Romania - Bucharest Water Supply Project

Document of The World Bank Report No. 15307-RO STAFF APPRAISAL REPORT ROMUNIA BUCHAREST WATER SUPPLY PROJECT July 8, 1996 Infrastructure Division Country Department I Europe and Central Asia Region  CURRENCY EQUIVALENTS (as of July 8, 1996) Currency Unit = Leu (ROL) ROL 1,000 = US$ 0.33 US$1 = ROL 3,041 AVERAGE EXCHANGE RATES ROL per US$1 1992 1993 1994 1995 308 760 1660 2070 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS CAS - Country Assistance Strategy CIF - Cost, Insurance and Freight CLMB - Bucharest Municipal Council (Consiliul Local al Municipiului Bucuresti) FESAL - Financial and Enterprise Sector Adjustment Loan FIP - Financial Improvement Plan FRP - Financial Recovery Plan ICB - International Competitive Bidding IRR - Internal Rate of Return IS - International Shopping MOF - Ministry of Finance MOH - Ministry of Health MOPWRD - Ministry of Public Works and Regional Development MOWFEN - Ministry of Water, Forests, and Environment NCB - National Competitive Bidding OED - Operations Evaluation Department PCU - Project Coordination Unit PIP - Project Implementation Plan RA - Regia Autonomd RADET - Bucharest District Heating Company (Regia Autonoma de Distribupie a Energiei Termice) RATB - Bucharest Public Transport Company (Regia Autonomna de Transport Bucureti) RGAB - Bucharest Water and Sewerage Company (Regia Generala de Apa Bucuresti) RENEL - Romanian National Power Company (Regia Nationala de Electricitate) STAP - Short-Term Action Program VAT - Value-Added Tax ROMANIA - FISCAL YEAR January I - December 31  STAFF APPRAISAL REPORT ROMANIA BUCHAREST WATER SUPPLY PROJECT CONTENTS LOAN AND PROJECT SUMMARY ........................... i PART I. COUNTRY AND SECTOR BACKGROUND .1 A. Country and Sector .1 B. Water Supply in Bucharest. 3 C. Development Strategy Issues. 5 D. Role of the Bank and Lending Strategy. 7 E. Bank Experience in the Sector and Lessons Learned. 8 PART II. THE PROJECT. 9 A. Project Origin. 9 B. Project Rationale and Objectives. 9 C. Project Description .10 D. Cost Estimates .11 E. Project Financing Arrangements .12 F. Environmental Aspects .13 PART III. PROJECT IMPLEMENTATION AND SUPERVISION ARRANGEMENTS .15 A. Organization and Management .15 B. Procurement .15 C. Disbursements ...................................... 17 D. Project Monitoring, Supervision and Auditing .19 PART IV. FINANCIAL AND INSTITUTIONAL ASPECTS .20 A. General Aspects .20 B. RGAB's Past Financial Performance .20 C. Tariff Schedule and Level .22 D. RGAB's Future Financial Performance .23 PART V. PROJECT BENEFITS AND RISKS .27 A. Project Benefits .27 B. Project Risks .29 PART VI. AGREEMENTS REACHED AND RECOMMENDATIONS . .31  ANNEXES: 1. Environmental Review 2. Financial Analysis 3. Economic Evaluation 4. Quarterly Disbursement Estimates 5. Project implementation Plan (PIP) 5.1 Detailed Project Description 5.2 Procurement Plan 5.3 Sunmmary Implementation Plan 5.4 Disbursement Plan 5.5 Performnance Monitoring Indicators 5.6 Reporting Plan 5.7 Technical Assistance Terms of Reference: (a) Project Coordination Unit (b) Public Awareness Campaign/Financial Incentive and Tariff Studies (c) Operational Assistance and Training 6. Short-Term Action Program (STAP) 7. Project Supervision Plan 8. Selected Documents Available in the Project File MAP: Map IBRD 27830 Romania - Bucharest Water Supply Project CHARTS: Chart A Organizational Structure of RGAB This document is based on the findings of an appraisal mission to Romania from December 4 to 15, 1995. Members of the mission included Felix A. Jakob (Task Manager); Augusta Dianderas (Water Sector Specialist); Pascal Douard (Municipal Engineer); Bernardo Gomez (Financial Analyst); Anca Dumitrescu (Project Officer, Romania Resident Mission); and Kristalina Georgieva (Environmental Specialist). Mirtha Pokorny (ECIIN) helped in the preparation of the economic evaluation and Anita George (EClIN) in that of the final results of the financial analysis. Peer reviewers were Vincent Gouarne (EMTIE), Peter Koenig (EMTAW), and Guillermo Yepes (TWUWS). The Division Chief is Ricardo A. Halperin and the Department Director is Kenneth Lay. The project was prepared with the support of a Japanese Government PHRD Grant to Romania.  ROMANIA BUCHAREST WATER SUPPLY PROJECT Executive Loan and Project Summary Borrower: Romania Beneficiary and Regia Generall de Apa Bucuresti - RGAB (Bucharest Water and Implementing Agency: Sewerage Company) IBRD Loan Amount: US$ 25 million Lending Terms: Twenty years, including five years of grace, at the standard variable interest rate for LIBOR-based US Dollar single currency loans. On-Lending Terms: To RGAB, for twenty years, including five years of grace, at the standard variable interest rate for LIBOR-based US Dollar single currency loans. Project Objectives: The primary objectives of the project are to: (a) improve the reliability and quality of water supply in Bucharest; (b) progressively reduce water losses (both physical and commercial); and (c) strengthen RGAB's operational, commercial and financial management. Project Description: To achieve these objectives, the project would comprise the following components: (a) Improvement of water supply reliability and quality - through the rehabilitation of water treatment plants and water pumping stations (US$ 14.5 million; 33% of base cost); (b) Reduction of water losses - through (i) the repair and replacement of deteriorated sections of the primary and secondary distribution network in several neighborhoods of Bucharest; and (ii) the replacement of meters foi residential and commercial consumers; (US$ 24.9 million; 57% of base cost); and (c) Institutional Strengthening of RGAB - through technical assistance to improve the company's customer account management for the reorganization of billing and collection operations, develop the effectiveness of its operational management, and prepare and implement public awareness and water conservation programs, (US$ 4.1 million; 9% of base cost). Project Benefits: The project supports the rehabilitation of infrastructure which has been identified as a priority in the Bank's Country Assistance Strategy (CAS). The project benefits for RGAB would consist in (a) decreases in operating costs as a result of the progressive reduction of physical and commercial water losses; and (b) increases in RGAB revenues from the improvement in the company's commercial and financial management. The IRR, that has been calculated with very conservative assumptions for the project components with quantifiable benefits (76% of total base cost), is about 12%. The benefits for  ii the consumer, though not quantifiable, are significant and include improved reliability of water supply in terms of daily hours of adequate supply and pressure, as well as an improvement in water quality and concurrent reduction of public health risks arising from water-borne diseases. Environmental Impact: The project has been classified as a category "B" project. An environmental review has been carried out consistent with the provisions of the World Bank's O.D. 4.01 "Environmental Assessment" and the applicable environmental procedures of the Government of Romania. Project Risks: The principal risks faced by the proposed project are of two kinds: financial risks: although assurances have been given, and official commitments made, by both the Romania Government and the Bucharest municipality as to the availability of counterpart funding, Bank-experience shows that the possibility of a future shortfall of such resources either at the central government level (owing to a deterioration of the country's macro-economic conditions) or at the Bucharest municipality level (owing to local fiscal difficulties) can never be ruled out entirely; and technical risks: even if carefully planned and prepared, the implementation of a first-time investment operation by a new beneficiary carries inherent risks, including possible delays in implementation start-up due to (i) the beneficiary's general inexperience in this type of activity; and (ii) his lack of practice in dealing with the complexity of the procurement review and approval process by the Government. While the technical risks can be mitigated by the build-up of RGAB's implementation capacity through provision of technical assistance and an early completion of procurement documents, the project's financial risks are, to a large extent, not project-, but country-specific. They can only be addressed through the continuation and intensification of the ongoing dialogue with the Government and the Bucharest municipality on institutional and financial management issues for local governments. The risk of a deterioration of RGAB's financial performance and its ensuing inability to make its financial contribution to the project is mitigated by (a) the Government, the Bucharest municipality, and RGAB's to implement the three-year Short-Term Action Plan (STAP) included in the project; and the implementation of a technical assistance program for the strengthening of RGAB's customer account management department that was initiated in January 1996 under funding from the French Government. Rigorous planning of work execution and continuous monitoring of project implementation by staff from Bank headquarters and the Bank Resident Mission in Romania is planned. Project ID Number RO-PA-8778  Project Cost and Financing: ----------------USS Millions---------------- Project Components Local Foreign Total % Foreign A. Improvement of Water Supply Reliability 6.4 8.1 14.5 56 B. Reduction of Water Losses 13.2 11.7 24.9 47 C. Institutional Strengthenirg of RGAB 1.4 2.8 4.2 67 Base Cost 21.0 22.6 43.6 52 D. Physical Contingencics 2.0 1.0 3.0 E. Price Contingencies 1.6 1.8 3.4 Total Project Cost 24.6 25.4 50.0 51 Financing Plan: ----------------US$ Millions---------------- Local Foreign Total % Total IBRD 25.0 25.0 50 Government 15.0 15.0 30 Bucharest Municipality 7.5 7.5 15 RGAB 2.1 0.4 2.5 5 Total 24.6 25.4 50.0 100 Estimated Disbursements: Bank Fiscal Year 1997 1998 1999 2000 2001 Annual 4.0 9.5 7.5 3.0 1.0 Cumulative 4.0 13.5 21.0 24.0 25.0 Intemal Rate of Return: about 12 % Poverty Category: nla   ROMANIA BUCHAREST WATER SUPPLY PROJECT STAFF APPRAISAL REPORT I. COUNTRY AND SECTOR BACKGROUND A. Country and Sectoral Context 1.1 Country Profile. With a land area of 283,000 km2 and a population of about 23 million, Romania is the second largest country in Eastern Europe, after Poland. Until World War 11 a country with an agriculture-dominated economy, Romania underwent, under the communist rule, a process of forced industrialization that inter alia resulted in an increase of the urbanization rate from 23 % in 1948 to 54% in 1990. Following the overturn of the Ceaucescu regime in 1989 the economy suffered a decline of about 40% over the first three years of transition. Since then it has resumed growing reaching in 1994 a growth rate of 4% and a GDP per capita of about US$ 1,450. The growth rate is estimated to have reached 5% in 1995 and could stay at that level for the rest of the decade if sound economic policies continue to be followed. Inflation that was at 260% in 1993, decreased to 137% in 1994, and to 31% in 1995. The economic transition has not gone without deeply affecting the population's living standards. According to the Bank's 1995 Poverty Assessment, average household income in 1993 stood, in real terms, at about 80% of that of 1989, while over the same interval the level of poverty had countrywide increased from about 4% to about 22%. In 1995 Romania became an associate member of the European Union and it is expected that this will contribute to accelerate the transition to a market economy. 1.2 In parallel to taking the necessary measures to stabilize the economy, the Government has moved on a number of structural reforms. Significant progress has been made in price reform (including the reduction of controls on industrial and agricultural products, energy price increases to acceptable levels and virtual elimination of consumer subsidies) and tax reform. The most difficult challenges have been the enforcement of enterprise financial discipline and the acceleration of privatization, two issues that are now addressed, in coordination with the IMF, under the Financial and Enterprise Sector Adjustment Loan (FESAL) which was approved by the Board on January 18, 1996. 1.3 Local Government. In 1991 Romania reverted to local autonomy as a basic principle of governance and established a two-tiered system of public administration, within which the central governmert and State administration is paralleled by a system of local government. The local government system is comprised of two distinct, non-hierarchically organized segments: district governments (judefe) and municipalities (municipii, orare, and comune).' Districts, of which there are forty-one (including Bucharest), are responsible for matters of regional/sub-regional interest, whereas municipalities, totalling close to 3,000, are in charge of matters of local interest. Because of its role as the country's capital and the size of its population, Bucharest has a special status as it combines features of both a district and a municipality. 1.4 Although endowed, in principle, with autonomy in financial management, local governments (both districts and municipalities) have little own revenue and therefore rely extensively on inter-governmental fiscal transfers for both the funding of current and capital expenditures. Financing The classification reflects population size and geographical importance of the locality, but does not involve any difference in terms of legal obligations and/or responsibilities of the respective local governments.  2 of major investment projects is almost exclusively secured through project-specific investment grarnts from the State budget. Because of the decline of the overall economy and the Government's efforts to reduce inflation, investment appropriations for local infrastructure and services which in comparison to other countries have traditionally been low in Romania, have shrunk even further in recent years falling from 2.2% of GDP in 19l to 1.9% in 1994. As a result, there is an enormous backlog of investment needs which, if not addressed, may pose constraints to the resumption of economic growth. 1.5 Provision of Local Public Services. Provision of local public services is a responsibility of municipalities. Most services are delivered by local utilities, so-called local regie autonome (Ras). Local RAs were created in 1990 as a result of the break-up of the of the former State enterprise complex. Local RAs are legally independent entities endowed with a distinct administrative board, but operate under the overall supervision and regulatory oversight of the municipal governments. They are run, in principle, on a self-financ..Ag basis and have the legal capacity to raise loans for the financing of their capital expenditure needs. Tariffs for services are regulated by the-municipal authorities in consultation with the Ministry of Finance (MOF) and, specifically, its Department for Prices and Protection of Competitiori. Typically, tariffs cover only the operating costs of the utilities, whereas investments for infrastructure ani equipment, like other municipal investments, are financed, on a grant basis, from the central government budget and, occasionally, from small contributions by the municipalities themselves. 1.6 The currently existing local RAs result from the dismantling in 1990 of previously State- owned public service enterprises that until then operated at district level. Because their creation predates the establishment of the new local government system in 1991, the legal regime under which these local RAs operate has remained imprecisely defined in certain areas. A definitive ruling on the property regime of RA assets that were formerly owned by the State is still outstanding and some aspects of the legal relationship between the local RAs, the overseeing municipal authorities, and the central government administration still require further clarification, in particular as far as the precise delimitation of the respective competencies in matters of setting of technical and financial objectives, and monitoring of management performance is concerned. However, the existence of these deficiencies does not pose any problem for the proposed operation. Moreover, amendments to the existing legislation on local governments are currently under discussion at the Parliament. 1.7 Like their equivalent operating at national level, most local RAs face severe financial problems. Their ability to offset cost increases is constrained by a complex approval process that is often influenced by political concerns about the possible impact of tariff increases. Moreover, they are confronted with a widespread lack of payment discipline among their customers. As a result, local RAs face difficulty to meet their financial obligations. Financial shortfalls have been customarily minimized by cutting maintenance expenditures below acceptable levels and delaying payments to suppliers. Because of the potentially severe macroeconomic consequences of a continuing build-up of public sector enterprise arrears, restoring stricter discipline in the financial management of public enterprises is one of the objectives of the FESAL which includes Financial Recovery Plans (FRP) for a series of RAs. 1.8 Water Sector. Romania is comparatively well endowed with both surface and underground water resources, although their distribution across the territory is uneven. Like other natural resources, water is declared by the Romanian Constitution to be an exclusive and inalienable public property. There is no single institution specifically responsible for sector policies as a whole. Use of water resources at the national level is administered and regulated by the Ministry of Water, Forestry and Environment (MOWFEN) within which a specific body - APELE ROMANE - is in charge of water management questions. MOWFEN is also responsible for monitoring and enforcing water pollution and  3 quality standards, while specific drinking water standards are monitored by the Ministry of Health (MOH). Provision of water supply, sewerage and waste water treatment services is a responsibility of municipal governments. Operational quality standards and norms for water and sewerage utilities are set by the Ministry of Public Works and Regional Development (MOPWRD), while the financial aspects of local utility management are monitored by MOF. 1.9 Water resource management by APELE ROMANE is organized on a watershed basis with specific bodies set up for each of the country's eleven major river basins. These bodies are in charge of regulating water allocation to different users as well as acting as executing agencies for all investment programs related to water resource management. Water is provided by APELE ROMANE to municipal water companies for an abstraction fee. Charges for water abstraction are set by the Government on a countrywide unitary basis (currently ROL 5,967 per 1,000 m3 for domestic consumption and ROL 16,271 per 1,000 m3 for industrial use). Fees for waste water discharges and pollution are regulated similarly. Though most legislation regarding water resource management still dates back to the previous regime, a new law on water resources is presently under preparation. A new law on the protection of the environment was approved in December 1995. Romania has ratified the 1992 Convention on the use and protection of international rivers and lakes. It is member of the Black Sea Convention and has ratified the 1994 Danube River Protection Convention. 1.10 Water supply conditions in Romania are poor by international standards. Only about 50% of the total population has access to piped drinking water supply with the proportion going from about 80% for urban areas, to only about 20% in rural areas. However, such statistics must be interpreted with caution. Indeed, because of the general dilapidation of water supply systems, the quality of water available in urban areas is considered, in many cases, to be inferior to that of the water obtained from sources or wells in rural areas. The service level for sewerage is significantly lower with only about 40% of households connected and most of them located in urban areas. Wastewater treatment is similarly insufficient as highlighted by the studies carried out under the Environmental Program for the Danube River Basin. According to available statistics, about two hundred municipal waste water treatment plants are currently operating. However, they are, in a large proportion, equipped for primary treatment only and, therefore, have a relatively reduced effect on pollution abatement. B. Water Supply in Bucharest 1.11 The City. Bucharest, as the capital of Romania and the country's largest urban center, has a population of about 2.1 million which represents about 10% of the total population. At present, Bucharest counts some 750,000 households of which over 80% live in multi-level apartment buildings (blocs) built during the last forty years predominantly with industrial pre-fabrication techniques. Population growth since 1989 has stagnated in reaction to the decline of the economy and the shrinking of the labor market in the industrial sector. Given the prevailing demographic dynamics (with a natural growth rate of close to zero) and the weak prospects in Bucharest for a rapid resumption of labor- intensive activities, no significant urban growth is expected. Despite the extensive loss of employment, Bucharest has suffered comparatively less from the economic transition than other parts of the country and, in 1994, less than 10% of its population was estimated to live below the poverty level. 1.12 Bucharest Water and Sewerage Company (Regia GeneralA de ApE-Bucurelti/RGAB). The construction of a modem city wide water supply system including a first water treatment plant began towards the end of the 19th century. The system has been successively expanded and, operated at present  4 by the Bucharest Water and Sewerage Company (Regia Generall de Apa Bucure$ti - RGAB), supplies drinking water to about 93 % of all households as well as to a large number of industrial, commnercial and institutional customers. The distribution network has a total length of about 2,700 km. The daily production of drinking water reaches currently about 1.7 million m3 and relies to about 90% on surface sources (Arges and Dimbovila rivers) while the remainder is provided through groundwater abstraction. Water is treated in two relatively old plants (Arcuda, Rosu) that operate between 20% and 40% beyond their nominal capacity. A complementary third plant (Crivina-Ogrezeni) that should allow to reduce the pressure on the existing plants, is under construction, but is not expected to become operational before the turn of the century due to the financial constraints on the central government budget (see para. 1.18). 1.13 Water supply conditions are unsatisfactory in most parts of the city. Service interruptions are frequent, pressure is poor and in many neighborhoods availability of reliable water supply service is only intermittent and limited, on average, to twelve hours per day. Paradoxically, this is contrasted by an extremely high production level which is in excess of 800 liters per capita per day. At least 60% of .production is estimated to be lost either through leaks in the RGAB distribution network (25 %) or as a result of building internal leaks, defective appliances and wastage by households and other RGAB customers (35%). As a result, RGAB produces and distributes about 80% more water than it would need to do under normal operating conditions (i.e. about 1,7 million m3 instead of about 0.9 million mi3). An important loss contributing factor is the widely used practice of households to resort to 'coping strategies', that is to mitigate the effects of the intermittent availability of reliable water supply by stocking reserves in various recipients and drain most of them at the first sign of resumption of normal service conditions. 1.14 Treatment plants are operating with substandard and worn out equipment. Filtering, in particular, is inadequate. The distribution network is in a state of advanced dilapidation, primarily owing to the low quality of the materials used over most of the past forty years and the lack of systematic maintenance. The quality of water delivered to the consumer is generally poor and, although no specific data are available, risks of contamination by the intrusion of polluted groundwater in periods of service interruption are suspected to exist in many areas. Outbreaks of viral hepatitis and acute diarrhea have been reported, as well as, in 1995, several cases of cholera. Currently, about 85% of the city population is served by the sewer system, the remainder relying on septic tanks. Waste water treatment, however, is extremely unsatisfactory. A large-scale treatment plant has been under construction for over ten years but is unlikely to be completed in the foreseeable future. 1.15 RGAB supplies cold water and provides sewerage services within the boundaries of the Bucharest municipality. (Hot water is supplied separately by RADET, another local RA that also ensures district heating for residential, institutional and commercial customers). RGAB was created in 1990 as a successor to ICAB, the State-enterprise previously in charge of local services in the capital city. RGAB purchases raw water from APELE ROMANE and treats and distributes it to residential, commercial, industrial, and institutional customers. (Additionally, it supplies, through separate networks untreated water to a few specific industrial customers). RGAB has a staff of about 4,800, of which about 4,000 are low-skilled workers (see Chart A). In 1995, RGAB had operating revenues of US$ 49 million equivalent, operating costs of US$ 46 million equivalent (before depreciation), and total assets with a book value of US$ 345 million equivalent (see Annex 2). 1.16 RGAB faces institutional and financial problems similar to those of other local Ras in regard to its legal status, its accountabilities and the legal ownership of its assets. Like other municipal RAs its revenues only cover its operating expenditure. However, unlike various other local RAs, RGAB does not receive any subsidy for operational expenditures. Water sale proceeds and sewerage service  5 charges are its only source of revenue. Its financial difficulties result in a large proportion from the fact that, for a variety of reasons, over 70% of water consumption is not metered and, as a consequence, customers are billed on a flat-rate basis (including a sewerage surcharge) for a normative consumption of 170 liters/day/inhabitant which is unrelated to the volume actually consumed. (Additionally, customers are billed, under the same procedure, for a consumption of 110 liters/day/inhabitant of hot water by RADET). Bill collection is unsatisfactory, especially from larger institutional consumers. By end of 1995, RGAB's accounts receivable stood at US$ 15 million equivalent. They equaled around 33% of RGAB's operating revenues and about one-third of them were owed by RADET, RGAB's single largest customer. To make ends meet, RGAB has been running up arrears with suppliers such as the National Power Company (RENEL) and its total payables amounted to US$ 17 million equivalent by end of 1995. 1.17 RGAB's tariffs for water and sewerage are uniform and non-discriminating. They have increased repeatedly since 1990 and, contrary to those of other public services, were allowed to keep up with inflation, though often with substantial delay (see para. 4.6). To revert the downward trend, tariffs were increased twice in 1995 leading to an increase of 80% in nominal terms, while total annual inflation did not exceed 31 %. The current tariffs of US$ 0.12 2 (ROL 355) per m3 for water supply and US$ 0.02 (ROL 41) for sewerage services should be sufficient to allow RGAB to cover its operating costs (before depreciation). Further tariff increases in real terms will be unavoidable but are likely to face significant resistance as long as income levels stay below pre-1989 levels and quality of services remains poor. Average household expenditure for water supply and sewerage services (including hot water purchases from RADET) at present equals about 3% of total average household expenditures, a proportion that is substantially higher in the lower segments of the income scale. Lest increases in real tariffs may simply help perpetuate existing inefficiencies, new real tariff adjustments should only be contemplated after all possible cost reduction alternatives have been implemented, financial discipline enforced and arrangements made to relate water billings to actual consumption, issues that are addressed through the Short-Term Action Program (STAP) included in the proposed project (see para. 4.12). 1.18 To date, investments for the Bucharest water supply and sewerage system are financed, to about 95%, by central government subsidies, the remainder being financed from the Bucharest municipality's own resources. Over the three-year period 1992-94, the total amount of these investments was US$ 108 million equivalent (see para. 1.21). A major part of the resources allocated went into the continuation of works on tv/o large-scale investment projects (Glina wastewater treatment and Crivina- Ogrezeni water treatment plants). All service infrastructure and equipment is, in principle, municipal property. Investment execution is managed by the Bucharest municipality as the recipient of the investment grants, though some delegation of responsibilities to RGAB has occasionally occurred in recent years. RGAB attempts to break away from the dependency on exclusive government investment funding and to finance rehabilitation programs from its own resources. It has, in particular, been able to fund the acquisition and installation of water meters to larger institutional and industrial consumers, as well the implementation of leak-detection campaigns by private operators. However, given the state of its finances, its access to commercial credit remains to date extremely limited. C. Issues of Sector Development Strategy 1.19 General Issues: As mentioned above (see para. 1.5), the provision of local public services in Romania is a direct responsibility of municipalities and the central government plays, in 2 At the end of June 1996 exchange rate of USS I = ROL 3000  6 principle, only a monitoring role. However, because many decentralization issues have not yet been resolved, the actual ability of local governments to decide on questions of service organization is extremely limited. To eliminate existing ambiguities and fill critical gaps amendments to the local government legislation issued in 1991 were made in April 1996. Also, in keeping with its reform program for public enterprises that aims at restoring financial discipline in their management and enhancing their profitability, the Government introduced in 1993 legislation (Law 66/93) that made mandatory for all RAs the preparation of management contracts linking the pay of the managers to their performance, assessed according to a set of previously negotiated and agreed performance criteria. 1.20 The Government and the Bucharest municipality recognize that there is a need for substantial changes to be brought into the institutional setup and policies regulating the provision of municipal services. In response to 1994 legislation that mandated extensive organizational changes in the system of local RAs, the Bucharest municipality is studying a redesign of the framework of the legal and financial relationships with the RAs operating under its supervision (RGAB, RATB, RADET), and how to contract out to private operators a certain number of its services and, in particular, solid waste collection. RGAB itself has started in 1995 to restructure its management organization in order to make itself more responsive to the needs of a company run along commercial and customer-oriented principles and its general director is performing under a management contract arrangement since end of 1995. 1.21 Financing of Sector Investment. Investment decisions for local utilities are made by the central govermnent authorities in consultation with the recipient municipalities as well as the beneficiary RAs. To date, investments are selected primarily according to their technical merits with a generally modest regaid for economic considerations, including whether they represent the least-cost solution in terns of capital expenditure or the resulting operational costs for the beneficiary. Another drawback of the current sys.em of financing is that frequently projects are started without any guarantee that the required resources will be available over time when needed and, as a result, an excessive amount of time is needed for their completion. The shortcomings of these policies are illustrated by the cases of two major investment operations for the Bucharest area, the Glina waste water treatment plant (estimated cost US$ 220 million equivalent) and the Crivina-Ogrezeni water treatment plant (estimated cost US$ 100 million equivalent) that were started in 1985 and 1986, respectively, but are still far from completion. 1.22 The full rehabilitation of the entire water and sewerage system in Bucharest (excluding waste water treatment) would require investments of over US$ 500 million equivalent, at 1995 prices, according to studies carried out for the preparation of the proposed project. RGAB and the Bucharest municipality are aware that such amounts are not affordable presently, and that a comprehensive overhaul of management practices is warranted. In particular, incentives for a more conmmercially oriented management must be introduced as a first step to ensure that available resources are used efficiently. However, in line with the Government's general political strategy, the Bucharest municipality is opting for a gradual approach to reforms rather than an immediate and wholesale restructuring of the local services sector. The proposed project will lead to a clear departure from past procedures of infrastructure financing for local utilities and introduce, for the first time, an explicit linkage between investment costs, affordability, and the operator's capacity to assume the corresponding financial obligations. 1.23 Private sector involvement in the delivery of local public services is still limited in Romania. Some small-scale attempts are being made in sectors such as solid waste collection, where operations can easily be fragmented and the intervention of private operators is facilitated. The water supply and sewerage sector, however, is unlikely to elicit a major private sector interest in the medium-  7 term for three main reasons: (a) the need to develop the trust in the political commitment to assign the delivery of vital public services to private sector operators, create the necessary regulatory capacity, and allow a liberalization of tariffs; (b) the lack of reliable data on (i) the technical and financial performance of RGAB, (ii) the ownership and value of its fixed assets, (iii) the present and likely future demand for water, and (iv) the physical condition of the system and the likely costs of its rehabilitation; and (c) the uncertainty still surrounding the future development of the economy and the ensuing question whether and to which extent needed price increases would be affordable and politically acceptable. 1.24 RGAB's Development Strategy: The strategy developed by RGAB, which is supported by the Government and the Bucharest municipality, for overcoming the water supply problems in Bucharest and improving the enterprise's operational and financial performance represents an important break with past policies that tried to resolve shortfalls in service quality by investing in increased production capacity. RGAB's strategy focusses on rehabilitation and maintenance of existing infrastructure and reduction of water production and distribution costs and pursues two major objectives: first, to progressively reduce RGAB's large water losses (and corresponding operating costs) by (a) improving the maintenance and intensifying the rehabilitation of the existing network; and (b) through the shift from the flat-rate billing of a theoretical consumption to the billing of the metered actual consumption creating the financial incentives for consumers to opt for a more rational use of water. second, to improve the efficiency of RGAB's operations by (a) strengthening the enterprise's technical, financial and commercial management functions and restructuring it along conmmercial and consumer-oriented business principles, and (b) streamlining the cost of RGAB's operations to ensure the provision of water at affordable tariffs, and create the conditions that could facilitate, in the longer-term, a possible involvement of private sector operators. D. Role of the Bank and Lending Strategy 1.25 The Bank's Country Assistance Strategy (CAS) for Romania, discussed by the Board of Directors on April 5, 1994, during the presentation of the Romania Petroleum Sector Rehabilitation Project (Loan 3723-RO) aims primarily at supporting the Govermnent's structural adjustment program and macro-economic stabilization objectives. It also identifies rehabilitation of infrastructure as one of the priority areas for Bank lending. The Bank's support of the strategy has been materialized through the Technical Assistance and Critical Imports Project (Loan 3363-RO) which financed studies for the restructuring of the railway sector and urban transport in Bucharest, the Transport (Road Rehabilitation) Project (Loan 3593-RO), and the Railway Rehabilitation Project presented to the Board on January 18, 1996. Important issues of public utility management were addressed under the Power Sector Rehabilitation and Modernization Project presented to the Board on August 29, 1995, and the Financial and Enterprise Sector Adjustment Loan (FESAL) presented to the Board on January 18, 1996. 1.26 The proposed project is consistent with the objectives of the CAS and in line with the strategy options adopted for the other above mentioned infrastructure sector projects. It is based on studies initiated as an outcome of the Bank's ESW in Fall 1990 summarized in the ESW Report 'Romania: The Challenge of Transition' (Report No. 9497-RO). It has also benefitted from informal sector work on local government development issues that was carried out in 1992.  8 E. Bank Experience in the Sector and Lessons Learned 1.27 The project is the Bank's first operation in the water sector in Romania and, thus, cannot build up on previous experience. Bank experience in other transition economy countries is also limited to date, and consists primarily of operations that are in start-up phase and do not yet allow any conclusion as to their implementation performance. Involvement of other donors in the Romania water thus far has been modest, too. EBRD is currently funding a Municipal Utilities Project (US$ 28 million equivalent) for five of the largest secondary cities that was signed in Spring 1995 and which finances rehabilitation of water supply and waste water treatment. It has also has started the preparation of a second operation of similar size and scope. Other, bilaterally funded operations include ongoing studies for water supply and sewerage rehabilitation in various secondary cities. 1.28 In designing the project, attention was paid to general Bank experience in the water and sanitation sector. A 1995 OED Water Sector Report as well as other Bank surveys have concluded that although projects have often been successful in achieving their physical objectives, in general, limited succ,ess has been obtained in improving the institutional performance of the utilities. Some of the reasons for the less than optimal results were: (i) inadequate linkages between physical and institutional objectives; (ii) lack of management and financial autonomy of local utilities; (iii) staff inexperience in project implementation and institutional problem solving; (iv) project complexity; (v) lack of reliable information on production and consumption patterns that prevented the design of well-focused unaccounted-for-water reduction prograrns and adequate tariff structures; and (vi) problems related to cost recovery and timely provision of counterpart funds. 1.29 These lessons have been incorporated, to the extent feasible, into the design of the project in the following way: (a) project components were selected linking physical improvements with the implementation of institutional, technical and financial measures to improve RGAB's management, productivity, financial self-sufficiency and expertise in project implementation; (b) strong support for the project at the level of the central government, the Bucharest municipality and RGAB as the implementing agency, was sought at an early stage of project preparation; (c) special attention was given to RGAB's overall financial situation and to set realistic financial targets, taking into account the constraints for tariff increases stemming from the overall economic conditions; (d) simplicity in project design was sought in view of RGAB's lack of familiarity with Bank preparation and implementation procedures; (e) strengthening the commercial management together with implementation of a metering program will enable RGAB to monitor its production and acquire a better understanding of the demand and consumption patterns of its customers; and (f) support to public awareness development will build up on, and complement, previous efforts deployed by RGAB and the Bucharest municipality to better understand customer satisfaction with local public services and benefit from the experience already acquired.  9 II. THE PROJECT A. Project Origin 2.1 The proposed project was identified in February 1995 after discussions with officials of the Government, the Bucharest mumnicipality, and RGAB. Preparation of feasibility studies was undertaken with fund.ng from the Japanese PHRD Grant TF 20515 (Bucharest Water Supply and Sewerage Rehabilitation). Complementary technical assistance for project preparation was provided through the Japanese PHRD Grant TF 23063 (Local Government Development). Preappraisal was carried out in June 1995, followed by appraisal in December 1995. Negotiations were held in Washington from June 10 to 14, 1996. 2.2 The outline and general concept of the proposed project was approved by the Board of Administrators of RGAB on June 22, 1995 and officially endorsed by the Municipal Council of Bucharest on October 6, 1995, (CLMB Decision 81/95). It was approved by the Government on March 21, 1996, (Government Decision 181/96). B. Project Rationale and Objectives 2.3 The amount of financial resources that would be required for a full rehabilitation of the entire Bucharest water supply and sewerage is in excess of US$ 500 million equivalent (para. 1.21). However, rather than engage in the preparation of a large-scale and complex operation, the Bank and the Romania Government, together with the Bucharest municipality and RGAB, have agreed to opt for a step- by-step approach that would consist of a series of separate, sequential projects over a multi-year period. Each of these projects would build up on, and benefit from, the preceding operations' institutional achievements and implementation experience and allow to tailor the size, timing, and design features of these successive projects to the pace of improvement in RGAB's technical and financial performance, its compliance with project conditionality, and the evolution of the country's economic and institutional context. The primary reasons that justify such a 'widening circle' approach are that: (a) thus far, RGAB has not had any significant experience with the preparation and implementation of operations funded from external sources and its project management capacity needs to be progressively built-up; (b) without further real tariff increases that are unlikely to be politically and socially acceptable at this point RGAB can only afford a relatively small project. Tariff increases will become unavoidable in the longer terrn, however, and it is expected that the display under the proposed project of a first visible effort to improve water supply conditions, together with a public outreach program supported by the project, will create the climate that will facilitate such future tariff increases. Furthermore, there is also a potential for a significant rationalization of RGAB's operational expenditures, that must (and will under the proposed project) be explored before raising tariffs any further; and (c) RGAB's current financial position is weak and needs to be strengthened before any significant expansion of its financial commitments can be considered. Likewise, RGAB's basic managerial informations lack the reliability and relevance required for an efficient  10 management and must be thoroughly overhauled to allow RGAB to achieve a better operational and financial performance and expand its investments. 2.4 Given the constraints described above, the scope and size of the proposed project have deliberately been kept narrow to create the framework for a successful project implementation. The project's objectives would be to finance the execution of a three-year program of investments that have been identified as the highest priority to: (a) improve the reliability and quality of water supply in Bucharest; (b) start to reduce water losses (both physical and commercial); and (c) strengthen RGAB's operational, commercial and financial management and help it acquire the expertise necessary for the preparation and implementation of future operations. 2.5 The relatively narrow focus of the proposed operation reflects a concern for simplicity in design since the project will be carried out by a beneficiary without prior experience in the implementation of such projects. Lack of complexi.y will permit an easier implementation and allow RGAB to rapidly display a visible and concrete effort to improve the living conditions of the Bucharest population. This will also help further the dialogue with the Government and municipal authorities on issues of local utility management, which has already seen a fruitful beginning. For these reasons, components for waste water collection and treatment that are more complex and require more intensive scrutiny have been deferred, in agreement with the Government and RGAB, to a future operation. C. Project Description 2.6 The proposed project will include the following components: A. Improvement of Water Supplv Reliability and Quality (33% of base project cost) (a) Water treatment plant rehabilitation, including the repair and/or replacement of filters, and installation of new chlorination and chemical treatment equipment for existing treatment plants; (b) Aqueduct flow control improvement and reservoir upgrading, including the purchase and installation of flow control valves and flow meters at key locations of the network; and (c) Pumping station rehabilitation, including the acquisition and installation of new high energy efficiency pumps, the rehabilitation of existing pumps and electrical equipment, and the installation of flow control equipment for several key pumping stations. B. Reduction of Water Losses (57% of base project cost) (a) Primary network repair, including the replacem-.ent of deteriorated network sections, survey and repair and/or replacement of distribution valves as well as the reconstitution of a minimum stock of essential spare parts;  I1 (b) Secondary network rehabilitation, including the repair and/or replacement of elements of the secondary network including house connections in several city neighborhoods with above average water losses and reported breaks; and (c) Metering program, including the purchase and installation of meters of different sizes for larger consumers such as housing development authorities and commercial enterprises. C. Institutional Strengthening of RGAB (9% of base project cost) (a) Public awareness and water wastage reduction campaign, including the preparation and implementation of media campaigns (press, radio, TV) to sensitize the public on water conservation issues and the study of measures to provide incentives to consumers for reducing excessive water consumption; as well as preparation of a tariff study including the identification of possible financial incentives for water consumption reduction; (b) Improvement of RGAB's customur accounts management system, including technical assistance to pursue the reorganization efforts initiated with technical assistance provided, as of January 1996, by the French Government under a bilateral agreement; (c) Training and other technical assistance, including training for RGAB staff to acquire and/or develop management skills in the areas of finance and accounting, human resource management, and technical operations. Complementary technical assistance (not included in project costs) is provided under the Danube River Basin Environmental Program; and (d) Implementation supervision, including consulting services to assist RGAB in the management of project execution. A detailed description of project components is contained in Annex 5. 1. D. Cost Estimates 2.7 The total project cost (including contingencies, taxes and duties) is estimated to be about US$ 50 million equivalent with a foreign exchange component of US$ 25.4 million equivalent or about 50% of the total project cost. Cost estimates were prepared by the consultant SAFEGE/LOTTI on the basis of quantity estimates from substantially completed design studies, and using unit prices from similar projects under implementation either in Romania or other countries. A detailed analysis of costs has been made to determine the foreign exchange component and local costs. All project costs have been estimated in US Dollars on the basis of December 1995 prices at the mid-December 1995 exchange rate of ROL 2,550 per US$ 1. Import duties (15%), VAT (18% of total costs) and other incidental taxes are included in the local component. Physical contingencies (5% for equipment, 10% for civil works) have been added to cover possible increases in quantities. Price contingencies have been applied to base costs following the Bank's expected price increases as per OP 6.50 of October 1995,(1996: 3.3%; 1997: 2.3%; 1998: 2.5%; 199: 2.5%) with the assumption that the exchange rate will adjust to the evolution of domestic prices and external inflation.  12 2.8 Summary Cost estimates are shown in Table 1 below. TABLE 1: PROJECT COST ESTIMATES -------(in US$ million)------- % foreign % Project Components Local* Foreign Total exchange of base cost A. Improvement of Water Supply Reliability and Quality Water Treatment Plant Rehabilitation 2.4 2.1 4.5 47 Aqueduct Flow Control and Reservoir Upgrading 0.7 0.9 1.6 56 Pumping Station Rehabilitation 3.3 5.1 8.4 61 Subtotal 6.4 8.1 14.5 56 33 B. Reduction of Watf r Losses Primary Network Repair 1.2 1.4 2.6 54 Secondary Network Repair 8.2 8.3 16.5 50 Metering Program 3.8 2.0 5.8 34 Subtotal 13.2 11.7 24.9 47 57 C. Institutional Strengthening of RGAB Public Awareness Campaign 0.6 0.0 0.6 0 Improvement of Customer Accounts Management 0.4 1.3 1.7 76 Training 0.1 0.5 0.6 83 Implementation Supervision 0.3 1.0 1.3 77 Subtotal 1.4 2.8 4.2 67 9 Total Base Cost (December 1995 prices) 21.0 22.6 43.6 52 100 Physical Contingencies 2.0 1.0 3.0 Price Contingencies 1.6 1.8 3.4 Total Project Cost 24.6 25.4 50.0 51 *The local cost component includes local material, installation works, custom duties (15%) and value-added-tax (VAT) (18%). Note: some figures may not add up due to rounding. E. Project Financing Arrangements 2.9 The financing plan of the project is summarized in Table 2 below. The Bank will finance US$ 25 million of the project's total foreign cost estimated at US$ 25.4 million or about 51 % of total project costs. 3 Local counterpart financing will be provided, as a grant, for about US$ 15 million equivalent (or 30% of total project cost) from the central government budget and about US$ 7.5 million 3 The proposed cost-sharing: IBRD 50 % / Romania 50% is consistent with the cost-sharing arrangements adopted for EBRD's Municipal Utilities loan signed on April 9, 1995 for the rehabilitation of water supply and sewerage infrastructure in five major Romanian secondary cities.  13 equivalent frorr the Bucharest municipal budget (15 % of total project cost). RGAB will contribute about US$ 2.5 million from its own annual budgetary resources (5% of total project cost). TABLE 2: FINANCING PLAN ----------------US$ Millions---------------- Local Foreign Total % Total IBRD 0.0 25.0 25.0 50 Government 15.0 15.0 30 Bucharest Municipality 7.5 7.5 15 RGAB 2.1 0.4 2.5 5 Total 24.6 25.4 50.0 100 2.10 The Borrower for the loan will be Romania. At the Borrower's request, the loan will be made at the Bank's standard variable rate for LIBOR-based US Dollar Single Currency Loans at the Bank's standard conditions for Romania (20 years, including five years of grace). Loan proceeds will be on-lent by the Ministry of Finance (MOF), with a guarantee from the Bucharest municipality, to RGAB on the basis of a Subsidiary Loan and Guarantee Agreement. The Agreement of MOF, the Bucharest municipality and RGAB on the on-lending arrangement was confirmed at negotiations fsee para. 6.1(a)1. Signature of the on-lending agreement will be a condition for loan effectiveness fsee para. 6.2(a)]. On-lending will be made in foreign currency at the IBRD variable interest rate. RGAB would carry the foreign exchange and interest rate risks. The contributions from the central government and the Bucharest municipality budgets, respectively, will be made through annual appropriations in accordance with Romanian public finance procedures. During negotiations an understanding was reached with the Government, the Bucharest municipality, and RGAB on the funding arrangements for the local counterpart contribution. F. Environmental Aspects 2.11 For the purpose of O.D. 4.01 on Environmental Impact Assessment the Project has been classified as Category B, which requires a limited environmental review to determine potential negative environmental impacts and propose mitigation measures where needed, as well as to identify opportunities for environmental enhancement. Such a review has been carried out during project appraisal by RGAB and Bank experts [see Annex 11. 2.12 The project will have relatively minor negative environmental effects and will not raise any resettlement or property rights issues since it focuses primarily on rehabilitation of existing network and facilities. All works will be executed either within the premises of existing facilities or the rights of way of the public street network. The project will not affect any archeological or historical site. Contractors will be responsible, under the clauses of the bidding documents, for keeping worksites pollu- tion free, returning sites to their original conditions, and minimizing dust, noise and other work-related  14 nuisances. They will also be responsible for notification of the discovery of, or any problem related to, a previously unknown historical site. The project will have no impact on the flow regime of the Arges and Dimbovila rivers nor will it affect the quality of their waters through increased water abstraction or waste water discharges and, therefore, does not require a notification for the purposes of OD.7.50. 2.13 The project is expected to bring significant environmental, as well as health, benefits from. (i) reducing water losses in the distribution network; (ii) assuring better drinking water quality from improved operation and maintenance of the drinking water plants and elimination of point- contamination sources in the distribution network; (iii) better handling of residuals from drinking water treatment; and (iv) increased energy efficiency of water supply distribution. To improve its operational day-to-day environmental management (sludge management; handling of chemicals and toxic substances; improvements in the operation and maintenance of the sewerage network, including improved emergency response; more efficient use of information from the existing water quality monitoring networks; and better compliance with environmental regulations), RGAB will create an environmental advisory position and appoint an environmental advisor to the general director. During negotiations RGAB confirmed that it would appoint an environmental advisor by January 1. 1997 at the latest under terms of reference reviewed, and found satisfactory. by the Bank Isee para. 6. 1(b)l. 2.14 Moreover, the project will support RGAB's efforts to encourage water conservation through the extension of metering to all major consumers and the implementation of an awareness campaign. The purpose of the latter, for which complementary support from the Danube River Basin Environmental Program is being provided, is to raise public awareness of the need to manage water resources more carefully through the preparation of advertising campaigns in different media (press, radio, TV, billboards, etc.) and the development of educational programs for kindergartens and primary schools [see Annex 5.7(b)1.  15 III. PROJECT IMPLEMENTATION AND SUPERVISION ARRANGEMENTS A. Organization and Management 3.1 The project will be executed by RGAB as the sole implementing agency. As such, RGAB will assume direct obligations towards the Bank on all matters under its jurisdiction. RGAB has set up a project coordination unit (PCU) and has hired appropriately skilled Romanian staff. The PCU reports directly to the general director of RGAB and has a non-hierarchical relationship with RGAB's four main departments: commercial (customer account management) services, finances and accounting, technical services, and human resources [see para. 1.14 and Chart Al, and coordinates their participation in project implementation. Technical assistance has been recruited under funding from a Japanese PHRD Grant to train local specialists in matters of procurement and project coordination prior to project preparation completion. To compensate for its current lack of expertise in project implementation management, the PCU would be supported, throughout project implementation, by a team of adequately experienced technical assistance experts [see para. 3.8]. Additionally, technical assistance will be provided to RGAB to help it train its technical staff in the operation of the facilities upgraded under the project, and monitor and evaluate the effects of the network rehabilitation program [see Annex 5.7(c)1. 3.2 The PCU will review and follow-up on procurement procedures and bidding documents, monitor and coorcdinate every aspect of project implementation (including procurement). The PCU will prepare detailed work schedules and coordinate project activities in accordance with Terms of Reference agreed with the Bank [see Annex 5.7(a)1. The PCU will also be responsible for preparing and submitting quarterly reports on project implementation performance to the Bank and the Romanian authorities according to an agreed Reporting Plan [see Annex 5.61. During negotiations RGAB confirmed that PCU will remain in operation and be satisfactorily staffed and funded through the project implementation [see para. 6. 1(c)1. Agreement was also reached on the project implementation schedule, monitoring criteria. and reporting arrangements [see para. 6. 1(d) and Annex 5.61. 3.3 The target implementation scenario for the project is that it would be executed over a period of about three years and completed by December 31, 1999. The project's Implementation Plan (PIP) is shown in Annex 5.3. The loan will close on June 30, 2000, six months after the project completion date. The approval procedures required by the Romania Government for all investments funded totally or partially with central or local government resources are relatively complex and there is a risk that this could lead to possible delays. In order to avoid such delays, an early clearance of bidding documents was warranted and completion of four bidding packages for ICB procured contracts was sought as a condition for Board Presentation. B. Procurement 3.4 Procurement arrangements for the elements of the project, their estimated cost and proposed methods of procurement are summarized in Table 3 below. A detailed list of contracts to be concluded is contained in the Project Procurement Plan [see Annex 5.21. 3.5 All goods, works and services to be financed from the loan proceeds will be procured in accordance with the Bank's Guidelines for Procurement (January 1995), including amendments as of the loan signing date, using the Bank standard bidding documents. Consulting Services will be procured in  16 accordance with the Guidelines for use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency (August 1981), including possible amendments as of the loan signing date. A Country Procurement Assessment Report will be completed by June 1997. The laws and regulations governing national procurement procedures and practices in Romania are being reviewed in the Bank in order to establish whether national procedures are acceptable for Bank-financed contracts. A 'General Procurement Notice' containing information about bidding opportunities (for procurement on the basis of ICB) has been published in the April 16, 1996 issue of the 'Development Business' in accordance with paras. 2.7 and 2.8 of the Bank Guidelines for Procurement, January 1995. Prequalification documents were completed as a condition for negotiation. A project launching workshop will be held prior to implementation start-up expected for September 1996. TABLE 3: PROCUREMENT ARRANGEMENTS (in US$ million) a/ ELEMENTS PROCUREMENT METHOD TOTAL ICB NCB Other b/ NBF COST 1. Civil Works 26.5 2.0 28.5 (11.9) (0.9) (12.8) 2. Goods 4.9 0.3 0.3 5.5 (3.4) (0.2) (0.2) (3.8) 3. Supply and Install 11.6 - 11.6 (7.5) -- (7.5) 4. Consultant Services 3.8 0.6 c/ 4.4 - - (0.9) (0.0) (0.9) Total Cost 43.0 2.3 4.1 0.6 50.0 (22.8) (1. 1) (1.1) (0.0) (25.0) Note: a/ Cost estimates include contingencies, taxes and duties. Figures in parentheses are the amounts financed by the Bank loan. b/ Other includes international shopping (USS 0.3 million) and contracting of consultants according to Bank guidelines. c/ NBF includes consulting services financed directly by RGAB 3.6 Civil Works. Civi1 works contracts (including supply of necessary goods and equipment) for the rehabilitation of water treatment plants and primary and secondary network repair (about US$ 26.5 million) will be carried out under ICB with prequalification. They would be procured in seven packages [see Annex 5.21. Four of these contracts (secondary network repair and replacement, about US$ 19.3 million) will be advertised and procured on a slice-and-package basis. Romanian firms with adequate experience are likely to enter into joint venture agreements with foreign contractors in order to bid. For all ICB contracts prequalification of firms will be required. Contracts of less than US$ 10 million equivalent will be procured using the Bank's standard bidding document for civil works (smaller contracts). Civil works for meter installation will be carried out under National Competitive Bidding (NCB) procedures through at least four separate contracts with an aggregate value not to exceed US$ 2.0 million.  17 3.7 Goods and Supply and Installation. Goods to be financed from the Bank loan (about US$ 5.5 million) consisting of filtering equipment, water meters, accessories and complementary equipment will, to over 85%, be procured through ICB. They will be procured in four packages [see Annex 5.21. Romanian manufacturers competing for the contracts for the supply of goods procured under ICB procedures will receive a preference in bid evaluation of 15 percent of the CIF price or the prevailing custom duty applicable to non-exempt importers, whichever is less, provided they can prove to the satisfaction o- the Borrower and the Bank that the manufacturing cost of such goods includes more than 30 percent of 'ocally procured labor, raw materials and components. National Competitive Bidding (NCB) will be used for the procurement of filtering sand (US$ 300,000). International Shopping (IS) based on a comparison of price quotations obtained from at least three suppliers from at least two eligible countries will be used for the procurement filter nozzles (US$ 300,000). Supply and Installation procurement (US$ 11.6 million) will be used for two contracts for (a) the rehabilitation of pumping stations and (b) the installation of flow control equipment on the primary network. Bidding for these contracts will be carried out through ICB on the basis of prequalification and, given the adequate preparation of technical specifications, one-stage bidding for supply and installation contracts using the Bank standard contract for Supply and Installation. 3.8 Consultant services. Consultant services estimated at US$ 4.5 million for technical assistance and training will be carried out by qualified and experienced consulting firms and individual consultants appointed in accordance with Bank Guidelines for the Use of Consultants (August 1981). Consulting services will be required to assist (a) RGAB's PCU in project implementation management [see para 3.1]; (b) RGAB in the management improvement of its customer accounts system [see para. 4.131 and operating systems [see para. 3.11; and (d) the preparation of a public awareness campaign [see para 2.14]. A detailed description of the consulting services to be procured is contained in the Project Implementation Plan [see Annex 5.21. Available local expertise should allow for the participation of Romanian experts in consulting assignments under the project. Unless otherwise agreed, all individual contracts will be awarded on the basis of comparison of at least three curricula vitae for each selection of consultant (see para. 3.9 below) and will be limited to assignments of short duration and requiring specialized expertise. 3.9 Prior Review. All contracts exceeding US$ 250,000 (more than 80% of total project cost), and all contracts for consultant services valued in excess of US$ 100,000 for firms and US$ 50,000 for individual consultants will be subject to prior review and approval by the Bank. Contracts of a lesser amount would be subject to ex-post review by Bank supervision missions. Likewise, terms of reference for all consultant contracts will be reviewed in advance by the Bank. Procurement information will be included in the quarterly project progress reports to be prepared by RGAB [see para. 3.2 and Annex 5.61. During negotiations, an understanding was reached with the Government and RGAB on all procurement arrangements, including the list of contract packages and the procurement timetable. C. Disbursements 3.10 The proposed Bank loan will be disbursed against the different categories of project elements as shown in Table 4 below. 3.11 Withdrawal applications for contracts for civil works and goods above US$ 250,000, consulting firms above US$ 100,000 and individual consultants above US$ 50,000 will be fully documented and for contracts for less than these amounts will be made on the basis of Statements of  18 Expenditures (SOE). Documnentation to support expenditure financed under SOE will be maintained by the Borrower in one location and made available upon request for review by Bank representatives in addition to being audited by the auditors [see para. 3.16 and para. 4.19]. Agreement on these arrangements was obtained from the Government and RGAB during negotiations [see para. 6. l(e)l. TABLE 4: DISBURSEMENT CATEGORIES (in US$ million) Amount of the Loan 56 of expenditure Category Description Allocated in US$ to be financed 1 Civil Works 11.7 45% of total expenditures; 2 Goods and Supply and Install 10.0 100% of foreign expenditures, or 100% of local (ex-factory net of taxes and duties), or 70% of local expenditures for other items procured locally. 3 Consultant Services 0.8 25 % of total expenditures 4 Unallocated 2.5 n.a. TOTAL 25.0 3.12 Estimrted disb'irsements by Bank fiscal year are summarized in Table 4 below. The schedule of quarterly disbursements is shown in Annex 4. RGAB expects to disburse the loan of US$ 25 million over a period of about three years with the completion of all project activities by December 31, 1999 but with disbursements continuing for another six months through June 30, 2000. TABLE 4: ESTIMATED DISBURSEMENTS (in US$ million) Bank Fiscal Year 1997 1998 1999 2000 2001 Annual 4.0 1/ 9.5 7.5 3.0 1.0 Cumulative 4.0 13.5 21.0 24.0 25.0 " includes 1.0 million for initial deposit in Special Account 3.13 To maintain an adequate flow of funds for eligible project expenditure with a minimum of administrative delay, the Borrower will establish a Special Account with an authorized allocation of US$ 2.0 million at a bank of its choice acceptable to the Bank. The initial deposit of the authorized allocation will be limited to US$ 1.0 million and the remaining portion of the authorized allocation would be released when disbursements reach a level of US$ 3.0 million. Applications for replenishment of the Special Account will be submitted on a monthly basis or when one third of the amount deposited has been withdrawn, whichever occurs earlier. All applications for direct payment or special commitments must be for an amount not less than 20% of the initial deposit of the authorized allocation to the Special Account or not less than 20 % of the full authorized allocation once available. In addition to the  19 documcntation mentioned above, all replenishment applications would be accompanied by monthly bank statements of the Special Account which have been reconciled by the Borrower. Records of the Special Account proceeds and outlays will be available for review by the Bank's supervision mission and subject to anuual audit (see para. 4.18). During negotiations, agreement was reached with the Government and RGAB on all Special Account management and disbursement arrangements [see para. 6. 1(e)1. D. Project Monitoring, Supervision, and Auditing 3.14 A Project Implementation Plan (PIP) has been prepared jointly with RGAB to ensure a shared understanding of the project activities to be carried out and their timing [see Annex 51. The compliance with the PIP will be monitored by the PCU project coordinator and the Bank on the base of monitoring indicators shown in Annex 5.5. 3.15 In addition to direct monitoring and assistance on day-to-day matters which will be provided by the Resident Mission in Romania, about 20 staff/weeks per year of headquarter staff input will be reqjuired over the life of the project. Supervision missions staff should include a water sector specialist, financial analyst and institutional experts. Although, because of the short duration of the project, a full mid-term review would not be warranted, a project implementation progress review will be carried out about eightecn months after project implementation start-up with a view to take stock of project achievements, agree on remedial action, if necessary, and determine the prospects for the preparation of a follow-up project, identify the most important issues such an operation should.address and decide on its content and timing. During negotiations, agreement on the scope and timing of the proiect implementation progress review was obtained [see para. 4.18 and para. 6. 1(f)1. 3.16 RGAB will establish a separate Project Account and maintain it according to accepted international accounting standards, in order to ensure that the flow of funds associated with the project can be identified and tracked. The Project Account, together with the Special Account and SOEs [see para. 3. 11 and para. 3.13] will be subject to annual audit by qualified independent auditors acceptable to the Bank and in accordance with international accounting auditing procedures. Audit reports will be submitted to the Bank within six months of the close of each fiscal year [see para. 4.19]. Agreement on the auditing arrangements for the Special Account and the Proiect Account was confirmed at negotiations [see para. 6.1(e) and para 6.1(i)1.  20 IV. FINANCIAL AND INSTITUTIONAL ASPECTS A. General Aspects 4.1 In line with the prevailing financing practices for local water utilities in Romania, RGAB is only expected to cover its current expenditures (including maintenance) through revenues from water and sewerage services [see para. 1.16]. All water supply and sewerage investments are financed from the State budget through annual fiscal grants to the Bucharest municipal budget, the remainder, if any, being financed from the Bucharest municipality's own resources. Unlike other RAs providing local services in Bucharest (RADET, RATB), RGAB receives no subsidy for its operations. It relies ex-lusively on service proceeds as a source of funding for its operational expenditures. As a result of this policy, RGAB has currently no long-term debts and its only liabilities are with suppliers. Thus, if properly managed, RGAB has the potential capacity to borrow in order to fund a reasonable proportion of its investment needs. B. RGAB's Past Financial Performance 4.2 Overall Results. RGAB's financial performance since its creation in 1990 has been less than satisfactory as a result of inadequate tariff and bill collection policies and practices: First, in the more recent years RGAB's revenues have not been sufficient to adequately cover the utility's operating costs. According to RGAB's accounting records, the amounts billed in 1992 zind 1993 (about ROL 9 billion and ROL 21 billion, respectively, or US$ 25 million and US$ 28 million equivalent) 4 were roughly equivalent to the total operating costs each year; in 1994 losses amounted to over ROL 6 billion, or the equivalent of over US$ 3 million, but in 1995 losses decreased (prior to extra- o1dinary income) to ROL 0.6 billion or about US$ 0.3 million. I It has to be noted, however, that the above figures provide a rather optimistic picture of RGAB's performance because the company's accounting practices underestimate its operating costs and, thus, overestimate its net income. Important among these practices are those that relate to depreciation charges and accounts receivable. The depreciation charges from 1992 to 1994 were calculated on non-revalued fixed assets and were negligible (the estimated 1995 financial statements include adequate depreciation charges). No provision was made for losses on accounts receivable during the whole 1992-95 period despite the unsatisfactory bill collection performance. These practices are closely regulated by the Government, however, and RGAB, in these matters, has been complying with existing accounting regulations in Romania. The financial statements in Annex 2 contain complementary details on RGAB's financial performance. Second, a large proportion of RGAB's assets are worn down owing to the insufficient allocation of financial resources to preventive maintenance and renewal of the existing infrastructure and equipment. This fact has serious negative implications on RGAB's ability to continue providing services to its customers at an acceptable level of quality and, if not corrected promptly, would result in a further deterioration of RGAB's finances. 4 All Romanian currency amounts indicated in this chapter are in current ROL. All US$ equivalents are at the average exchange rates for the corresponding years for revenues and expenditures and at the end-of-the year exchange rates for balance statement data. 1995 figures are still provisional and unaudited but were prepared in accordance with Romanian regulations.  21 Third, bill collection by RGAB has been negatively affected by the weak performance of the economy, in general, and by the financial problems encountered by public sector enterprises, in particular. The problem has been compounded by the lack, or inadequate implementation, of sanctions to customers for delays in payment of bills. Between 1992 and 1994 collection rates stood at around 75 % of the amounts billed each year, but dropped to 68% in 1995 (for definition of collection rate see para. 4.13). By the end of 1995, accounts receivable were at about ROL 34 billion (about US$ 13 million equivalent at Lhe end-of-the year exchange rate) or about four months of billings. 4.3 An additional problem is that the above figures mask the fact that RGAB has suffered significant financial losses from delayed collection of bills without penalties or adjustments in an inflationary environment. A significant proportion of receivables is older than six months and due from public sector entities. By law, penalties for late payments are fixed at 0.5% per day for the amount in arrears with the provision that the total accumulated amount of penalties cannot exceed the amount of the original bill. Such penalties are rarely applied, though. RGAB is also authorized to cut off water supply to customers that are forty or more days in arrears, but for a variety of reasons, it has, so far, rarely resorted to this measure. The arrears issue is endemic to the public sector enterprise sector in Romania and can only be addressed effectively through a comprehensive program to restore and promote financial discipline - which is one of the objectives of the recently approved FESAL [see para. 1.2]. Actions to reduce accounts receivable are part of the three-year Short-Term Action Program (STAP) included in the project [see para. 4.12]. The technical assistance currently provided to RGAB under a French bilateral program will be continued under the project and is expected to significantly help improve the procedures for collecting bills and managing arrears. 4.4 Unsatisfactory bill collections have resulted in significant cash shortfalls, which RGAB (like other RAs) has routinely compensated by delaying payments to its key suppliers, in particular to RENELI for power consumption and to APELE ROMANE for water abstraction. By the end of 1994, GAB's accounts due to RENEL and APELE ROMANE amounted to the equivalent of US$ 11 million and equaled nine months of billing in the case of RENEL and six months in the case of APELE ROMANE. This situation deteriorated in 1995 and the accounts payable to RENEL and APELE ROMANE as of the end of the year were estimated to be in the vicinity of ROL 30 billion (US$ 12 million equivalent) representing 13 me nths of billings in the case of RENEL and three months of billings in the case of APELE ROMANE. Like the reduction of accounts receivable, the reduction of accounts payable is addressed tlirough the STAP included in the project [see para. 4.12]. 4.5 RGAB Cost and Revenue Structure. Thus far, RGAB's current expenditures have been limited tc those strictly necessary for keeping day-to-day operations going at minimal technical quality standards and limiting maintenance to indispensable emergency interventions. In 1994 and 1995, about 80% of costs were incurred for three primary production inputs: power consumption (35%), raw water abstraction fees (8%), and payroll (39%), while expenses for administrative and other operational and maintenance expenditures accounted for the remaining 18%. The comparatively high proportion of expenditures for primary production inputs is the combined result of various factors including the predominant use of low energy efficiency equipment, especially for pumping, the importance of physical and commercial water losses, and, owing to the disproportionally high needs for repair work, a relatively numerous staff (though the impact of the latter is, to some extent, still offset by a low salary level).  22 C. Tariff Schedule and Level 4.6 Tariffs for water supply and sewerage are set by the Bucharest municipality at the request of RGAB and upon prior clearance by MOF [see para. 1.5]. Tariffs are set on the basis of RGAB's recurrent costs at the time of the submission of the tariff proposal plus a 10% mark-up or "profit". As applied, the tariff setting system is far from adequate as it (a) is based on past rather than projected costs; 'b) does not include any provision for uncollectible bills; (c) is affected by inappropriate accounting for depreciation of fixed assets [see para. 4.2]; and, above all, (d) refers to a normative m' consumption and not actual metered consumption [see para. 1.16 and para. 4.71. 4.7 Owing to the 'condominium' management procedures for large housing developments in force under the previous regime, the installation of building-specific meters, let alone individual household meters, was thought to be superfluous. Even when existing, meters are frequently broken down. As a result, most customers are billed by water supply and sewerage utilities on a flat-rate basis for a ncrmative daily per capita consumption of 170 liters for cold water (and separately by hot water and district heating utilities for a consumption of 110 liters of hot water). Sewerage services are covered through a sewerage surcharge. Tariff discrimination was eliminated in 1992 and, at present, all RGAB customers pay the same price per m3 for supply of treated drinking water and for sewerage services, (whereas previously a different tariff existed for industrial customers). In addition, RGAB also provides, through separate networks, small amounts of untreated water for industrial use (about 6% of water sales) at a lower tariff. Until March 1995, RGAB was also co-responsible for the delivery of hot water to residenLial customers through an arrangement under which RGAB billed customers for the quantity of water used whereas RADET charged them for the energy required to heat it. This arrangement has been discontinued and at present RGAB only sells bulk water to RADET leaving it to the latter to recover its costs from customers through separate billing. 4.8 Tariff increases have been made periodically since 1992 and, globally, the evolution of the price of water and sewerage services has been above that of inflation and, thus has resulted in a steady increase in the base tariff. Tariff adjustments, however, have usually been made at erratic intervals causing wide fluctuations in real tariff levels, which, in US$ equivalents, have experienced declines of 30% to 50 % between successive adjustments. In view of the cash shortfalls suffered by RGAB in recent years and confronted with the threat of major system breakdowns, as well as in response to discussions held by the Bank with authorities of the central government and the Bucharest municipality in connection with the preparation of the proposed project, RGAB tariffs were adjusted twice in 1995: first, in March, from ROL 189 per m3 to ROL 250 per m3 for water supply, and from ROL 21 to ROL 29 for the sewerage surcharge; and again in August, to ROL 355 per m3 (US$ 0.12 at end of June 1996 exchange rates) for water supply and ROL 41 (US$ 0.02) for the sewerage surcharge. This resulted in an increase of about 80% in nominal terms, while inflation for 1995 was 31 %. Because no increase in the cost of RGAB's primary production inputs has occurred since August 1995, no further tariff adjustment has been required until now [see para. 4.5]. It has been agreed and confirmed during negotiations. however, that. in accordance with the provisions of the STAP. tariff adiustments will be carried out as soon as rises in the cost of the above mentioned production inputs will cause RGAB's operating costs to increase by more than 10% [see para. 4.12. para. 4.13. and para. 6.1(g)l. 4.9 Because of the 'condominium' management practices mentioned above, the distribution networks in housing developments built since the 60's as well as within buildings were designed in a way that makes apartment specific metering virtually unfeasible. Today household water bills only reflect therefore the average household consumption of an entire building and, thus, provide no incentive to individual households to strive for water conservation. As part of the Public Awareness and Water  23 Wastage Reduction Program included in the proposed project RGAB will be exploring possible solutions (both technical and commercial) that would allow to create financial incentives for water conservation at the level of individual households. It will also carry out a tariff study and identify possible solutions that would ensure that the services remain affordable to poorer households [see para. 4.13 and Annex 5.7(b)1. D. RGAB's Future Financial Performance 4.10 In the institutional context of Romania, the case of RGAB cannot be dissociated from that of other municipal RAs, and it seems unrealistic to try to change its operating regime (unless within the context of a broader reform for all local RAs). Thus, it must be presumed that (a) authority over tariffs will remain with the Bucharest municipality, with MOF continuing to exercise an indirect yet powerful control, and (b) a substantial portion of water sector investments and, in particular, the completion of the projects of the Glina waste water and the Crivina-Ogrezeni water treatment plants will continue to be financed on a grant basis from the central government budget. This notwithstanding, the Government, the Bucharest municipality, and RGAB have agreed that it is possible and desirable to introduce, under the proposed project, significant changes in RGAB's current financial management practices. The main effect of these changes would be that RGAB would (a) assume the full responsibility for contracting and servicing the Bank, loan, (b) increase its internal cash generation in order to participate in the financing of the project investments, and (c) take into account the resulting financial costs in its budgetary planning. 4.11 Financial projections for the 1996-2002 period [see Annex 21 using the tariff levels contemplated under the proposed project show that RGAB would have some negative net income (after depreciation), mainly as a result of: (a) more realistic estimates of losses on accounts receivable (the equivalent of about 17% of the amount billed in 1996 to reflect accumulated losses, and about 4% to 5% annually after 1996), (b) more adequate depreciation charges (2.5% on revalued fixed assets); and (c) increased allocations (in real terms) to operation and maintenance expenditures. The projections are conservative and assume a lag of two months in tariff increases to cover increases in operating costs. It also assumes a gradual improvement in parameters such as bill collection, resulting from the actions taken under the STAP. RGAB's internal cash generation will increase gradually from ROL 14 billion (US$ 4 million) in 1996 to ROL 27 billion (US$ 6 million) in the year 2000. RGAB will be able to maintain a debt service coverage ratio greater than 1.3 through the life of the project and will be able to generate (after taking care of working capital and debt service requirements) close to ROL 50 billion (US$ 12 million) for contribution to the project and for other network rehabilitation programs. 4.12 Short-Term Action Program (STAP). RGAB, in consultation with the Bucharest Municipality and MOF, prepared by end of 1995 a Financial Improvement Plan (FIP) using the methodology developed for the FESAL. The FIP identified those key actions that affect the cash generation of RGAB and the viability of the project and allowed to group them in a coherent thee-year Short-Term Action Program (STAP) [see Annex 61. The STAP includes the measures required to achieve the targets indicated above and, specifically, the steps to be taken to (a) reduce payables, (b) improve bill collection rates, and (c) prevent the recurrence of arrears build-up. The plan, whose outline was approved by the RGAB Administration Board on December 28, 1995, contains a detailed implementation schedule of the above measures and defines a series of criteria and performance targets that will allow a close surveillance of RGAB's future financial perfornance. 4.13 The most critical actions included in the STAP that will be closely monitored during project implementation are the following [see Annex 61:  24 (a) Tariff adiustment: adoption of the principle of a tariff adjustment to compensate for increases in the cost of RGAB's main production inputs within a period of thirty days after RGAB's operating costs 6 have increased by 10% over previous levels with a view to obtain coverage of RGAB's full costs 7 and maintain real tariffs at the August 1995 level [see para. 4.8]; (b) Receivables and payables: measures to improve bill collection as percentage of the total potential collections (current year bills + accounts receivable at the beginning of the year) from 69% (1995 peformance) to levels consistent with the financial program supporting the project. Technical assistance to improve the management of its customers accounts is currently provided to RGAB under a French bilateral program and will be continued under the project. The bill collection targets I included in the financial projections are: 70% in 1996; 72% in 1997; and 75 % in 1998 and beyond. To make the bill collection performance feasible, the STAP includes measures to: (i) establish compensation agreements between RGAB, suppliers and customers for settlement of arrears; (ii) reschedule and write-off of arrears of more than one year; (iii) swap RADET debt with RENEL and other public sector enterprises at a discount to be negotiated between RGAB and other public sector enterprises; and (iv) make amendments in contracts with RADET and other customers to enable RGAB to enforce payment according to metered consumption; (c) Operating costs: implementation of measures to (i) increase staff productivity; (ii) reduce wastage of production inputs; and (iii) renegotiate financial conditions of raw water purchases from APELE ROMANE; (d) Payroll: reduction of number of employees (all categories) by about 12% over the 1996 - 1999 period through attrition, encouragement of voluntary departures, and divestment of non-essential activities. During negotiations. agreement was obtained on the content and implementation timetable of the Short-Term Action Program (STAP) [see para. 6. 1(g)1. Approval of the STAP by the Romanian authorities is a condition for loan effectiveness Isee para. 6.2(b)1. 4.14 Progress in the implementation of the STAP will be monitored closely on the basis of indicators agreed upon with RGAB (working ratio, bill collection ratio) and results will be reviewed and discussed annually with the Bank (see Annex 6). Discussions would take place before September 30 each year starting in 1996 and the review would include: (a) assessment of progress achieved; (b) possibly required target adjustments, antd (c) adequacy of budget proposal for following year. If any of these reviews would show results unsatisfactory to the Bank, RGAB would submit an acceptable alternative adjustment proposal no later than November 30 of the same year [see para. 4.121. During negotiations, 6 Operating costs defined as: Expenditure for salaries and wages + energy + raw water + materials + maintenance 7 Full costs include operating costs + non-operating costs + depreciation + taxes + provision for bad debts 8 Bill collection ratio defined as amount of collections against current year bills + accounts receivable at the beginning of the year divided by amount of current year bills + accounts receivable at the beginning of the year  25 the conditions, timing and performance evaluation criteria for the annual review of STAP results were reviewed and agreed [see para. 6. 1(g)l. 4.15 Financial Risks. An acknowledged risk is that RGAB could be unable to fund its financial contribution to the project or service the Bank loan. A change in the volume of water billed is likely to be a lesser risk given that the financial projections are based on a moderate increase in billings (from 340 million m3 estimated in 1995 to 367 million m3 estimated for 2002, or a less than a 10% cumulative increase over seven years). Tariff and bill collection levels below the ones established in the base case [see para. 4.12] would significantly affect RGAB's financial performance and reduce its capacity to generate sufficient internal cash resources for financing its share of the project or other investments for maintenance and overhaul of infrastructure and/or equipment. The combination of reduced tariffs and reduced collection ratio would result in a debt service coverage less than 1.0 in 1999 and beyond. The agreement of MOF, the Bucharest municipality and RGAB to maintain tariffs at August 1995 level in real terms and the various actions included in the STAP to improve collection are key for sustaining the financial viability of the project. Agreement was obtained at negotiations that RGAB will consult with the Bank before incurring additional debt if RGAB's debt coverage ratio falls or is proiected to fall below 1.3 for any year throughout the loan repavment period [see para. 6. 1(h). 4.16 A financial sensitivity analysis shows that the lowest tariff level that would allow RGAB to generate enough cash to make its contribution to the proposed project without reducing the quality level of operation and maintenance below acceptable levels or running up payment arrears to its suppliers is 5% below the base case level (assuming bill collection stays at the base case level). The lowest acceptable bill collection index would be about 68% (with tariffs staying at the base case level) [see details in Annex 21. The actions included in the STAP [see para 4.12.] should reduce the risk that RGAB's performance falls below the base case level, and [as noted in para. 4.14] the Bank will monitor progress closely. 4.17 Clarification of Institutional Framework. An important obstacle to a sustainable improvement in RGAB's technical, financial and commercial management performance is the lack of a precisely defined framework for its legal and financial relationships with the Bucharest municipality, under whose supervision it now operates. While a certain number of the prevailing ambiguities stem from the absence of an appropriate national legal framework and can only be resolved by legal action taken at that level (e.g. the issue of legal ownership of RGAB assets), other issues fall in the competence of the Bucharest municipality. The latter include (a) the scope and extent of regulatory functions performed by the municipal authorities (i.e. the mayor and/or the municipal council), in regard to tariff setting, and fixing conditions and standards of service provision, (b) the autonomy granted to RGAB to make decisions in investment and operational management matters, (c) the nature of the financial obligations assumed by either the Bucharest municipality or RGAB and the delimitation of the corresponding accountabilities. As spelled out in a policy statement presented to the Bank during negotiations, the Bucharest municipality and RGAB have agreed to revise the existing legal framework and service provision directives that currently govern RGAB's operations. The revised service provision directives would precisely delimit the respective obligations, rights and responsibilities of the Bucharest municipality and RGAB in matters of operational and financial management, and would define criteria to be used for assessing the future performance of the company. 4.18 Medium-term investment and financing program: The expected improvement in RGAB's financial position will not be sufficient to generate the resources needed for a broader rehabilitation and modernization of the water supply and sewerage system in Bucharest. To complete on-  26 going projects with central government financing in a reasonable time would require public sector resources in an amount that, given the macroeconomic constraints, is unlikely to be available in the near future. A comprehensive review of the investment and operation and maintenance strategy for the water supply and sewerage sector in Bucharest is therefore warranted. A comprehensive medium- and long- term development program will be prepared by RGAB, in accordance with terms of reference to be agreed with the Bank, in connection with the project implementation progress review [see para. 3.15]. The program will (a) define the measures to be taken to address the most critical problems (including further rationalization of expenditures, revision of tariff structures and policies, and review of investment policies and strategies), and (b) prepare an operational development and investment plan with corresponding sources of financing [see para. 3.15]. The program will be prepared with the understanding that its satisfactory completion will allow the preparation of possible follow up projects to be funded with Bank assistance. 4.19 Accounting and Auditing. According to the interim audit report for 1995 which was prepared by independent external auditors, RGAB's accounting practices are comply with the instructions of the Romanian National Accounting Plan adopted in 1994. RGAB has agreed to implement a specific action plan to that effect. There are several areas such as inventory management, fixed asset accounting, accounting of receivables, payables and cash where the auditors have recommended improved accounting practices and controls to bring RGAB's accounts closer to internationally acceptable accounting standards. It should be noted that differences between Romanian accounting practices and International Accounting Standards (IAS) cannot be resolved through this project. However, the auditors' recommendations for improving internal accounting practices in RGAB will be implemented in such a way that RGAB's financial statements will be presented as closely as possible to internationally accepted accounting standards and an accounting manual setting down RGAB's accounting policies and practices will be prepared. The external audit will cover RGAB's financial statements, the Special Account, Statements of Expenditure and compliance with loan covenants of a financial nature. The audit report will be submitted to the Bank within six months of the close of each fiscal year. Agreement on the arrangements for the annual auditing of RGAB's financial statements was obtained during negotiations [see para. 6.1(i)l.  27 V. PROJECT BENEFITS AND RISKS A. Project Benefits 5.1 The project will support the rehabilitation of infrastructure in a sector that faces a significant backlog of unmet needs and where the potential for improvements in efficiency is very high. This was identified as a priority in the Country Assistance Strategy (CAS) that was discussed at the Board on March 14, 1994 in conjunction with the Petroleum Rehabilitation Project (Loan 3723-RO). The project's position was further confirmed in the November 1995 CPPR discussions with the Romania Government. 5.2 The project will complement the Financial and Enterprise Sector Adjustment Loan (FESAL) by seeking to improve the issue of financial discipline in RGAB. Through the implementation of a program of financial and operational measures that are necessary to ensure the sustainability of the proposed investment program, the project will lay the giound for the future expansion of the rehabilitation of the water supply and sewerage system in Bucharest which could be supported by a series of follow-up projects. The policy measures which are included in the STAP and which were agreed and confirmed at negotiations will lead to improved financial viability of RGAB and the sustainability of its operations in the medium- and longer term. They are also expected to create the basis for a possible future private sector involvement in the delivery of water supply services. The project also will support the Government's policy of decentralizing the responsibility for the provision of local services to local authorities. By introducing the concepts of cost-recovery and consumer contribution to the financing of sector investments it would have a beneficial development impact. 5.3 The project will bring significant policy changes to the management of the water sector in Bucharest. First, it will support RGAB's efforts to shift from a system of billing for a notional water consumption to one based on actual consumption. Second, it will introduce the concept of cost recovery into RGAB's investment planning, and concurrently, initiate a financial management reform that should lead to a gradual decrease in RGAB's dependence on central government funding for future infrastructure investment. 5.4 It must not be overlooked, however, that the project will represent only a first and modest step in a long-term effort to rehabilitate the entire Bucharest water supply system and upgrade it into a financially sustainable operation. Given the limited scope of the project in comparison to the needs for a full rehabilitation of the entire water supply and sewerage system, the direct and immediate effects on problems such as water losses should not be overestimated. Indeed, the project's objective is not to solve all of RGAB's problems at once, but to launch a rehabilitation process that could be progressively expanded as the operational and financial performance of RGAB will improve. Of special importance in this respect will be RGAB's efforts - supported by the project -to raise community awareness of the need for water conservation through public education and information programs and the creation of corresponding financial incentives. 5.5 Rehabilitation and repair of existing infrastructure and facilities are the least-cost and only practical alternative for the improvement of water supply conditions in Bucharest. Further deferment of the critically needed investments funded under the project is expected to result in an annual increase of water losses at an annual rate of about 10% in the neighborhoods whose networks will be rehabilitated under the project and a corresponding rise in water distribution costs. Postponement of the proposed rehabilitation and repair works would lead to a rapid reduction of water availability and quality with  28 important negative economic and social effects and, although not quantifiable with the data available, rising health risks [see para. 1.14], or request likely emergency repair works whose cost would be significantly above those of the proposed project. Attempting to maintain current levels of water availability, in a context of high, and increasing losses, by constructing new additional production capacity without previously addressing the issue of water loss causes would represent the economically least efficient alternative. 5.6 The principal quantifiable benefits that will accrue to RGAB from the project will be a decrease in RGAB's operating costs as a result of increased production efficiency (i.e. reduced energy consumption) and reduction of water losses (which will lead to a reduction of the total volume of water to be produced). In the medium- and longer-term, the implementation of the Short-Term Action Program (STAP) will bring about important improvements in RGAB's operational, financial and commercial management performance. The combined effects of the above will-bring about a reduction in the total cost of water supply and thereby allow RGAB to significantly expand its financial contribution to future sector investments, including in environmentally important but thus far ill-attended areas such as waste water treatment. 5.7 Specific benefits of the project will include: (a) increase in the hours of availability of adequate water supply service in various areas of the city gradually passing from the current average of twelve hours per day to approximately seventeen hours per day as a result of improved flow management in the primary distribution network and higher water pressure; (b) improvements in water quality through the upgrading of water treatment plants and, in particular, filtering and chlorination equipment, as well as through repairs of the distribution network. These repairs will also contribute to prevent contamination of drinking water by groundwater and, therefore, would help reduce the incidence of water- borne diseases; (c! gradual reduction of unaccounted-for-water, currently estimated at over 60 %, due to both the elimination of physical losses in the distribution network, and the improvement of RGAB's commercial management as well as the extension of metering and the development of water conservation programs; (d) improvement in RGAB's maintenance, control, and operational functions through the provision of spare parts, meters, operational equipment and training; (e) reduction in RGAB's operating costs as a result of decreasing energy consumption through the provision of new, and rehabilitation of existing pumping equipment as well gradual reduction in unaccounted-for-water. 5.8 An internal rate of return (IRR) has been calculated for the components of the project that will have a measurable effect on RGAB's cost of water production and distribution (76% of total base cost) [see Annex 31. No rate of return has been calculated for the components addressing the issues of water quality (15% of total base cost) and strengthening of RGAB's management (9% of total base cost) because their benefits are largely unquantifiable, thougii clearly very significant. The project is predicated on the assumption that on average the aggregate demand being met (albeit with the deficiencies noted  29 above) and that no additional water will be made available to consumers. Rather, as a result of more balanced distribution and increase in service reliability the project is expected to bring about a decrease of household consumption owing to the elimination of the need for 'coping strategies' [see para. 1.13]. However, these latter benefits cannot be evaluated ex-ante and, therefore, have not been taken into account. Future evolution of water production and consumption will be closely monitored under the project [see monitoring indicators in Annex 5.51 and terms of reference for operational technical assistance in Annex 5.7(c)l in order to provide, among other things, a data base for the evaluation of future projects. 5.9 The IRR calculations are based on very conservative estimates for the projected operating cost savings that would derive from (a) the decrease in water losses, (b) the reduction of energy consumption, and (c) the reduction of maintenance and repair costs in comparison to the situation that could be expected to result without the project. Separate calculations were made for the four sub- components: (1) 'Primary Network Repair', (2) 'Secondary Network Repair', (3) 'Pumping Station Rehabilitation', and (4) 'Metering'. The combined IRR calculated for the target implementation scenario (see para. 3.3) which assumes a three-year project implementation according to schedule, no cost overrun, and water and energy savings as expected, is 19% (weighted average of the IRR for the above four sub- components: 22%, 12%, 15%, and 48%, respectively). 5.10 In view of RGAB's lack of experience with the implementation of projects of this nature, it seems reasonable, however, to set the expected IRR at a lower level which reflects possible slippage. To assess the impact of various possible negative developments sensitivity analyses were carried out comparing the above case to four less favorable alternative scenarios: (a) assuming a 50% lower than anticipated customer response to the extension of metering and water conservation incentives and loss reduction benefits therefore primarily derived from reduced physical losses, the IRR would drop from 19% to 15%; (b) assuming that, because of higher than expected costs of the secondary distribution network rehabilitation, only 75% of the initial project area could be covered and water losses reduced accordingly, the IRR would decrease from 19% to 18%; the effects of (c) a possible one year delay in project start up and (d) a longer than anticipated implementation period of five (instead of three) years were also analyzed but turned out to be marginal, primarily because the type of works included in the project generates a stream of discrete benefits and costs that occur in tandem and are proportional. 5.11 Taking the various analyses into account, the base case against which actual results will be monitored assumes a cost overrun of 20% on all four components mentioned in para. 5.9 above, and a corresponding reduction of 20% of all project benefits. The resulting IRR is 12%. B. Project Risks 5.12 In addition to the political risks typical for any project dealing with local authorities and local utilities, the project faces two main categories of risks: financial and technical. The financial risks are twofold. First, given the high proportion of local counterpart funding required for the project there is a risk that the project's implementation performance could be adversely affected by the lack or insufficiency of counterpart funding due to (a) unforeseen macro-economic constraints and a resulting downturn of the economy or (b) financial difficulties at the level of the Bucharest municipality. However, this risk is country- and not project-specific, however, and would affect the Bank's project portfolio as a whole. Because of its very nature it cannot be assessed on an ex-ante basis and can only be dealt with on a case by case basis including a project restructuring should the need for it arise. Additionally, it must  30 be taken into account that the funding requirements are relatively small. The annual contribution of US$ 5.0 million from the central government budget represents only about 2% of the 1995 total annual investment transfers to local governments, while the annual contribution of US$ 2.5 million from the Bucharest municipality amnounts to about 4% of its 1995 investment budget. 5.13 Second, a financial risk could arise from RGAB's weak financial position and are described above (see para 4.15). RGAB's financial viability depends, to a large extent, on a timely collection of bills. To date, collection rates remain unsatisfactory, primarily, due to the poor payment behavior of large industrial and institutional customers. A persistence of lack of financial discipline at the level of public sector enterprises, a problem which is addressed under the FESAL, could jeopardize the financial recovery of RGAB. The seriousness of these risks is mitigated by (a) the implementation of the measures adopted under the FESAL; (b) the Governmnent and the Bucharest municipality's commitment to implement and enforce the measures included in the STAP; and (c) the continuation, under the project, , of the restructuring program for RGAB's customer account management system which was initiated in early 1996 with French bilateral technical assistance and can be expected to significantly strengthen the company's financial and commercial management 'muscle'. 5.14 The technical risks of the project are inherent to the implementation of any first-time project by a new beneficiary who lacks the necessary familiarity with the World Bank procedures associated with this type of activity. These risks are compounded by (a) the novelty of the type of operations funded by the project in Romania, the ensuing lack of reference price framework and, therefore, some uncertainty about costs, and (b) the complexity of the approval procedures required by the Romania Government for all investments funded totally or partially with government resources and which could lead to substantial delays in the start-up of the project. The possible effects of (a) a delay of up to one year in the project and a longer than anticipated implementation period of five years instead of three and (b) a significant cost overrun have been assessed in the sensitivity analyses presented above, [see para. 5.101. The risks are mitigated by (i) the pruvision (under already ongoing technical assistance programs) of extensive technical support and training to RGAB prior to loan effectiveness and during the start-up phase of project implementation [see para. 3.1]; (ii) the early completion of all bidding documents and the completion by the Romanian authorities of the prequalification documents which was set as a condition for negotiation, and the completion of the bidding packages for at least four ICB procured contracts which was set as a condition for Board presentation; and (iii) the provision of necessary technical assistance for project supervision under the project and a thorough monitoring of implementation by the Bank [see para. 3.1 and para. 3.15].  31 VI. AGREEMENTS AND RECOMMENDATIONS 6.1 During negotiations, agreements were reached on the following: (a) On-lending arrangements [see para. 2.10]; (b) RGAB internal management procedures for project-related environmental issues and appointment of RGAB environmental advisor [see para. 2.13]; (c) Operating aiid staffing conditions for RGAB's Project Coordination Unit (PCU) [see para. 3.2]; (d) Procedures for project implementation monitoring, monitoring criteria, and reporting [see para. 3.2]; (e) Procedures for Special Account management and disbursement arrangements including disbursements against SOEs, as well as annual auditing of SOE documentation by independent auditors [see para. 3.11, para. 3.13, and para. 4.19]; (f) Project implementation plan and scope and timing of project implementation progress review [see para. 3.15 and para. 4.18]; (g) Short-Term Action Program (STAP) including monitoring criteria and procedures for annual review in consultation with the Bank [see para. 4.12, para. 4.13 and para. 4.14]; and (h) Prior consultation by RGAB with the Bank before incurring additional debt in the event that such debt would lower the debt-service coverage ratio below 1.3, (see para. 4.15]; and (i) Annual Auditing of RGAB's financial statements [para. 4.19]; 6.2 The following are conditions of Loan Effectiveness: (a) Signing of On-lending and Guarantee Agreement [see para. 2.10]; and (b) Approval of the STAP by the Romanian authorities [see para. 4.12]. 6.3 With the above assurances and conditions, the project is suitable for a Bank loan of US Dollar 25 million to Romania, repayable in twenty years, including five years of grace, at the standard variable interest rate for LIBOR-based US Dollar Single Currency loans.   33 Annex 1 (page 1 of 3i ROMANIA Bucharest Water Supply Project Environmental Review 1. Environmental Screening 1.1 The Bucharest Water Supply Project is assigned in Category B for the purposes of environmental screening, required for World Bank lending operations. Following the guidelines of Operational Directive (OD) 4.01 of the Bank, a review of the environmental problems associated with water supply operations in Bucharest has been carried out by a team of RGAB and Bank environmental experts to (a) determine the potential negative environmental impacts of the project and identify appropriaEe mitigaEion measures (if needed); (b) identify opportunities for environmental enhancement; and (c) assess environmental monitoring and management capacity. The environmental review confirmed that the project will have no major negative environmental impact, and that minor negative environmental effects that ma) result from construction activities will be adequately monitored and mitigated by RGAB in collaboration with the contractors concerned. 1.2 The review also confirmed that the environmental permit for the Bucharest Water Supply Project. obtained by RGAB, complied with the Romnanian legal requirements of the current Romanian environmental impact assessment regulation, and, more specifically, the regulations for environmental permits for invesrment projects, issued by the Ministry of Water, Forests and Environment (MOWFEN) - that is. Ordinances nos. 170/90; 113/90, and 619/92. The current Romanian environmental impact assessment regulation will be revised in line with the new Law on Environment promulgated beginning of January, 1996. Due to the verv limited environmental impacts of the project, however, no additional environmnental impact assessment will be necessary. 2. Project objectives and expected environmental benefits 2.1 The Bucharest Water Supply Project is a first step in the World Bank assistance to Romania's water supply and sanitation sector. As such it is designed as a relatively simple operation, financing rehabilitation/replacement of critical equipment and parts of the water supply network, and assisting RGAB in achieving financial and instirutional improvements. Concrete environmental enhancement opportunities identified through the project are linked to the rehabilitation of the drinking water treatment plants (water filtering and treatrnent, and sludge management). In both the Arcuda and the Ro,u plants, the project would improve filtering, filter washing and chlorination. In the Rosu plant, the project would also finance repairs of the sludge removal system and improvements in aluminum sulphate dosing, and silicate and sulfuric acid stocking (see Annex 5. 1). In addition, the project will promote better environmental management through the assignment of environmental advisory task to an appropriate senior company staff, who will report directly to the General Manager. 2.2 More specifically, the proposed project is expected to bring environmental and health benefits in the following areas: (i) rehabilitation and improved operation and maintenance of the rwo (Arcade and Race) drinking water treatment plants will assure better drinking water quality, as well as better handling of water treatment residuals;  34 Annex 1 (page 2 of 3) (ii) rehabilitation of parts of the water supply network, complemented with a metering program, and public awareness campaign will reduce water losses and encourage water conservation; (iii) pumping station rehabilitation will increase the energy efficiency of RGAB's operations; and (iv) improvements in the operational management will also contribute to a better day- to-day environmental management (treatment plants waste management; handling of chemicals and toxic substances; improvements in the operation and maintenance of the sewerage network, including improved emergency response; more efficient use of information from the existing water quality monitoring networks; better compliance with environmental regulations). 3. Environmental pmoblems associated with water supply operations in Bucharest 3.1 RC-AB is facing a number of problems related to quality of raw, drinking and waste water. Raw water quality is influenced by irregularities in upstream water use and treatment. Reportedly, water in the Arges and Dimbovita rivers is often polluted above category I permissible levels in the vicinity of Bucharest. During the summer period the level of coliform is said to exceed up to 6-7 times the standard levels. In the Arges river, explosive development of phyto-plankton biomass causes raw water quality problems from February-March onward. The low quality of raw water results in (i) higher costs of operations and maintenance of drinking water treatment plants; (ii) a need for excessive use of chemicals (chlorine and aluminum sulphate in particular) in the treatment process; and (iii) a comparatively poor quality of the drinking water supplied by RGAB. Although the level of pollution resulting from industrial activities has decreased significantly in the past few years due to the economic downturn, lax enforcement of environmental regulations and financial constraints have contributed to maintaining industrial water pollution at a level above acceptable standards. The project would contribute to a significant improvement in the quality of drinking water, but will not be able to address the problems of upstream pollution, an issue that is not in its area of competence. 3.2 Current water quality standards are defined by two key regulations: STAS 4706-88 of November 1, 1988 for surface water categories and conditions, and STAS 1342-91 of June 1, 1992 for standards for drinking water quality. In addition, Decrees nos. 414/79 and 14/83 specify the admissible pollution limits and technical rules for discharge of waste water into open water bodies and for discharges into public sewer systems. A permitting and contracting system is in place, requiring a permit for waste water discharge, specifying the permissible substances and emission levels, and a contract with the authority in charge of the receiving body (open water body or a municipal sewer). A new water law is under consideration in the Parliament and will provide the basis for revisions and updating of the existing water quality regulations. The new law will also introduce a compliance schedule for water companies and other point source polluters. 4. Monitoring capacity 4.1 Monitoring of water quality, a responsibility of the water department in MOFWEN is well developed. There are, countrywide, 3,070 water quality monitoring stations (divided among 11 river basins). In addition, RGAB has its own well-established system (a central laboratory with a number  35 Annex 1 (page 3 of 3) of check points, drinking water plant laboratories, pumping station check points, waste water laboratory and check points) for monitoring the quality of raw water, drinking water and waste water. The RGAB's laboratory provides physical, chemical, biological, and bacteriological analysis of both raw and drinking water. Moreover, drinking water quality is also monitored and controlled by the Center for Preventive Medicine of the Ministry of Health (MOH). While RGAB envisages further developing its capacity to monitor and control water quality, the review concluded that for the purpose of the project the existing capacity and perforrnance can be considered adequate. As an immediate first step towards improving its capacity to manage environmental issues, RGAB will establish the position of an environmental advisor to the general director with a view to improve coordination of environmental monitoring and compliance, (see para. 6.1 below). 5. Sewer system and waste water treatment. 5.1 Bucharest has a relatively well developed sewer system, which serves approximately 85 % of the population as well as a significant share of the industries located in the city. Currently there is no municipal waste water treatment facility. The waste water is discharged directly in Dimbovila river near Glina. Downstream from Bucharest both Dimbovila and Arges rivers are heavily polluted, with a negative impact on agricultural production and on the ecology of the Danube, and the Danube delta. A waste water treatment plant, designed in the late 70s/early 80s, has been under construction since 1985. The plant has two lines at different stage of completion. Line 1 is almost completed -- the primary treatment is ready for a trial start, the secondary treatment is 85-90% completed, and the sludge treatment is about 80% completed. Line 2 is only 35-40% completed (so far only basic infrastructure construction is finished). Since the time the treatment plant was designed, significant changes have occurred in the financial position of the central government budget (which funds the construction), as well as in the environmental regulations conditions. Additional changes are expected. For example, in the original design, reference is made only to BODS (12 or less mg/I) and suspended solids (20 or less mg/I), and neither nitrogen nor phosphorus removal were considered. To comply with current requirements and treatment needs, a study to determine the feasibility of updating the design of the plant is under preparation. 6. Recommendations 6.1 RGAB's performance in environmental monitoring should be strengthened by the creation of a Environmental Advisory position. The environmental advisor should monitor environmental compliance, fo!low up on changes in the environmental regulations which may affect RGAB and propose appropriate actions, serve as a RGAB internal focal point on environmental issues and corresponding staff training, and liaise with the relevant Romanian authorities and with other agencies on environmental matters. The detailed terms of reference for this task have been discussed during the negotiations. 6.2 Generally, RGAB should develop a more proactive attitude toward issues that are of concern for the company but are primarily under control of other entities such as MOWFEN, APELE ROMANE, and others and relate to matters such as the implementation of regulations governing industrial waste water discharge into the sewerage network (enforcement of pre-treatment standards; fines for non- compliance, billing and collection procedures, etc.); negotiation of a compliance schedule for waste water discharges by RGAB and harmonization across sectors of compliance requirements.  36 Annex 2 [pag. 1 of 1W ROMANIA Bucharest Water Supply Project Financial Analysis Bucharest Water and Sewerage Company - RGAB Historical and Projected Financial Statements 1. This annex includes: (a) RGAB Balance Statements 1992-1995 (b) RGAB Income Statements 1992-1995 (c) RGAB Projected Connections and Metering 1995-2002 (d) RGAB Projected Tariffs and Sales 1995-2002 (e) RGAB Projected Balance Sheets 1995-2002 (f) RGAB Projected Income Statements 1995-2002 (g) RGAB Projected Cash Flow Statements 1995-2002 (h) Financial Projections - Sensitivity Analysis 2. The main assumptions on which the financial projections are based, are the following: A. Connections and Metering (a) the number of connections remains constant since no significant urban growth is expected in the coming years; and (b) the number of metered connections is based on the program agreed at appraisal. B. Tariffs. Sales and Bill Collection Index (a) the volume of water sold experiences modest increases as a result of improvements in RGAB's commercial management, including the expansion of metering; (b) the tariff level remains constant in real terms at the August 1995 level; the tariff level will be adjusted within thirty days of an increase of 10% in operating costs over previous levels and a coverage equal to full costs (as defined in the Short-Term Action Program (STAP); and  37 Annex 2 4pm. 2 of 101 (c) the expected evolution of the ratios of total bill collection (current year bills + accounts receicvable at the beginning of the year) in relation to amounts billed each year + accounts receivable is as follows: 1996: 70%; 1997: 72%; 1998 and beyond: 75%; C. Inetnnts (a) the RGAB investment program is comprised of the Bank-financed project, the completion of the Crivina-Ogrezeni Water Treatment Plant, and complementary own-source financed rehabilitation projects, but does not include the completion of the Glina waste water treatment plant; and (b) the investment plan is based central government and Bucharest municipality contributions to the Bank-financed project; central government financing of 100% of the investments for the Crivina- Ogrezeni and Glina plants; and internal cash generation for complementary rehabilitation projects. D. QDeraing Costs, and Depreciation (a) the operating costs increase with inflation. They also include a provision fur the funding of a gradual improvement of operation and maintenance activities as well for additional costs incurred by RGAB from the operation of the Crivina-Ogrezeni Water Treatment plant as of 1999; (b) the losses on accounts receivable are estimated to be the equivalent of 7% of sales in 1996 in order to take into account the expected losses from accumulated receivables, and to represent about 5% to 6% of sales in 1997 and thereafter; and (c) the depreciation charges are estimated at 2.5% of revalued fixed assets. E. InmeTaxes the income taxes are estimated on the basis of 'income before taxes plus losses on receivables' to reflect the fact that RGAB currently is not allowed to make any provision for losses on receivables. [According to Romanian practices RAs cannot make provisions for losses on receivables. Losses on receivables are accounted-for on a case by case basis upon prior demonstration that the bill in question cannot be collected].  38 Annex 2 (pws 3ot 10) ROMANIA Bucharest Water Supply Prolect Bucharet Water and Sewerge Company - RGAB Balance Statementf 1992 -05 (as o December 31 )1/ Year 1992 1993 1994 1995 - -urment ROL biolln) ASSETS Revalued Fixed Assets 86.0 91.1 700.6 681.9 Revalued Depreciation 3.6 3.9 8.1 11.5 Net Fixed Assets 82.4 87.2 692.5 670.4 Work in Progress 55.7 66.9 98.4 138.0 Cash and Banks 1.6 1.3 4.0 3.7 Accounts Receivable 1.7 4.9 12.2 33.8 Inventories 2.0 4.1 8.4 25.8 Other 0.0 2.0 9.7 10.8 Total Current Assets 5.2 12.3 34.3 74.1 TOTAL ASSETS 143.3 1W.4 825.2 862.5 EQUITY AND LUABILMES Paid-in Capital 126.1 126.1 126.1 126.1 Central Govemment Grants 14.8 33.3 78.4 119.1 Revaluation Surplus 0.0 0.0 602.1 847.3 Cumulative Profits (Losses) 0.0 0.6 -6.5 -12.8 Total Equity 141.0 159.9 800.1 830.3 Suppliers 1.8 5.3 20.3 36.9 Other 0.6 1.1 4.8 15.3 Total Current Uabilities 2.4 6.4 25.1 52.2 TOTAL EQUITY AND LUABILMES 143.4 166.4 825.2 882.5 1/ The Inandal stamnut ae not fuly compable from yea to yea becau of canes In US wcoountn systwn hipemetd In 1993. The 1995 figures are prov1ln anid unaudied  39 Annex 2 (page 4 f 10) ROMANIA Bucharest Water Supply Project Bucharest Water and Sewerage Company - RGAB Income Statements 1992-95 /i Year 1992 1993 1994 1995 -(current ROL billion) - Operating Revenues Potable Water 7.8 21.3 47.5 82.2 Industrial Water 2/ 4.2 4.2 Sewerage 21 5.6 9.6 Other 1.0 0.1 0.0 2.7 Total Operating Revenues 8.8 21.4 57.3 98.7 Operating Costs Personnel 2.0 7.4 24.6 38.4 Energy 1.7 8.0 22.0 27.0 Raw Water 1.3 5.2 9.0 Contracted Services 0.9 1.5 3.3 6.8 Chemicals and O&M Materlals 2.8 2.8 8.4 12.5 Total Operating Costs 7.5 21.0 63.5 93.7 Income Before Depreciation 1.3 0.3 -6.2 5.0 Depreciatlon 0.2 0.3 1.8 5.4 Operating Income 1.1 0.0 -8.0 -0.4 Interest Eamed 0.0 0.1 0.4 0.4 Interest Expenses 0.0 0.0 0.0 0.0 Other Income and Expenses -0.2 0.0 1.0 0.6 Income Before Taxes 1.0 0.1 -6.6 -0.6 Extra-ordinary Proftts i3 0.0 0.0 0.0 1.2 Income Tax 0.0 0.0 0.0 0.0 Net Income 0.0 0.1 -6.6 0.6 1/ The finnrcil statements are not tily wmparable from year to year because of danrgm hI the accoufflng system rnolemented In 1993. 2/ RGABs acoountng system does not cortain a breakdown of revenues by Mype o service In 1992 and 1993. 3/ Exta-ordinary Pfts are dedved from sale od pubikc fountains to Buchart MunicipalIty  Year 1995 1 1996 1997 1998 1999 2000 2001 2002 (in '000) C) Total Water Connections 69.1 69.1 69.1 69.1 69.1 69.1 69.1 69.1 Metered 6.8 7.3 8.8 16.2 16.2 16.2 16.2 16.2 Unrnetered 62.3 61.8 60.3 52.9 52.9 52.9 52.9 52.5 c W Large Users Metered (%) 42.2 45.3 54.2 100.0 100.0 100.0 100.0 100.0 0 S *3~~~= Individual Hous (unmetered) 52.5 52.5 52.5 52.5 52.5 52.5 52.5 62.5 Apwrtment Blocks 11.4 11.4 11.4 11.4 11.4 11.4 11.4 11.4 0 2 Metered 5.7 6.2 7.2 11.4 11.4 11.4 11.4 11.4 3 u X Unmetered 5.7 5.2 4.2 0.0 0.0 0.0 0.0 0.0 C) Economic Agents 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 Z i Z Metered 0.1 0.1 0.1 3.2 3.2 3.2 3.2 3.2 e > Unmetered 3.1 3.1 3.1 0.0 0.0 0.0 0.0 0.0 CD i 0 0 Standposte (unmetered) 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 3 0 District Heating Boilers 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 7 1 . Metered 0.8 0.8 1.2 1.2 1.2 1.2 1.2 1.2 3 Unmetered 0.4 0.4 0.0 0.0 0.0 0.0 0.0 0.0 i 0 Booster Stations 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 @ Metered 0.2 0.2 0.2 0.4 0.4 0.4 0.4 0.4 a Unmetered 0.2 0.2 0.2 0.0 0.0 0.0 0.0 0.0 1 /Actual figures for 1995  Year 1995 1996 1997 199 1999 2000 2001 2002 War B9bd, Tobl (mI81n m3) 358.3 344.5 349 0 352.3 355.7 3593 359.3 367.1 ndirviduel HoLuee arn BIok3 152.0 89.9 65 6 88.9 72.3 75.9 75.9 83.7 0 Econonc Agwft 111.2 111.2 1112 111.2 111.2 1112 111.2 111.2 RADET 19.2 86.4 1152 115.2 1152 115.2 115.2 115.2 Irndhl. Raw Water 57 57 57 57 57 57 57 57 ! Taritfs (ROL par m3 at mIdk prie) 0 War 355 355 355 355 355 355 355 355 Induotial Raw Water Cerrca 120 120 120 120 120 120 120 120 1! Induearia RawWaterArgos 52 52 52 52 52 52 52 52 06 Tairnb (ROL per ma at eunwit pricm) Water 355 400 459 506 549 594 644 C98 3t n> SeWage 41 55 63 70 76 82 89 9e U DX Induria Raw Water Car- sa 120 135 155 171 185 201 218 236 & > 0 Ind-uaria Ra WaterArges 52 59 67 74 80 87 94 102 Talis (USt par m3 el cunwa pric) - -' Water 0 17 013 0.13 014 014 0.14 014 0.14 1 g Sewerage 0.02 0.02 0.02 0.02 0 02 0.02 0 02 0.02 - Irdustrial Raw Water Cerrmca 0 06 0 04 0.04 0 05 0 05 0.05 0 05 0.05 Indurial Raw Water Arges 0 03 0.02 0.02 0 02 0 02 0.02 0 02 0.02 D _____ _____ ______ ~~~~~~~~~~~C) memo _e, W IrfIlaon Farlnr, Year 131 1.20 1.15 1.10 1 10 1 10 1 10 1.10 Irflaon Factor, Arna Average 1000 1255 1 175 1.125 1.100 1 100 1 100 1 100 Prn; Deflator (1995=Baae) m&yoar prce 1.000 0.797 0.678 0 603 0.548 0.498 0 453 0 412 Average Ea0hange Rate (ROL per USS) 2,033 3,077 3,447 3,694 3,956 4.236 4,529 4,845 Erd--period Ertange Rate (ROL per USS) 2,555 3,262 3,571 3,825 4,098 4,383 4,887 5,015  Year 1995 1996 1997 1998 f 1999 2000 2001 2002 . . . .. * j. u n.n.R OL.. . . .n . . . .................... .... . ... . . . . . . . . . , . , .,, .. ......... ASSETS Revalued Fixed Assets 682 828 1,003 1,193 1,583 1,783 1,944 2,144 Revalued Depreciabon 11 33 60 94 138 194 259 336 Net Fixed Assets 670 795 943 1,099 1,445 1,569 1,685 1,807 Work in Progress 138 239 340 446 261 288 316 348 Cash and Banks 4 11 9 7 5 8 3 3 Accounts Receivable 34 41 50 47 51 59 68 76 3 Inventory 26 32 38 43 47 52 57 63 w Other 11 1 1 1 1 1 1 1 C Total Current Assets 74 86 99 98 105 120 129 142 8 U TOTAL ASSETS 883 1,120 1,382 1,643 1,812 1,977 2,131 2,298 -* UABLMES I0 Long-term Debt, Revalued Ending Balarce 0 5 32 73 94 110 109 108 IL> Long-term Debt, Current Portion 0 0 0 0 0 7 8 10 C 3 Long-term Debt Long-termn 0 5 32 73 94 102 101 98 8 , Suppliers 37 35 32 29 28 28 26 25 o < Other 15 19 23 26 29 33 37 41 m o Long-term Debt Current Porbon 0 0 0 0 0 7 8 10 f 3 Total Current Liabilities 52 54 55 55 57 67 71 75 CD TOTAL LIABIUTIES 52 59 87 128 152 170 172 174 - Paid-in Capital 126 126 126 126 126 126 126 126 Central and Municipal Government Grants 147 224 313 418 432 440 440 440 C) Revaluabon Surplue 563 725 880 1,008 1,163 1,334 1,519 1,719 > Cumulative Profts (Losses) -6 -15 -24 -37 -61 -92 -126 -162 W Total Equity 830 1,060 1,295 1,515 1,660 1,807 1,959 2,124 TOTAL EOUITY AND LIABILITIES 883 1,120 1,382 1,643 1,812 1,977 2,131 2,298 Debtl (Debt + Equity) % 0.0YO 0.5% 2.6%/6 5.0YO 5.9%/ 6.3% 5.8% 5.3% Current Rato 1.4 1.6 1.8 1.8 1.8 1.8 1.8 1.9 Acid Rabo 0.9 1.0 1.1 1.0 1.0 1.0 1.0 1.1  Year 1996 1l 1996 1997 1998 1999 2000 2001 2002 (Current ROL billion) Opwtbg Reynue Potable Water (Excluding RADET) 61 7 805 811 91.2 100.7 111.2 122.9 135.9 Potable Water to RADET 20 6 34 6 52.8 58 3 83 2 68.5 74 2 80.4 Sewerage Revenues (12% o water billed) 9 6 138 161 17 9 19 7 21 6 23 7 26.0 W lnrduktial Water and Other Ircome 6 9 8 7 10.2 11 4 12 6 13 9 15.2 16.8 OpwsMgRewnueu 987 1375 160.2 1789 1961 2151 2360 259.0 i Opeiting Cobt. PereDnnel 38 4 45 7 52.4 59.0 64.9 713 78.5 86.3 Energy 27 0 32 2 36.8 41.5 45 6 50.2 55.2 80.7 __ a Raw Water 90 107 12.3 139 152 1e.8 184 20.3 CortratedServices 6.8 81 93 10 4 11 5 12 6 13i9 15a3 Chemicals 3 9 4 6 5.3 6 0 6 6 7 2 8.0 8.8 Mateuial for Operation anr Mairtenarce 2I 7 4 8 8 10.1 11 4 12.5 13 7 15.1 16.6 Material for Opration and Mairtanarce 3/ 0.0 1.8 2ao 4 5 7 5 9 6 13 6 183 Lomeea on Receivables 0.0 101 10.3 10 1 9.4 7 7 5 9 6 1 0 Z. Other Cas 1.2 3A Tal Ope-rig Coaf 93.7 126.4 143.4 156 7 173.2 189.2 208.6 227.8 t g" IncomeBefo reDepreiabton 5.0 11 2 16 7 22 3 22.9 25 8 27.4 313 O Depreciation 5 4 189 22 9 27 4 34 7 41.8 46.3 s1 13