Turkey - Antalya Water Supply and Sanitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6420-TU MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$100 MILLION TO THE ANTALYA WATER SUPPLY AND SEWERAGE AUTHORITY WITH THE GUARANTEE OF THE REPUBLIC OF TURKEY FOR THE ANTALYA WATER SUPPLY AND SANITATION PROJECT APRIL 26, 1995 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Turkish Lira (TL) AVERAGE EXCHANGE RATES TL per US$1 December 1993 June 1994 December 1994 14,458 31,162 37,372 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS AMM - Antalya Metropolitan Municipality ASO - Antalya Water and Bus Department ASAT - Antalya Water Supply and Sewerage Authority DM - District Municipality DSI - State Hydraulic Works EIB - European Investment Bank iB - Iller Bank (Local Authorities Bank) Sirket - Management company for Water Supply, Sewerage and Solid Waste incorporated under the Turkish Trade Law TURKEY - FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY REPUBLIC OF TURKEY ANTALYA WATER SUPPLY AND SANITATION PROJECT Loan and Proiect SummarY Borrower: Antalya Water Supply and Sewerage Authority (ASAT) Guarantor: Republic of Turkey Poverty: Not applicable Amount: US$100 million equivalent Terms: Seventeen years, including five years of grace, at the Bank's standard variable interest rate Financing Plan: Local Foreign Total ------ US$ million ------- World Bank 0.0 100.0 100.0 EIB 19.1 26.9 46.0 Iller Bank & DSI 32.0 3.0 35.0 Internal Cash Generation 63.6 0.0 63.6 TOTAL 114.7 129.9 244.6 Internal Rate of Return: 9% Staff Appraisal Report: Report No. 13516-TU Malps: IBRD Nos. 26274 and 26275 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. l   MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ANTALYA WATER SUPPLY AND SEWERAGE AUTHORITY FOR THE ANTALYA WATER SUPPLY AND SANITATION PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed loan to the Antalya Water Supply and Sewerage Authority (ASAT) for US$100 million equivalent, with the guarantee of the Republic of Turkey to help finance the Antalya Water Supply and Sanitation Project. The loan would be at the Bank's standard variable interest rate, with a maturity of seventeen years, including five years of grace. A parallel financing totalling US$46.0 million is to be provided by the European Investment Bank (EIB). 2. Country/Sector Background. Turkey enjoys abundant aggregate water resources. However, there are some regions facing permanent or seasonal water shortages. About 93 percent of the population is served with piped water but the quality of service is often poor. Water consumption (77 lcd) is about 39 percent of the European average (200 lcd). Water resources are estimated at about 200 billion m3/year, of which 60 percent are used for irrigation and the rest for municipal and industrial use. In the Central Government, the responsibility for water and sewerage is shared by six different organizations. 3. Greater Metropolitan Antalya (AMM) is a major tourism center and the largest municipality on the southern Turkish Mediterranean coast with a population of 491,000 in 1994, growing at an average annual rate of 7 percent. About 95 percent of the population is connected to the water supply network, and 100 percent to individual septic tanks, cesspits or small sewage treatment plants. Handling of septage is provided by the municipal Environmental Health Department and three private companies. Domestic, commercial and industrial wastewater is currently discharged into the underlying karstic limestone travertine formation. This has degraded underground water quality and has had negative impacts on water supply, health, recreation and fisheries. The provision of water supply and distribution is inefficient. Non-revenue water accounts for 46 percent of production. These losses generate pressure for premature development of new water sources. Moreover, pollution from septic tanks has forced AMM to abandon some springs and wells, and soon other water sources will have to be abandoned. 4. Lessons Learned from Previous Bank Operations. In the past 20 years the Bank provided eight loans amounting to US$946.3 million to water authorities in Istanbul, Ankara, Izmir and Bursa and to small municipalities in the Cukurova Region. Five of the projects are still under implementation. The Bank-financed projects have been partially successful in meeting their physical targets and in encouraging the Government to establish municipal water authorities, thereby reducing the need for financial support from the central and municipal governments. Lessons learned from the previous projects indicated a need to improve efficiency. In view of the generally poor track record and constraints faced by public sector entities, there is a growing consensus that private sector participation would improve project management and financial discipline. Past projections of water sales and implementation schedules generally proved to be too optimistic. It was also learned that for timely and successful project implementation, detailed designs should be prepared in the early stages of the project. Last but not least, it is  - 2 - essential to obtain a clear political commitment to implement adequate tariff levels and improve utility finances. The proposed project takes the above lessons into account and goes a step further than previous projects by promoting important institutional changes to enable significant private sector involvement. 5. Rationale for Bank Involvement. This project is consistent with the Bank's strategy for Turkey as outlined in the Country Assistance Strategy (CAS) discussed by the Board on March 11, 1993. The strategy includes support to help improve water supply and the environment, promote sustainable use of natural resources, and strengthen local institutions' capacity. Recently, through a review of sector issues (Urban Water and Sanitation Sector Review, March 26, 1993) and a workshop, the Bank has promoted discussion of institutional changes aiming at: (a) reducing Central Government involvement in water supply and sanitation investments; (b) promoting decentralization of investment responsibilities and service delivery; and (c) encouraging private sector involvement wherever possible. The proposed project outlines a course to achieve these goals, and hence could have potential for replication in other municipalities. Also, the proposed project is to be followed by a solid waste management project, also for Antalya, which is expected to be submitted for Board consideration shortly, after the borrower completes all the necessary requirements for acquiring the land for the landfill. The solid waste management project would aim at: (a) improving solid waste collection; (b) developing a new sanitary landfill; (c) improving land management and pollution monitoring; and (d) contracting out with the private sector solid waste operations and street sweeping. 6. Project Objectives. The proposed project would be an important step in the implementation of the Bank's strategy in the water supply and sanitation sector. The objectives of the proposed project are: (a) to meet at least cost the demand for water supply, sewerage, and stormwater drainage; (b) to develop new institutional arrangements for management of municipal water supply, sewerage and stormwater drainage, and to introduce private sector participation in the operation of the services; (c) to implement appropriate cost recovery policies; (d) to postpone the need to develop costly new water resources by improving the efficiency of utilization of existing sources and of water usage; and (e) to improve and sustain environmental conditions and reduce health hazards that threaten the local population and the tourism industry. 7. Prolect Description. The project would support the policies needed to achieve the objectives summarized above. The project represents the first phase, to be implemented from 1995 through 2002, of an investment program designed to continue to the year 2020. The project will: (a) renovate, rehabilitate and extend the existing water supply network; (b) provide a new sewerage network and a preliminary wastewater treatment plant on the western part of the Municipality; (c) improve operation of septic tanks in the eastern part of the city; (d) upgrade the stormwater drainage system in flood areas and establish a comprehensive master plan; and (e) provide 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). 8. Project Implementation. 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, AMM and the District Municipalities (DMs) and incorporated under Turkish trade law. The creation of this Sirket, which will oversee the operation of the services by a private operator 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 water supply and sewerage services. A high-level expert for the PMU, experienced in project management and familiar with the Bank's procurement and disbursement procedures and guidelines, will be hired as a condition of loan effectiveness. 9. Project Cost and Financing. The project cost is estimated at US$244.6 million equivalent, with a foreign exchange component of US$129.9 million equivalent (53%), including taxes and duties estimated at about 9% of total cost. The Bank would finance US$100.0 million (77% of the foreign exchange cost and 41% of the total financing required). EIB would finance US$46.0 million, Iller Bank US$31.5 million, DSI US$3.5 million and internal cash generation US$63.6 million. 10. The Bank would finance incremental recurring expenditures for the Sirket and the PMU (US$200,000 each) for a limited period (until the end of August and November 1996, respectively). The financing of the Sirket is required to cover its operating costs from the initiation of operations until the flow of tariff-based income from the private operator of the water and sewerage system becomes effective. The financing of the PMU is required to substitute for the Japanese Grant until the Sirket is fully operational. Retroactive financing in an amount of US$600,000 would be provided to cover PMU expenditures after March 31, 1995. 11. Issues and Actions. At negotiations agreement was reached that ASAT would invite bids for the private operator of water and sewerage services not later than October 31, 1995, and that the private operator would be hired not later than May 31, 1996. Assurances were obtained that ASAT would implement tariff and other charges sufficient to ensure full coverage of: (i) ASAT and Sirket operating costs; (ii) the charges of the private operator as set in the lease and management contract; (iii) a reasonable contribution to investment; and (iv) debt service. ASAT also agreed to: (a) implement quarterly tariff adjustments to compensate for inflation; (b) not to undertake investments over US$200,000 outside the Project without the prior concurrence of the Bank; (c) to come with alternative financing arrangements if EIB financing is not effective by December 1, 1995. Further, it was agreed that ASAT: (a) would appoint key staff of the Sirket by November 30, 1995 and would limit the Sirket professional staff to a maximun of ten; (b) would contract, not later than April 30, 1996, technical assistance for the Sirket, (c) would sign with the Sirket, not later than November 30, 1995, a subsidiary agreement for contract management and other project related administrative and financial services; and (d) would undertake jointly with the Bank and the Sirket annual reviews of progress in project execution. Prior to loan effectiveness ASAT would: (a) establish the Sirket; (b) engage the technical assistance for the PMU; (c) engage the consultant to assist in the preparation of bidding documents, bid evaluation and negotiations for the hiring of the private operator of the water and sewerage services; and (d) complete all the legal  - 4 - requirements for land acquisition and ensure that no obstacles remain for the completion of the sewage treatment plant. 12. Environmental Aspects. The Project is classified as "B" for the purpose of O.D. 4.01. Analyses consistent with the requirements for Category "B" projects were undertaken during the preparation of the Project and the consultant who prepared the feasibility study took into account the needed assessment and control of detrimental effects of the marine outfall for the treated effluent from the wastewater treatment plant. Satisfactory designs would be submitted to the Ministry of Environment and the Bank for approval before tendering. Civil works contracts would include appropriate requirements to ensure that these works are carried out in such a way as to minimize any negative environmental effects. There are no resettlement issues in the project. 13. The project strives to protect the unique environmental conditions of Antalya, benefitting the local population and the tourism industry as it would: (a) protect and improve underground water quality through construction of sewerage; and (b) improve water distribution and ease pressure on the water sources by reducing water losses. 14. Program Objective Categories. The project would introduce private sector participation in the operation of municipal services and would contribute to improving environmental conditions and reducing health hazards. The gender impact of the project is expected to be positive because adequate access to water tends to alleviate existing burden on women. In 2002, 96% of the population would be connected to the water network with about 60,000 new beneficiary households having been added, including about 12,000 additional low income households. Care has been taken to ensure that water and sewer tariffs do not exceed two percent of the monthly income of the lowest income groups. This is well within the Bank's rule of thumb of 5% of income for maximum level of water and sewer charges for poor households. 15. Participatory Approach. Municipal as well as Central Government authorities participated extensively in the project preparation process including, inter alia, a seminar to discuss the proposed institutional arrangements and a visit to privately-operated water and sanitation facilities in Europe. This has ensured government ownership of the project at both levels. 16. Project Benefits. The project approach supports the Government's decentralization objective in shifting investment responsibility from the government budget to the Municipality, which would recover costs through user charges. It also seeks to strengthen the local authorities responsible for provision of services. In particular, the project would: (a) promote managerial efficiency and improve service quality through the new institutional arrangements that would introduce private sector participation through lease and management arrangements for the operation of the water supply and sewerage services; (b) reduce health hazards to the local and tourist population; and (c) improve environmental conditions. 17. Risks. Project risks relate to: (a) the challenge of setting up, for the first time in Turkey, lease and management arrangements for the operation of public utilities; (b) the Sirket's institutional and financial capacity to carry out a large investment program in view of potential  -- 5 - political interference; (c) the sustained willingness of municipal authorities to maintain cost recovery measures necessary to assure affordability and self- financing; and (d) the ability of Iller Bank and the State Hydraulic Works (DSI) to complete their investments within the expected time. To mitigate these risks substantial up-front actions have taken place. In addition, (i) a seminar was held in May 1994 to discuss private sector participation as an instrument to improve efficiency in the operation of public services; and (ii) a visit of representatives of AMM, DMs, Ministry of Interior and Treasury was organized in May-June 1994 to privately-operated water and sanitation facilities in France and the UK. Furthermore, the project would include: (i) substantial technical assistance; (ii) commitments from Iller Bank and DSI to the objectives of the project; and (iii) a commitment from ASAT to complete land acquisition before loan effectiveness. Another risk relates to securing the full financing required; this would be contained by requiring that EIB financing, which has already been approved, becomes effective by December 1, 1995, or that ASAT secure alternative financing arrangements satisfactory to the Bank. Failure to secure such financing would constitute an event of default. 18. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Lewis T. Preston President by Gautam Kaji Attachments: Schedules A-D Washington, D.C. April 26, 1995  -6- Schedule A ESTIMATED COSTS AND FINANCING PLAN Estimated Project Costs Local Foreign Total ------(US$ million)------ Water Supply Works 36.1 43.0 79.1 Stormwater Drainage works 0.3 0.3 0.6 Sewerage Works 44.7 26.1 70.8 Preliminary Sewage Treatment Plant 6.6 10.0 16.6 Water Supply & Sewerage Equipment 1.9 6.2 8.1 Consultant Services and Engineering 2.9 20.9 23.8 Land Acquisition 1.4 0.0 1.4 Total Base Cost (June 1994) 93.9 106.5 200.4 Contingencies 20.8 23.4 44.2 TOTAL PROJECT COST 114.7 129.9 244.6 Financing Plan % of Total Total World Bank 100.0 40.9 EIB 46.0 18.8 Iller Bank & DSI 35.0 14.3 Internal Cash Generation 63.6 26.0 TOTAL 244.6 100.0  -7- Schedule B Page 1 of 2 PROCUREMENT METHOD AND DISBURSEMENTS'1/ (US$ million) A. Procurement Procurement Method Total Project Element ICB NCB Other N.B.F. Costs 1.0 Works2/ Water Supply, Sewerage 119.20 6.90 76.70 202.80 and Stormwater Drainage (65.20) (3.80) (69.00) 2.0 Goods Water Supply and Sewerage 8.90 0.103/ 1.30 10.30 (5.00) (0.05) (0.55) (5.60) 3.0 Consultant Services Project Implementation 19.40 4.70 24.10 (19.40) (19.40) Institutional Development 6.00 6.00 (6.00) (6.00) 4.0 Miscellaneous Land Acquisition 1.40 1.40 TOTAL 128.10 7.00 26.70 82.80 244.60 (70.20) (3.85) (25.95) (100.00) NOTE: iFigures in parentheses are the amounts financed by the Bank loans. 21Works includes supply and installation of equipment for pumping stations. 31Furniture Other: Includes international/local shopping (US$1.3 million) and selection of consultants according to Bank Guidelines. NBF: Not Bank Financed. Includes amounts financed by EIB (US$46.0 million), lMter Bank (US$31.5 million); DSI (US$3.5 million), and internal cash generation (US$1.8 million)  -8- Schedule B Page 2 of 2 B. Disbursements Amount of the Loan %- of expenditures CategorY Allocated in US$ to be financed 1. Civil Works 57,800,000 54 2. Goods 4,700,000 55 3. Consultant's Services (a) Project Implementation 18,700,000 100 (b) Institutional Development 4,900,000 100 4. Incremental Recurrent Costs (a) for the Sirket 200,000 100% of expenditures through August 31, 1996 (b) for the PMU 200,000 100% of expenditures through November 30, 1996 5. Unallocated 13,500,000 TOTAL 100,000,000 ESTIMATED DISBURSEMENT SCHEDULE (US$ million) World Bank Fiscal Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 Annual 0.0 10.0 10.0 11.5 12.4 18.3 16.1 13.0 8.7 Cumulative 0.0 10.0 20.0 31.5 43.9 62.2 78.3 91.3 100.0  -9 Schedule C Timetable of Key Project Processing Events (a) Time taken to prepare the project: 2 1/2 years, November 1991--May 1994 (b) Prepared by: Antalya Metropolitan Municipality (AMM) with the assistance of the Bank and consultants financed by Japanese Grant. (c) First Bank mission: November 1991 (d) Appraisal mission departure: June 1994 (e) Negotiations: March 1995 (f) Planned date of effectiveness: August 1995 (g) List of relevant PCRs and PPARs: Credit/Loan No. Project PCR Date PPAR No. Ln. 2159-TU Istanbul Sewerage June 1992 10852 Ln. 844-TU Istanbul Water December 1983 4853  10 - ~~~~~~Schedule D THE STATUS OF BANK GROUP OPERATIONS IN TURKEY Page 1 of 2 A. STATEMENT OF BANK LOANS AND IDA CREDITS (As of March 31, 1995) Amount (Srmillion) Fiscal (les cancellations) Loan No. Year Borrower Purpose Bank IDA Undisbursed Ninety-seven loans, six B-loans and 14 credits have been fully disbursed, 7636.15 196.15 of which SECALs, SALs and Program Loans: a/ Ln. 1818-TU 1980 Republic of Turkey SAL 200.00 0.00 Ln. 1915-TU 1981 Republic of Turkey SAL 75.00 0.00 Ln. 1987-TU 1981 Republic of Turkey SAL 11 300.00 0.00 Ln. 2158-TU 1982 Republic of Turkey SAL III 304.50 0.00 La. 2321-TU 1983 Republic of Turkey SAL IV 300.80 0.00 Ln. 2441-TU 1984 Republic of Turkey SAL V 376.00 0.00 * Ln. 2585-TU 1985 Republic of Turkey ASAL 250.19 0.00