions as the Bank loan (Loan Agreement Section 3.01). Since the two authorities may not have sufficient funds to provide customers with credit facilities to cover connection fees and consumer contributions to construction costs, the Government has agreed to provide funds for this purpose (Loan Agreement, Section 3.01 (d)). Project Execution 46. MPW will have primary responsibility for project execution which by June 1977 will be assumed by its new Wastewater Department. MPW already has adequate staff for this purpose, and will expand its staff as needed to undertake the wider responsibilities envisioned for it in future. Final designs will be prepared by consultants acceptable to the Bank and construc- tion will be carried out under their supervision by qualified contractors, both under the overall supervision of MPW. In order to develop the capability of the two project authorities to undertake future project design and con- struction, staff from the two authorities will be assigned by June 1978 to work with MPW staff on the project (Loan Agreement, Schedule 5). Because of the specialized technical expertise required, the responsibility for con- struction of treatment plants and disposal facilities will remain with MPW for the foreseeable future. The consultants for project final designs should be selected and employed before December 31, 1976 (Loan Agreement Section 3.04). Construction is expected to have started by the end of 1977 and to be completed in 1981 and will require the acquisition of land and rights of way and the relocation of a small number of households. Agreement has been reached that the land and rights of way will be acquired in a timely manner. Greek law provides for relocation of displaced residents (Loan Agreement, Section 3.08). 47. The studies of industrial wastewater, accounting and financial con- trol and the feasibility of the Mega Emvolon sewerage system will be carried out by consultants whose qualifications, experience and terms and conditions of employment will be acceptable to the Bank. Because of the importance of the first two studies to the institutional objectives of the project (para- graphs 32 and 39 above), the Government has agreed that the consultants for these will be employed by June 30, 1977 (Loan Agreement Section 3.04). The oceanographic studies will be carried out under terms of reference acceptable to the Bank by IOKAE under contract with MPW. IOKAE is adequately staffed for this purpose. To evaluate the progress towards the projects technical, financial and administrative objectives and provide guidance in the develop- ment of future policies, the Government has agreed to monitor key indicators of performance on the basis of criteria satisfactory to the Bank (Loan Agree- ment Section 3.07(c)).  - 16 - Procurement and Disbursement 48. Equipment and materials contracts estimated to cost more than $200,000, and civil works contracts estimated to cost more than $500,000, will be procured after international competitive bidding in accordance with the Bank Group's guidelines. Bidders will be prequalified. Domestic manu- facturers of equipment will be given a margin of preference of 15 percent or customs duties, whichever is lower. Other equipment and civil works con- tracts will be awarded on the basis of the procedures of MPW, which provide for competitive bidding advertised locally but open to foreign firms and are acceptable. Contracts will be grouped to the extent practicable after consul- tation with Bank. Minor works, such as service connections and rehabilita- tion or replacement of secondary sewers, may be carried out by the project authorities under arrangements acceptable to the Bank, up to an aggregate value of $1.0 million. In order to continue the necessary oceanographic studies and to enable final design to be started, advance contracting is con- templated for work by IOKAE and by the engineering consultants. Retroactive financing of up to $100,000 is provided for expenditures incurred after June 30, 1976 for this purpose. 49. The loan would be disbursed against 24 percent of expenditures on civil works and materials (representing the estimated foreign exchange com- ponent), 100 percent of foreign expenditures--and 100 percent of local ex- penditures (ex-factory), in the unlikely event that local manufacturers win contracts for equipment--100 percent of foreign expenditures for consulting services, and 100 percent of foreign expenditures for training of staff. Financial Projections 50. Pro-forma financial statements have been prepared for the two new authorities and projections of their future earnings made under the tariff provisions noted in paragraphs 33 to 35. SSA is projected to earn a rate of return after tax on total net fixed assets of 5 to 6 percent from 1981 onward, and VWSO about 4 percent after 1981. SSA would have a debt equity ratio of about 50/50 in 1981, which would fall thereafter, and debt service coverage would be 1.4-1.5 times in each year following project completion. For VWSO, the debt equity ratio would be about 45:55 by 1980 and and remain fairly constant thereafter; debt service coverage is expected to be 1.4-1.5 times in each year following project completion. In order to ensure the liquidity of both SSA and VWSO, agreement has been reached that further borrowings will not be undertaken by either authority without Bank concurrence unless net revenues (before depreciation and interest) exceed 1.3 times debt service in any future year (Loan Agreement, Section 4.11). The accounts and financial statements of SSA and VWSO will be annually audited by independent auditors acceptable to the Bank (Loan Agreement, Section 4.03). Benefits and Risks 51. The main benefit anticipated from the project will be the development of institutions and policies which can cope in an efficient and expeditious manner with the long-term human, environmental and developmental problems  - 17 - posed by wastewater disposal in Greece. The proposed Salonica sub-project will specifically help prevent further deterioration of the water quality of Salonica Bay, eliminate the odors which presently affect the city during part of the summer and allow the reestablishment of fishing and reopening of bathing beaches. The project will help eliminate the unsanitary conditions created by overloaded septic tanks serving the poorest areas, and by the present discharge of raw sewage into inland water courses. Some adverse effects will result from the discharge of primary effluent into the Axios River, although these effects will be reduced by the use of chemical coagula- tion. The problem is expected to become serious only after 1995 when either the upgrading of treatment or the construction of an effluent outfall will be required. Since the affected part of the Axios River is not presently populated, these adverse effects will be far outweighed by the resulting benefits of improved sanitation in and around the city. 52. In Volos, the proposed sub-project will allow closing down a large number of the septic tanks which constitute a serious threat to the city's water supply, and will stop the incipient deterioration of the bay's water quality. The preliminary oceanographic studies indicate that the pro- posed outfall location provides for adequate dilution of the pollutant ex- pected up to 1995 and thus no significant detrimental affects are expected. 53. While there is increasing recognition of the important benefits de- riving from well-conceived sewerage projects, including the positive environ- mental effects noted above, these benefits are difficult to quantify. The dangers of large-scale industrial pollution to health often cannot be veri- fied until after long exposure. The project will improve health, increase property values and ameliorate fishing and recreation, as a result of the removal of wastewaters from inland areas and the improvement of coastal waters and beaches. Moreover, the proposed systems are necessary for the orderly development of the two cities. The proposed methods of collection, treatment, and disposal of sewerage are adequate and represent the least cost solutions for each project area. 54. The investments and measures supported by the proposed loan are an integrated and well-conceived package. Nevertheless, some of the changes envisaged require legislative approval and therefore face the risk that the legislative authorities will not act promptly or will disagree with the Government's proposals. There are also the usual risks of delay and cost increases associated with a large and complex construction program. These risks are mitigated by the Government's strong desire to make fundamental changes in the sub-sector, and by the careful attention that has been given to the preparation of the project. PART V - LEGAL INSTRUMENTS AND AUTHORITY 55. The draft Loan Agreement between the Hellenic State (the Borrower) and the Bank, the Report of the Committee provided for in Article III, Sec- tion 4(iii) of the Articles of Agreement and the text of a draft resolution  - 18 - approving the proposed loan are being distributed to the Executive Directors separately. The draft agreement conforms generally to the normal pattern for loans for sewerage projects. 56. It is a special condition of loan effectiveness that either one of the following sets of events has occurred: (a) with respect to SSA: (1) SSA's jurisdiction, responsibilities and tariff powers have been appro- priately extended and modified in a manner satis- factory to the Borrower and the Bank; and (2) a satisfactory agreement has been entered into between the Borrower and SSA; or (b) with respect to VWSO: (1) VWSO has been established in a manner satisfactory to the Borrower and the Bank; and (2) a satisfactory agreement has been entered into between the Borrower and VWSO. It is a special condition of disbursement for each sub-project that the set of events referred to above relating to that sub-project has taken place by June 30, 1978. 57. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 58. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments November 15, 1976  ANNEX I Page Tof 6 pages TABLE 3A GREECE - SOCIAL INDICATORS DATA SHEET LAND AaEA (THOU K1(121 --- ---- -------------- ~GREECE REFERENCE COUNTRIES (1970) TOTAL 131.9 MOST RECENT AGRIC. .. 1960 1970 ESTIMATE SPAIN BILDIUI FNUJE GNP PER CAPITA (USs) 530.0 1390.0 2360.0* 1560.0 3760.0 3620.0 POPULATION AND VITAL STATISTICS _______________________________ PCP'ILATION (MID-YR, MILLION) 8.3 8.8 9.1 33.6 9.7 50.8 PnPULATION DENSITY PEP SOUARE KM. 63.0 67.0 69.0 67.0 317.0 93.0 PER SQ. KM. AGRICULTURAL LAND 93.0 99.0 *- 97.0 599.0 154.0 VITAL STATISTICS AVFIRAGE 8IRTH RATE (/THOU) 19.4 18.1 15.4 21.0 16.3 17.6 AVE9AGE DEATH RATE (/THOU) 7.3 8.0 9.4 8.8 12.3 11.2 INFANT MORTALITY RATE I/THOU) 40.1 29.6 24.0 27.9 21.1 18.2 LIFE FgEPCTANCY AT BIRTH (YRS) 68.0 70.9 71.8 70.8 70.9 11.6 GRCRS FPQO0UCTIUN RATE 1.1 1.0 1.0 1.4 1.3 1.3 PCPJLATICK GQOwTH PATE (U) '9TAL 1.0 0,5/a 0.7 1.1 0.5 1.1 liJ.EN 2.1 1.5 .. 2.0 1.3 2.5 UPHAE[ PliPULATION (- OF TlTALI 57.0 62.6 .. 59.1 71.2 70.2 A,0C STPIICTURE (PF9CFNTI 0 Ti 14 YFARS 26.7 24.9 24.4 77.8 23.7 24.0 15 Ttl 64 YEARS b6.1 64.0 63.9 62.5 63.0 62.6 cs Y ARS ANC 'JVED 8.2 11.1 11.7 9.7 13.3 13.4 AGF VECONDENCY RATI, 0.5 0.6 0.6 0.6 0.6 0.6 LCCrN-1IC DEPENDENCY RATIO 0.9 .. 1.1 aI .1 0.9 0.9 FAfILY PLANNING ACCFPTORS (CUMULATIVF, TDO) .. .. .. I LSEPS C2 OF MARRIED WOMEN) .. .. .. 'EPLOYME1T TOTAL LARCE FORCF ITHIUSANO) 3600.0 / .. 3300.0 11900.0 3600.0 20600.0 LAP.2 F1lRCE IN AGRICULTURE (7) 54.0 .. 34.0 24.8 5.0 15.1 LNR-PLIYEC IT rF LAOCR FORCE) 6.0 /5 .. 3.0 /ab 2.0 /a 3.0 /a 2.2 INCIEF OISTPIBUTIUN % [IF PIIVATE INCOL: REC*n 8Y- HIGHIST 5S OF HOUSEHOLDS 18.7 Ic .. .. HIGH ST 20t OF HGUSEHOLDS 44.7 7 .. ... L'4IWST 20r rF HOUSFHOLDS 6.3 7 .. ... ICWPST 4J0 OF HUISEHOLDS 17.4 7 .. ... OIS TA IJTION OF LAND 04\ERSHIP ______________________________ 8 CwNEn AY TCP 1t0 OF OWNERS 275 I/a t OWN-0) IY SEALLEST 10 OWNERS 2.6 7a- HEALTH ANO NUTEITION POPULATTION PEF PHYSICIAN 790.0/d 62J.0 500.0 753.o Ab 6S0.0 750.o POIJI ATI ON PEP NUPSINC PERSCN 1260.07d e 1140.0 1480.0 / c 1430.0 410.0 370.0 R P.PLATIDN PEP HOSPITAL RED 170.07KXf 160.0 160.0 220.o 120. 0 140.0 IA DFO CAPITA SUPPLY nF - CAL PIES IA OF DEOUIPEMENTSI 120.0 116.0 128.0 /d 107.0 128.0 127.0 PAOTTIN (GPAMS PER OAY) 99. 0 99.0 113.0 7J 81.0 94.0 104.0 -r ,HICP ANIMAL AND PULSE 39.0 & 52.0 /A .. 40.0 56.0 66.0 IEATH mRTE t/TIiTTl AGES 1-4 .. .. 0.9 /a 0.9 0.9 0.8 EDUCATIUN ADJUSTED FNROLLMENT IATin PRIMARY SCHCOL 109.0 106.0 107.0 131.0 111.0 118.0 / SFCONDARY SCHr]OL 39.0 66.0 69.0 ___ 570 84.0 74 0w YEARS OF SCHCCLING PROVIDEO 57.0 H (FIRST AND SECOND IEVEL) 12.0 12.0 12.0 13.0 14.0 14.0 VOCATIONAL ENRnLLMENT 1t CF SECONDARY) 17.0 A 20.0 22.0 Ia 20.0 60.0 19.0 ADULT LITERACY RATE 18 80.0 82.0 . 94.0 99.0 99.0 HOtS I NG PERSONS PER ROjM (AVERAGF) 1.4 .. 0.9 0.6 0.9 OCCUPIEC DWELLINGS WITHOUT PIPED WATER 18) 71.0 A 35 .0