Turkey - Izmir Water Supply and Sewerage Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15958 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF TURKEY IZMIR WATER SUPPLY AND SEWERAGE PROJECT (LOAN NO.2818-TU) AUGUST 26, 1996 Infrastructure Operations Division Country Department I Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Yearly Averages) Currency Unit Turkish Lira 1987 - 855 = US$ 1.00 1988 - 1,421 = US$ 1.00 1989 - 2,120 = US$ 1.00 1990 - 2,606 = US$ 1.00 1991 - 4,168 = US$ 1.00 1992 - 6,864 = US$ 1.00 1993 - 10,965 = US$ 1.00 1994 - 29,668 = US$ 1.00 1995 - 45,731 = US$ 1.00 WEIGHTS AND MEASURES Metric System US System 1 hectare (10,000 square meters) 2.47 acres 1 meter 39.37 inches 1 square meter 10.76 square feet 1 cubic meter 264 US gallons FISCAL YEAR OF BORROWER January 1st to December 31st ABBREVIATIONS AND ACRONYMS IZSU - Izmir Water and Sewerage Administration ISKI - Istanbul Water and Sewerage Administration DSI - State Hydraulic Works IB - Iller Bankasi SAR - Staff Appraisal Report SPO - State Planning Office KHGM - General Directorate of Rural Services PMU - Project Management Unit PPF - Project Preparation Facility Advance  FOR OFFICL41 USE ONLY IMPLEMENTATION COMPLETION REPORT REPUBLIC OF TURKEY IZMIR WATER SUPPLY AND SEWERAGE PROJECT (Loan No. 2818-TU) CONTENTS Preface .................... Evaluation Summary .................................................. ii PART I. Project Implementation Assessment .................................. 1 A. Project Background ..........1................................. I B. The Water Supply and Sewerage Sector in Izmir ......................... 1 C. Project Objectives and Design .................................... 2 D. Project Achievements .......................................... 3 E. Factors Affecting the Achievement of the Project Objectives .................. 4 F. Project Executing Agencies Performance .............................. 5 G. Bank Performance ............................................ 7 H. Assessment of Project Outcome .................................. 11 I. Project Completion and Future Operations ............................ 11 J. Key Lessons Learned ......................................... 11 PART II. Statistical Annexes ........................................... 13 Table 1: Summary of Assessments .14 Table 2: Related Bank Loans .15 Table 3: Project Timetable .17 Table 4: Loan Disbursements: Cumulative Estimated and Actual .18 Table 5A: Project's Physical Components .19 Table 5B Contract Procurement Schedule .21 Table 5C Project Implementation Schedule .23 Table 6: Key Indicators for Project Operation .24 Table 7: Studies Included in Project .25 Table 8A: Project Costs .26 Table 8B: Project Financing .27 Table 9: Economic Costs and Benefits .28 Table 10: Status of Legal Covenants .29 Table 11: Compliance with Operational Manual Statements .31 Table 12: Bank Resources: Staff Inputs .32 Table 13: Bank Resources: Missions .33 Table 14: IZSU Income Statements (1987-1995) .34 Table 15: IZSU Balance Sheets (1987-1995) .35 dThis ocument has a restricted distibuLion and may be used by recipients only in the performance of their | oricial duties. Its contents may not otherwise be disclosed wiLhout World Bank authorization.  Appendices: A. Mission's Aide-Memoire B. Borrower contribution to the ICR C. Borrower comments to the draft ICR D. Comments on the Yellow Cover SAR E. Map: IBRD 28054  IMPLEMENTATION COMPLETION REPORT REPUBLIC OF TURKEY IZMIR WATER SUPPLY AND SEWERAGE PROJECT (Loan No. 2818-TU) Preface This is the Implementation Completion Report (ICR) for the Izmir Water and Sewerage Project in Turkey, for which Loan No. 2818-TU in the amount of US$184.0 million equivalent was approved on May 21, 1987 and made effective on October 30, 1987. The loan was amended on December 13, 1994 and March 21, 1996 to cancel US$68 million and US$11,230,000 respectively, thus reducing the loan from US$184 million to US$104,770,000. The loan was closed on December 31, 1995 with no extension. The Bank, nevertheless made an exception to its general practice and agreed not only to keep the loan account open until April 30, 1996 in respect of expenditures made before December 31, 1995, but also in respect of withdrawal applications for goods and services delivered until April 30, 1996 under one particular contract. US$99.4 million of the loan were disbursed and US$5.4 million remained undisbursed after the last disbursement in May 1996. The ICR was prepared by Bernardo Gomez (Infrastructure Operations Division, Country Department 1, Europe and Central Asia Region) and Alptekin Orhon (Resident Mission, Turkey), and reviewed by Ricardo Halperin, Division Chief, Infrastructure Operations, ECI and by George Zaidan, Project Adviser, EC1. Preparation of this ICR was begun during the Bank's final supervision/completion mission, November 8-13,1995. It is based on material in the project file. The Borrower contributed to the ICR by preparing its own evaluation of the project implementation, and by commenting on the draft ICR.   IMPLEMENTATION COMPLETION REPORT REPUBLIC OF TURKEY IZMIR WATER SUPPLY AND SEWERAGE PROJECT (Loan No. 2818-TU) Evaluation Summary Introduction 1. Bank involvement in the water supply and sanitation sector in Turkey goes back to the early 1970's with the Istanbul Water Supply and Sewerage Project. It was followed by a second loan to Istanbul in 1982, and three more comparable operations in other urban areas. 2. The Izmir Water Supply and Sewerage Project was the outcome of the dialogue between the Bank and Turkish authorities starting in the early 1970's covering an urban development project with broad objectives. As the preparation of that project confronted difficulties, the Government requested the Bank to focus on a water supply and sewerage project. The Bank in turn assisted Izmir authorities in project preparation with a US$1.5 million Project Preparation Facility Advance. 3. The institutional arrangements for the provision of water and sewerage services in Izmir at the time of project preparation were based on the model for major urban areas in Turkey. These arrangements vested the full responsibility for the services in the public sector, with the underlying assumption that the main objective was to expand the provision of services through new investments. A number of agencies collaborated toward this objective: DSI, by financing and constructing water production and transmission facilities; Iller Bank, by financing and constructing major sewerage infrastructure; and the Municipality, by financing and constructing networks, and operating and maintaining the infrastructure through two municipal departments: one responsible for sewerage, and the other for water supply, together with gas and bus services. Issues of efficiency, accountability and affordability were not then prominent in the minds of decision makers. 4. At the time of project preparation, the coverage and quality of the water and sewerage services in lzmir was highly unsatisfactory: only 80% of the population was connected to the water supply system, and 60% to the sewerage network (without any sewage treatment); water supply service was intermittent for part of the population; metering of water production and consumption was inadequate; and cost recovery was limited to operation and maintenance expenditures. Capital expenditures were financed with central government contributions and by concessionary loans from DSI and Iller Bank. The loans were serviced by the Municipality from its general budget. Project Objectives and Design 5. The project objectives sought to broaden the scope of issues to be addressed by covering not only the expansion of the physical infrastructure but also sector financial and institutional issues. From that perspective the project objectives were important for Izmir and Turkey, and for supporting the Bank's strategy in the sector. The project objectives were to:  - iii - (i) assist the municipality in the establishment of an autonomous water and sewerage entity; (ii) encourage the implementation of full cost recovery policies; (iii) correct deficiencies in the water and sewerage services, and to provide for the growing requirements for services; and (iv) bring about environmental improvements, and to reduce health hazards caused by the discharge of untreated sewage to streams and to the Izmir Bay. 6. The project design was, however, inappropriate for a number of reasons: (i) it attempted to accomplish too much at once: establishing a water and sewerage utility; implementing for the first time full cost recovery policies; moving from zero wastewater treatment to treating about 80% of the wastewater generated in the Metropolitan area; doubling the water supply capacity; and rehabilitating and expanding the water distribution system; (ii) the scale of project investments (US$522 million) was excessively large compared to the implementation capabilities of the project executing entities; (iii) the project financing plan was not realistic as it envisaged a local counterpart financing (US$338 million) which was too high compared to the financial capabilities of the project entities, and required IZSU to service the large Bank loan (US$184 million) while project investments were still in progress; and (iv) the institutional arrangements were excessively complex, as they involved five project executing and financing entities: the Municipality, IZSU, DSI, Iller Bank and the Ministry of Agriculture through KHGM. Implementation Results 7. The Project did not achieve its objectives. The physical investments were not completed, and the progress made in strengthening the borrower's (IZSU) institutional capabilities and financial performance was below appraisal expectations. As of the time of the closing date (December 31, 1995), the status of each one of the project components was as described below. 8. Water Supply -- this component included the completion of the Tahtali dam and reservoir, and the construction of the Tahtali water supply system. Most parts of this component are at an advanced stage of implementation, and the system is expected to become operational in 1998. However, IZSU has yet to ensure that the households and businesses around the dam do not pollute the sources of water. 9. Water Distribution -- this component included the expansion and reinforcement of the water distribution network. The investments envisaged at appraisal were substantially completed. 10. Sewage Collection and Treatment -- this component included the completion and construction of sewage interceptors, the construction and rehabilitation of secondary and tertiary sewers, and the  - iv - construction of a sewage treatment plant. This component has not been completed. The most significant shortfall is that the construction of the treatment plant has not yet started. 11. Institutional Strengthening -- this component included technical assistance in the areas of unaccounted-for water and industrial waste management, as well as acquisition of equipment for leak detection and repair, laboratory, and source meters. Not much progress was made under this project component as IZSU continues being a highly inefficient utility by most standards -- water supply is still intermittent for large parts of the population, and the unaccounted-for water is estimated at about 60% of production. 12. Resettlement - The Bank after some initial delays tried very hard to assist the Turkish authorities in putting in place and implementing a satisfactory resettlement plan. The main actions taken by the Bank consisted of: allocating resources from the Italian Trust Fund for the completion of the resettlement plan; maintaining a continuous dialogue with IZSU, the Treasury, KHGM, DSI and SPO aiming at the satisfactory implementation of the plan; urging Izmir officials, including the Mayor, to allocate land for resettlement in urban areas; and offering to finance from the loan the cost of the houses for displaced families (IZSU did not agree with this proposal). The outcome of these efforts was positive as the affected families are most likely to be relocated on time. 13. IZSU's Financial Performnance -- IZSU's financial performance was substantially below appraisal expectations mainly as a result of unrealistic water demand projections and of an overoptimistic assessment of IZSU's capability to develop promptly into an efficient and effective water utility. In fact, according to the SAR, the volume of water sales was to more than double between 1986 and 1994 (from 61 m3 sold in 1986 to 149 million m3 in 1994), and the non-revenue water was to decrease from an estimated 40% of production in 1986 to 32% in 1994. Actual results were disappointing: water sales were virtually stagnant (50 to 60 million m3 per year until 1993 and 76 million m3 in 1994), and non- revenue water increased to an estimated 60% of production. In addition, total actual operating costs between the first year of project implementation (1988) and the last year of the financial projections (1994) were about 26% higher than estimated at appraisal (US$210 million estimated at appraisal vis-a-vis US$264 million actual). 14. IZSU attempted to close the gap between actual financial results and appraisal estimates by implementing substantial tariff increases, which were expected to compensate for the lower than projected volume of water sales. This policy, which led to tariff levels higher than estimated at appraisal every year starting in 1991 (20% and 73% higher in 1991 and 1992, respectively; about twice as high in 1993; and 35% higher in 1994) was, however, insufficient to close completely the gap between appraisal and actual results, and to allow IZSU to fulfill its obligations under the Project. IZSU's actual tariff levels were below appraisal estimates only in the first two years of project implementation, and about the same in 1990. Implementation Experience 15. At a very early stage in project implementation the Bank became aware that the Project could not be implemented as appraised and made vigorous efforts to restructure it to the extent necessary to make it feasible. These efforts, which required intensive staff inputs (200 staff-weeks) during eight-and-a-half years were, however, not sufficient to correct the deficiencies in the original project design. The most significant outcomes of the Bank's efforts were the agreements reached with three successive municipal administrations and IZSU to implement orderly reductions in project scope in view of the prevailing  v - financial constraints. These agreements took place in September 1990, October 1992 and December 1994. The first agreement included a relatively minor reduction in project scope (dropping two sewage collectors from the Project), a plan to strengthen IZSU's financial performance through the implementation of quarterly tariff adjustments to compensate for inflation, and the amendment of the Loan Agreement to increase Bank financing of civil works from 27% to 30%. Unfortunately, the municipal and IZSU's authorities suspended the tariff adjustments shortly after the agreement was reached and IZSU continued facing severe financial constraints and experiencing further delays in project implementation. 16. The October 1992 agreement included two essential elements, as follows. First, a further reduction in the scope of sewerage works by scaling-down the capacity of the sewage treatment plant from 8.0 to 1.8 m3 per second and by reducing complementary works to maintain the balance between the flow from the sewage collectors and the treatment capacity. As a result of this reduction in project scope, the collectors to be constructed under the Project would directly benefit about 450,000 inhabitants by the year 2000, or the equivalent of about 25 % of the appraisal estimates. The whole population would continue benefitting from the gradual environmental improvements of the Bay. The second element aimed at enhancing the financial viability of the scaled-down project by reinstating the quarterly tariff adjustments, and by increasing the percentage of financing for sewerage civil works provided from the loan from 30% to 35%. The agreement was satisfactorily implemented by IZSU for about a year but started falling apart at the beginning of the municipal electoral campaign in late 1993, when the municipal administration discontinued the quarterly tariff adjustments. IZSU's performance deteriorated further after the elections in April 1994, as the new municipal administration decided to expand the project scope, while at the same time not adjusting tariffs as required. 17. The December 1994 plan called for virtually dropping the sewerage component from the Project. Under the plan, IZSU would continue carrying out a substantially expanded sewerage project through a BOT arrangement, for which IZSU had already invited the submission of proposals. The Bank would continue financing only two ongoing sewerage contracts, the consultants for their supervision, and the water supply component. As a result of the changes in the project, IZSU asked the Bank to cancel US$68 million of the loan amount. The plan failed as the Municipality rejected the two bids received for the BOT, and started looking for new options to carry out the sewerage project. No new option has yet materialized. 18. The Bank on several occasions offered Izmir and IZSU's authorities options other than the existing loan to finance the works required to resolve the environmental problems of Izmir Bay. In particular, the Bank offered the possibility of considering a guarantee or a second loan. The second loan would be contingent on the implementation of improved institutional arrangements, which would include bringing in a private firm to provide the water and sewerage services. Izmir and IZSU's authorities did not show interest in the Bank's proposals. In October 1995, the Bank, in view of the poor prospects for utilizing efficiently the undisbursed proceeds of the loan, communicated to the Borrower its decision not to extend the loan closing date beyond December 31, 1995. About US$99 million of the loan was disbursed. Part (US$68 million) of the original loan was cancelled at IZSU's request in December 1994, US$11,230,000 were cancelled also at IZSU's request in March 1996, and the remaining part (US$5.4 million) remained undisbursed after the last disbursement in May 1996. Summary of Findings, Future Operations, and Key Lessons Learned 19. The factors preventing the achievement of the project objectives have their roots in the highly ambitious project design with its large size, the multiplicity of project components and executing agencies,  - vi - and the financing plan which was based on overoptimistic assumptions regarding the performance of the executing and financing entities. Yet, the overriding factor preventing the achievement of the original or the reduced project objectives was the unsatisfactory performance of IZSU's Board and management, which was a consequence of IZSU's institutional set up which makes its Board and management subject to short-term political pressures rather than the technical needs of a water and sewerage utility providing high quality services at economic costs. 20. The project design attempted to insulate the water and sewerage authority from political pressures and sought to ensure that its decisions would be made solely on technical criteria by establishing IZSU as a municipal enterprise based on the model of Istanbul Water and Sewerage Company. Unfortunately, this new institutional arrangement proved to be not fully satisfactory, as it did not bring about a fundamental change in governance. The Mayor and the Municipal Council retained a tight control over IZSU's day-to-day operations. 21. Bank performance in project preparation was highly deficient as its approach to the proposed project was to carry out within a few years the large investments required to compensate for many years of underinvestment and neglect of the water and sewerage systems. In addition, the Bank lacked realism by expecting a newly created entity (IZSU) to be able to carry out the proposed large investment program while simultaneously becoming an efficient water and sewerage utility. 22. Bank performance in project appraisal was highly deficient. The Bank failed to give appropriate weight to available evidence pointing to the conclusion that the proposed investments in water supply could be postponed, and that, in any event, the proposed project appeared to be more costly than what the Turkish economy, the Izmir Municipality and the project beneficiaries could afford. Also, the planning assumptions for the project were highly unrealistic as the values for critical variables like volume of water sales and prices were all on the "high side" and no plans were developed to cope with potential problems. 23. Bank performance in project supervision was partially satisfactory. On one hand, the Bank deserves to be commended for the efforts made jointly with three successive municipal administrations and with IZSU to address the failures of the initial project design. On the other hand, Bank's performance fell short of what was needed to address the root cause of IZSU's of shortcomings which was its political linkage to the Municipal Government. Also, the Bank was unwilling to invoke its remedies when critical covenants were in default. 24. The key lessons to be learned from this project could make a significant difference to the results of other Bank-financed projects. These lessons are: (i) it is highly risky to attempt to compensate for past underinvestment and neglect of water and sewerage systems by undertaking overly ambitious investment programs. Choices have to be made to implement gradual improvements which adequately take into account the prevailing institutional and financial constraints. Emphasis should be put on actions and investments required for using existing infrastructure in a more efficient manner, particularly in cases where there is evidence that poor service is due to deficiencies in system operation and maintenance practices. Additions to installed capacity to meet future demands should not be undertaken as a substitute for improving operation and maintenance, and should not put an excessive burden on the borrower's implementation and financial capacity;  - vii - (ii) Bank loans should generally finance only investments which can be realistically expected to be completed and commissioned during the grace period for the repayment of the loan. This approach should result in a sounder financial performance of the borrowers, particularly revenue-earning entities, and should also provide an incentive to both borrowers and the Bank to set investment priorities carefully; (iii) project appraisal should ensure that the project planning assumptions are realistic and that appropriate contingency plans are drawn for coping with deviations from the plan. Projects where the planning assumptions regarding the values of most of the main variables are on the "high side" are most likely to result in unsatisfactory project implementation and rates of return lower than estimated at appraisal; and (iv) utilities subject to strong political interference are unlikely to become effective and efficient organizations without substantial reform to ensure that the utility's management has the continuity, the authority, the incentives and the resources to effectively discharge its responsibilities. Meeting these conditions will require in many cases private sector participation in the provision of services under adequate monitoring of performance by municipal authorities.  IMPLEMENTATION COMPLETION REPORT REPUBLIC OF TURKEY IZMIR WATER SUPPLY AND SEWERAGE PROJECT (Loan No. 2818-TU) PART I. PROJECT IMPLEMENTATION ASSESSMENT A. Project Background 1. Bank involvement in the water supply and sanitation sector in Turkey goes back to the early 1970's with the Istanbul Water Supply Project. It was followed by the Istanbul Sewerage Project in 1982, the Engineering Loan for the Cukurova Region in 1985, and the Cukurova Urban Development Project, which was submitted to the Board simultaneously with the Izmir Project in 1987. 2. The Project was the outcome of the dialogue between the Bank and Turkish authorities, starting in the early 1970's, covering an urban development project in Izmir with broad objectives. As the preparation of that project confronted difficulties, the Government requested the Bank in 1985 to focus on a water supply and sewerage project. The Project was based on the Water Supply and Sewerage Master Plan prepared by the Municipality in 1971 and updated in 1980 and 1986. The Bank in turn assisted Izmir authorities in the preparation of the Project with a US$1.5 million Project Preparation Facility Advance approved in early 1986. B. The Water Supplv and Sewerage Sector in Izmir 3. The institutional arrangements for the provision of water and sewerage services in Izmir at the time of project preparation were based on the model for major urban areas in Turkey. These arrangements vested the full responsibility for these services in the public sector, with the underlying assumption that the main objective was to expand the provision of services through new investments. A number of agencies collaborated toward this objective: DSI, by financing and constructing water production and transmission facilities; Iller Bank, by financing and constructing major sewerage infrastructure; and the Municipality, by financing and constructing water and sewerage networks, and operating and maintaining the infrastructure through two municipal departments: one responsible for sewerage, and the other for water supply, together with gas and bus services. Issues of efficiency, accountability and affordability were not then prominent in the minds of decision makers. 4. At the time of project preparation, the coverage and quality of the water and sewerage services in Izmir was highly unsatisfactory: only 80% of the population was connected to the water supply system, and 60% to the sewerage network (without any sewage treatment); water supply service was intermittent for part of the population; metering of water production and consumption was inadequate, and a significant proportion (40% to 50%) of the estimated water production was not billed to customers. 5. Cost recovery was limited to operation and maintenance expenditures. There was no recovery of capital expenditures as the Municipality serviced DSI and Iller Bank loans from its general budget. Moreover, DSI and iller Bank loans contained a significant grant element, as they were long-term (up to 30 years) and the interest rates highly negative in real terms. In addition, some of the investments by  2 ller Bank were funded from Izmir municipality's share in tax collections, which Iller Bank by law administers on its behalf. C. Project Obiectives and Design 6. The project objectives sought to broaden the scope of issues to be addressed by covering not only the expansion of the physical infrastructure but also sector financial and institutional issues. From that perspective the project objectives were important for Izmir and Turkey, and for supporting the Bank's strategy in the sector. The project objectives were to: (i) assist the municipality in the establishment of an autonomous water and sewerage entity; (ii) encourage the implementation of full cost recovery policies; (iii) correct deficiencies in the water and sewerage services, and to provide for the growing requirements for services; and (iv) bring about environmental improvements, and to reduce health hazards caused by the discharge of untreated sewage to streams and to the lzmir Bay. 7. The project design was, however, inappropriate for a number of reasons: (i) it attempted to accomplish too much at once: establishing a water and sewerage utility; implementing for the first time full cost recovery policies; moving from zero wastewater treatment to treating about 80% of the wastewater generated in the Metropolitan area; doubling the water supply capacity; and rehabilitating and expanding the water distribution system; (ii) the scale of project investments (US$522 million) was excessively large compared to the implementation capabilities of the project executing entities; (iii) the project financing plan was not realistic as it envisaged a local counterpart financing (US$338 million) which was too high compared to the financial capabilities of the project entities, and required IZSU to service the large Bank loan (US$184 million) while project investments were still in progress; and (iv) the institutional arrangements were excessively complex, as they involved five project executing and financing entities: the Municipality, IZSU, DSI, Iller Bank and the Ministry of Agriculture through KHGM.  3 8. The project financing plan was as follows: |The World Bank T 184 |Izmir Municipality | 108 IZSU's Internal Cash Generation 103 Iller Bank 77 DSI 50 Total 522 D. Project Achievements 9. The project did not achieve its objectives. The investments in physical assets were not completed and the progress made in strengthening IZSU's institutional and financial capabilities was below appraisal expectations. The achievements under each one of the project components are described below. 10. Water Supply -- this component included the completion of the Tahtali dam and reservoir, which had been under construction by DSI since 1982, and the construction of the Tahtali water supply system (water intake, treatment plant, pumping station, transmission main, and reservoir of treated water). Most parts of this component are substantially advanced and DSI and IZSU expect to complete them in 1998. The dam was close to completion by the time of the loan closing date; the construction of 286 houses in rural areas for displaced population had an advance of about 50%, and the 35 houses in urban areas had yet to be tendered; the civil works for the water treatment plant had an advance of about 65%; the transmission line had an advance of about 50%; and the major equipment for the water treatment plant had been already purchased. The main uncertainty regarding the completion of the Tahtali System is the acquisition by IZSU of the right-of-way (3 km) for laying the transmission main in the outskirts of Izmir. Also, IZSU has yet to ensure that the households and businesses around the dam do not pollute the water sources. 11. Water Distribution -- this component included the expansion and reinforcement of the water distribution network. The investments envisaged at appraisal were substantially completed. 12. Sewage Collection and TReatment -- this component included the completion and construction of sewage interceptors, which had been under construction by Iller Bank since 1983, the construction and rehabilitation of secondary and tertiary sewers, and the construction of a sewage treatment plant with a capacity of 8 m3 per second. The implementation of this component is far from achieving its physical objectives as established at appraisal and at subsequent project restructurings (para. 34). The most significant shortfall was that by the time of the closing date IZSU had not even started the construction of the sewage treatment plant and, thus, other sewerage investments already made provided no benefit to the city. The investments already made include: (i) 17 out of 21 km of sewage interceptors and a tunnel; (ii) equipment for four sewage pumping stations;  4 (iii) civil works for two sewage pumping stations currently under construction; and (iv) approximately 500 km of secondary and tertiary networks. 13. Institutional Strengthening -- this component included technical assistance in the areas of unaccounted-for water and industrial waste management, as well as acquisition of equipment for leak detection and repair, laboratory, and source meters. Not much progress was made under this project component as IZSU continues being a highly inefficient utility by most standards -- water supply is still intermittent for large parts of the population; and the unaccounted-for water is estimated at about 60% of production. 14. About US$99 million of the loan was disbursed. Part (US$68 million) of the original loan was cancelled at IZSU's request in December 1994, US$11,230,000 were cancelled also at IZSU's request in March 1996, and US$5.4 million remained undisbursed after the last disbursement in May 1996. E. Factors Affectine the Achievement of the Project Objectives 15. The factors preventing the achievement of the project objectives have their roots in the highly ambitious project design with its large size, multiplicity of project components and executing agencies, and the financing plan (paras. 30-31) which was based on overoptimistic assumptions regarding the performance of the executing and financing entities. Yet, the overriding factor preventing the achievement of the project objectives was the unsatisfactory performance of IZSU's Board and management, which was a consequence of IZSU's institutional set up which makes its Board and management subject to short-term political pressures rather than to the technical needs of a water and sewerage utility providing high quality services at economic costs. 16. The project design attempted to insulate the water and sewerage authority from political pressures and assure that its decisions be made solely on technical criteria by establishing IZSU as a municipal enterprise based on the model of Istanbul Water and Sewerage Company. This new institutional arrangement represented an improvement over what existed before the Project (para. 3), but proved to be not fully satisfactory, as it did not bring about a fundamental change in governance. Under the new institutional arrangement the entity's governance continued to be subject to short-term political considerations. The Mayor exercises tight control over IZSU through his position as Chairperson of the Board and as the authority who proposes to the Minister of Interior the persons to be appointed as Board members and General Director. The Municipal Council approves water and sewerage tariffs and other major decisions, particularly investment plans. The major negative consequences of politically-driven decisions on project implementation are illustrated below. 17. Firs, IZSU's Board and top management were frequently changed in response to changes in political circumstances. This practice resulted in IZSU having five successive general managers and four heads of the PMU during the eight and-a-half years of the loan. The first head of the PMU was appointed in November 1987, six months after the approval of the Bank loan. 18. Second, the conflicting views regarding the Project among the five general managers and the three municipal administrations they represented significantly hampered the prospects of satisfactory project implementation. The first municipal administration involved in the Project, which was the one negotiating the loan with the Bank, lost the elections in March 1989, about two years after loan approval, without having made much progress in project implementation. The next administration did not assign priority to the Project until 1992 (para. 36), with the consequent further delays in project implementation; and, the third administration, which took over in April 1994 did not support the implementation of the  5 Project along the lines agreed with the preceding administration. By this time the options available to reactivate the project were very limited as the grace period of the loan had expired several years before (1991), making its financial terms very onerous. 19. Third, IZSU's has been unable to compete effectively in the labor market for staff with the experience and qualifications to establish and develop a modem utility. This inability is to a large extent the result of IZSU's Board and management limited autonomy in managing the entity's staff. First, the personnel structure, including the number of positions in each administrative and operational unit requires approval of the Ministry of Interior. Second, the salary scales for managerial, professional and administrative personnel are the same as the ones for civil servants, and in many cases these salary levels are not sufficient to attract personnel with the required qualifications. F. Project Executing Agencies Performance 20. Project Preparation. Deficient. Izmir authorities failed to take into account the institutional and financial constraints likely to affect the capacity of the water and sewerage utility to be created to carry out the project, and also underestimated the problems that could arise as a result of the lack of experience in project implementation. IZSU's deficient performance may be explained by the prevailing practice in the Turkish public sector where funds are committed to start investments without reasonable assurances regarding the availability of funds to complete the investments in a timely manner. 21. Project Implementation. Deficient. IZSU's performance was deficient. DSI, Iller Bank and KHGM performance was generally satisfactory, but with delays.' IZSU's deficient performance is illustrated below. 22. First, the actions taken by IZSU's Board and management to strengthen the entity's institutional capability were late and lacking in commitment. It took IZSU until early 1993, about five years after loan approval, to hire a consulting firm to assess the entity's operational capabilities. This action was followed by a twinning arrangement with a foreign water company in early 1994, to assist IZSU in the implementation of the consultant's recommendations. Unfortunately, the twinning was of short duration (until June 1995) and its limited accomplishments are unlikely to be sustainable. The short duration of the twinning was the result of a change of IZSU's General Manager. The General Manager succeeding the one entering into the twinning arrangement considered that the foreign water company could not adapt itself to the institutional and operational procedures of IZSU, which was subject to the constraints of several Turkish laws and, thus, could not provide an effective assistance. IZSU's management therefore brought the twinning arrangement to an end and, instead, appointed nine university professors as part- time advisors outside the Project. 23. Second, IZSU's financial performance was substantially below appraisal expectations mainly as a result of unrealistic water demand projections and of an overoptimistic assessment of IZSU's capability to develop promptly into an efficient and effective water utility. In fact, according to the SAR, the volume of water sales was to more than double between 1986 and 1994 (from 61 m3 sold in 1986 to 149 million m3 in 1994), and the non-revenue water was to decrease from an estimated 40% of production in 1986 to 32% in 1994. Actual results were disappointing: water sales were virtually stagnant (50 to 60 million m3 per year until 1993 and 76 million m3 in 1994), and non-revenue water increased to an estimated 60% of production. In addition, the total actual operating costs between the first year of project implementation (1988) and the last year of the financial projections (1994) were about 26% higher than IZSU's management contends that IZSU's performance was better than DSI and Iller Bank's perfbrmance taking into account that IZSU's financial contribution to the Project was larger than DSI and Iller Bank's contributions.  6 estimated at appraisal (US$210 million estimated at appraisal vis-a-vis US$264 million actual). The table below includes a comparison of IZSU's projected and actual operating revenues, operating expenses and net operating income during 1986-94. 1988 31 19 20 16 11 3 1989 42 24 22 21 20 3 1990 55 54 24 41 31 13 1991 65 65 27 52 28 13 1992 73 81 32 51 41 30 1993 81 101 40 52 41 49 1994 89 60 45 31 44 29 TOTAL 436 404 210 264 216 140 24. IZSU attempted to close the gap between actual financial results and appraisal estimates by implementing substantial tariff increases, which were expected to compensate for the lower than projected volume of water sales. This policy, which led to tariff levels higher than estimated at appraisal every year starting in 1991 (20% and 73% higher in 1991 and 1992, respectively; about twice as high in 1993; and 35% higher in 1994 -- details in Table 6) was, however, insufficient to close completely the gap between appraisal and actual results, and to allow IZSU to fulfill its obligations under the Project. IZSU's actual tariff levels were below appraisal estimates only during the first two years of project implementation, and about the same in 1990. 25. Third, IZSU's performance below appraisal expectations was the immediate cause of costly mistakes in the allocation of IZSU's resources, as well as of IZSU's lack of compliance with contractors, as illustrated below: (i) the timing of major investments was determined not by their expected benefits, but by the availability of financial resources from the loan. This was the case of the equipment for four pumping stations with a total cost of US$24 million, fully financed by the Bank. The equipment was received between 1992 and early 1993 and there was no place to install it. This unsatisfactory situation has persisted as none of the pumping stations, of which the Bank financed 30% to 35%, has been completed yet. IZSU was also able to acquire at an early stage the pumps and accessories for the water distribution system, which were 100% Bank-financed; (ii) in the case of one awarded contract (Cigli Pumping Station), the contractor took legal action against IZSU for lack of payment. As a result, the works were not completed, IZSU incurred in substantial legal costs, and new bids had to be invited; and  7 (iii) several bids (for the sewage treatment plant, pumping stations and sewage collectors) issued in 1988-89 were not awarded because of lack of funds. 26. And, fourth, IZSU was frequently out of compliance with the financial covenants: contribution to investment, bill collection, and debt and investment limitation. This lack of compliance carried major significance for the lack of success in project implementation. Compliance with other covenants was generally satisfactory. G. Bank Performance 27. Project Identification. Satisfactory. The Bank correctly identified the critical need to improve the provision of water supply and sewerage services in Izmir, while at the same time encouraging the implementation of improved institutional arrangements and financial policies. In addition, the Bank fully took into account the Government and Municipal authorities expressions of strong support to the Project. 28. Project Preparation. Highly deficient. Bank performance in project preparation was highly deficient as its approach to the proposed project was to carry out within a few years the large investments required to compensate for many years of underinvestment and neglect of the water and sewerage systems. In addition, the Bank lacked realism by expecting a newly created entity (IZSU) to be able to carry out the proposed large investment program while simultaneously becoming an efficient water and sewerage utility. 29. Project Appraisal. Highly deficient. The Bank failed to give appropriate weight to: (a) available evidence pointing to the conclusion that the proposed investments in water supply could be postponed, and that the Project appeared to be more costly than what the Turkish economy, the Izmir Municipality and the project beneficiaries could afford; and (b) the risks involved in a project where the planning assumptions were highly unrealistic as the values for most variables (i.e.: sales, prices, local counterpart financing) were on the "high side". These issues were flagged in a 1987 Bank internal memorandum (Appendix D) commenting on the Yellow Cover SAR. The main points in the memorandum are the following: (i) the projected water sales were unrealistic, and this had major implications for the timing of additional water source development, the sizing of water and sewerage networks, and the financial viability of the investments. To substantiate this point, the memorandum makes the case that total water sales could be expected to range between 87 and 115 million m3 in 1994 compared to a SAR projection of 149 million m3 ;2 (ii) it was not likely that the Tahtali water supply system would be required before the turn of the century, and its full capacity probably would not be needed until after 2010;3 2 Actual yearly sales until 1993 were in the 50 to 60 million m3 range, and 76 million m3 in 1994. This volume of sales, much lower than projected, was the result of a number of factors, mainly: the inadequate water distribution system, and the inadequate metering and billing practices. Lack of water supply has not been a factor, as available water has been about two to three times the water billed (the estimated safe yield of existing water supply sources is 6.1 m3 per second or 192 million m3per year, and IZSU's estimated water production fluctuated between 138 and 166 m3per year between 1988 and 1993, and reached 184 million m3 in 1994). 3 Although the timing for additional sources of water is open to discussion, the fact remains that the safe yield of the existing water supply sources at the time of appraisal - 400 liters per day per inhabitant connected to the system, and 319 liters per inhabitant in the area served by IZSU -- was high by most standards, and thus the first priority was to improve the distribution and commercialization systems. Also, the implementation of adequate tariff policies should  8 (iii) the project financing plan was not realistic. First, the viability of the municipal contribution (US$108 million) to IZSU was not demonstrated in the SAR, which only states that it represents one third of the Municipality's investment budget. Second, the financing plan was further weakened by the excessive optimism underlying the projections of the volume of water sales and the tariffs; and (iv) the Project represented a model which could not be replicated in other urban areas within a reasonable timeframe, within existing macro-economic constraints. 30. In addition to the above, it is important to mention three more points regarding the inadequate Bank performance. First, the project financing plan: (i) IZSU would have to service the large Bank loan during project implementation while at the same time generating funds for investment. This assumption was not realistic, taking into account that IZSU had just been created and, traditionally, water and sewerage revenues had only covered operating and maintenance expenditures. The SAR financial tables clearly show the sharp break with past policies and practices, but the implications of the break are not evaluated. Some of the relevant figures in the SAR are included below. IZSU's required debt service and contribution to investment the first full year (1988) of project implementation amounted to about US$13 million, which was equivalent to more than four times the internal cash generation (US$3 million) estimated for the year before appraisal (1986). These requirements continue increasing year by year to about US$33 million in 1990 and US$47 million in 1992; (ii) the design of the Bank loan provided a strong incentive for the acquisition of imported equipment as the loan financed 100% of this item and only 27% of civil works. The latter represented a high proportion of the total cost of the Project; and (iii) the project cost and financing plan in the SAR did not include the resettlement costs in the Tahtali dam reservoir area which were to be financed by the Government through KHGM. 31. Second, the Bank intention was to have the final designs and bidding documents for the project ready by the time of loan approval, and for this purpose provided a PPF to Izmir Municipality. Unfortunately, the Bank ended up approving the loan without final designs for Bank-financed investments. The first bidding documents for Bank-financed investments (sewage treatment plant and sewage pumping stations) were available in February 1988, nine months after loan approval.4 This delay in initiating investments was a significant factor on the unsatisfactory project outcome because of the bunching of investments in the outer years of project implementation with the increasing demands on IZSU's limited managerial and financial capabilities. The latter was particularly serious because the project viability had been based on IZSU performing at a very high level of efficiency. The lack of final designs also helps to explain the substantial project cost overruns (total costs of US$765 million estimated at the time of the reduction of the project scope in 1992 compared to US$522 million estimated at appraisal). The result in a more efficient water usage with the consequent reduction in the quantity of water demanded. 4 IZSU argues that the delays in project implementation were also due to the time-consuming procedures for expropriating the land (1,500 has) required for constructing the sewage stabilization ponds, and to the Bank insistence in this technology. From the documents in the Bank's files it is difficult to reach a conclusion regarding the respective roles of IZSU and the Bank in selecting the technology.  9 estimated cost overruns were mainly caused by sewerage investments, and for the land for both the sewage treatment plant and the Tahtali dam. 32. Third, the Bank underestimated the complexity of the resettlement issues under the Project. No satisfactory resettlement plan existed at appraisal for the families in the area to be inundated by the Tahtali dam, no budgetary allocations were made for resettlement, and there is no evidence of Bank contacts with the agency (KHGM) directly in charge of resettlement under the Law. In addition, no plan was available for the protection of the quality of the water sources for the Tahtali dam, which implies the regulation and control of the activities of some 6,000 households and industries. 33. Project Supervision. Partially satisfactory. It is difficult to categorize the performance of the Bank in project supervision. On the one hand, the efforts made to address the failures of the project design and to work together with three successive municipal administrations deserve to be commended. On the other hand, the efforts to improve IZSU's performance without fully addressing the root cause of its shortcomings -- its political linkage to the Municipal Government, - and the unwillingness to invoke the Bank remedies when critical covenants were in default were unsatisfactory. A particularly significant case of the latter failure was when IZSU purchased pipes financed with suppliers credit for the equivalent of about US$45 million without prior consultation with the Bank as required by the Loan Agreement (Section 5.04 establishes that any commitment for investments not included in the project or any long-term borrowing exceeding in the aggregate in any fiscal year the equivalent of US$2 million required consultation with the Bank). This case was significant not only because of the amounts involved but also because IZSU failed to disclose this transaction, which took place by the time the 1992 project restructuring (para. 36) was being discussed. The net result of the Bank's efforts was that it allocated a substantial amount of its own resources (200 staff-weeks) to supervise during eight-and-a-half years a project which did not achieve its objectives. 34. On the satisfactory side of the Bank's performance, it is important to emphasize that at a very early stage in project implementation, the Bank became aware that the Project as appraised was not feasible and it made vigorous efforts to assist the successive Izmir and IZSU authorities in restructuring the Project to the extent necessary to turn it around. In making these efforts the Bank took into account the need to provide incoming municipal administrations with the opportunity to improve IZSU's performance. The most significant outcomes of the Bank's efforts were three successive agreements reached with the Borrower to implement orderly reductions in project scope. These agreements took place in September 1990, October 1992 and December 1994. The first agreement called for a relatively minor reduction in project scope (dropping two sewage collectors from the Project), while the other two called for major reductions. In all cases there was also agreement on institutional and financial actions to be taken by the Municipality and IZSU to improve performance. 35. In September 1990, the Bank and the municipal administration which had replaced the one preparing the Project and negotiating the Loan agreed to a plan of action to reactivate the sewerage project component, after serious delays in implementation (para. 25). This plan included three main components. First, alleviating the burden of the Project on IZSU's finances by postponing the construction of two sewage collectors (Bornova and Melendez). Second, strengthening IZSU's financial performance through the implementation of quarterly tariff adjustments to compensate for inflation, and by increasing Bank financing of civil works from 27% to 30%. And, third, improving IZSU's financial planning and reporting capabilities by hiring a financial expert to assist the entity's management in this endeavor. Unfortunately, the municipal and IZSU's authorities suspended the quarterly tariff adjustments shortly after the agreement was reached and IZSU continued facing severe financial constraints and further delays in project implementation.  10 36. In October 1992, the Bank and Izmir and IZSU's authorities reached agreement again on a plan aiming at facilitating the execution of the sewerage project component. The agreement included three essential elements, as follows. First, a further reduction in the scope of the sewerage works by reducing the capacity of the sewage treatment plant from 8.0 to 1.8 m3 per second and reducing the interceptors and collectors to be built so as to maintain the balance between the flow from the sewage collectors and the treatment capacity. As a result of this reduction in project scope, the collectors to be constructed under the Project would directly benefit about 450,000 inhabitants by the year 2000 or about 25% of the appraisal estimates. The whole population would continue benefitting from the gradual environmental improvement of the Bay. The original project targets would be achieved by IZSU at a later date, as the sewage treatment plant could be completed in stages. Second, the financial viability of the plan would be enhanced by IZSU implementing quarterly tariff adjustments to maintain adequate water and sewerage tariff levels (the equivalent of US$1.34 per ni3 of water sold), and by the Bank increasing the percentage of Bank financing of sewerage civil works (from 30% to 35%). And third, IZSU would expand the institutional strengthening project component through a twinning arrangement (para. 22). The above agreement was satisfactorily implemented by IZSU for about a year but started falling apart at the beginning of the municipal electoral campaign in late 1993. At this time, the agreed tariff adjustments were no longer implemented and the tariff levels dropped in real terms (from US$1.34 per ni3 of water sold in October 1992 to US$0.75 in April 1994). The situation worsened after the April 1994 election as the new municipal administration decided to expand the project scope and not to adjust tariffs. The tariff level declined to the equivalent of US$0.69 in October 1994. 37. In December 1994, the Bank and the municipal administration which had taken office in April 1994 agreed on a new plan for the completion of the sewerage project component. This plan called for virtually dropping the sewerage component from the Project. Under the plan, Izmir and IZSU's authorities would continue carrying out the sewerage project through a BOT arrangement, for which IZSU had already invited for the submission of proposals. The proposed BOT arrangement included a sewage treatment plant in the same location and with similar capacity as the one appraised by the Bank but using a different process (activated sludge rather than lagoons), an additional plant located in the western part of the city, and the complementary works (interceptors, collectors, network). The Bank would continue financing only the two ongoing sewerage contracts (Cigli and Karsyaka pumping stations), the consultants for their supervision, and the water supply component. Also, at IZSU's request the Bank cancelled US$68 million of the loan amount not yet disbursed. Unfortunately, this plan also failed as the municipality rejected the two bids received for the BOT. 38. In October 1995, the Bank, in view of the unlikely prospects for an efficient utilization of the loan proceeds, communicated to the Borrower its decision not to extend the loan closing date beyond December 31, 1995. The Bank took this action after having been given warnings to IZSU for about a year about the low probability of the Bank extending the closing date given the unsatisfactory project implementation. Nevertheless, the Bank made an exception to its general practice and agreed not only to keep the loan account open until April 30, 1996 not only in respect of expenditures made before December 31, 1995, but also in respect of withdrawal applications received in the Bank until April 30, 1996 for goods and services delivered until that date under the contract for the water treatment plant being built by DSI. This would allow the Bank to finance the equipment for the plant which had been contracted several years before and was scheduled to be delivered between January and April 1996. 39. The Bank after some initial delays tried very hard to assist the Turkish authorities in putting in place and implementing a satisfactory resettlement plan. The main actions taken by the Bank consisted of: allocating resources from the Italian Trust Fund for the completion of the resettlement plan; maintaining a continuous dialogue with IZSU, the Treasury, KHGM, DSI and SPO aiming at the satisfactory implementation of the plan; urging Izmir officials, including the Mayor, to allocate land for  11 resettlement in urban areas; and offering to finance from the loan the cost of the houses for displaced families (IZSU did not agree with this proposal). The outcome of these efforts was positive as the affected families are most likely to be relocated on time. 40. In view of the problems facing the Project, the Bank offered Izmir and IZSU's authorities options other than the existing loan to finance the environmental improvements of Izmir Bay. In particular, the Bank offered the possibility of considering a guarantee for the BOT arrangement or a second loan. The second loan would be contingent to the implementation of improved institutional arrangements, which would include bringing in a private operator for the water and sewerage services. Izmir and IZSU's authorities did not show interest on the Bank proposals. H. Assessment of Project Outcome 41. The project outcome was highly unsatisfactory. The investments under the Project were not completed and little progress was made toward the achievement of the institutional and financial objectives. 1. Project Completion and Future Operations 42. Izmir Municipality and IZSU's authorities as well as the other project executing agencies have expressed to the Bank their commitment to complete the Project as soon as possible within the financial constraints facing each one of them. IZSU is advancing the construction of the sewerage works in progress and it is financing them with internal cash generation made possible by water and sewerage tariffs increases implemented as of August 1995 and January 1996 (US$0.60 and US$1.14, respectively per m3 of water sold excluding VAT). For other major investments under the Project, particularly the sewage treatment plant, IZSU is actively investigating financing options. The sewage interceptors being built and financed by Iller Bank are likely to be completed by the end of 1997. The Tahtali Water Supply System being built by DSI is expected to be operational in 1998. In addition, IZSU has yet to ensure that the households and businesses around the dam do not pollute the water sources. 43. The Bank bears some responsibility for the situation now confronting IZSU and it should be ready to consider a loan or guarantee operation to finance the completion of the sewerage system in Izmir, provided the authorities are willing to implement major institutional and financial reform. In view of the lessons learned, this reform would call for private sector participation in project execution as well as in the operation of the water and sewerage utility. J. Key Lessons Learned 44. The key lessons to be learned from this project may make a significant difference in the results of Bank-financed projects. These lessons are: (i) it is highly risky to attempt to compensate for past underinvestment and neglect of water and sewerage systems by undertaking overly ambitious investment programs. Choices have to be made to implement gradual improvements which adequately take into account the prevailing institutional and financial constraints. Emphasis should be put on actions and investments required for using existing infrastructure in a more efficient manner, particularly in cases where there is evidence that poor service is due to deficiencies in system operation and maintenance practices. Additions to installed capacity to meet future demands should not be undertaken as substitutes for improving operation and  12 maintenance, and should not put an excessive burden on the borrower's implementation and financial capacity; (ii) the Bank loans should generally finance only investments which can be realistically expected to be completed and commissioned during the grace period for the repayment of the loan. This approach should result in a sounder financial performance of the borrowers, particularly revenue-earning entities, and should also provide an incentive to both borrowers and the Bank to set investment priorities carefully; (iii) project appraisal should ensure that the project planning assumptions are realistic and that appropriate contingency plans are drawn for coping with deviations from the plan. Projects where the planning assumptions regarding the values of most of the main variables are on the "high side" are most likely to result in unsatisfactory project implementation and rates of return lower than estimated at appraisal; and (iv) utilities subject to strong political interference are unlikely to become effective and efficient organizations without substantial reform to ensure that the utility's management has the continuity, the authority, the incentives and the resources to effectively discharge its responsibilities. Meeting these conditions will require in many cases private sector participation in the provision of services under adequate monitoring of performance by municipal authorities.  13 PART II. STATISTICAL TABLES Table 1: Summary of Assessments Table 2: Related Bank Loans Table 3: Project Timetable Table 4: Loan Disbursements: Cumulative Estimated and Actual Table 5A: Project's Physical Components Table 5B Contract Procurement Schedule Table 5C Project Implementation Schedule Table 6: Key Indicators for Project Operation Table 7: Studies Included in Project Table 8A: Project Costs Table 8B: Project Financing Table 9: Economic Costs and Benefits Table 10: Status of Legal Covenants Table 11: Compliance with Operational Manual Statements Table 12: Bank Resources: Staff Inputs Table 13: Bank Resources: Missions Table 14: IZSU Income Statements (1987-1995) Table 15: IZSU Balance Sheets (1987-1995) m:\bg\uUmir%iu.2  14 TABLE 1: SUMMARY OF ASSESSMENTS A. Achievement of Objectives Substantial Partial Negligible Not Applicable Macroeconomic Policies [J [I I [ Sector Policies J EJ EJ E Financial objectives [ |xJ |EJ Institutional development [- J EJ0 Physical objectives 0E E 0E Poveaty reduction ] 0 ] Gender concerns MC ] 02] Other ocial objectives [ J - I Environmental objectives EJ I EJ Public sector management I E I I Private sector development j [ I Other(specify) 1 ] t I B. Project Sustainability Likely Unlikely Uncertain C] 1 1 Highly C. Bank Performance Satisfactory Satisfactory Deficient Identification ni j X ] Preparation assistance j E I Appraisal j | | Supervision I [X) Highly D. Borrower Perfornance Satisfactory Satisfactory Deficient Preparation 1 ( EJ Implementation J I I 3 Covenant compliance -] | |] E. Asesmo nt of Outcome Highly Highly Satisfactory Satis. Unsatis. unsatisfactory O] I] C I1O2]  15 TABLE 2: RELATED BANK LOANS Page 1 of 2 Loan Title Purpose Year of Status Approval l ?roeedig XOperastions- ':::: , :........,, -.:,... -.,'.-'. Istanbul Urban To provide assistance for the preparation of an 1972 Closed Development Project integrated urban development program and an (Credit No. 324-TU) urban transport/land model. l Istanbul Water Supply To increase production of potable water for 1972 Closed Project Greater Istanbul and set up a regional water (Loan No. 844-TU) supply and sewerage authority in the Istanbul Metropolitan area. Istanbul Sewerage I To expand and improve sewage collection in 1982 Closed (Loan No. 2159-TU) Istanbul; to reduce water pollution in the Golden Horn and the sea of Marmara; and to strengthen the Municipal Water Company ([SKI). l Cukurova Region To identify and design investments for five 1985 Closed Urban Engineering municipalities in the Cukurova Region; to develop Project complementary policies and national, regional and (Loan No. 2537-TU) local institutional arrangements to support decentralization, achieve integrated regional and urban planning, and improve urban efficiency. Cukurova Urban To assist the municipalities to overcome service 1987 Closed Development Project deficiencies and manage urban growth through the (Loan No. 2819-TU) financing of urban infrastructure; introduce municipal policies and institutional arrangements which would be suitable for replication in other cities for investment planning and implementation, cost recovery, financial management, and staff development; and build a capacity in Iller Bankasi to appraise and monitor municipal infrastructure projects and investments programs. '''';lW*ng Operatins'''"'''' .... -,,:'':'--"':::: .. ..................................... Istanbul Water Supply To improve and extend sewerage service to 70% 1987 Active and Sewerage of the population of Istanbul by the end of 1994; (Loan No. 2888-TU) to provide for appropriate treatment and disposal of sewage, to protect the water and shorelines of the sea of Marmara and the Bosphorus; to reduce unaccounted-for water; and to strengthen ISKI's operation and maintenance, and industrial waste management capabilities.  16 TABLE 2: RELATED BANK LOANS Page 2 of 2 Loan Title Purpose Year of Status Approval Ankara Sewerage To eliminate the discharge of untreated sewage to 1989 Active (Loan No. 3151-TU) the Ankara river and its tributaries flowing through Ankara; to extend sewerage to approximately 850,000 unserved persons; to reduce flooding during heavy rainstorms; and to l___________________ improve ASKI's operations and maintenance. Earthquake To reconstruct housing, infrastructure and other 1992 Active Rehabilitation and facilities required for restoring economic activity Reconstruction in the affected areas. (Loan No. 3511-TU) l Bursa Water and To improve environmental conditions and reduce 1993 Active Sanitation health hazards in Bursa metropolitan area; to (Loan No. 3565 and improve the management of municipal water Loan No. 3566-TU) supply and sewer services, and of domestic, industrial and clinical solid waste; to meet the demand for water supply, sewerage, flood protection, and solid waste services including the demand of the poor living in the fringes of the city; to postpone the need to develop new water resources by increasing efficiency of water usage by reducing the volume of non-revenue water; and to implement appropriate cost recovery policies. Antalya Water Supply To meet at least cost the demand for water supply, 1995 Active and Sanitation sewerage and stormwater drainage; to develop (Loan No. 3893-TU) new institutional arrangements for managing the municipal water supply and sewerage and stormwater drainage, and to introduce private sector participation in the operation of the services; to implement appropriate cost recovery policies; to postpone the need to develop new water resources; to improve and sustain environmental conditions and reduce health hazards. m:\bg\tuidzmirtable2  1 7 TABLE 3: PROJECT TIMETABLE Identification Apr-84 Jul-85 Preparation Sep-85 Apr-86 Appraisal May-86 Nov-86 Negotiations Nov-86 Apr-87 Board presentation Dec-86 May-87 Signing Jun-87 Jun-87 Effectiveness Oct-87 Oct-87 Project completion Dec-94 Not yet completed Loan closing Dec-95 Dec-95 m:\bg\tur\izmir\table3 .xls  18 TABLE 4: LOAN ICREDII DISBURSEMENTS: CUMULATIVE ESTIMATED AND ACTUALS (US$ million) FY88 4.8 11.1 231.3 FY89 23.2 12.1 52.2 FY90 52.4 22.6 43.1 FY91 85.2 39.4 46.2 FY92 118.0 54.8 46.4 FY93 143.6 61.8 43.0 FY94 163.8 74.3 45.4 FY95 178.6 85.5 79.1 44.3 92.5 FY96 184.0 116.0 99.4 54.0 85.7 Date of final disbursement: May 16, 1996 Note: The disbursements in FY88 were for the Special Account (US$10.0 million) and for the payment of the Project Preparation Facility Advance. m:%bgUurUzmir\wbI4.iI  Page lof 2 TABLE 5A: PROIECT'S PHYSICAL COMPONENTS Part A: Water Supply Improvenent 1. Completion of the construction of 1 The construction of the dam Tahtali Damn and reservoir. is close to completion (92% progress). 2. Construction of intake, water treatment plant, 2. The physical progress of the intake pumping station, 32 km of water transmission line and the pumping station is 98 %. and a storage rcservoir. The general progress for the treatment plant is 65 %; 15 out of 32 km. of the transmission line. 3. Expansion and reinforcement of the water distribution network. 3. a. construction of 320 km of primary distribution. a. 102 kmn. of primary distribution pipes have been installed. b. construction of 800 km of secondary distribution. b. 1049 km. of secondary distribution system pipes have been installed. c. 23 pumping stations. (includes expansion and rehabilitation) d. 179,000 m3 of distribution storage. c. 11 pumping stations have been constructed. d. 17 distribution storage have been constructed with a capacity of 113,000 in3. 4. Rehabilitation and replacement of about: 4. a. 77 km of distribution main. a. Included in 3b. b. 50,000 customer meters. b. 50,000 new customer meters have been purchased and installed. c. 50,000 service connections. c. 50,000 service connections have been installed. d. 5 source meters. d. not purchased. 5. Installation of about 200,000 new metered water connections. 5. With the installation of about 130,500 new onnections __________________________________________________________ about 300,000 new houweholds have been served.  Page 2of 2 TABLE 5A: PROJECT'S PHYSICAL COMPONENTS Part B: Sewerage Collection and Treatment a. The construction of this was taken out of the project. a. Construction of interceptor section 1. b. The construction of the tunnel for section 2 b. Completion of interceptor section 2, 3 and 4. have been completed. The lining is to be completed by IZSU. The construction of section 3 and 4 is 88% completed. Section 5, 6, and 7 and the force main for two pumping stations were taken out of the project in October 1992. c. The construction of the sewage treatment plant has yet to start. c. Construction of sewage treatment facilities Only the preloading have been completed. comprising a series of stabilization ponds d. The construction of only two pumping stations have started. d. Construction of seven interceptor and collector pumping stations and associated force mains. e. The construction of only 2 km of collectors have been completed. e. Construction of about 69 kIm of collectors. f & g. 544 km of pipes have been installed. f. Construction of about 430 km of secondary and tertiary sewers. g. Rehabilitation or replacement of about 77 km. of secondary and tertiary sewers. h. Installation of about 300,000 sewerage connections. Part C: Institutional Improvements a. IZSU prepared and put into effect the regulations for the control a. Technical assistance for the borrower in the areas of unaccounted-for of industrial waste treatment and disposal. The regulations water control, industrial waste treatment and disposal, and in the on the protection of Tahtali Dam were also put into effect. preparation and implementation of regulations for industrial IZSU entered into a contract with a foreign water company under a twinni waste disposal and sewer use. arrangement. However, the results are unlikely to be sustainable. b. This training was not carried out. b. Training of the borrower's staff in the operation and maintenance of facilities constructed under the project. c. The flow meters, correlator and logger were provided for the unit worki c. Provision for the Borrower vehicles, equipment, and materials for unaccounted-for water reduction. operation and maintenance. m~~~~~~~~~~xiiv,drVabi.kxb~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~  21 Page 1 of2 TABLE SB: CONTRACT PROCUREMENT SCHEDULE iContract (Project Component) SAR ACT SAR ACT I . I Tahtali Dam and Reservoir (Al) 04/86 07/86 12/89 07/96 2 Tahtali Intake, PS & WTP CW (A2) 12/87 01/93 12/91 03/97 3 Tahtali Intake, PS & WTP EQ (A2) 09/87 01/93 06/91 03/97 4 Tahtali Transmission Main (A2) 03/88 12/92 12/90 09/96 . Tahtali Terminal Reservoir (A2) 03/88 - 12/90 - 6 Resettlement - 10/93 - 08/96 7 Primary Mains Installation (A3) 01/87 01/87 12/94 12/95 2_ 8 Tertiary Mains Installation (A3) 01/87 01/87 12/94 12/95 9 9 System Rehabilitation CW (A4) 01/87 01/87 12/94 12/95 c 10 Water Connection Installation (A5) 01/87 01/87 12/94 12/95 0' 11 Supply of Pipes & Fittings (A3,A4,A5) 01/87 12/90 06/94 111/92 _ X Supply of Customer Meters (A4) 03/87 12/89 12/94 09/94 13-Source Meter Installation (A4) 08/87 - 12/87 - 14 Source Meter EQ (A4) 07/87 - 10/87 - 15 Distribution Reservoirs (A3) 08/87 08/87 12/94 12/95 4 16 Water Pump Station CW (A3) 09/87 09/87 12/94 12/95 9 17 Water Pump Station EQ (A3) 1' 09/87 - 06/94 - .Total of 8,9,10,15,16 01/87 01/87 12/94 12/95 18 Tahtali Engineering (A2) 05/87 10/89 06/94 05/96 19 Distribution Engineering (A3) 12/87 - 12/94 - 20 Sewage Treatment Plant CW (B3) 10/88 06/92" 12/92 _ 21 Sewage Treatment Plant EQ (B3) 10/88 06/92 12/91 _ Supply of Pipes Fittings (A3,A4,A5) These dates are the dates related to preloading. The WWTP has not been tendered yet. Dates refer to first contract when there Is more than one contract Dates refer to last contract when there is more than one contract These works will be done continously due to their nature  22 Page 2 of 2 TABLE SB: CONTRACT PROCUREMENT SCHEDULE Contract (Project Component) SAR ACT SAR ACT 22 Interceptor Section 1 (B1) 04/89 - 12/92 - 23 Interceptor Section 2,3 & 4 (B2) 01/83 07183 12/90 1i2/97 24 Sewage Pump Station CW (B4) 02/89 03/89 3 12/93 06/96 25 Sewage Pump Station EQ (84) 12/88 09/88 06/93 05/93 26 Primary & Secondary Collectors (B5) 06/88 06/93 12/94 01/96 27 Tertiary Collectors (86) 09/87 09/87 12/94 12/95 cJ 28 Sewerage System Rehabilitation (B7) 09/87 09/87 12/94 12/95 c' 29 Sewer Connections (88) 08187 08187 12/94 12/95 2 30 Supply of Sewer Pipes (B5,B6,B7) u 09/87 - 06/94 - 31 Supply of PVC Linings (BII,B2,B5) 4 05/89 - 12/89 - Total of 27,28,29 08/87 08/87 12/94 12/95 cl 32 Sewerage Engineering (B(all)) 03/87 12187 12/94 Dec-95 33 Project Mangement (ABC(all)) 12/87 - 12194 - 34 0 & M Equipment Supply (C3M) i 08/87 03/91 06/94 12/95 35 Technical Assistance (C1,C2) ' 09/87 11/92 12/90 11/96 Total X The Contract for gl6Ii Pumping Station was cancelled in 1991. The new contract was signed in October 1993. i All pipes for collectors have been produced by contractor on the side. ff Purchase of computers. IV It includes Price Waterhouse, SAUR-Su Yapi, BVI Amendment 7-8. ' Dates refer to first contract when there is more than one contract ' Dates refer to last contract when there is more than one contract f These works will be done continuoulsy due to their nature  27 TABLE 8B: PROJECT FINANCING (USS million) IBRD 184 184 0 184 116 98 Izmir Municipality 1/ 108 108 0 0 0 10 IZSU 103 268 165 224 152 82 DSI 50 123 73 123 134 90 Iller Bank 77 82 5 82 88 79 Total 522 765 243 613 490 359 1/ The Municipality contribution to the Project was applied to service the Bank loan. table Sa.xis  28 TABLE 9: ECONOMIC COSTS AND BENEFITS Not reestimated as the project has not been completed. m:\bg\tur\izmir\table9.xIs  TABLE 10: STATUS OF LEGAL COVENANTS | Agreemenet - - Setion Covenant Typep Present Description of covenants Comments Status LA 3.01(b) Project Management C Project management unit adequately staffed LA 3.02(b) Other C Land acquisition LA 3.04 and side Environmental C Controlling industrial A program was prepared and letter waste discharge its implementation initiated. LA 3.05 Monitoring, review CP Semiannual progress The reports on the entity's and reporting reports on the entity's financial status and on project financial status, progress implementation were in project implementation satisfactory. No adequate information was provided to the Bank on the management of the industrial waste program. LA 5.01 (b) Audits NC IZSU's audited financial The private external auditors statements always expressed "no opinion" on IZSU's financial statements. LA 5.01 (b) Audits C Audit of Special Account LA 5.02 (a) Counterpart funding NC Contribution to investment _L - -I _ 11  TABLE 10: STATUS OF LEGAL COVENANTS Ag r .t . SetonCovenant vTyp. |Present Description ofcovenants Commnts _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _.. I S tatu s~ .. ... .. ... .. LA 5.03 (a) Accounts CP Revaluing its assets IZSU started revaluing its assets in 1992. The external audits, however, have questioned the methodology for the evaluation. LA 5.03 (b) Financial Performance NC Tariff study The study was carried out, but recommendations were not fully implemented. LA 5.05 Financial performance NC Plan for settling accounts The plan was submitted but the receivable and payable with accounts receivable continued at Government entities unacceptable levels (estimated at 5.2 months of billing as of September 1995). GA 3.01 Involuntary resettlement CP Resettlement plan for the The plan was submitted but its 0 Tahtali Reservoir implementation is behind schedule. LA 3.02 Environmental C Inspection of Tahtali Dam LA 5.04 Financial performance NC Debt and investment IZSU carried out investments limitation outside the project exceeding the limit without (US$2.0 million a year) proper consultation with the Bank. C: covenant complied CD: complied with after delay CP: complied with partially NC: not complied with m:\bg\tir\izmir\tabIelO  31 TABLE 11: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENTS There is no evidence of non-compliance.  32 TABLE 12: BANK RESOURCES - STAFF INPUTS (in staff weeks) Stage of Project Cycle Planned Actual Preparation to appraisal not availabe 110 Appraisal not available 30 Negotations-Board Approval not available 7 Supervision not available 200 Completion 15 25 Total 372 m:\bg\tur\izmir\table 12. a  33 TABLE 13: BANK RESOURCES: MISSIONS Performance ratinP2 Stage of Number of Days in Specialized Staff skills Implementation Development Types of Project Cycle Month/year Persons Field represented/1 Status Objectives problems/3 Through appraisal 7/85 - 9/86 72 F,N,E Appraisal through Board approval Nov-86 2 16 F,N Board Approval through effectiveness Supervision Jun-87 3 3 F,N,E 1 1 Supervision Jan-88 2 5 F + N 1 1 T Supervision Apr-88 2 6 F+N T Supervision Jun-88 2 5 F+N 1 1 T Supervision Dec-88 2 4 F + N F,M Supervision May-89 3 15 F-+ N 2 1 F,M Supervision Nov-89 1 11 N 3 2 F,M Supervision Mar-90 2 6 F+N 3 2 F,M Supervision Jun-90 2 4 F+N 3 2 F,M Supervision Dec-90 1 6 N 2 2 F,M Supervision May-91 2 9 F-+ N 2 2 F Supervision May-92 3 8 2F-+ N 3 3 F,M,T Supervision Oct-92 3 18 F + N + consultant 3 3 F,M,T Supervision Mar-93 3 8 2F + N + 2Resettlement 3 3 F,M Supervision Dec-93 3 6 F + N + Resettlement 2 2 F Supervision Jun-94 3 13 2F+N U U F,M Supervision Dec-94 3 16 2F+N U U F,M Supervision Jun-95 2 5 2F HU HU F,M Completion Nov-95 2 6 2F HU HU F,M 1-Specialization 2-Performance Rating 3-Types of Problems A = Agriculturalist 1 = Minor problems F= Financial E = Economist 2- =Moderate Problems T= Technical D = Education Specialist 3- = Major problems M Managerial F=Financial Analyst H = Horticulturist L = Livestock Specialist M = Marketing Specialist N= Engineer R= Forestor m:\bg\tur\izmir\1 3.xls  _______________ _ TABLE 14: IZSU INCOME STATEMENTS (1987 - 1995) (US$ million) _________ 1987 1988 1989 1990 1991 1992 1994 1995 Total Operating Revenue 26.82 19.47 24.36 53.95 65.44 A 81.19 100.77 60.19 56.81 Operating Expenses ________ Staff Costs 6.57 9.45 27.25 31.17 23.52 24.19 12.71 13.16 Provision for employee lermination benefits 0.00 0.00 0.00 11.65 8.55 2.33 0.26 Energy Costs _ ___ 7.20 8.80 10.01 10.35 10.61 12.07 7.89 9.76 Raw Materials _ 0.94 1.25 1.75 2.40 1.72 1.70 1.43 3.52 Depreciation _ ___ 0.70 0.95 0.92 0.86 0.92 0.83 0.47 0.86 Provision for bad and doubtful debts __ 4.87 0.86 0.74 2.35 0.29 Repair and Maintenance __ _ __ 0.16 0.14 0.10 0.48 2.46 2.42 2.08 Communication Expenses 0.08 0.10 0.08 0.24 0.23 0.13 0.10 Notary and legal expenses ____ 0.00 0.03 0.19 0.09 0.31 0.25 0.00 Rent Expenses 0.21 0.22 0.22 0.04 0.32 0.55 0.81 ESHOT balance written.off =1 __ _ _ I .12 0.13 Other Expenses 0.53 0.12 0.88 0.45 0.45 0.26 0.42 1.83 Total Operating Expense 18.75 15.93 21.03 41.30 51.82 50.58 51.79 30.94 32.66 Net Income from Opelraions ___ 8.07 _ 3.54 3.33 12.65 13.62 30.61 48.98 29.24 24.14 Non-operating income _ __ ___ 2.67 2.75 3.36 5.17 5.49 8.18 7.27 5.71 Non-operating expenses __ __ 0.00 _ _ I.09 1.87 3.32 1.85 0.27 Net Non-Operating income _____ 2.67 2.75 _ 3.36 4.08 3.62 4.86 5.42 5.44 Financial expenscs ____0.00 1.70 2.25 9.47 5.40 5.34 6.18 4.93 Net Income for the Year 8.07 6.201 4.38 13.76 8.23 28.83 48.50 28.48 24.66 Municipal Grants and Other Income 4.10 12.31 0.00 Income after extraordinary income 8.07 6.20 4.38 13.76 8.23 28.83 52.60 40.79 24.66 Oprating Ratio 0.70 0.82 0.86 0.77 0.79 0.62 0.51 0.51 0.57 Average Exchange Rate 855 1,421 2,120 2,606 4,168 6,864 10,965 29,668 45,731 Note: 1991-1994 IZSU financial statements audited by private independent extemal auditors. ___|_. _ __ j 1987-1990 IZSU financial statements unaudited. | .- I IZSU has capitalized the borrowing costs incurred in respect of foreign borrowings (i.e. interest expenses and foreign exchange losses) - | as part of construction work in progress. _ _ _______ Breakdown for 1987 not available _______ __ __ ___ __ m:b\W Ki U. x 1 _ _ _ t  Appendix A Page 3 of 16 Annex 1 TURKEY lzmir Water Supply and Sewerage Project (Loan 2818-TU) Guidelines for The Evaluation Report to be prepared by IZSU The following issues should be addressed in the final evaluation report to be prepared by IZSU: (a) the assessment of the project objectives, design, and implementation; (b) the evaluation of IZSU's own performance (including DSI, Iler Bank and KHGM's performance) during the preparation, appraisal, and implementation stages of the project with special emphasis on lessons learned that may be relevant in the future; (c) the evaluation of the performance of the Bank during the preparation, appraisal and implementation of the project, including the effectiveness of the relationship among IZSU, DSI, Iller Bankasi, KHGM and the Bank, with special emphasis on lessons learned; and (d) the plan and timetable for the completion of the project as restructured in October 1992, defining the indicators to be used to monitor project implementation. Information to be provided by IZSU to the Bank (a) Information on tariffs and tariff structure (1987-1995); calculation of average tariffs, providing a copy of the Board resolution for each tariff increase. (b) Comparison between estimates water demand/production and related indicators (SAR Annex 2, page 36) and actual results (1987-1995). (c) Comparison between estimates of sewerage connections and related indicators (SAR Annex 3, page 37) and actual results (1987-1995). (d) Comparison between estimates of the project cost and financing plan (SAR Annex 5, page 40-42 and page 17) and actual results. (e) Comparison between estimates of monitoring indicators (SAR annex 1 1, page 49) and actual results (1987-1995). (f) Comparison between estimates of Income Statements, Sources and Applications of Funds, and Balance Sheets (SAR Annex 12, 13 and 14, pages 50-52) and actual results (1987-1995). (g) Comparison between the estimates of the expansion, reinforcement, and rehabilitation of the water and Sewerage networks (Schedule 2 of the Loan Agreement) and actual results.  Appendix A Page 4 of 16 Annex 2 TURKEY Izmir Water Supply and Sewerage Project (Loan 2818-TU) Status of Project Execution Sewerage Project Component 1. The different elements of this project component as restructured in October 1992, have progressed at an uneven pace, and the investments already made will not produce benefits to Izmir until the wastewater treatment plant and its complementary works, which have not yet been started, are built. The status of the main elements is as follows: (a) the construction of the wastewater treatment plant with a minimum capacity of 1.8 m3 second has yet to start. The cost is estimated at about US$90 million, to be financed by IZSU; (b) the construction of the force main and the Box Culvert has yet to start. The cost is estimated at about US$20 million, to be financed by IZSU; (c) the construction of the main interceptors is well advanced (14 out of 19 kn). The investment to be made after the closing date amounts to about US$9 million, to be financed by Iller Bank; (d) the construction of the two pumping stations (Cigli and Karsiyaka) is well advanced and they are expected to be completed in 1997. This schedule takes into account the time required to dry the construction sites for both stations, which were inundated during the recent (November 1995) floods in Izmir. The investment to be made after the closing date is estimated at about US$9 million, to be financed by IZSU; and (e) the data on construction of collectors, secondary and tertiary sewers and sewerage connections is to be updated by IZSU. IZSU will also prepare by November 30, 1995 a comparison between the figures in Schedule 2 of the Loan Agreement and the actual results. Water Supplv Proiect Component 2. The construction of the different elements of this project component has progressed at a relatively even pace but the resettlement of the displaced population and the land expropriation have lagged behind. The lag in the resettlement of the affected population and in land expropriation are likely to result in both hardship for the population and further delays in the commissioning of the Tahtali Water Supply System. The status of the main elements of this project component is as follows: Construction (a) the Tahtali Dam is close to completion and the impoundment is scheduled to take place at the end of 1995. The investment to be made after the loan closing date amounts to about USS14 million, to be financed by DSI;  Appendix A Page 5 of 16 Annex 2 (b) the water treatment plant is well advanced, and 90% of the equipment is scheduled to be delivered by the suppliers before the end of 1995. The investment to be made after the closing date amounts to about US$23 million, including US$1 million of consultant fees, ,to be financed by DSI; (c) the water transmission line has a physical progress of about 40%, and all the required materials are scheduled to be in stock by the end of 1995. The investment in civil works to be made after the loan closing date amounts to about US$7 million, to be financed by DSI; (d) the information on the expansion, reinforcement and rehabilitation of the water distribution network, as well as on the number of new metered connections is to be updated by IZSU. IZSU will also prepare by November 30, 1995 a comparison between the figures in Schedule 2 of the Loan Agreement and the actual results; Resettlement (e) the construction of houses for 286 families which have requested resettlement in rural areas has a physical advance of about 50% since its initiation two years ago (October 1993). The construction of houses for 35 families in urban areas has yet to be tendered. The investment to be made in the rural area after the closing date amounts to US$11 million, and to US$1 million in the urban area. All houses are to be financed by K(1HGM; Land expropriation (f) the expropriation process for 54% of the land (1,018 out of 2,018 has.) required for the Tahtali Dam. the treatment plant and the roads has been completed. The expropriation cost for the remaining land is estimated at about US$19 million, to be financed by DSI; (g) the expropriation process for the approximately 580 has. for the Absolute Protection Zone has yet to start. The expropriation cost is estimated at about US$17 million, to be financed by IZSU; (h) the expropriation of the 33 has. of land for the water transmission line between the dam and Izmir Airport has been completed. The expropriation process for 11 has, from the airport to the reservoir in Izmir has yet to start. The investment to be made after the closing date amounts to US$5 million, to be financed by IZSU; and Twinning Proiect Component (i) IZSU's twinning company completed the first stage of the work in June 1995. Continuation of the second stage, implementation of the recommendations, was subject to the negotiation of a new contract. IZSU decision was no to enter into a second contract and to implement the consultant's recommendations with the help of individual consultants. With this purpose, IZSU has hired 17 advisors outside the Project.  Appendix A Page 6 of 16 Annex 2 Summar of Main Investments After Closing Date 3. The total investments to be carried out after loan closing date amount to about US$225 million as shown in the table on the next page. IZSU's 1995 Financial Perfomnance 4. IZSU's financial performance during January-September 1995 has been highly unsatisfactory. IZSU's cash collection from bills, tax sharing and other revenues (US$41.8 million) have barely been sufficient to cover its most urgent operating expenditures (US$24.2 million) plus an amount equivalent to the debt service requirements (US$17.7 million). The debts, however, have not been fully serviced (only US$9.9 out of the US$17.7 million) by IZSU as the cash has been used to partially finance its investments (US$12.9 million) during the year. The remaining part of the investments have been financed by credits. 5. IZSU's unsatisfactory financial performance is the result of two main factors. First, water and sewerage tariffs were not adjusted between October 1993 and August 1995. This delay resulted in a reduction in the tariff levels from the equivalent of about US$1.35 per m3 of water sold in October 1993 to USS0.37 in July 1995. Tariff levels after the August adjustment are estimated at about US$0.75 per m3 sold (based on September billing), which is still insufficient to satisfy IZSU's financial requirements, including the financing of its investment plan. Earlier estimates of required tariffs have been in the order of US$1.05 to US$1.35 per m3 of water sold, depending on the size of the investment plan. Second. bill collection continues being unsatisfactory as the bills outstanding as of the end of September 1995 are equivalent to 5.2 months of billing. IZSU's Compliance with Loan Covenants 6. IZSU is out of compliance with several covenants under the Loan Agreement with the Bank, including: the revenue covenant - Section 5.02; consultations with the Bank about investmnents and borrowing outside the Project - Section 5.04. Other covenants are only partially in compliance: resettlement - Section 3.01; collection of accounts receivable - Section 5.05.  Appendix A Page 7 of 16 Annex 2 TABLE Summary of Investments After Closing Date Item Executing and Financing Agency IZSU DSI I EB I KHGM TOTAL (US$ million) Sewerage Treatment plant 90.00 90.00 Force main & Culvert 20.00 20.00 Interceptors 9.00 - 9.00 Pumping, stations 9.00 9.00 Subtotal 119.00 0.00 9.00 0.00 128.00 Water Supply Tahtali Dam 14.00 14.00 Treatment plant 23.00 _ 23.00 Transmission line 7.00 7.00 Resettlement 12.00 12.00 Expr. for dam 19.00 _______ 19.00 Expr. for APZ 17.00 17.00 Expr. for transmission 5.00 5.00 Subtotal____________________ 22.00 63.00 0.00 12.00 97.00 141.00 63.00 9.00 12.00 225.00 m:Abg\twmij.aidmem .n6  Appendix A Izsu Page 8 of 16 WATER SUPPLY AND SEWERAGE PROJECT Annex 2 ._ . ......... .... o ..7A C-- P Nisburded To - -eisburte Contract .A (Cidli P*S old) 1006 1. 0.0.. .0.06-..- ..........._ Contract..,.,.,'.:. 8A;,J,.,,*9$,,B, &yaka P/S. .-:.i:- .j:.j.... 481.t... S; 18 -:'- -,_ ....... .... .at...9 ContrEc- .A (Kyaka Colector) a~ 1- 06 1060... ... .. . ..... .. .:..,- -. .z. l -''a&.. . an .-X&- a: E * E -..-.-. :D::tE:i : C. .- a E-: n I .. .... .. .... -. : . .---i. - -- _ 1 _ 1 ; f~~~~~~~~~~~~~~~~~~~~US DOLLAR MILLION) Contract 7A (Cidli PIS aid) 10.0 006 10.06 10.06.. . . Contract 7A (Ciali PIS Now) 7.99 2.45 3.41 I 3.79 0.13 4.20_ 4.2 1st art of'96 Contrmct 8A K.aka P/S) 10 24 4.32 4.81 5.18 0.13 5.06 5.06 1st ort of 96 Cotra n 1A.0 1801 a C18 1. 1.06 1 Contract~ ~ ~ .. .. ...... .... .... .. :........ - i i ' : t:'t"t; '5,t'l.X X 00 I _ X X I 1. = . X~~~~~~~~~VA (B) Equipment (100% WB Finance) Contract 5-W (Soil Lab) 0.12 0.12 0.12 0.12= Contract 6 (PIS Ecuipment) 24.25 24.25 24.2S -24.25. Comouteri(Wana) J 5.27 42. . 4.91 4.91 . _0.36 1 I 0.36 1 0 start8of 9 Vles and Acc ssories | 18;01 : 18.01 1.01 - 8.:1-;.: :| (C) Consultant (100 % WB Finance) | Su_ervision-1__nst./BVI_ 7.44 _7_44 7.44 I7.44 Suoervision-2 /BVI) 2.48 1.95 12.22 2.40 0_ 1t 0.08 0 T 08 4 SAUR Institution 2 .12 L. .20 2.20- - Auditino 0.43 0.27 . 0.31 0.31 . 0.12 _ 0.12 COM Institution 0 072 0.72 2 0.72. 0.72 |(DiZSU 100% Finance | _ _ __|-_ Contract 6 (Preload) 1l23 |1.23 | 1. 23 | 1.23 | - - - - |Water Suoly Network-Civil | 48.08 | 29.96 30.74 31.02 17.06 17.06 . 4th art of 97 WIS House Connection 350 0.99 0.99 0.99 2.1 4th rt of 97 Sewer Network '13.46 11i13 12.58 2.58 0 88 - 4th art of 97 |Land (Water Distribution) | ".30 |0.82 | 104 | 1.13 | 10.17 | 1'01 7 | 4th 2rt or 97 I Land (APZ) | 1_.63 _ |16.63 __| | 16.63 4th art of .97 | Land IWater Pipeline)_ 3 37 3. - ||337 | |3 37 4th art of 97 I-Land (Sewer) | 7.40 1 2.24 2.42 . 2.51 4| . 89 - - - 4 89 4th art of 97 |LLand (WWTP) | 38.33 i .35.73 36.52. | 36.84 | * 1.49 | - 1 .49 4th qrt of '97 SUM 4 1t43.30 L:82).t 5700 - 7.0 | #lsu - no n T a- ---- -*0- -7$--- j;; u <S - t i Y *st6 .;;  Appendix A Page 9 of 16 lzsu Annex 2 WATER SUPPLY AND SEWERAGE PROJECT C.ioutrset No 1 lnstauneiWTP iLdL. ~ .12...ZL........... 14 To t. t Contract N. 2 . e 17 jj.,.. S_ 'y :Ai _ i .Zn~. . ..... (A)A CiiWok M (US OOLLAR ILLION) (W10S0%S Financina) . Contract No.1 Intake/WTP 18.38 8.10 10.32 10.78 0.14 7.0 7.60 4th art of 96 Contract No.2 Piaelene 179 S.03 7 78 0.25.4 - .42 4th art of 097 lixl (8) Equipment (100% WS Finace) !Contract Nol1lntake/WTP ..3 2618 1 3.17 9.05 5.E = 4.68 = 4.6a 4th art of '96 -Contract No.2 Piceline 7.13 3.91 5.55 .4 ... 1.29 0 29 0 29 4th. sart. of 96 (C) Consultant 4.18 2.61 2.77 2.89 0.12 1.27 1.27 2nd qrt of 97 (100 __ WB Finance) - - (0) DSI Finance -r |Component Tahtali Dam . 64.5 47.40 49.30 50.7 13.93 13.93 4th art of '97 Land Acausitlon 43.42 17.74 22.18 254.41- 1 7.95 1_ 17.95 . 4th grt of '97 . ...-.. ... .. . *. . T . n . I-:'-'.'"'''"'''''',"''___ ______ ______ _ ________ = _=____ - I________ Intercoter 2 12.00 112.00 1200 1200 mntercmoter 3 27.43 | 2.25 _ | .18.18 7 4th art of'96 Interceoter 4 _ 1 4385 35.35 I 35.85 38.22 . . 7.43 743 a 4th art of 98 IMiscllanscus 4786 4.8 4.78 4.88 Project Total 490.77 324.06 344.57 360.20 a6.82 55.14 861 8 .30S f~~~~~~~~~~~~~4 -Jal t1==  Appendix A IZSU Page 10 of 16 WATER SUPPLY AND SEWERAGE PROJECT Annex 2 LAND ACQUISITION Area to be Area Expropriated Status Expropriated (bee) Until Nov. 01, 1995 (hec) |A-WATER 1-Tahtali Dam Reservoir 1,923 986 The remaining 937 hec. should be expropriated by DSI by the end of 1997 as the rescrvoir should reach its maximum level at that time. DSI needs 519 million to complete the expropriation. 2-Treatment Plant 30 30 DSI has compicted 3-Roads. 65 65 DSI has completed 4-Absolute Protection Zone 583 0 IZSU has yet to receive aouthorization from the Nlinistry of Interior to expropriatc. The expropriation plan for 30 hec has been prepared by IZSU. For the rest, IZSU is preparing the expropriation plan. IZSU is planning to complete the expropriation by the end of 1997. IZSU requires S16.6 million. S-Transmission Line (Between Tahtali Dam and Karabaglar Reservoir) a) Between the dam and treatment plant (1) (1) DSI has complcted 33 33 b) Between the treatment plant and Airport DSI has completed c) Between Airport and Bornova-Balcova Road 10 0 IZSU has not yet started Intersection . the expropriation. IZSU requires S4 million. d) Between Bomova-Balcova Road Intersection 2 1 Izmir Municipality has and Karbaglar Water Reservoir prepared the expropriation plan. The Municipilaty has deposited Si million and it needs additional SI million. (land + improvements) B.WASTE WATER TREATMIENT PLANT 1.482 1.362 IZSU requires SI.81 million to expropriate the remaining 120 hec. This area not yet expropriated does not delay the construction of the plant.  Appendix A ,______________ Page 11 of 16 Are to be Area Expropriated Status Expropriated (hec) Until Nov. 01, 1l9 C. COLLECTORS -Bornova Sanayi CoUectors 0.2 0.2 IZSU has completed -Buyuk Cigli CoUectors 2 2 IZSU has completed -Karsiyaka Collector To be determined by - IZSU has not started yet izSu TOTAL 4.130.2 2,479.2 (1) Covers 5 a and 5 b filename/dunybank/land  Appendix A Page 12 of 16 Annex 2 TURKEY Izmir Water and Sewerage Project (Loan 2818-TU) Revenue Contribution to Investment (US$ Million) Jan-Sept. 1995 Water Sold (million m3) 70.5 Water and Sewerage Bills 30.0 Other Services Billed 9.1 Total Billing 39.1 Cash Collections 35.4 Cash Operating Expenses 24.2 Operational Surplus/Deficit 11.2 Tax Sharing 2.3 Interest Revenue & Other Income 4.1 Gross Cash Generation 17.6 Debt Service 17.7 Net Internal Cash Generation -0.1 Capital Expenditures 12.9 m:\bg\mur\izmir\anx2amc.icr  Appendix A Page 13 of 16 Annex 2 TURKEY Izmir Water Supply and Sewerage Project (Ln. 2818-TU) Compliance with Loan Covenants Covenant Date Compliance Comments Project Management Life of the project C Unit adequately staffed (3.01 [b]) Land acquisition Dec. 1988 C (3.02 [b]) Controlling industrial Continuous C A program was waste discharge (3.04 prepared and its and side letter) implementation initiated. Semi-annual progress February and August CP The reports on the reports on the entity's entity's financial financial status, status and on project progress in project implementation are implementation (3.05) satisfactory. No adequate information is provided on the management of the industrial waste program. IZSU's audited June 30 each year CP The auditors have financial statements repeatedly expressed (5.01 Ib]) "no opinion" on IZSU's financial statements. IZSU is taking some, although insufficient measures, to correct the deficiencies stated by the auditors. Audit of special June 30 each year C account (5.01 [b])  Appendix A Page 14 of 16 Annex 2 Contribution to Life of the project NC During January- investment (5.02 [a]) September 1995 there has not been net internal cash generation. The capital expenditures has been about USS13 million. Bank waived IZSU's lack of compliance with this covenant in 1994. Financial forecast and May and November NC IZSU has not yet measures necessary to each taken actions required meet financial to finance its requirements (5.02 operating [b] and [c]) expenditures and investment program in 1995 and to comply with the revenue covenant. Revaluing its assets Dec. 1988 C IZSU started (5.03 [a]) revaluing its assets in 1992. Tariff study (5.03 [b]) June 1988 CP The study was carried out but its recommendations have not been implemented. Tariffs have been insufficient to cover IZSU's financial needs and to comply with the revenue covenant. Plan for settling Dec. 1987 CP The plan was accounts receivable submitted but the and payable with the accounts receivable Goverment entities continue at (5.05) unacceptable levels (estimated at 5.2 months- of billing by the end of September 1995). Resettlement plan for Dec. 1987 PC The plan was the Tahtali Reservoir submitted but its (3.01 of Guarantee . implementation is Agreement) __ behind schedule.  Appendix A Page 15 of 16 Ainex 2 Inspection of Tahtali Yearly C Dam (3.02) Debt and investment Life of the project NC IZSU has carried out limitation outside the investments and project (US$2.0 contracted credits for million a year) (5.04) about US$6.0 million in 1995 without proper consultation with the Bank. C: Complied with CP: Complied with partially NC: Not complied with  Appendix A Page 16 of 16 Annex 2 TURKEY Izmir Water SuDDIy and Sewerage Proiect (Ln. 2818-TU) Key Persons Met Yakup Basmaci - General Director Sacit Basol - Assistant General Director, Technical Gulay Demircioglu - Project Manager Nazif zkan - Department Head, Finance and Accounting M: Hikmet Ozgobek - Regional Director, Izmir Enver Caglayan - Deputy Regional Director, Izmir Musa Erdem - Engineer KCHGM: Unal Oguz - Manager, Resettlement Zeki Erdem - Manager, Projects and Implementation Sami Tecimer - Engineer Ali Kececi - Engineer ILLER BANKASI: Sevil Ok - Regional Director BLACK AND VEATCH: Tim Tougas - Project Manager m:si~  Appendix B Page 1 of 7 PROJECT EXECUTION EVALUATION REPORT TU RKiYE iZMiR WATER SUPPLY AND SEWERAGE PROJECT LOAN NO:2818-TU JANUARY 1996  Appendix B Page 2 of 7 PROJECT EXECUTION EVALUATION REPORT TU RKIYE iZMiR WATER SUPPLY AND SEWERAGE PROJECT LOAN NO: 2818-TU PREFACE This is the Implementation Completion Report (ICR) for the Izmir Water Supply and Sewerage Project in Turkiye, for which loan in the amount of USS 184 million equivalent was approved on 28 January 1986 and Loan Agreement was signed on 12 June 1987. The Loan was closed on 31 December 1 995.Final disbursement took place on . at which time an amount of 1,USS68,000,000 was cancelled.Cofinancing for the project was provided by izmir Metropolitan Municipality, Iller Bankasi and DSI(State Water Works Organization). (1 ) The sewerage works not yet contracted were draped from the project and their total amount of USS 8.000,000, was cancelled from the undisbursed amount of L^an on 13 December 1994.  Appendix B A. ACHIEVEMENT OF OBJECTIVES Page 3 of 7 At the end of implementation the progress in the relevant parts are: 1. Tahtali Oam which is totally financed by local fundsis contracted in Oecember 1989 and is close to completion and the impoundment is scheduled to take place at the end of 1995.The investment to be made after the loan closing date amounts to about USS14 million to be financed by oSi and the progress will be 98%.1t is scheduled to be completed in July 1996. The population in the Tahtali Dam lake area is subject to the resettlement.The construction of houses for 286 families which have requested resettlement in rural areas has a physical advance about 50% since its initiation two years ago(October 1993).7he construction of houses for 35 families in urban areas has yet to be tendered.The investment to be made in the rural area after the closing date amounts to USS1 million.lt is financed by KHGM and is scheduled to be completed in August 1996. 2. Tahtali System of an intake, water treatment plant and pump station is contracted in January 1993 and well advanced.90 % of the equipment purchase is scheduled to be delivered and 40% progress will be achieved at the end of 1995.the investment to be made after the closing date amounts to about USS23 million including USSI million of consultant fees, to be financed by DSi.lt is scheduled to be completed March 1997. The water transmission main is contracted in December 1992 and has a physical progress of about 52%, and all the required materials are scheduled to be in stock by the end of 1995.The investments in civil works to be made after the loan closing date amounts to about USS7 million, to be financed by OSI.lt is scheduled to be completed in September 1996. 3. The installation of primary mains of 320 km length, 300 mm to 1,000 mm diameter which is financed by local funds is contracted in January 1987 and the work is completed in December 1995. The installation of secondary mains of 800 km length, 100 mm to 200 mm diameter which is financed by local funds is contracted in January 1987 and the work is completed in December 1995. Civil work for 23 water pumping stations which is financed by local funds and the equipments for this project which iscontracted by ICB are contracted in September 1987 and December 1990 respectively and both are compieted in Oecember 1995. The installation of distribution reservoir of 1 79.000 mJ which is financed by local funds is contracted in August 1987 and the work is completed in December 1995. 4. The civil works for system rehabilitation (77 km of distribution main) which is financed by local funds is contracted in January 1987 and the work is completed in December 1 995. Purchasing of 50,000 customer meter which is financed by local funds is contracted in December 1989 and the work is completed in September 1994. 5. The first contract for the installation of 200.000 new metered water connections is signed in January 1987 and the whole work is completed in Oecember 1995. PART B: Sewace Collection and Treatment 1. Interceptor section 1 (5.0 km length; 3.0 m and 3,5 m diameter) is contracted in April 1983 by iller Bank.Since the contractor died during the project stage. the contract has been terminated.Because of the place of the treatment is changed as a result of Project revisions made by iZSU, it is not required the tendering once again of this part of interceptor. 2. Interceptor Section 2 (4,430 m length; 3,6 m diameter tunnel) which amounts to USS1Z million is contracted in August 1983 and the work is completed in March 1990  Interceptor Section 3 (5.668 m length; 2.4 m and 2.2 m diameter) is contracted in July 1983. The investments to be made after the loan closing date amounts to about USS1.18 million, to be financed by Iller Bank The progress is 87% it is scheduled to be completed in December 1997. Interceptor Section 4 (9,217 m length; 1.4 m , 2.2 m and N390 diameter) is contracted in September 1983. The investments to be made after the loan closing date amounts to about USS7.43 million, to be financed by Iller Bank.The progress is 88% and it is scheduled to be completed in December 1997. 3. The preloading ( USS1.7 millon) and the equipment purchase regarding the preloading ( USSO.1 millon) which is financed by loan are contracted in June 1992 and August 1992 and are completed in December 1992 and December 1991 respetively.The waste water treatment plant has not been tendered yet. 4. The construction of two pumping stations, Cioli and Kar,iyaka which is financed by the loan is well advanced and they are expected to be completed in September 1996 and September 1997 respectively.The investment to be made after the loan closing date is USS4.20 millon for r,ili and Uss5.06 millon for Kar;iyaka whereas the progress are 74% and 50% respectively.Bayrakii (USS 7 million) and GQmr0k (USS5.5 million)Pump Stations which will be financed by local funds are contracted in December 1995 and both are excpected to be completed in November 1997. Kar;iyaka Collectors(USS11.2 million) is contracted in October 1993 where 10% progressis reached and the contract is terminated in June 1995 due to the Contractor's default and has not been tendered yet. 5. Construction of 89 km of collectors (1.0-2.5 m diameter) which is financed by local funds is contracted in June 1993 and expected to be completed in January 1996. .6. The first contract for the construction of 431 km of secondary and tertiary collectors(t.2-0.8 m diameter) which is financed by local funds is signed in September 1987 and whole of the work is completed in December 1995. 7. The first contract for the rehabilitation or replacement of 77 km of secondary and tertiary sewers which is financed by local funds is signed in September 1987 and whole of the work is completed in December 1995. 8. The first contract for 300,000 sewerage connections (using appropriate technologies for low income areas) which is financed by local funds is signed in August 1987 and whole of the work is completed in December 1995. 9. The engineering for sewerage components of the project which is procured by Guidelines method is contracted in December 1987 and the contract will be terminated by the end of December 1995 due to the loan closing.New engineering services will be financed by local funds and will be contracted in the beginning of 1 99s. PART C: Institutional Imorovement of IZSU 1. For unaccounted for water control a responsible department is established and this department is monitoring and determining the physical unaccounted for water. Industrial waste management is carried out according to the related internal regulations prepared by IZSU and approved by Municipality councill in 1988. To prevent the pollution in Tahtali dam protection zone a Protection Regulation is prepared and is active since 1992. The services for institutional strengthening is contracted in February 1994 and the first part is completed in May 1 995.Because of this first part is not well advanced and found, unsatisfactory, the second part is not contracted. 2. Training in the operation and maintenance of facilities constructed under the project is not done because the constructions under the sewerage project are not completed  pleldx B 3. For the use of the unaccounted for water department for the purpose of detection and repair of leaks IZSU purchased flowmeters. correlators and logger. B. MAJOR FACTORS AFFECTING THE PROJECT The scope of the project have been required not to be determined that much big and the investment plan exceeded the IZSU's financial capasity.Also, iZSU could not arrange the tariff levels accordigly so that the income remained under the investment cost. Due to both the staffing problem (IZSU could not satisfy to establish a good organization with skillful staff in PMU) and the unready project drawings, a long time has elapsed between the loan agreement and project implementation period. World Bank monitoring procedures were such strong that IZSU was not free enough for deciding. Institutional Strengtening project failed because IZSU could not nominate the counterpart staff. iZSU and World Bank could not decide for the Waste Water Treatment Plant for a long time. The project entities DSI and Iller Bank together with KHGM have important financial difficulties because their budget is allocated by the Treasury. The World Bank contribution in the financing of the project was not enough beside IZSU's financial difficulties. C. PERFORMANCE ON THE PROJECT 1. Performance of IZSU iZSU created the necessity for restructuring because of the financial difficulties.. Inspite of financial difficulties and the effects of municipal elections. enough importance has been given to the procedures and studies before the implemantation period and IZSU has paid USS1 00 million for the project from the beginning. By the end of 1995, it is possible to say that IZSU has an active Project Oepartment supported by the qualified staff which was required at the beginning of the project. 2. Pertormance of DSi The construction of the different elements of the Water Supply Project has progressed at a relatively even pace.The land expropriation have lagged behind due to the financial difficulties from government.In spite of the serlous financial problems OSI has spent USS90 million from the beginning of the project. 3. Performance of ILLER BANK The,rnstruction of the main interceptors is well advanced (14 out of 19 km).Iller Bank has spent USS80 million for the project from the beginning. 4. Performance of KHGM The resettlement of the displaced population in the Tahtahi Dam late area have lagged behind and is likely to result in further delays in the commissioning of the Tahtali Water Supply System.The main cause of this delay is the financial difficulties from government. 5. Performance of WORLD BANK The scope of the project should have been required not to be determined that much big.  Page 670oF:7T Involvement of IZSU in the project preparation period should have been definitely secured taking into account that an establisment of IZSU was new and in the project preparation period iZSU can not be productive enough. Due to the World Bank's too close monitoring procedures, iZSU was forced and districted opn deciding. Staffing of PMU having the task of coordination in suitable quality, quantity, time and location should have been conssdered according to the condition to be realized in order to implement the project. D. KEY LESSONS It appears that project is not satisfactory since it was deviated from the original project objectives due to restructuring. The scope of the project should have been required not to be determined that much big and tne investment plan exceeded the iZSU's financial capasity.lnstead, a step-vise construction programme should have been applied. Since the original project was not implemented, it is not possible to asses the project benefits as planned at the beginning, therefore no data were obtained to be used for working on future operation. Problems faced in stuffing should have been anticipated and measures had to be taken by Treasury in the name of Borrower at least at the beginning of the project. The contribution of World Bank to the construction parts of the project should be at least 50%. The tariff levels adjusted by IZSU and approved by Municipality councill shoul be arranged in such a way that the income should be enough for the project investments.The related law that IZSU was established according to, should be revised.iZSU should arrange the studies by taking the audit reports into account.At the end of the non-return period of the present loan, after ensuring the institutional improvement, IZSU should apply to the Bank for the cancellation of the remaining part of present loan and alowance for the new loan.The ways should have been searched by the project executer to work jointly with the project entities. F. PLAN AND TIMETABLE FOR COMPLETION OF PROJECT Above project history shows that some major parts of the waste water sewerage system have already been constructed.The construction of the box culvert, force rain, Kar;iyaka collectors and waste water tr^atmen:t plant are a top priority for Izmir Bay continues to deteriorate dramatically. Since the World Bank facility for funding 35% of the project expired on 31 December 1995, IZSU management has decided to complete the remainin components of the waste water collection system, pumping stations and waste water treatment using internal financing supplemented by external funding for individual portions of the work by international loan agencies. If iZSU faces difficulties in financing the whole project, to get the greatest impact for the available money, iZSU intends to divide the complete waste water project into three construction phases, each lasting roughly three years. Phase I will consentrate on building the interceptors, major pump stations and treatment facilities needed to quickly intercept and treat the bulk of the raw sewage now flowing into Izmir Bay. Phase II will consentrate on building the neighborhood collectors and minor pump stations to complete a modern sewerage system for the entire city.  Appendtlx B Page T7 o Phase IlIl will expand the transmission and treatment capacity to accommodate population and water consumption growth until the year 2020. The Works Remainino to be Bid under the orolect are Component Budaet(US S Million] Bayrakli Pump Station 10.00 (The contract was signed on December 19,1995) GdimrQk Pump Station 5.80 (Bids were submitted on December,20 1995) Force Main & Box Culvert(lst part) 8.70 Kar*iyaka and Alaybey Collectors 5.00 Alsancak Collectors 1.70 Waste Water Treatment Plant,Part l(Civil) 77.00 Waste Water Treatment Plant,Part l(Equipment) 9.20 Diversion Wiers and River Inlet Structures 12.00 Upper West Collectors 3.59 Balova Collectors 1.10 Bornova Collectors 18.50 Lower Melez Collectors 29.23 Upper Melez Collectors 11.20 Tunnel Linning(Civil) 2.00 Piyale & $ehitler Collectors 10.80 Tunnel Lining(Equipment) 2.00 Waste Water Treatment Plant,Part II(Civil) 50.00 Waste Water Treatment Plant,Part I l(Equipment) 15.40 Lower West Collectors 9.30 Abdullahaoa Pump Station 14.24 GQzelbahce Pump Station 11.37 Elrefpala Collectors 1 40 Sewer Street Network Construction&Entegration 3. All components of the project except Diversion Wier Inlet Structures, Southwest Interceptor and Salgova Collector already have final designs available.The two latter components have conseptual designs available. IZSU will need a total of USS 126 million to implement the Phase I plan and USS 350 million to implement the overall project over the next four years. The enviosed Map indlcates the present situation after implementation and Table SA and SB shows the Contract Procurement and project implementation schedules respectively.  izsu Appendix C IZMNdR WATER AND SEWERAGE ADMlNISTRAnON Page 1 of 2 GENERAL DIRECTORPTE DATE : NNUIMBER .~O MNr. Ricardo Halperin Chief, Infrastructure and Environmental Division Countrv Departm-ent I 'Europe and Central Asia Region World Bank 1818 H Street N.W. Washington, D.C.20433 Ref Izrnir Water SuFglv and Sewerage Project(Loan 2818-TU) Dear NInHalperin; The draft Implementadon Completion Report for the referenced project have been reviewed and the following comments were made: Factors affecting the achievement of the proiect objectives Para. 15; The scope of the project was very larze at the begnning.Therefore the achievement of the project delaved 4 years until restructuring and thus the grace peniod which was very important in loan agreements was elapsed without a considerable proeress. World Bank did not extend the grace period.Therefore, t7ZSU had to both ensure the repayments and allocate enough budget for the investments. The Bank insisted on the lagoon type WWTP which requires a large area.For this purpose, an area of approximately 1500 ha had to be expropriated.Imnplementation of the expropriation took a long time due to the tedious procedures diccated bv the related laws.This also caused the delay in the project implementation. Para. 17; Although IZSU-'s Board and top management were changed in response to changes in political circumstances, the Project Management Unit remained unchangedfor the period of 1987-94 and the decisions of PMU have been applied bv the upper manazement during that period.There were no complains from WB about these decisions.Frequent changes in the management of PivfU happened in a short period in 1994, only. Para. 1 8; It is correct that the first municipal administration involved in the project. which was the one negotiating the loan with the Bank, lost the elections in Mlarch 1989.However, it took about two years after the loan agreement to prepare the dra%%ings and update the MNaster Plan before starting the construction implementation.The scope of the project in the beginning had been determined too larwe and financial contribution to the project was very high for IZZSU as a young instirution and these caused further  delays in the project implementation although tZSU assigned high priority to the Rpend