Ukraine - Municipal Water and Wastewater Project (Odessa and Lviv)

Report No. PID5760 Project Name Ukraine-Municipal Water and Wastewater (+) Project, Odessa and Lviv Region Europe and Central Asia Sector Other Water Supply and Sanitation Project ID UAPE35786 Borrower Ukraine Implementing Agency Municipal Water and Wastewater Enterprise of Lviv (LVK): Mr. Sulipa, Director, Lviv Vodokanal City of Lviv Council 1 Rynok Square 290008 Lviv, Ukraine Fax. 380-482-664-093 Municipal Water and Wastewater Enterprise of Odessa (OVK) Mr. Alexandr Sergeevitch Shikin, Director, Odesvodokanal, 5 Basseynovaya St. Odessa, Ukraine 270046 Tel. 380-482-22-87-36, fax 380-482-66-40-93. Probable Cost tbd; most likely about US$ 100 million; US$ 40 million for Lviv and US$ 60 million for Odessa Appraisal June 1997 Projected Board Date June 1997 Date of PID November 5, 1997 Background 1. The recent political and economic events in Ukraine have had profound effects on the municipal water and wastewater sector. The country's overall economic downturn and severe fiscal constraints have cut off municipal water and wastewater enterprises (Vodokanals) and local governments from the large subsidies which they used to receive from the national budget for subsidizing operating and covering investment costs. As a result, Vodokanals today suffer from large financial shortfalls which preclude proper maintenance and operation of existing systems and do not allow much needed asset rehabilitation, replacement and expansion. The scarcity of financial resources has brought investments in water and wastewater almost to a complete stop. If the present trend of increased input prices and diminished revenues continues, the provision of safe water and wastewater services in many Ukrainian cities is in jeopardy. Vodokanals need help to keep their systems functioning and maintain a minimum service quality necessary for public health. The  gradual introduction of full cost recovery for operations and investments is essential for allowing Vodokanals to generate the resources needed to improve services. At the same time, Vodokanals must become more efficient, as much scarce capital is wasted in poor administration, inefficient operation (losses, excessive water consumption, hydraulically inefficient networks and plants with high energy consumption) and investment choices of questionable priority and justification. 2. The Bank has proposed the following two pronged sector assistance strategy: (a) assistance to the government in the definition and implementation of a reform program aimed at introducing more appropriate sector policies and and a stronger institutional and regulatory environment; and (b) support for demonstration projects with reform minded municipal governments to improve the management, financial capacity, and operation of water and waste water enterprises and for the financing of cost effective and affordable investment programs to improve water and wastewater services with emphasis on system rehabilitation and operational improvements. The projects in Lviv and Odessa have been selected for several reasons, including: local government interest in reform, urgent needs, and connection with externally supported environmental initiatives - the Black Sea Environmental Program (Odessa) and the Baltic Sea Program (Lviv). The experiences gained from the projects in Lviv and Odessa are expected to motivate other cities in Ukraine to improve the functioning of Vodokanals through similar reform efforts. Project Objectives 3. The objective of the proposed projects in Lviv and Odessa are to: a) strengthen the managerial, financial, and operational capacity of the Vodokanals through programs of technical assistance and training. In Odessa that would be acomplished through a twining arragment, and in Lviv through a management service contract with an international private utility operator; b) stop the decline in the quality of water and wastewater services and improve the efficiency of of operations of plants and networks; and c) support small locally managed environmental activities - water quality monitoring, coastal zone management, for example. Project Description 4. The project has the following components: Indicative Cost US$ million Component LVK OVK (a) investments to rehabilitate and improve the 36 54 operating efficiency of existing water and wastewater - 2-  facilities, including water and wastewater treatment plants, leak detection and repair, unaccounted-for- water reduction, metering, demand management, and energy conservation (b) consulting services for: (i) the preparation of final designs, supervision of construction and project 5 7 management; (ii) strengthening management and administration; and (iii) implementing a systematic program of plant and network rehabilitation and efficiency improvements (c) envrironmental investments 3 2 Total 44 63 Financing 5. The Bank would finance up to 90t of net investment cost. Vodokanal/local government would provide financing for 10t of net investment cost and duties and taxes. Cofinacing 6. To lower the financial burden on Vodokanals, donors are encouraged to provide grant funding for selected investments. The Swedish International Development Cooperation Agency (SIDA) has expressed interest in financing improvements in wastewater treatment in Lviv. Implementation 7. The project would be implemented during 1998 - 2002. The Vodokanals of Odessa and Lviv would be the implementing agencies of the project. International consultants assisted by local consultants would assist Vodokanal management and staff in institutional reorganization and strengthening, definition and implementation of the project. Environmental components would be executed by the municipal and/or oblast agencies. Benefits 8. Immediate benefits would be the improvement of water and wastewater services -- reliability and water quality -- to the population served by participating Vodokanals. The institutional strengthening programs to be undertaken by OVK and LVK will introduce better management and control, increased autonomy and better information management and a new relationship with the consumer. Physical investments to be implemented under the project will address the most urgent problems in a most cost efficient way, will achieve some initial efficiency gains, reversing the present trend of the system and service deterioiration. Better Vodokanal management, improved resource mobilization through introduction of cost recovery, more cost effective allocation of investment - 3 -  resources and more efficient operation of facilities and lower levels of consumption and losses will ultimately lead to cost savings for the population and release pressure on local and national budget resources. In the longer run, the reforms introduced in beneficiary Vodokanals are expected to carry sector reform to other cities in Ukraine. Environmental benefits accrue by improving the efficiency of wastewater treatment plants, increasing the capacity of Oblast agencies to regulate, enforce and monitor water and wastewater water quality and to address resource management issues. Sustainability 9. The sustainability of the project will depend primarily on the ability of the Vodokanals to raise the resources needed to fund their operations adequately and generate the internal funds for local counterpart contributions and repayment of the loan. Cost recovering tariffs and rigourous collection are essential to turn Vodokanals into financially enterprises capable of supporting the project. To demonstrate that there is sufficient commitment on these points, Vodokanals are expected to meet rigorous quality of entry requirements regarding institutional and financial capacity. The chances for sustainability of the project will be enhanced by ambitious, but realistic conditionality and rigorous project supervision. Risks 10. The main risk associated with the project is waning commitment to institutional reform. Relaxation of financial discipline, refusal by the authorities to raise tariffs as needed and poor collections would not only jeopardize the project's development objectives, but also make it impossible to complete the investments envisioned. Again, insistence on clear upfront commitment and action, realism in the definition of project objectives, scope and cost, and rigorous supervision will keep these risks to a minimum. Poverty 11. In the project cities most people already have water and wastewater services, but the poor segment of the population tends to suffer the most from inadequate services. Improvements in the quality and reliability of water and wastewater services will contribute to poverty alleviation. In project design emphasis will be given to improving service conditions for the poor segment of the population. Contact Point: Walter Stottmann, Task Manager 1818 H Street, N.W. Washington, D.C 20433 Telephone: (202) 473-2495 Fax: (202) 477-3378 - 4-  Note: This is information on an evolving project. Certain activities and/or components may not necessarily be included in the final project. Processed by the World Bank InfoShop week ending November 21, 1997. - 5 -  Annex Environmental Aspects The project carries EA category "B." The project concentrates entirely on rehabilitating and improving the efficiency of existing water and wastewater systems. No increases in new capacity are contemplated. Proposed investments in water supply will result in modest improvements of the quality of the water distributed to consumers with accompanying public health benefits. Investments in wastewater collection and treatment will reduce the pollution load on the aquatic environment in both Odessa and Lviv. In Lviv, restoration of sewer collectors would remove the risk of spillage into living areas, thereby providing large potential health benefits. The project would not have any harmful effect on downtown riparians. Because all construction would proceed on sites already in use, there are no resettlement issues. No negative environmental impacts are foreseen. -6-