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Document of

The World Bank

Report No. 15307-RO

STAFF APPRAISAL REPORT

ROMUNIA

BUCHAREST WATER SUPPLY PROJECT

July 8, 1996

Infrastructure DivisionCountry Department IEurope and Central Asia Region

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CURRENCY EQUIVALENTS(as of July 8, 1996)

Currency Unit = Leu (ROL)ROL 1,000 = US$ 0.33

US$1 = ROL 3,041

AVERAGE EXCHANGE RATESROL per US$1

1992 1993 1994 1995

308 760 1660 2070

WEIGHTS AND MEASURESMetric System

ABBREVIATIONS AND ACRONYMS

CAS - Country Assistance StrategyCIF - Cost, Insurance and Freight

CLMB - Bucharest Municipal Council (Consiliul Local al Municipiului Bucuresti)FESAL - Financial and Enterprise Sector Adjustment Loan

FIP - Financial Improvement PlanFRP - Financial Recovery PlanICB - International Competitive BiddingIRR - Internal Rate of Return

IS - International ShoppingMOF - Ministry of FinanceMOH - Ministry of Health

MOPWRD - Ministry of Public Works and Regional DevelopmentMOWFEN - Ministry of Water, Forests, and Environment

NCB - National Competitive BiddingOED - Operations Evaluation DepartmentPCU - Project Coordination Unit

PIP - Project Implementation PlanRA - Regia Autonomd

RADET - Bucharest District Heating Company (Regia Autonoma de Distribupie aEnergiei Termice)

RATB - Bucharest Public Transport Company (Regia Autonomna de TransportBucureti)

RGAB - Bucharest Water and Sewerage Company (Regia Generala de Apa Bucuresti)RENEL - Romanian National Power Company (Regia Nationala de Electricitate)

STAP - Short-Term Action ProgramVAT - Value-Added Tax

ROMANIA - FISCAL YEARJanuary I - December 31


ROMANIA

BUCHAREST WATER SUPPLY PROJECT

CONTENTS

LOAN AND PROJECT SUMMARY ........................... i

PART I. COUNTRY AND SECTOR BACKGROUND .1

A. Country and Sector .1B. Water Supply in Bucharest. 3C. Development Strategy Issues. 5D. Role of the Bank and Lending Strategy. 7E. Bank Experience in the Sector and Lessons Learned. 8

PART II. THE PROJECT. 9

A. Project Origin. 9B. Project Rationale and Objectives. 9C. Project Description .10D. Cost Estimates .11E. Project Financing Arrangements .12F. Environmental Aspects .13

PART III. PROJECT IMPLEMENTATION AND SUPERVISION ARRANGEMENTS .15

A. Organization and Management .15B. Procurement .15C. Disbursements ...................................... 17D. Project Monitoring, Supervision and Auditing .19

PART IV. FINANCIAL AND INSTITUTIONAL ASPECTS .20

A. General Aspects .20B. RGAB's Past Financial Performance .20C. Tariff Schedule and Level .22D. RGAB's Future Financial Performance .23

PART V. PROJECT BENEFITS AND RISKS .27

A. Project Benefits .27B. Project Risks .29

PART VI. AGREEMENTS REACHED AND RECOMMENDATIONS . .31

ANNEXES:

1. Environmental Review2. Financial Analysis3. Economic Evaluation4. Quarterly Disbursement Estimates5. Project implementation Plan (PIP)

5.1 Detailed Project Description5.2 Procurement Plan5.3 Sunmmary Implementation Plan5.4 Disbursement Plan5.5 Performnance Monitoring Indicators5.6 Reporting Plan5.7 Technical Assistance Terms of Reference:

(a) Project Coordination Unit(b) Public Awareness Campaign/Financial Incentive and Tariff Studies(c) Operational Assistance and Training

6. Short-Term Action Program (STAP)7. Project Supervision Plan8. Selected Documents Available in the Project File

MAP:

Map IBRD 27830 Romania - Bucharest Water Supply Project

CHARTS:

Chart A Organizational Structure of RGAB

This document is based on the findings of an appraisal mission to Romania from December 4 to 15, 1995. Members of themission included Felix A. Jakob (Task Manager); Augusta Dianderas (Water Sector Specialist); Pascal Douard (MunicipalEngineer); Bernardo Gomez (Financial Analyst); Anca Dumitrescu (Project Officer, Romania Resident Mission); and KristalinaGeorgieva (Environmental Specialist). Mirtha Pokorny (ECIIN) helped in the preparation of the economic evaluation and AnitaGeorge (EClIN) in that of the final results of the financial analysis. Peer reviewers were Vincent Gouarne (EMTIE), PeterKoenig (EMTAW), and Guillermo Yepes (TWUWS). The Division Chief is Ricardo A. Halperin and the Department Directoris Kenneth Lay. The project was prepared with the support of a Japanese Government PHRD Grant to Romania.

ROMANIABUCHAREST WATER SUPPLY PROJECT

Executive Loan and Project Summary

Borrower: Romania

Beneficiary and Regia Generall de Apa Bucuresti - RGAB (Bucharest Water andImplementing Agency: Sewerage Company)

IBRD Loan Amount: US$ 25 million

Lending Terms: Twenty years, including five years of grace, at the standard variable interestrate for LIBOR-based US Dollar single currency loans.

On-Lending Terms: To RGAB, for twenty years, including five years of grace, at the standardvariable interest rate for LIBOR-based US Dollar single currency loans.

Project Objectives: The primary objectives of the project are to: (a) improve the reliability andquality of water supply in Bucharest; (b) progressively reduce water losses(both physical and commercial); and (c) strengthen RGAB's operational,commercial and financial management.

Project Description: To achieve these objectives, the project would comprise the followingcomponents:

(a) Improvement of water supply reliability and quality - through therehabilitation of water treatment plants and water pumping stations (US$14.5 million; 33% of base cost);

(b) Reduction of water losses - through (i) the repair and replacement ofdeteriorated sections of the primary and secondary distribution networkin several neighborhoods of Bucharest; and (ii) the replacement of metersfoi residential and commercial consumers; (US$ 24.9 million; 57% ofbase cost); and

(c) Institutional Strengthening of RGAB - through technical assistance toimprove the company's customer account management for thereorganization of billing and collection operations, develop theeffectiveness of its operational management, and prepare and implementpublic awareness and water conservation programs, (US$ 4.1 million;9% of base cost).

Project Benefits: The project supports the rehabilitation of infrastructure which has beenidentified as a priority in the Bank's Country Assistance Strategy (CAS). Theproject benefits for RGAB would consist in (a) decreases in operating costs asa result of the progressive reduction of physical and commercial water losses;and (b) increases in RGAB revenues from the improvement in the company'scommercial and financial management. The IRR, that has been calculatedwith very conservative assumptions for the project components withquantifiable benefits (76% of total base cost), is about 12%. The benefits for

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the consumer, though not quantifiable, are significant and include improvedreliability of water supply in terms of daily hours of adequate supply andpressure, as well as an improvement in water quality and concurrent reductionof public health risks arising from water-borne diseases.

Environmental Impact: The project has been classified as a category "B" project. An environmentalreview has been carried out consistent with the provisions of the World Bank'sO.D. 4.01 "Environmental Assessment" and the applicable environmentalprocedures of the Government of Romania.

Project Risks: The principal risks faced by the proposed project are of two kinds: financialrisks: although assurances have been given, and official commitments made,by both the Romania Government and the Bucharest municipality as to theavailability of counterpart funding, Bank-experience shows that the possibilityof a future shortfall of such resources either at the central government level(owing to a deterioration of the country's macro-economic conditions) or atthe Bucharest municipality level (owing to local fiscal difficulties) can neverbe ruled out entirely; and technical risks: even if carefully planned andprepared, the implementation of a first-time investment operation by a newbeneficiary carries inherent risks, including possible delays in implementationstart-up due to (i) the beneficiary's general inexperience in this type ofactivity; and (ii) his lack of practice in dealing with the complexity of theprocurement review and approval process by the Government.

While the technical risks can be mitigated by the build-up of RGAB'simplementation capacity through provision of technical assistance and an earlycompletion of procurement documents, the project's financial risks are, to alarge extent, not project-, but country-specific. They can only be addressedthrough the continuation and intensification of the ongoing dialogue with theGovernment and the Bucharest municipality on institutional and financialmanagement issues for local governments. The risk of a deterioration ofRGAB's financial performance and its ensuing inability to make its financialcontribution to the project is mitigated by (a) the Government, the Bucharestmunicipality, and RGAB's to implement the three-year Short-Term ActionPlan (STAP) included in the project; and the implementation of a technicalassistance program for the strengthening of RGAB's customer accountmanagement department that was initiated in January 1996 under funding fromthe French Government. Rigorous planning of work execution and continuousmonitoring of project implementation by staff from Bank headquarters and theBank Resident Mission in Romania is planned.

Project ID Number RO-PA-8778

Project Cost and Financing:

----------------USS Millions----------------Project Components Local Foreign Total % Foreign

A. Improvement of Water Supply Reliability 6.4 8.1 14.5 56B. Reduction of Water Losses 13.2 11.7 24.9 47C. Institutional Strengthenirg of RGAB 1.4 2.8 4.2 67

Base Cost 21.0 22.6 43.6 52

D. Physical Contingencics 2.0 1.0 3.0E. Price Contingencies 1.6 1.8 3.4

Total Project Cost 24.6 25.4 50.0 51

Financing Plan:

----------------US$ Millions----------------Local Foreign Total % Total

IBRD 25.0 25.0 50Government 15.0 15.0 30Bucharest Municipality 7.5 7.5 15RGAB 2.1 0.4 2.5 5

Total 24.6 25.4 50.0 100

Estimated Disbursements:

Bank Fiscal Year 1997 1998 1999 2000 2001

Annual 4.0 9.5 7.5 3.0 1.0Cumulative 4.0 13.5 21.0 24.0 25.0

Intemal Rate of Return: about 12 %

Poverty Category: nla

ROMANIABUCHAREST WATER SUPPLY PROJECT


I. COUNTRY AND SECTOR BACKGROUND

A. Country and Sectoral Context

1.1 Country Profile. With a land area of 283,000 km2 and a population of about 23 million,Romania is the second largest country in Eastern Europe, after Poland. Until World War 11 a countrywith an agriculture-dominated economy, Romania underwent, under the communist rule, a process offorced industrialization that inter alia resulted in an increase of the urbanization rate from 23 % in 1948to 54% in 1990. Following the overturn of the Ceaucescu regime in 1989 the economy suffered a declineof about 40% over the first three years of transition. Since then it has resumed growing reaching in 1994a growth rate of 4% and a GDP per capita of about US$ 1,450. The growth rate is estimated to havereached 5% in 1995 and could stay at that level for the rest of the decade if sound economic policiescontinue to be followed. Inflation that was at 260% in 1993, decreased to 137% in 1994, and to 31%in 1995. The economic transition has not gone without deeply affecting the population's living standards.According to the Bank's 1995 Poverty Assessment, average household income in 1993 stood, in realterms, at about 80% of that of 1989, while over the same interval the level of poverty had countrywideincreased from about 4% to about 22%. In 1995 Romania became an associate member of the EuropeanUnion and it is expected that this will contribute to accelerate the transition to a market economy.

1.2 In parallel to taking the necessary measures to stabilize the economy, the Government hasmoved on a number of structural reforms. Significant progress has been made in price reform (includingthe reduction of controls on industrial and agricultural products, energy price increases to acceptablelevels and virtual elimination of consumer subsidies) and tax reform. The most difficult challenges havebeen the enforcement of enterprise financial discipline and the acceleration of privatization, two issuesthat are now addressed, in coordination with the IMF, under the Financial and Enterprise SectorAdjustment Loan (FESAL) which was approved by the Board on January 18, 1996.

1.3 Local Government. In 1991 Romania reverted to local autonomy as a basic principleof governance and established a two-tiered system of public administration, within which the centralgovernmert and State administration is paralleled by a system of local government. The local governmentsystem is comprised of two distinct, non-hierarchically organized segments: district governments (judefe)and municipalities (municipii, orare, and comune).' Districts, of which there are forty-one (includingBucharest), are responsible for matters of regional/sub-regional interest, whereas municipalities, totallingclose to 3,000, are in charge of matters of local interest. Because of its role as the country's capital andthe size of its population, Bucharest has a special status as it combines features of both a district and amunicipality.

1.4 Although endowed, in principle, with autonomy in financial management, localgovernments (both districts and municipalities) have little own revenue and therefore rely extensively oninter-governmental fiscal transfers for both the funding of current and capital expenditures. Financing

The classification reflects population size and geographical importance of the locality, but does not involve any differencein terms of legal obligations and/or responsibilities of the respective local governments.

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of major investment projects is almost exclusively secured through project-specific investment grarnts fromthe State budget. Because of the decline of the overall economy and the Government's efforts to reduceinflation, investment appropriations for local infrastructure and services which in comparison to othercountries have traditionally been low in Romania, have shrunk even further in recent years falling from2.2% of GDP in 19l to 1.9% in 1994. As a result, there is an enormous backlog of investment needswhich, if not addressed, may pose constraints to the resumption of economic growth.

1.5 Provision of Local Public Services. Provision of local public services is a responsibilityof municipalities. Most services are delivered by local utilities, so-called local regie autonome (Ras).Local RAs were created in 1990 as a result of the break-up of the of the former State enterprise complex.Local RAs are legally independent entities endowed with a distinct administrative board, but operateunder the overall supervision and regulatory oversight of the municipal governments. They are run, inprinciple, on a self-financ..Ag basis and have the legal capacity to raise loans for the financing of theircapital expenditure needs. Tariffs for services are regulated by the-municipal authorities in consultationwith the Ministry of Finance (MOF) and, specifically, its Department for Prices and Protection ofCompetitiori. Typically, tariffs cover only the operating costs of the utilities, whereas investments forinfrastructure ani equipment, like other municipal investments, are financed, on a grant basis, from thecentral government budget and, occasionally, from small contributions by the municipalities themselves.

1.6 The currently existing local RAs result from the dismantling in 1990 of previously State-owned public service enterprises that until then operated at district level. Because their creation predatesthe establishment of the new local government system in 1991, the legal regime under which these localRAs operate has remained imprecisely defined in certain areas. A definitive ruling on the propertyregime of RA assets that were formerly owned by the State is still outstanding and some aspects of thelegal relationship between the local RAs, the overseeing municipal authorities, and the central governmentadministration still require further clarification, in particular as far as the precise delimitation of therespective competencies in matters of setting of technical and financial objectives, and monitoring ofmanagement performance is concerned. However, the existence of these deficiencies does not pose anyproblem for the proposed operation. Moreover, amendments to the existing legislation on localgovernments are currently under discussion at the Parliament.

1.7 Like their equivalent operating at national level, most local RAs face severe financialproblems. Their ability to offset cost increases is constrained by a complex approval process that is ofteninfluenced by political concerns about the possible impact of tariff increases. Moreover, they areconfronted with a widespread lack of payment discipline among their customers. As a result, local RAsface difficulty to meet their financial obligations. Financial shortfalls have been customarily minimizedby cutting maintenance expenditures below acceptable levels and delaying payments to suppliers. Becauseof the potentially severe macroeconomic consequences of a continuing build-up of public sector enterprisearrears, restoring stricter discipline in the financial management of public enterprises is one of theobjectives of the FESAL which includes Financial Recovery Plans (FRP) for a series of RAs.

1.8 Water Sector. Romania is comparatively well endowed with both surface andunderground water resources, although their distribution across the territory is uneven. Like other naturalresources, water is declared by the Romanian Constitution to be an exclusive and inalienable publicproperty. There is no single institution specifically responsible for sector policies as a whole. Use ofwater resources at the national level is administered and regulated by the Ministry of Water, Forestry andEnvironment (MOWFEN) within which a specific body - APELE ROMANE - is in charge of watermanagement questions. MOWFEN is also responsible for monitoring and enforcing water pollution and

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quality standards, while specific drinking water standards are monitored by the Ministry of Health(MOH). Provision of water supply, sewerage and waste water treatment services is a responsibility ofmunicipal governments. Operational quality standards and norms for water and sewerage utilities are setby the Ministry of Public Works and Regional Development (MOPWRD), while the financial aspects oflocal utility management are monitored by MOF.

1.9 Water resource management by APELE ROMANE is organized on a watershed basis withspecific bodies set up for each of the country's eleven major river basins. These bodies are in chargeof regulating water allocation to different users as well as acting as executing agencies for all investmentprograms related to water resource management. Water is provided by APELE ROMANE to municipalwater companies for an abstraction fee. Charges for water abstraction are set by the Government on acountrywide unitary basis (currently ROL 5,967 per 1,000 m3 for domestic consumption and ROL 16,271per 1,000 m3 for industrial use). Fees for waste water discharges and pollution are regulated similarly.Though most legislation regarding water resource management still dates back to the previous regime,a new law on water resources is presently under preparation. A new law on the protection of theenvironment was approved in December 1995. Romania has ratified the 1992 Convention on the use andprotection of international rivers and lakes. It is member of the Black Sea Convention and has ratifiedthe 1994 Danube River Protection Convention.

1.10 Water supply conditions in Romania are poor by international standards. Only about 50%of the total population has access to piped drinking water supply with the proportion going from about80% for urban areas, to only about 20% in rural areas. However, such statistics must be interpreted withcaution. Indeed, because of the general dilapidation of water supply systems, the quality of wateravailable in urban areas is considered, in many cases, to be inferior to that of the water obtained fromsources or wells in rural areas. The service level for sewerage is significantly lower with only about 40%of households connected and most of them located in urban areas. Wastewater treatment is similarlyinsufficient as highlighted by the studies carried out under the Environmental Program for the DanubeRiver Basin. According to available statistics, about two hundred municipal waste water treatment plantsare currently operating. However, they are, in a large proportion, equipped for primary treatment onlyand, therefore, have a relatively reduced effect on pollution abatement.

B. Water Supply in Bucharest

1.11 The City. Bucharest, as the capital of Romania and the country's largest urban center,has a population of about 2.1 million which represents about 10% of the total population. At present,Bucharest counts some 750,000 households of which over 80% live in multi-level apartment buildings(blocs) built during the last forty years predominantly with industrial pre-fabrication techniques.Population growth since 1989 has stagnated in reaction to the decline of the economy and the shrinkingof the labor market in the industrial sector. Given the prevailing demographic dynamics (with a naturalgrowth rate of close to zero) and the weak prospects in Bucharest for a rapid resumption of labor-intensive activities, no significant urban growth is expected. Despite the extensive loss of employment,Bucharest has suffered comparatively less from the economic transition than other parts of the countryand, in 1994, less than 10% of its population was estimated to live below the poverty level.

1.12 Bucharest Water and Sewerage Company (Regia GeneralA de ApE-Bucurelti/RGAB).The construction of a modem city wide water supply system including a first water treatment plant begantowards the end of the 19th century. The system has been successively expanded and, operated at present

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by the Bucharest Water and Sewerage Company (Regia Generall de Apa Bucure$ti - RGAB), suppliesdrinking water to about 93 % of all households as well as to a large number of industrial, commnercial andinstitutional customers. The distribution network has a total length of about 2,700 km. The dailyproduction of drinking water reaches currently about 1.7 million m3 and relies to about 90% on surfacesources (Arges and Dimbovila rivers) while the remainder is provided through groundwater abstraction.Water is treated in two relatively old plants (Arcuda, Rosu) that operate between 20% and 40% beyondtheir nominal capacity. A complementary third plant (Crivina-Ogrezeni) that should allow to reduce thepressure on the existing plants, is under construction, but is not expected to become operational beforethe turn of the century due to the financial constraints on the central government budget (see para. 1.18).

1.13 Water supply conditions are unsatisfactory in most parts of the city. Service interruptionsare frequent, pressure is poor and in many neighborhoods availability of reliable water supply service isonly intermittent and limited, on average, to twelve hours per day. Paradoxically, this is contrasted byan extremely high production level which is in excess of 800 liters per capita per day. At least 60% of.production is estimated to be lost either through leaks in the RGAB distribution network (25 %) or as aresult of building internal leaks, defective appliances and wastage by households and other RGABcustomers (35%). As a result, RGAB produces and distributes about 80% more water than it would needto do under normal operating conditions (i.e. about 1,7 million m3 instead of about 0.9 million mi3 ). Animportant loss contributing factor is the widely used practice of households to resort to 'coping strategies',that is to mitigate the effects of the intermittent availability of reliable water supply by stocking reservesin various recipients and drain most of them at the first sign of resumption of normal service conditions.

1.14 Treatment plants are operating with substandard and worn out equipment. Filtering, inparticular, is inadequate. The distribution network is in a state of advanced dilapidation, primarily owingto the low quality of the materials used over most of the past forty years and the lack of systematicmaintenance. The quality of water delivered to the consumer is generally poor and, although no specificdata are available, risks of contamination by the intrusion of polluted groundwater in periods of serviceinterruption are suspected to exist in many areas. Outbreaks of viral hepatitis and acute diarrhea havebeen reported, as well as, in 1995, several cases of cholera. Currently, about 85% of the city populationis served by the sewer system, the remainder relying on septic tanks. Waste water treatment, however,is extremely unsatisfactory. A large-scale treatment plant has been under construction for over ten yearsbut is unlikely to be completed in the foreseeable future.

1.15 RGAB supplies cold water and provides sewerage services within the boundaries of theBucharest municipality. (Hot water is supplied separately by RADET, another local RA that also ensuresdistrict heating for residential, institutional and commercial customers). RGAB was created in 1990 asa successor to ICAB, the State-enterprise previously in charge of local services in the capital city. RGABpurchases raw water from APELE ROMANE and treats and distributes it to residential, commercial,industrial, and institutional customers. (Additionally, it supplies, through separate networks untreatedwater to a few specific industrial customers). RGAB has a staff of about 4,800, of which about 4,000are low-skilled workers (see Chart A). In 1995, RGAB had operating revenues of US$ 49 millionequivalent, operating costs of US$ 46 million equivalent (before depreciation), and total assets with abook value of US$ 345 million equivalent (see Annex 2).

1.16 RGAB faces institutional and financial problems similar to those of other local Ras inregard to its legal status, its accountabilities and the legal ownership of its assets. Like other municipalRAs its revenues only cover its operating expenditure. However, unlike various other local RAs, RGABdoes not receive any subsidy for operational expenditures. Water sale proceeds and sewerage service

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charges are its only source of revenue. Its financial difficulties result in a large proportion from the factthat, for a variety of reasons, over 70% of water consumption is not metered and, as a consequence,customers are billed on a flat-rate basis (including a sewerage surcharge) for a normative consumptionof 170 liters/day/inhabitant which is unrelated to the volume actually consumed. (Additionally, customersare billed, under the same procedure, for a consumption of 110 liters/day/inhabitant of hot water byRADET). Bill collection is unsatisfactory, especially from larger institutional consumers. By end of1995, RGAB's accounts receivable stood at US$ 15 million equivalent. They equaled around 33% ofRGAB's operating revenues and about one-third of them were owed by RADET, RGAB's single largestcustomer. To make ends meet, RGAB has been running up arrears with suppliers such as the NationalPower Company (RENEL) and its total payables amounted to US$ 17 million equivalent by end of 1995.

1.17 RGAB's tariffs for water and sewerage are uniform and non-discriminating. They haveincreased repeatedly since 1990 and, contrary to those of other public services, were allowed to keep upwith inflation, though often with substantial delay (see para. 4.6). To revert the downward trend, tariffswere increased twice in 1995 leading to an increase of 80% in nominal terms, while total annual inflationdid not exceed 31 %. The current tariffs of US$ 0.12 2 (ROL 355) per m3 for water supply and US$0.02 (ROL 41) for sewerage services should be sufficient to allow RGAB to cover its operating costs(before depreciation). Further tariff increases in real terms will be unavoidable but are likely to facesignificant resistance as long as income levels stay below pre-1989 levels and quality of services remainspoor. Average household expenditure for water supply and sewerage services (including hot waterpurchases from RADET) at present equals about 3% of total average household expenditures, aproportion that is substantially higher in the lower segments of the income scale. Lest increases in realtariffs may simply help perpetuate existing inefficiencies, new real tariff adjustments should only becontemplated after all possible cost reduction alternatives have been implemented, financial disciplineenforced and arrangements made to relate water billings to actual consumption, issues that are addressedthrough the Short-Term Action Program (STAP) included in the proposed project (see para. 4.12).

1.18 To date, investments for the Bucharest water supply and sewerage system are financed,to about 95%, by central government subsidies, the remainder being financed from the Bucharestmunicipality's own resources. Over the three-year period 1992-94, the total amount of these investmentswas US$ 108 million equivalent (see para. 1.21). A major part of the resources allocated went into thecontinuation of works on tv/o large-scale investment projects (Glina wastewater treatment and Crivina-Ogrezeni water treatment plants). All service infrastructure and equipment is, in principle, municipalproperty. Investment execution is managed by the Bucharest municipality as the recipient of theinvestment grants, though some delegation of responsibilities to RGAB has occasionally occurred in recentyears. RGAB attempts to break away from the dependency on exclusive government investment fundingand to finance rehabilitation programs from its own resources. It has, in particular, been able to fundthe acquisition and installation of water meters to larger institutional and industrial consumers, as wellthe implementation of leak-detection campaigns by private operators. However, given the state of itsfinances, its access to commercial credit remains to date extremely limited.

C. Issues of Sector Development Strategy

1.19 General Issues: As mentioned above (see para. 1.5), the provision of local publicservices in Romania is a direct responsibility of municipalities and the central government plays, in

2 At the end of June 1996 exchange rate of USS I = ROL 3000

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principle, only a monitoring role. However, because many decentralization issues have not yet beenresolved, the actual ability of local governments to decide on questions of service organization isextremely limited. To eliminate existing ambiguities and fill critical gaps amendments to the localgovernment legislation issued in 1991 were made in April 1996. Also, in keeping with its reformprogram for public enterprises that aims at restoring financial discipline in their management andenhancing their profitability, the Government introduced in 1993 legislation (Law 66/93) that mademandatory for all RAs the preparation of management contracts linking the pay of the managers to theirperformance, assessed according to a set of previously negotiated and agreed performance criteria.

1.20 The Government and the Bucharest municipality recognize that there is a need forsubstantial changes to be brought into the institutional setup and policies regulating the provision ofmunicipal services. In response to 1994 legislation that mandated extensive organizational changes in thesystem of local RAs, the Bucharest municipality is studying a redesign of the framework of the legal andfinancial relationships with the RAs operating under its supervision (RGAB, RATB, RADET), and howto contract out to private operators a certain number of its services and, in particular, solid wastecollection. RGAB itself has started in 1995 to restructure its management organization in order to makeitself more responsive to the needs of a company run along commercial and customer-oriented principlesand its general director is performing under a management contract arrangement since end of 1995.

1.21 Financing of Sector Investment. Investment decisions for local utilities are made bythe central govermnent authorities in consultation with the recipient municipalities as well as thebeneficiary RAs. To date, investments are selected primarily according to their technical merits with agenerally modest regaid for economic considerations, including whether they represent the least-costsolution in terns of capital expenditure or the resulting operational costs for the beneficiary. Anotherdrawback of the current sys.em of financing is that frequently projects are started without any guaranteethat the required resources will be available over time when needed and, as a result, an excessive amountof time is needed for their completion. The shortcomings of these policies are illustrated by the casesof two major investment operations for the Bucharest area, the Glina waste water treatment plant(estimated cost US$ 220 million equivalent) and the Crivina-Ogrezeni water treatment plant (estimatedcost US$ 100 million equivalent) that were started in 1985 and 1986, respectively, but are still far fromcompletion.

1.22 The full rehabilitation of the entire water and sewerage system in Bucharest (excludingwaste water treatment) would require investments of over US$ 500 million equivalent, at 1995 prices,according to studies carried out for the preparation of the proposed project. RGAB and the Bucharestmunicipality are aware that such amounts are not affordable presently, and that a comprehensive overhaulof management practices is warranted. In particular, incentives for a more conmmercially orientedmanagement must be introduced as a first step to ensure that available resources are used efficiently.However, in line with the Government's general political strategy, the Bucharest municipality is optingfor a gradual approach to reforms rather than an immediate and wholesale restructuring of the localservices sector. The proposed project will lead to a clear departure from past procedures of infrastructurefinancing for local utilities and introduce, for the first time, an explicit linkage between investment costs,affordability, and the operator's capacity to assume the corresponding financial obligations.

1.23 Private sector involvement in the delivery of local public services is still limited inRomania. Some small-scale attempts are being made in sectors such as solid waste collection, whereoperations can easily be fragmented and the intervention of private operators is facilitated. The watersupply and sewerage sector, however, is unlikely to elicit a major private sector interest in the medium-

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term for three main reasons: (a) the need to develop the trust in the political commitment to assign thedelivery of vital public services to private sector operators, create the necessary regulatory capacity, andallow a liberalization of tariffs; (b) the lack of reliable data on (i) the technical and financial performanceof RGAB, (ii) the ownership and value of its fixed assets, (iii) the present and likely future demand forwater, and (iv) the physical condition of the system and the likely costs of its rehabilitation; and (c) theuncertainty still surrounding the future development of the economy and the ensuing question whetherand to which extent needed price increases would be affordable and politically acceptable.

1.24 RGAB's Development Strategy: The strategy developed by RGAB, which is supportedby the Government and the Bucharest municipality, for overcoming the water supply problems inBucharest and improving the enterprise's operational and financial performance represents an importantbreak with past policies that tried to resolve shortfalls in service quality by investing in increasedproduction capacity. RGAB's strategy focusses on rehabilitation and maintenance of existinginfrastructure and reduction of water production and distribution costs and pursues two major objectives:

first, to progressively reduce RGAB's large water losses (and corresponding operating costs) by(a) improving the maintenance and intensifying the rehabilitation of the existing network; and (b) throughthe shift from the flat-rate billing of a theoretical consumption to the billing of the metered actualconsumption creating the financial incentives for consumers to opt for a more rational use of water.

second, to improve the efficiency of RGAB's operations by (a) strengthening the enterprise'stechnical, financial and commercial management functions and restructuring it along conmmercial andconsumer-oriented business principles, and (b) streamlining the cost of RGAB's operations to ensure theprovision of water at affordable tariffs, and create the conditions that could facilitate, in the longer-term,a possible involvement of private sector operators.

D. Role of the Bank and Lending Strategy

1.25 The Bank's Country Assistance Strategy (CAS) for Romania, discussed by the Board ofDirectors on April 5, 1994, during the presentation of the Romania Petroleum Sector RehabilitationProject (Loan 3723-RO) aims primarily at supporting the Govermnent's structural adjustment programand macro-economic stabilization objectives. It also identifies rehabilitation of infrastructure as one ofthe priority areas for Bank lending. The Bank's support of the strategy has been materialized throughthe Technical Assistance and Critical Imports Project (Loan 3363-RO) which financed studies for therestructuring of the railway sector and urban transport in Bucharest, the Transport (Road Rehabilitation)Project (Loan 3593-RO), and the Railway Rehabilitation Project presented to the Board on January 18,1996. Important issues of public utility management were addressed under the Power SectorRehabilitation and Modernization Project presented to the Board on August 29, 1995, and the Financialand Enterprise Sector Adjustment Loan (FESAL) presented to the Board on January 18, 1996.

1.26 The proposed project is consistent with the objectives of the CAS and in line with thestrategy options adopted for the other above mentioned infrastructure sector projects. It is based onstudies initiated as an outcome of the Bank's ESW in Fall 1990 summarized in the ESW Report'Romania: The Challenge of Transition' (Report No. 9497-RO). It has also benefitted from informalsector work on local government development issues that was carried out in 1992.

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E. Bank Experience in the Sector and Lessons Learned

1.27 The project is the Bank's first operation in the water sector in Romania and, thus, cannotbuild up on previous experience. Bank experience in other transition economy countries is also limitedto date, and consists primarily of operations that are in start-up phase and do not yet allow any conclusionas to their implementation performance. Involvement of other donors in the Romania water thus far hasbeen modest, too. EBRD is currently funding a Municipal Utilities Project (US$ 28 million equivalent)for five of the largest secondary cities that was signed in Spring 1995 and which finances rehabilitationof water supply and waste water treatment. It has also has started the preparation of a second operationof similar size and scope. Other, bilaterally funded operations include ongoing studies for water supplyand sewerage rehabilitation in various secondary cities.

1.28 In designing the project, attention was paid to general Bank experience in the water andsanitation sector. A 1995 OED Water Sector Report as well as other Bank surveys have concluded thatalthough projects have often been successful in achieving their physical objectives, in general, limitedsucc,ess has been obtained in improving the institutional performance of the utilities. Some of the reasonsfor the less than optimal results were: (i) inadequate linkages between physical and institutional objectives;(ii) lack of management and financial autonomy of local utilities; (iii) staff inexperience in projectimplementation and institutional problem solving; (iv) project complexity; (v) lack of reliable informationon production and consumption patterns that prevented the design of well-focused unaccounted-for-waterreduction prograrns and adequate tariff structures; and (vi) problems related to cost recovery and timelyprovision of counterpart funds.

1.29 These lessons have been incorporated, to the extent feasible, into the design of the projectin the following way:

(a) project components were selected linking physical improvements with the implementationof institutional, technical and financial measures to improve RGAB's management,productivity, financial self-sufficiency and expertise in project implementation;

(b) strong support for the project at the level of the central government, the Bucharestmunicipality and RGAB as the implementing agency, was sought at an early stage ofproject preparation;

(c) special attention was given to RGAB's overall financial situation and to set realisticfinancial targets, taking into account the constraints for tariff increases stemming fromthe overall economic conditions;

(d) simplicity in project design was sought in view of RGAB's lack of familiarity with Bankpreparation and implementation procedures;

(e) strengthening the commercial management together with implementation of a meteringprogram will enable RGAB to monitor its production and acquire a better understandingof the demand and consumption patterns of its customers; and

(f) support to public awareness development will build up on, and complement, previousefforts deployed by RGAB and the Bucharest municipality to better understand customersatisfaction with local public services and benefit from the experience already acquired.

9

II. THE PROJECT

A. Project Origin

2.1 The proposed project was identified in February 1995 after discussions with officials ofthe Government, the Bucharest mumnicipality, and RGAB. Preparation of feasibility studies wasundertaken with fund.ng from the Japanese PHRD Grant TF 20515 (Bucharest Water Supply andSewerage Rehabilitation). Complementary technical assistance for project preparation was providedthrough the Japanese PHRD Grant TF 23063 (Local Government Development). Preappraisal was carriedout in June 1995, followed by appraisal in December 1995. Negotiations were held in Washington fromJune 10 to 14, 1996.

2.2 The outline and general concept of the proposed project was approved by the Board ofAdministrators of RGAB on June 22, 1995 and officially endorsed by the Municipal Council of Buchareston October 6, 1995, (CLMB Decision 81/95). It was approved by the Government on March 21, 1996,(Government Decision 181/96).

B. Project Rationale and Objectives

2.3 The amount of financial resources that would be required for a full rehabilitation of theentire Bucharest water supply and sewerage is in excess of US$ 500 million equivalent (para. 1.21).However, rather than engage in the preparation of a large-scale and complex operation, the Bank and theRomania Government, together with the Bucharest municipality and RGAB, have agreed to opt for a step-by-step approach that would consist of a series of separate, sequential projects over a multi-year period.Each of these projects would build up on, and benefit from, the preceding operations' institutionalachievements and implementation experience and allow to tailor the size, timing, and design features ofthese successive projects to the pace of improvement in RGAB's technical and financial performance, itscompliance with project conditionality, and the evolution of the country's economic and institutionalcontext. The primary reasons that justify such a 'widening circle' approach are that:

(a) thus far, RGAB has not had any significant experience with the preparation andimplementation of operations funded from external sources and its project managementcapacity needs to be progressively built-up;

(b) without further real tariff increases that are unlikely to be politically and sociallyacceptable at this point RGAB can only afford a relatively small project. Tariff increaseswill become unavoidable in the longer terrn, however, and it is expected that the displayunder the proposed project of a first visible effort to improve water supply conditions,together with a public outreach program supported by the project, will create the climatethat will facilitate such future tariff increases. Furthermore, there is also a potential fora significant rationalization of RGAB's operational expenditures, that must (and willunder the proposed project) be explored before raising tariffs any further; and

(c) RGAB's current financial position is weak and needs to be strengthened before anysignificant expansion of its financial commitments can be considered. Likewise, RGAB'sbasic managerial informations lack the reliability and relevance required for an efficient

10

management and must be thoroughly overhauled to allow RGAB to achieve a betteroperational and financial performance and expand its investments.

2.4 Given the constraints described above, the scope and size of the proposed project havedeliberately been kept narrow to create the framework for a successful project implementation. Theproject's objectives would be to finance the execution of a three-year program of investments that havebeen identified as the highest priority to:

(a) improve the reliability and quality of water supply in Bucharest;

(b) start to reduce water losses (both physical and commercial); and

(c) strengthen RGAB's operational, commercial and financial management and help it acquirethe expertise necessary for the preparation and implementation of future operations.

2.5 The relatively narrow focus of the proposed operation reflects a concern for simplicityin design since the project will be carried out by a beneficiary without prior experience in theimplementation of such projects. Lack of complexi.y will permit an easier implementation and allowRGAB to rapidly display a visible and concrete effort to improve the living conditions of the Bucharestpopulation. This will also help further the dialogue with the Government and municipal authorities onissues of local utility management, which has already seen a fruitful beginning. For these reasons,components for waste water collection and treatment that are more complex and require more intensivescrutiny have been deferred, in agreement with the Government and RGAB, to a future operation.

C. Project Description

2.6 The proposed project will include the following components:

A. Improvement of Water Supplv Reliability and Quality (33% of base project cost)

(a) Water treatment plant rehabilitation, including the repair and/or replacement of filters,and installation of new chlorination and chemical treatment equipment for existingtreatment plants;

(b) Aqueduct flow control improvement and reservoir upgrading, including the purchase andinstallation of flow control valves and flow meters at key locations of the network; and

(c) Pumping station rehabilitation, including the acquisition and installation of new highenergy efficiency pumps, the rehabilitation of existing pumps and electrical equipment,and the installation of flow control equipment for several key pumping stations.

B. Reduction of Water Losses (57% of base project cost)

(a) Primary network repair, including the replacem-.ent of deteriorated network sections,survey and repair and/or replacement of distribution valves as well as the reconstitutionof a minimum stock of essential spare parts;

I1

(b) Secondary network rehabilitation, including the repair and/or replacement of elements ofthe secondary network including house connections in several city neighborhoods withabove average water losses and reported breaks; and

(c) Metering program, including the purchase and installation of meters of different sizes forlarger consumers such as housing development authorities and commercial enterprises.

C. Institutional Strengthening of RGAB (9% of base project cost)

(a) Public awareness and water wastage reduction campaign, including the preparation andimplementation of media campaigns (press, radio, TV) to sensitize the public on waterconservation issues and the study of measures to provide incentives to consumers forreducing excessive water consumption; as well as preparation of a tariff study includingthe identification of possible financial incentives for water consumption reduction;

(b) Improvement of RGAB's customur accounts management system, including technicalassistance to pursue the reorganization efforts initiated with technical assistanceprovided, as of January 1996, by the French Government under a bilateral agreement;

(c) Training and other technical assistance, including training for RGAB staff to acquireand/or develop management skills in the areas of finance and accounting, human resourcemanagement, and technical operations. Complementary technical assistance (not includedin project costs) is provided under the Danube River Basin Environmental Program; and

(d) Implementation supervision, including consulting services to assist RGAB in themanagement of project execution.

A detailed description of project components is contained in Annex 5. 1.

D. Cost Estimates

2.7 The total project cost (including contingencies, taxes and duties) is estimated to be aboutUS$ 50 million equivalent with a foreign exchange component of US$ 25.4 million equivalent or about50% of the total project cost. Cost estimates were prepared by the consultant SAFEGE/LOTTI on thebasis of quantity estimates from substantially completed design studies, and using unit prices from similarprojects under implementation either in Romania or other countries. A detailed analysis of costs has beenmade to determine the foreign exchange component and local costs. All project costs have been estimatedin US Dollars on the basis of December 1995 prices at the mid-December 1995 exchange rate of ROL2,550 per US$ 1. Import duties (15%), VAT (18% of total costs) and other incidental taxes are includedin the local component. Physical contingencies (5% for equipment, 10% for civil works) have beenadded to cover possible increases in quantities. Price contingencies have been applied to base costsfollowing the Bank's expected price increases as per OP 6.50 of October 1995,(1996: 3.3%; 1997: 2.3%;1998: 2.5%; 199: 2.5%) with the assumption that the exchange rate will adjust to the evolution ofdomestic prices and external inflation.

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2.8 Summary Cost estimates are shown in Table 1 below.

TABLE 1: PROJECT COST ESTIMATES

-------(in US$ million)-------% foreign %

Project Components Local* Foreign Total exchange of base cost

A. Improvement of Water Supply Reliability and Quality

Water Treatment Plant Rehabilitation 2.4 2.1 4.5 47Aqueduct Flow Control and Reservoir Upgrading 0.7 0.9 1.6 56Pumping Station Rehabilitation 3.3 5.1 8.4 61

Subtotal 6.4 8.1 14.5 56 33

B. Reduction of Watf r Losses

Primary Network Repair 1.2 1.4 2.6 54Secondary Network Repair 8.2 8.3 16.5 50Metering Program 3.8 2.0 5.8 34

Subtotal 13.2 11.7 24.9 47 57

C. Institutional Strengthening of RGAB

Public Awareness Campaign 0.6 0.0 0.6 0Improvement of Customer Accounts Management 0.4 1.3 1.7 76Training 0.1 0.5 0.6 83Implementation Supervision 0.3 1.0 1.3 77

Subtotal 1.4 2.8 4.2 67 9

Total Base Cost (December 1995 prices) 21.0 22.6 43.6 52 100

Physical Contingencies 2.0 1.0 3.0Price Contingencies 1.6 1.8 3.4

Total Project Cost 24.6 25.4 50.0 51

*The local cost component includes local material, installation works, custom duties (15%) and value-added-tax (VAT) (18%).

Note: some figures may not add up due to rounding.

E. Project Financing Arrangements

2.9 The financing plan of the project is summarized in Table 2 below. The Bank will financeUS$ 25 million of the project's total foreign cost estimated at US$ 25.4 million or about 51 % of totalproject costs. 3 Local counterpart financing will be provided, as a grant, for about US$ 15 millionequivalent (or 30% of total project cost) from the central government budget and about US$ 7.5 million

3 The proposed cost-sharing: IBRD 50 % / Romania 50% is consistent with the cost-sharing arrangements adopted forEBRD's Municipal Utilities loan signed on April 9, 1995 for the rehabilitation of water supply and sewerage infrastructure

in five major Romanian secondary cities.

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equivalent frorr the Bucharest municipal budget (15 % of total project cost). RGAB will contribute aboutUS$ 2.5 million from its own annual budgetary resources (5% of total project cost).

TABLE 2: FINANCING PLAN

----------------US$ Millions----------------Local Foreign Total % Total

IBRD 0.0 25.0 25.0 50Government 15.0 15.0 30Bucharest Municipality 7.5 7.5 15RGAB 2.1 0.4 2.5 5

Total 24.6 25.4 50.0 100

2.10 The Borrower for the loan will be Romania. At the Borrower's request, the loan will bemade at the Bank's standard variable rate for LIBOR-based US Dollar Single Currency Loans at theBank's standard conditions for Romania (20 years, including five years of grace). Loan proceeds willbe on-lent by the Ministry of Finance (MOF), with a guarantee from the Bucharest municipality, toRGAB on the basis of a Subsidiary Loan and Guarantee Agreement. The Agreement of MOF, theBucharest municipality and RGAB on the on-lending arrangement was confirmed at negotiations fsee para.6.1(a)1. Signature of the on-lending agreement will be a condition for loan effectiveness fsee para.6.2(a)]. On-lending will be made in foreign currency at the IBRD variable interest rate. RGAB wouldcarry the foreign exchange and interest rate risks. The contributions from the central government andthe Bucharest municipality budgets, respectively, will be made through annual appropriations inaccordance with Romanian public finance procedures. During negotiations an understanding was reachedwith the Government, the Bucharest municipality, and RGAB on the funding arrangements for the localcounterpart contribution.

F. Environmental Aspects

2.11 For the purpose of O.D. 4.01 on Environmental Impact Assessment the Project has beenclassified as Category B, which requires a limited environmental review to determine potential negativeenvironmental impacts and propose mitigation measures where needed, as well as to identify opportunitiesfor environmental enhancement. Such a review has been carried out during project appraisal by RGABand Bank experts [see Annex 11.

2.12 The project will have relatively minor negative environmental effects and will not raiseany resettlement or property rights issues since it focuses primarily on rehabilitation of existing networkand facilities. All works will be executed either within the premises of existing facilities or the rightsof way of the public street network. The project will not affect any archeological or historical site.Contractors will be responsible, under the clauses of the bidding documents, for keeping worksites pollu-tion free, returning sites to their original conditions, and minimizing dust, noise and other work-related

14

nuisances. They will also be responsible for notification of the discovery of, or any problem related to,a previously unknown historical site. The project will have no impact on the flow regime of the Argesand Dimbovila rivers nor will it affect the quality of their waters through increased water abstraction orwaste water discharges and, therefore, does not require a notification for the purposes of OD.7.50.

2.13 The project is expected to bring significant environmental, as well as health, benefitsfrom. (i) reducing water losses in the distribution network; (ii) assuring better drinking water qualityfrom improved operation and maintenance of the drinking water plants and elimination of point-contamination sources in the distribution network; (iii) better handling of residuals from drinking watertreatment; and (iv) increased energy efficiency of water supply distribution. To improve its operationalday-to-day environmental management (sludge management; handling of chemicals and toxic substances;improvements in the operation and maintenance of the sewerage network, including improved emergencyresponse; more efficient use of information from the existing water quality monitoring networks; andbetter compliance with environmental regulations), RGAB will create an environmental advisory positionand appoint an environmental advisor to the general director. During negotiations RGAB confirmed thatit would appoint an environmental advisor by January 1. 1997 at the latest under terms of referencereviewed, and found satisfactory. by the Bank Isee para. 6. 1(b)l.

2.14 Moreover, the project will support RGAB's efforts to encourage water conservationthrough the extension of metering to all major consumers and the implementation of an awarenesscampaign. The purpose of the latter, for which complementary support from the Danube River BasinEnvironmental Program is being provided, is to raise public awareness of the need to manage waterresources more carefully through the preparation of advertising campaigns in different media (press,radio, TV, billboards, etc.) and the development of educational programs for kindergartens and primaryschools [see Annex 5.7(b)1.

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III. PROJECT IMPLEMENTATION AND SUPERVISION ARRANGEMENTS

A. Organization and Management

3.1 The project will be executed by RGAB as the sole implementing agency. As such, RGABwill assume direct obligations towards the Bank on all matters under its jurisdiction. RGAB has set upa project coordination unit (PCU) and has hired appropriately skilled Romanian staff. The PCU reportsdirectly to the general director of RGAB and has a non-hierarchical relationship with RGAB's four maindepartments: commercial (customer account management) services, finances and accounting, technicalservices, and human resources [see para. 1.14 and Chart Al, and coordinates their participation in projectimplementation. Technical assistance has been recruited under funding from a Japanese PHRD Grant totrain local specialists in matters of procurement and project coordination prior to project preparationcompletion. To compensate for its current lack of expertise in project implementation management, thePCU would be supported, throughout project implementation, by a team of adequately experiencedtechnical assistance experts [see para. 3.8]. Additionally, technical assistance will be provided to RGABto help it train its technical staff in the operation of the facilities upgraded under the project, and monitorand evaluate the effects of the network rehabilitation program [see Annex 5.7(c)1.

3.2 The PCU will review and follow-up on procurement procedures and bidding documents,monitor and coorcdinate every aspect of project implementation (including procurement). The PCU willprepare detailed work schedules and coordinate project activities in accordance with Terms of Referenceagreed with the Bank [see Annex 5.7(a)1. The PCU will also be responsible for preparing and submittingquarterly reports on project implementation performance to the Bank and the Romanian authoritiesaccording to an agreed Reporting Plan [see Annex 5.61. During negotiations RGAB confirmed that PCUwill remain in operation and be satisfactorily staffed and funded through the project implementation [seepara. 6. 1(c)1. Agreement was also reached on the project implementation schedule, monitoring criteria.and reporting arrangements [see para. 6. 1(d) and Annex 5.61.

3.3 The target implementation scenario for the project is that it would be executed over aperiod of about three years and completed by December 31, 1999. The project's Implementation Plan(PIP) is shown in Annex 5.3. The loan will close on June 30, 2000, six months after the projectcompletion date. The approval procedures required by the Romania Government for all investmentsfunded totally or partially with central or local government resources are relatively complex and thereis a risk that this could lead to possible delays. In order to avoid such delays, an early clearance ofbidding documents was warranted and completion of four bidding packages for ICB procured contractswas sought as a condition for Board Presentation.

B. Procurement

3.4 Procurement arrangements for the elements of the project, their estimated cost andproposed methods of procurement are summarized in Table 3 below. A detailed list of contracts to beconcluded is contained in the Project Procurement Plan [see Annex 5.21.

3.5 All goods, works and services to be financed from the loan proceeds will be procured inaccordance with the Bank's Guidelines for Procurement (January 1995), including amendments as of theloan signing date, using the Bank standard bidding documents. Consulting Services will be procured in

16

accordance with the Guidelines for use of Consultants by World Bank Borrowers and by the World Bankas Executing Agency (August 1981), including possible amendments as of the loan signing date. ACountry Procurement Assessment Report will be completed by June 1997. The laws and regulationsgoverning national procurement procedures and practices in Romania are being reviewed in the Bank inorder to establish whether national procedures are acceptable for Bank-financed contracts. A 'GeneralProcurement Notice' containing information about bidding opportunities (for procurement on the basisof ICB) has been published in the April 16, 1996 issue of the 'Development Business' in accordance withparas. 2.7 and 2.8 of the Bank Guidelines for Procurement, January 1995. Prequalification documentswere completed as a condition for negotiation. A project launching workshop will be held prior toimplementation start-up expected for September 1996.

TABLE 3: PROCUREMENT ARRANGEMENTS(in US$ million) a/

ELEMENTS PROCUREMENT METHOD TOTAL

ICB NCB Other b/ NBF COST

1. Civil Works 26.5 2.0 28.5

(11.9) (0.9) (12.8)

2. Goods 4.9 0.3 0.3 5.5

(3.4) (0.2) (0.2) (3.8)

3. Supply and Install 11.6 - 11.6

(7.5) -- (7.5)

4. Consultant Services 3.8 0.6 c/ 4.4

- - (0.9) (0.0) (0.9)

Total Cost 43.0 2.3 4.1 0.6 50.0

(22.8) (1. 1) (1.1) (0.0) (25.0)

Note: a/ Cost estimates include contingencies, taxes and duties. Figures in parentheses are the amounts financed by the Bank loan.b/ Other includes international shopping (USS 0.3 million) and contracting of consultants according to Bank guidelines.c/ NBF includes consulting services financed directly by RGAB

3.6 Civil Works. Civi1 works contracts (including supply of necessary goods and equipment)for the rehabilitation of water treatment plants and primary and secondary network repair (about US$ 26.5million) will be carried out under ICB with prequalification. They would be procured in seven packages[see Annex 5.21. Four of these contracts (secondary network repair and replacement, about US$ 19.3million) will be advertised and procured on a slice-and-package basis. Romanian firms with adequateexperience are likely to enter into joint venture agreements with foreign contractors in order to bid. Forall ICB contracts prequalification of firms will be required. Contracts of less than US$ 10 millionequivalent will be procured using the Bank's standard bidding document for civil works (smallercontracts). Civil works for meter installation will be carried out under National Competitive Bidding(NCB) procedures through at least four separate contracts with an aggregate value not to exceed US$ 2.0million.

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3.7 Goods and Supply and Installation. Goods to be financed from the Bank loan (aboutUS$ 5.5 million) consisting of filtering equipment, water meters, accessories and complementaryequipment will, to over 85%, be procured through ICB. They will be procured in four packages [seeAnnex 5.21. Romanian manufacturers competing for the contracts for the supply of goods procured underICB procedures will receive a preference in bid evaluation of 15 percent of the CIF price or theprevailing custom duty applicable to non-exempt importers, whichever is less, provided they can proveto the satisfaction o- the Borrower and the Bank that the manufacturing cost of such goods includes morethan 30 percent of 'ocally procured labor, raw materials and components. National Competitive Bidding(NCB) will be used for the procurement of filtering sand (US$ 300,000). International Shopping (IS)based on a comparison of price quotations obtained from at least three suppliers from at least two eligiblecountries will be used for the procurement filter nozzles (US$ 300,000). Supply and Installationprocurement (US$ 11.6 million) will be used for two contracts for (a) the rehabilitation of pumpingstations and (b) the installation of flow control equipment on the primary network. Bidding for thesecontracts will be carried out through ICB on the basis of prequalification and, given the adequatepreparation of technical specifications, one-stage bidding for supply and installation contracts using theBank standard contract for Supply and Installation.

3.8 Consultant services. Consultant services estimated at US$ 4.5 million for technicalassistance and training will be carried out by qualified and experienced consulting firms and individualconsultants appointed in accordance with Bank Guidelines for the Use of Consultants (August 1981).Consulting services will be required to assist (a) RGAB's PCU in project implementation management[see para 3.1]; (b) RGAB in the management improvement of its customer accounts system [see para.4.131 and operating systems [see para. 3.11; and (d) the preparation of a public awareness campaign [seepara 2.14]. A detailed description of the consulting services to be procured is contained in the ProjectImplementation Plan [see Annex 5.21. Available local expertise should allow for the participation ofRomanian experts in consulting assignments under the project. Unless otherwise agreed, all individualcontracts will be awarded on the basis of comparison of at least three curricula vitae for each selectionof consultant (see para. 3.9 below) and will be limited to assignments of short duration and requiringspecialized expertise.

3.9 Prior Review. All contracts exceeding US$ 250,000 (more than 80% of total projectcost), and all contracts for consultant services valued in excess of US$ 100,000 for firms and US$ 50,000for individual consultants will be subject to prior review and approval by the Bank. Contracts of a lesseramount would be subject to ex-post review by Bank supervision missions. Likewise, terms of referencefor all consultant contracts will be reviewed in advance by the Bank. Procurement information will beincluded in the quarterly project progress reports to be prepared by RGAB [see para. 3.2 and Annex 5.61.During negotiations, an understanding was reached with the Government and RGAB on all procurementarrangements, including the list of contract packages and the procurement timetable.

C. Disbursements

3.10 The proposed Bank loan will be disbursed against the different categories of projectelements as shown in Table 4 below.

3.11 Withdrawal applications for contracts for civil works and goods above US$ 250,000,consulting firms above US$ 100,000 and individual consultants above US$ 50,000 will be fullydocumented and for contracts for less than these amounts will be made on the basis of Statements of

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Expenditures (SOE). Documnentation to support expenditure financed under SOE will be maintained bythe Borrower in one location and made available upon request for review by Bank representatives inaddition to being audited by the auditors [see para. 3.16 and para. 4.19]. Agreement on thesearrangements was obtained from the Government and RGAB during negotiations [see para. 6. l(e)l.

TABLE 4: DISBURSEMENT CATEGORIES(in US$ million)

Amount of the Loan 56 of expenditure

Category Description Allocated in US$ to be financed

1 Civil Works 11.7 45% of total expenditures;

2 Goods and Supply and Install 10.0 100% of foreign expenditures, or 100% of local

(ex-factory net of taxes and duties), or

70% of local expenditures for other

items procured locally.

3 Consultant Services 0.8 25 % of total expenditures

4 Unallocated 2.5 n.a.

TOTAL 25.0

3.12 Estimrted disb'irsements by Bank fiscal year are summarized in Table 4 below. Theschedule of quarterly disbursements is shown in Annex 4. RGAB expects to disburse the loan of US$25 million over a period of about three years with the completion of all project activities by December31, 1999 but with disbursements continuing for another six months through June 30, 2000.

TABLE 4: ESTIMATED DISBURSEMENTS(in US$ million)

Bank Fiscal Year 1997 1998 1999 2000 2001

Annual 4.0 1/ 9.5 7.5 3.0 1.0Cumulative 4.0 13.5 21.0 24.0 25.0

" includes 1.0 million for initial deposit in Special Account

3.13 To maintain an adequate flow of funds for eligible project expenditure with a minimumof administrative delay, the Borrower will establish a Special Account with an authorized allocation ofUS$ 2.0 million at a bank of its choice acceptable to the Bank. The initial deposit of the authorizedallocation will be limited to US$ 1.0 million and the remaining portion of the authorized allocation wouldbe released when disbursements reach a level of US$ 3.0 million. Applications for replenishment of theSpecial Account will be submitted on a monthly basis or when one third of the amount deposited has beenwithdrawn, whichever occurs earlier. All applications for direct payment or special commitments mustbe for an amount not less than 20% of the initial deposit of the authorized allocation to the SpecialAccount or not less than 20 % of the full authorized allocation once available. In addition to the

19

documcntation mentioned above, all replenishment applications would be accompanied by monthly bankstatements of the Special Account which have been reconciled by the Borrower. Records of the SpecialAccount proceeds and outlays will be available for review by the Bank's supervision mission and subjectto anuual audit (see para. 4.18). During negotiations, agreement was reached with the Government andRGAB on all Special Account management and disbursement arrangements [see para. 6. 1(e)1.

D. Project Monitoring, Supervision, and Auditing

3.14 A Project Implementation Plan (PIP) has been prepared jointly with RGAB to ensure ashared understanding of the project activities to be carried out and their timing [see Annex 51. Thecompliance with the PIP will be monitored by the PCU project coordinator and the Bank on the base ofmonitoring indicators shown in Annex 5.5.

3.15 In addition to direct monitoring and assistance on day-to-day matters which will beprovided by the Resident Mission in Romania, about 20 staff/weeks per year of headquarter staff inputwill be reqjuired over the life of the project. Supervision missions staff should include a water sectorspecialist, financial analyst and institutional experts. Although, because of the short duration of theproject, a full mid-term review would not be warranted, a project implementation progress review willbe carried out about eightecn months after project implementation start-up with a view to take stock ofproject achievements, agree on remedial action, if necessary, and determine the prospects for thepreparation of a follow-up project, identify the most important issues such an operation should.addressand decide on its content and timing. During negotiations, agreement on the scope and timing of theproiect implementation progress review was obtained [see para. 4.18 and para. 6. 1(f)1.

3.16 RGAB will establish a separate Project Account and maintain it according to acceptedinternational accounting standards, in order to ensure that the flow of funds associated with the projectcan be identified and tracked. The Project Account, together with the Special Account and SOEs [seepara. 3. 11 and para. 3.13] will be subject to annual audit by qualified independent auditors acceptableto the Bank and in accordance with international accounting auditing procedures. Audit reports will besubmitted to the Bank within six months of the close of each fiscal year [see para. 4.19]. Agreement onthe auditing arrangements for the Special Account and the Proiect Account was confirmed at negotiations[see para. 6.1(e) and para 6.1(i)1.

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IV. FINANCIAL AND INSTITUTIONAL ASPECTS

A. General Aspects

4.1 In line with the prevailing financing practices for local water utilities in Romania, RGABis only expected to cover its current expenditures (including maintenance) through revenues from waterand sewerage services [see para. 1.16]. All water supply and sewerage investments are financed fromthe State budget through annual fiscal grants to the Bucharest municipal budget, the remainder, if any,being financed from the Bucharest municipality's own resources. Unlike other RAs providing localservices in Bucharest (RADET, RATB), RGAB receives no subsidy for its operations. It reliesex-lusively on service proceeds as a source of funding for its operational expenditures. As a result ofthis policy, RGAB has currently no long-term debts and its only liabilities are with suppliers. Thus, ifproperly managed, RGAB has the potential capacity to borrow in order to fund a reasonable proportionof its investment needs.

B. RGAB's Past Financial Performance

4.2 Overall Results. RGAB's financial performance since its creation in 1990 has been lessthan satisfactory as a result of inadequate tariff and bill collection policies and practices:

First, in the more recent years RGAB's revenues have not been sufficient to adequatelycover the utility's operating costs. According to RGAB's accounting records, the amounts billed in 1992zind 1993 (about ROL 9 billion and ROL 21 billion, respectively, or US$ 25 million and US$ 28 millionequivalent) 4 were roughly equivalent to the total operating costs each year; in 1994 losses amounted toover ROL 6 billion, or the equivalent of over US$ 3 million, but in 1995 losses decreased (prior to extra-o1dinary income) to ROL 0.6 billion or about US$ 0.3 million. I It has to be noted, however, that theabove figures provide a rather optimistic picture of RGAB's performance because the company'saccounting practices underestimate its operating costs and, thus, overestimate its net income. Importantamong these practices are those that relate to depreciation charges and accounts receivable. Thedepreciation charges from 1992 to 1994 were calculated on non-revalued fixed assets and were negligible(the estimated 1995 financial statements include adequate depreciation charges). No provision was madefor losses on accounts receivable during the whole 1992-95 period despite the unsatisfactory bill collectionperformance. These practices are closely regulated by the Government, however, and RGAB, in thesematters, has been complying with existing accounting regulations in Romania. The financial statementsin Annex 2 contain complementary details on RGAB's financial performance.

Second, a large proportion of RGAB's assets are worn down owing to the insufficientallocation of financial resources to preventive maintenance and renewal of the existing infrastructure andequipment. This fact has serious negative implications on RGAB's ability to continue providing servicesto its customers at an acceptable level of quality and, if not corrected promptly, would result in a furtherdeterioration of RGAB's finances.

4 All Romanian currency amounts indicated in this chapter are in current ROL. All US$ equivalents are at the averageexchange rates for the corresponding years for revenues and expenditures and at the end-of-the year exchange rates forbalance statement data.

1995 figures are still provisional and unaudited but were prepared in accordance with Romanian regulations.

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Third, bill collection by RGAB has been negatively affected by the weak performanceof the economy, in general, and by the financial problems encountered by public sector enterprises, inparticular. The problem has been compounded by the lack, or inadequate implementation, of sanctionsto customers for delays in payment of bills. Between 1992 and 1994 collection rates stood at around 75 %of the amounts billed each year, but dropped to 68% in 1995 (for definition of collection rate see para.4.13). By the end of 1995, accounts receivable were at about ROL 34 billion (about US$ 13 millionequivalent at Lhe end-of-the year exchange rate) or about four months of billings.

4.3 An additional problem is that the above figures mask the fact that RGAB has sufferedsignificant financial losses from delayed collection of bills without penalties or adjustments in aninflationary environment. A significant proportion of receivables is older than six months and due frompublic sector entities. By law, penalties for late payments are fixed at 0.5% per day for the amount inarrears with the provision that the total accumulated amount of penalties cannot exceed the amount of theoriginal bill. Such penalties are rarely applied, though. RGAB is also authorized to cut off water supplyto customers that are forty or more days in arrears, but for a variety of reasons, it has, so far, rarelyresorted to this measure. The arrears issue is endemic to the public sector enterprise sector in Romaniaand can only be addressed effectively through a comprehensive program to restore and promote financialdiscipline - which is one of the objectives of the recently approved FESAL [see para. 1.2]. Actions toreduce accounts receivable are part of the three-year Short-Term Action Program (STAP) included in theproject [see para. 4.12]. The technical assistance currently provided to RGAB under a French bilateralprogram will be continued under the project and is expected to significantly help improve the proceduresfor collecting bills and managing arrears.

4.4 Unsatisfactory bill collections have resulted in significant cash shortfalls, which RGAB(like other RAs) has routinely compensated by delaying payments to its key suppliers, in particular toRENELI for power consumption and to APELE ROMANE for water abstraction. By the end of 1994,GAB's accounts due to RENEL and APELE ROMANE amounted to the equivalent of US$ 11 millionand equaled nine months of billing in the case of RENEL and six months in the case of APELEROMANE. This situation deteriorated in 1995 and the accounts payable to RENEL and APELEROMANE as of the end of the year were estimated to be in the vicinity of ROL 30 billion (US$ 12million equivalent) representing 13 me nths of billings in the case of RENEL and three months of billingsin the case of APELE ROMANE. Like the reduction of accounts receivable, the reduction of accountspayable is addressed tlirough the STAP included in the project [see para. 4.12].

4.5 RGAB Cost and Revenue Structure. Thus far, RGAB's current expenditures have beenlimited tc those strictly necessary for keeping day-to-day operations going at minimal technical qualitystandards and limiting maintenance to indispensable emergency interventions. In 1994 and 1995, about80% of costs were incurred for three primary production inputs: power consumption (35%), raw waterabstraction fees (8%), and payroll (39%), while expenses for administrative and other operational andmaintenance expenditures accounted for the remaining 18%. The comparatively high proportion ofexpenditures for primary production inputs is the combined result of various factors including thepredominant use of low energy efficiency equipment, especially for pumping, the importance of physicaland commercial water losses, and, owing to the disproportionally high needs for repair work, a relativelynumerous staff (though the impact of the latter is, to some extent, still offset by a low salary level).

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C. Tariff Schedule and Level

4.6 Tariffs for water supply and sewerage are set by the Bucharest municipality at the requestof RGAB and upon prior clearance by MOF [see para. 1.5]. Tariffs are set on the basis of RGAB'srecurrent costs at the time of the submission of the tariff proposal plus a 10% mark-up or "profit". Asapplied, the tariff setting system is far from adequate as it (a) is based on past rather than projected costs;'b) does not include any provision for uncollectible bills; (c) is affected by inappropriate accounting fordepreciation of fixed assets [see para. 4.2]; and, above all, (d) refers to a normative m' consumption andnot actual metered consumption [see para. 1.16 and para. 4.71.

4.7 Owing to the 'condominium' management procedures for large housing developments inforce under the previous regime, the installation of building-specific meters, let alone individualhousehold meters, was thought to be superfluous. Even when existing, meters are frequently brokendown. As a result, most customers are billed by water supply and sewerage utilities on a flat-rate basisfor a ncrmative daily per capita consumption of 170 liters for cold water (and separately by hot waterand district heating utilities for a consumption of 110 liters of hot water). Sewerage services are coveredthrough a sewerage surcharge. Tariff discrimination was eliminated in 1992 and, at present, all RGABcustomers pay the same price per m3 for supply of treated drinking water and for sewerage services,(whereas previously a different tariff existed for industrial customers). In addition, RGAB also provides,through separate networks, small amounts of untreated water for industrial use (about 6% of water sales)at a lower tariff. Until March 1995, RGAB was also co-responsible for the delivery of hot water toresidenLial customers through an arrangement under which RGAB billed customers for the quantity ofwater used whereas RADET charged them for the energy required to heat it. This arrangement has beendiscontinued and at present RGAB only sells bulk water to RADET leaving it to the latter to recover itscosts from customers through separate billing.

4.8 Tariff increases have been made periodically since 1992 and, globally, the evolution ofthe price of water and sewerage services has been above that of inflation and, thus has resulted in a steadyincrease in the base tariff. Tariff adjustments, however, have usually been made at erratic intervalscausing wide fluctuations in real tariff levels, which, in US$ equivalents, have experienced declines of30% to 50 % between successive adjustments. In view of the cash shortfalls suffered by RGAB in recentyears and confronted with the threat of major system breakdowns, as well as in response to discussionsheld by the Bank with authorities of the central government and the Bucharest municipality in connectionwith the preparation of the proposed project, RGAB tariffs were adjusted twice in 1995: first, in March,from ROL 189 per m3 to ROL 250 per m3 for water supply, and from ROL 21 to ROL 29 for thesewerage surcharge; and again in August, to ROL 355 per m3 (US$ 0.12 at end of June 1996 exchangerates) for water supply and ROL 41 (US$ 0.02) for the sewerage surcharge. This resulted in an increaseof about 80% in nominal terms, while inflation for 1995 was 31 %. Because no increase in the cost ofRGAB's primary production inputs has occurred since August 1995, no further tariff adjustment has beenrequired until now [see para. 4.5]. It has been agreed and confirmed during negotiations. however, that.in accordance with the provisions of the STAP. tariff adiustments will be carried out as soon as rises inthe cost of the above mentioned production inputs will cause RGAB's operating costs to increase by morethan 10% [see para. 4.12. para. 4.13. and para. 6.1(g)l.

4.9 Because of the 'condominium' management practices mentioned above, the distributionnetworks in housing developments built since the 60's as well as within buildings were designed in a waythat makes apartment specific metering virtually unfeasible. Today household water bills only reflecttherefore the average household consumption of an entire building and, thus, provide no incentive toindividual households to strive for water conservation. As part of the Public Awareness and Water

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Wastage Reduction Program included in the proposed project RGAB will be exploring possible solutions(both technical and commercial) that would allow to create financial incentives for water conservation atthe level of individual households. It will also carry out a tariff study and identify possible solutions thatwould ensure that the services remain affordable to poorer households [see para. 4.13 and Annex 5.7(b)1.

D. RGAB's Future Financial Performance

4.10 In the institutional context of Romania, the case of RGAB cannot be dissociated from thatof other municipal RAs, and it seems unrealistic to try to change its operating regime (unless within thecontext of a broader reform for all local RAs). Thus, it must be presumed that (a) authority over tariffswill remain with the Bucharest municipality, with MOF continuing to exercise an indirect yet powerfulcontrol, and (b) a substantial portion of water sector investments and, in particular, the completion of theprojects of the Glina waste water and the Crivina-Ogrezeni water treatment plants will continue to befinanced on a grant basis from the central government budget. This notwithstanding, the Government,the Bucharest municipality, and RGAB have agreed that it is possible and desirable to introduce, underthe proposed project, significant changes in RGAB's current financial management practices. The maineffect of these changes would be that RGAB would (a) assume the full responsibility for contracting andservicing the Bank, loan, (b) increase its internal cash generation in order to participate in the financingof the project investments, and (c) take into account the resulting financial costs in its budgetary planning.

4.11 Financial projections for the 1996-2002 period [see Annex 21 using the tariff levelscontemplated under the proposed project show that RGAB would have some negative net income (afterdepreciation), mainly as a result of: (a) more realistic estimates of losses on accounts receivable (theequivalent of about 17% of the amount billed in 1996 to reflect accumulated losses, and about 4% to 5%annually after 1996), (b) more adequate depreciation charges (2.5% on revalued fixed assets); and (c)increased allocations (in real terms) to operation and maintenance expenditures. The projections areconservative and assume a lag of two months in tariff increases to cover increases in operating costs. Italso assumes a gradual improvement in parameters such as bill collection, resulting from the actions takenunder the STAP. RGAB's internal cash generation will increase gradually from ROL 14 billion (US$4 million) in 1996 to ROL 27 billion (US$ 6 million) in the year 2000. RGAB will be able to maintaina debt service coverage ratio greater than 1.3 through the life of the project and will be able to generate(after taking care of working capital and debt service requirements) close to ROL 50 billion (US$ 12million) for contribution to the project and for other network rehabilitation programs.

4.12 Short-Term Action Program (STAP). RGAB, in consultation with the BucharestMunicipality and MOF, prepared by end of 1995 a Financial Improvement Plan (FIP) using themethodology developed for the FESAL. The FIP identified those key actions that affect the cashgeneration of RGAB and the viability of the project and allowed to group them in a coherent thee-yearShort-Term Action Program (STAP) [see Annex 61. The STAP includes the measures required to achievethe targets indicated above and, specifically, the steps to be taken to (a) reduce payables, (b) improve billcollection rates, and (c) prevent the recurrence of arrears build-up. The plan, whose outline wasapproved by the RGAB Administration Board on December 28, 1995, contains a detailed implementationschedule of the above measures and defines a series of criteria and performance targets that will allowa close surveillance of RGAB's future financial perfornance.

4.13 The most critical actions included in the STAP that will be closely monitored duringproject implementation are the following [see Annex 61:

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(a) Tariff adiustment: adoption of the principle of a tariff adjustment to compensatefor increases in the cost of RGAB's main production inputs within a period ofthirty days after RGAB's operating costs 6 have increased by 10% over previouslevels with a view to obtain coverage of RGAB's full costs 7 and maintain realtariffs at the August 1995 level [see para. 4.8];

(b) Receivables and payables: measures to improve bill collection as percentage ofthe total potential collections (current year bills + accounts receivable at thebeginning of the year) from 69% (1995 peformance) to levels consistent with thefinancial program supporting the project. Technical assistance to improve themanagement of its customers accounts is currently provided to RGAB under aFrench bilateral program and will be continued under the project. The billcollection targets I included in the financial projections are: 70% in 1996; 72%in 1997; and 75 % in 1998 and beyond. To make the bill collection performancefeasible, the STAP includes measures to: (i) establish compensation agreementsbetween RGAB, suppliers and customers for settlement of arrears; (ii) rescheduleand write-off of arrears of more than one year; (iii) swap RADET debt withRENEL and other public sector enterprises at a discount to be negotiated betweenRGAB and other public sector enterprises; and (iv) make amendments incontracts with RADET and other customers to enable RGAB to enforce paymentaccording to metered consumption;

(c) Operating costs: implementation of measures to (i) increase staff productivity;(ii) reduce wastage of production inputs; and (iii) renegotiate financial conditionsof raw water purchases from APELE ROMANE;

(d) Payroll: reduction of number of employees (all categories) by about 12% overthe 1996 - 1999 period through attrition, encouragement of voluntary departures,and divestment of non-essential activities.

During negotiations. agreement was obtained on the content and implementation timetableof the Short-Term Action Program (STAP) [see para. 6. 1(g)1. Approval of the STAP by the Romanianauthorities is a condition for loan effectiveness Isee para. 6.2(b)1.

4.14 Progress in the implementation of the STAP will be monitored closely on the basis ofindicators agreed upon with RGAB (working ratio, bill collection ratio) and results will be reviewed anddiscussed annually with the Bank (see Annex 6). Discussions would take place before September 30 eachyear starting in 1996 and the review would include: (a) assessment of progress achieved; (b) possiblyrequired target adjustments, antd (c) adequacy of budget proposal for following year. If any of thesereviews would show results unsatisfactory to the Bank, RGAB would submit an acceptable alternativeadjustment proposal no later than November 30 of the same year [see para. 4.121. During negotiations,

6 Operating costs defined as: Expenditure for salaries and wages + energy + raw water + materials + maintenance

7 Full costs include operating costs + non-operating costs + depreciation + taxes + provision for bad debts

8 Bill collection ratio defined as amount of collections against current year bills + accounts receivable at the beginning ofthe year divided by amount of current year bills + accounts receivable at the beginning of the year

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the conditions, timing and performance evaluation criteria for the annual review of STAP results werereviewed and agreed [see para. 6. 1(g)l.

4.15 Financial Risks. An acknowledged risk is that RGAB could be unable to fund itsfinancial contribution to the project or service the Bank loan. A change in the volume of water billedis likely to be a lesser risk given that the financial projections are based on a moderate increase in billings(from 340 million m3 estimated in 1995 to 367 million m3 estimated for 2002, or a less than a 10%cumulative increase over seven years). Tariff and bill collection levels below the ones established in thebase case [see para. 4.12] would significantly affect RGAB's financial performance and reduce itscapacity to generate sufficient internal cash resources for financing its share of the project or otherinvestments for maintenance and overhaul of infrastructure and/or equipment. The combination ofreduced tariffs and reduced collection ratio would result in a debt service coverage less than 1.0 in 1999and beyond. The agreement of MOF, the Bucharest municipality and RGAB to maintain tariffs at August1995 level in real terms and the various actions included in the STAP to improve collection are key forsustaining the financial viability of the project. Agreement was obtained at negotiations that RGAB willconsult with the Bank before incurring additional debt if RGAB's debt coverage ratio falls or is proiectedto fall below 1.3 for any year throughout the loan repavment period [see para. 6. 1(h).

4.16 A financial sensitivity analysis shows that the lowest tariff level that would allow RGABto generate enough cash to make its contribution to the proposed project without reducing the quality levelof operation and maintenance below acceptable levels or running up payment arrears to its suppliers is5% below the base case level (assuming bill collection stays at the base case level). The lowestacceptable bill collection index would be about 68% (with tariffs staying at the base case level) [seedetails in Annex 21. The actions included in the STAP [see para 4.12.] should reduce the risk thatRGAB's performance falls below the base case level, and [as noted in para. 4.14] the Bank will monitorprogress closely.

4.17 Clarification of Institutional Framework. An important obstacle to a sustainableimprovement in RGAB's technical, financial and commercial management performance is the lack of aprecisely defined framework for its legal and financial relationships with the Bucharest municipality,under whose supervision it now operates. While a certain number of the prevailing ambiguities stemfrom the absence of an appropriate national legal framework and can only be resolved by legal actiontaken at that level (e.g. the issue of legal ownership of RGAB assets), other issues fall in the competenceof the Bucharest municipality. The latter include (a) the scope and extent of regulatory functionsperformed by the municipal authorities (i.e. the mayor and/or the municipal council), in regard to tariffsetting, and fixing conditions and standards of service provision, (b) the autonomy granted to RGAB tomake decisions in investment and operational management matters, (c) the nature of the financialobligations assumed by either the Bucharest municipality or RGAB and the delimitation of thecorresponding accountabilities. As spelled out in a policy statement presented to the Bank duringnegotiations, the Bucharest municipality and RGAB have agreed to revise the existing legal frameworkand service provision directives that currently govern RGAB's operations. The revised service provisiondirectives would precisely delimit the respective obligations, rights and responsibilities of the Bucharestmunicipality and RGAB in matters of operational and financial management, and would define criteriato be used for assessing the future performance of the company.

4.18 Medium-term investment and financing program: The expected improvement inRGAB's financial position will not be sufficient to generate the resources needed for a broaderrehabilitation and modernization of the water supply and sewerage system in Bucharest. To complete on-

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going projects with central government financing in a reasonable time would require public sectorresources in an amount that, given the macroeconomic constraints, is unlikely to be available in the nearfuture. A comprehensive review of the investment and operation and maintenance strategy for the watersupply and sewerage sector in Bucharest is therefore warranted. A comprehensive medium- and long-term development program will be prepared by RGAB, in accordance with terms of reference to beagreed with the Bank, in connection with the project implementation progress review [see para. 3.15].The program will (a) define the measures to be taken to address the most critical problems (includingfurther rationalization of expenditures, revision of tariff structures and policies, and review of investmentpolicies and strategies), and (b) prepare an operational development and investment plan withcorresponding sources of financing [see para. 3.15]. The program will be prepared with theunderstanding that its satisfactory completion will allow the preparation of possible follow up projects tobe funded with Bank assistance.

4.19 Accounting and Auditing. According to the interim audit report for 1995 which wasprepared by independent external auditors, RGAB's accounting practices are comply with the instructionsof the Romanian National Accounting Plan adopted in 1994. RGAB has agreed to implement a specificaction plan to that effect. There are several areas such as inventory management, fixed asset accounting,accounting of receivables, payables and cash where the auditors have recommended improved accountingpractices and controls to bring RGAB's accounts closer to internationally acceptable accounting standards.It should be noted that differences between Romanian accounting practices and International AccountingStandards (IAS) cannot be resolved through this project. However, the auditors' recommendations forimproving internal accounting practices in RGAB will be implemented in such a way that RGAB'sfinancial statements will be presented as closely as possible to internationally accepted accountingstandards and an accounting manual setting down RGAB's accounting policies and practices will beprepared. The external audit will cover RGAB's financial statements, the Special Account, Statementsof Expenditure and compliance with loan covenants of a financial nature. The audit report will besubmitted to the Bank within six months of the close of each fiscal year. Agreement on the arrangementsfor the annual auditing of RGAB's financial statements was obtained during negotiations [see para.6.1(i)l.

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V. PROJECT BENEFITS AND RISKS

A. Project Benefits

5.1 The project will support the rehabilitation of infrastructure in a sector that faces asignificant backlog of unmet needs and where the potential for improvements in efficiency is very high.This was identified as a priority in the Country Assistance Strategy (CAS) that was discussed at the Boardon March 14, 1994 in conjunction with the Petroleum Rehabilitation Project (Loan 3723-RO). Theproject's position was further confirmed in the November 1995 CPPR discussions with the RomaniaGovernment.

5.2 The project will complement the Financial and Enterprise Sector Adjustment Loan(FESAL) by seeking to improve the issue of financial discipline in RGAB. Through the implementationof a program of financial and operational measures that are necessary to ensure the sustainability of theproposed investment program, the project will lay the giound for the future expansion of the rehabilitationof the water supply and sewerage system in Bucharest which could be supported by a series of follow-upprojects. The policy measures which are included in the STAP and which were agreed and confirmedat negotiations will lead to improved financial viability of RGAB and the sustainability of its operationsin the medium- and longer term. They are also expected to create the basis for a possible future privatesector involvement in the delivery of water supply services. The project also will support theGovernment's policy of decentralizing the responsibility for the provision of local services to localauthorities. By introducing the concepts of cost-recovery and consumer contribution to the financing ofsector investments it would have a beneficial development impact.

5.3 The project will bring significant policy changes to the management of the water sectorin Bucharest. First, it will support RGAB's efforts to shift from a system of billing for a notional waterconsumption to one based on actual consumption. Second, it will introduce the concept of cost recoveryinto RGAB's investment planning, and concurrently, initiate a financial management reform that shouldlead to a gradual decrease in RGAB's dependence on central government funding for future infrastructureinvestment.

5.4 It must not be overlooked, however, that the project will represent only a first and modeststep in a long-term effort to rehabilitate the entire Bucharest water supply system and upgrade it into afinancially sustainable operation. Given the limited scope of the project in comparison to the needs fora full rehabilitation of the entire water supply and sewerage system, the direct and immediate effects onproblems such as water losses should not be overestimated. Indeed, the project's objective is not to solveall of RGAB's problems at once, but to launch a rehabilitation process that could be progressivelyexpanded as the operational and financial performance of RGAB will improve. Of special importancein this respect will be RGAB's efforts - supported by the project -to raise community awareness of theneed for water conservation through public education and information programs and the creation ofcorresponding financial incentives.

5.5 Rehabilitation and repair of existing infrastructure and facilities are the least-cost and onlypractical alternative for the improvement of water supply conditions in Bucharest. Further deferment ofthe critically needed investments funded under the project is expected to result in an annual increase ofwater losses at an annual rate of about 10% in the neighborhoods whose networks will be rehabilitatedunder the project and a corresponding rise in water distribution costs. Postponement of the proposedrehabilitation and repair works would lead to a rapid reduction of water availability and quality with

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important negative economic and social effects and, although not quantifiable with the data available,rising health risks [see para. 1.14], or request likely emergency repair works whose cost would besignificantly above those of the proposed project. Attempting to maintain current levels of wateravailability, in a context of high, and increasing losses, by constructing new additional productioncapacity without previously addressing the issue of water loss causes would represent the economicallyleast efficient alternative.

5.6 The principal quantifiable benefits that will accrue to RGAB from the project will be adecrease in RGAB's operating costs as a result of increased production efficiency (i.e. reduced energyconsumption) and reduction of water losses (which will lead to a reduction of the total volume of waterto be produced). In the medium- and longer-term, the implementation of the Short-Term Action Program(STAP) will bring about important improvements in RGAB's operational, financial and commercialmanagement performance. The combined effects of the above will-bring about a reduction in the totalcost of water supply and thereby allow RGAB to significantly expand its financial contribution to futuresector investments, including in environmentally important but thus far ill-attended areas such as wastewater treatment.

5.7 Specific benefits of the project will include:

(a) increase in the hours of availability of adequate water supply service in various areas ofthe city gradually passing from the current average of twelve hours per day toapproximately seventeen hours per day as a result of improved flow management in theprimary distribution network and higher water pressure;

(b) improvements in water quality through the upgrading of water treatment plants and, inparticular, filtering and chlorination equipment, as well as through repairs of thedistribution network. These repairs will also contribute to prevent contamination ofdrinking water by groundwater and, therefore, would help reduce the incidence of water-borne diseases;

(c! gradual reduction of unaccounted-for-water, currently estimated at over 60 %, due to boththe elimination of physical losses in the distribution network, and the improvement ofRGAB's commercial management as well as the extension of metering and thedevelopment of water conservation programs;

(d) improvement in RGAB's maintenance, control, and operational functions through theprovision of spare parts, meters, operational equipment and training;

(e) reduction in RGAB's operating costs as a result of decreasing energy consumptionthrough the provision of new, and rehabilitation of existing pumping equipment as wellgradual reduction in unaccounted-for-water.

5.8 An internal rate of return (IRR) has been calculated for the components of the project thatwill have a measurable effect on RGAB's cost of water production and distribution (76% of total basecost) [see Annex 31. No rate of return has been calculated for the components addressing the issues ofwater quality (15% of total base cost) and strengthening of RGAB's management (9% of total base cost)because their benefits are largely unquantifiable, thougii clearly very significant. The project is predicatedon the assumption that on average the aggregate demand being met (albeit with the deficiencies noted

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above) and that no additional water will be made available to consumers. Rather, as a result of morebalanced distribution and increase in service reliability the project is expected to bring about a decreaseof household consumption owing to the elimination of the need for 'coping strategies' [see para. 1.13].However, these latter benefits cannot be evaluated ex-ante and, therefore, have not been taken intoaccount. Future evolution of water production and consumption will be closely monitored under theproject [see monitoring indicators in Annex 5.51 and terms of reference for operational technicalassistance in Annex 5.7(c)l in order to provide, among other things, a data base for the evaluation offuture projects.

5.9 The IRR calculations are based on very conservative estimates for the projected operatingcost savings that would derive from (a) the decrease in water losses, (b) the reduction of energyconsumption, and (c) the reduction of maintenance and repair costs in comparison to the situation thatcould be expected to result without the project. Separate calculations were made for the four sub-components: (1) 'Primary Network Repair', (2) 'Secondary Network Repair', (3) 'Pumping StationRehabilitation', and (4) 'Metering'. The combined IRR calculated for the target implementation scenario(see para. 3.3) which assumes a three-year project implementation according to schedule, no cost overrun,and water and energy savings as expected, is 19% (weighted average of the IRR for the above four sub-components: 22%, 12%, 15%, and 48%, respectively).

5.10 In view of RGAB's lack of experience with the implementation of projects of this nature,it seems reasonable, however, to set the expected IRR at a lower level which reflects possible slippage.To assess the impact of various possible negative developments sensitivity analyses were carried outcomparing the above case to four less favorable alternative scenarios: (a) assuming a 50% lower thananticipated customer response to the extension of metering and water conservation incentives and lossreduction benefits therefore primarily derived from reduced physical losses, the IRR would drop from19% to 15%; (b) assuming that, because of higher than expected costs of the secondary distributionnetwork rehabilitation, only 75% of the initial project area could be covered and water losses reducedaccordingly, the IRR would decrease from 19% to 18%; the effects of (c) a possible one year delay inproject start up and (d) a longer than anticipated implementation period of five (instead of three) yearswere also analyzed but turned out to be marginal, primarily because the type of works included in theproject generates a stream of discrete benefits and costs that occur in tandem and are proportional.

5.11 Taking the various analyses into account, the base case against which actual results willbe monitored assumes a cost overrun of 20% on all four components mentioned in para. 5.9 above, anda corresponding reduction of 20% of all project benefits. The resulting IRR is 12%.

B. Project Risks

5.12 In addition to the political risks typical for any project dealing with local authorities andlocal utilities, the project faces two main categories of risks: financial and technical. The financial risksare twofold. First, given the high proportion of local counterpart funding required for the project thereis a risk that the project's implementation performance could be adversely affected by the lack orinsufficiency of counterpart funding due to (a) unforeseen macro-economic constraints and a resultingdownturn of the economy or (b) financial difficulties at the level of the Bucharest municipality. However,this risk is country- and not project-specific, however, and would affect the Bank's project portfolio asa whole. Because of its very nature it cannot be assessed on an ex-ante basis and can only be dealt withon a case by case basis including a project restructuring should the need for it arise. Additionally, it must

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be taken into account that the funding requirements are relatively small. The annual contribution of US$5.0 million from the central government budget represents only about 2% of the 1995 total annualinvestment transfers to local governments, while the annual contribution of US$ 2.5 million from theBucharest municipality amnounts to about 4% of its 1995 investment budget.

5.13 Second, a financial risk could arise from RGAB's weak financial position and aredescribed above (see para 4.15). RGAB's financial viability depends, to a large extent, on a timelycollection of bills. To date, collection rates remain unsatisfactory, primarily, due to the poor paymentbehavior of large industrial and institutional customers. A persistence of lack of financial discipline atthe level of public sector enterprises, a problem which is addressed under the FESAL, could jeopardizethe financial recovery of RGAB. The seriousness of these risks is mitigated by (a) the implementationof the measures adopted under the FESAL; (b) the Governmnent and the Bucharest municipality'scommitment to implement and enforce the measures included in the STAP; and (c) the continuation,under the project, , of the restructuring program for RGAB's customer account management systemwhich was initiated in early 1996 with French bilateral technical assistance and can be expected tosignificantly strengthen the company's financial and commercial management 'muscle'.

5.14 The technical risks of the project are inherent to the implementation of any first-timeproject by a new beneficiary who lacks the necessary familiarity with the World Bank proceduresassociated with this type of activity. These risks are compounded by (a) the novelty of the type ofoperations funded by the project in Romania, the ensuing lack of reference price framework and,therefore, some uncertainty about costs, and (b) the complexity of the approval procedures required bythe Romania Government for all investments funded totally or partially with government resources andwhich could lead to substantial delays in the start-up of the project. The possible effects of (a) a delayof up to one year in the project and a longer than anticipated implementation period of five years insteadof three and (b) a significant cost overrun have been assessed in the sensitivity analyses presented above,[see para. 5.101. The risks are mitigated by (i) the pruvision (under already ongoing technical assistanceprograms) of extensive technical support and training to RGAB prior to loan effectiveness and during thestart-up phase of project implementation [see para. 3.1]; (ii) the early completion of all bidding documentsand the completion by the Romanian authorities of the prequalification documents which was set as acondition for negotiation, and the completion of the bidding packages for at least four ICB procuredcontracts which was set as a condition for Board presentation; and (iii) the provision of necessarytechnical assistance for project supervision under the project and a thorough monitoring of implementationby the Bank [see para. 3.1 and para. 3.15].

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VI. AGREEMENTS AND RECOMMENDATIONS

6.1 During negotiations, agreements were reached on the following:

(a) On-lending arrangements [see para. 2.10];

(b) RGAB internal management procedures for project-related environmental issuesand appointment of RGAB environmental advisor [see para. 2.13];

(c) Operating aiid staffing conditions for RGAB's Project Coordination Unit (PCU)[see para. 3.2];

(d) Procedures for project implementation monitoring, monitoring criteria, andreporting [see para. 3.2];

(e) Procedures for Special Account management and disbursement arrangementsincluding disbursements against SOEs, as well as annual auditing of SOEdocumentation by independent auditors [see para. 3.11, para. 3.13, and para.4.19];

(f) Project implementation plan and scope and timing of project implementationprogress review [see para. 3.15 and para. 4.18];

(g) Short-Term Action Program (STAP) including monitoring criteria and proceduresfor annual review in consultation with the Bank [see para. 4.12, para. 4.13 andpara. 4.14]; and

(h) Prior consultation by RGAB with the Bank before incurring additional debt in theevent that such debt would lower the debt-service coverage ratio below 1.3, (seepara. 4.15]; and

(i) Annual Auditing of RGAB's financial statements [para. 4.19];

6.2 The following are conditions of Loan Effectiveness:

(a) Signing of On-lending and Guarantee Agreement [see para. 2.10]; and

(b) Approval of the STAP by the Romanian authorities [see para. 4.12].

6.3 With the above assurances and conditions, the project is suitable for a Bank loan ofUS Dollar 25 million to Romania, repayable in twenty years, including five years of grace, at thestandard variable interest rate for LIBOR-based US Dollar Single Currency loans.

33

Annex 1(page 1 of 3i

ROMANIABucharest Water Supply Project

Environmental Review

1. Environmental Screening

1.1 The Bucharest Water Supply Project is assigned in Category B for the purposes ofenvironmental screening, required for World Bank lending operations. Following the guidelines ofOperational Directive (OD) 4.01 of the Bank, a review of the environmental problems associated withwater supply operations in Bucharest has been carried out by a team of RGAB and Bank environmentalexperts to (a) determine the potential negative environmental impacts of the project and identifyappropriaEe mitigaEion measures (if needed); (b) identify opportunities for environmental enhancement;and (c) assess environmental monitoring and management capacity. The environmental review confirmedthat the project will have no major negative environmental impact, and that minor negative environmentaleffects that ma) result from construction activities will be adequately monitored and mitigated by RGABin collaboration with the contractors concerned.

1.2 The review also confirmed that the environmental permit for the Bucharest Water SupplyProject. obtained by RGAB, complied with the Romnanian legal requirements of the current Romanianenvironmental impact assessment regulation, and, more specifically, the regulations for environmentalpermits for invesrment projects, issued by the Ministry of Water, Forests and Environment (MOWFEN) -that is. Ordinances nos. 170/90; 113/90, and 619/92. The current Romanian environmental impact

assessment regulation will be revised in line with the new Law on Environment promulgated beginningof January, 1996. Due to the verv limited environmental impacts of the project, however, no additionalenvironmnental impact assessment will be necessary.

2. Project objectives and expected environmental benefits

2.1 The Bucharest Water Supply Project is a first step in the World Bank assistance toRomania's water supply and sanitation sector. As such it is designed as a relatively simple operation,financing rehabilitation/replacement of critical equipment and parts of the water supply network, andassisting RGAB in achieving financial and instirutional improvements. Concrete environmentalenhancement opportunities identified through the project are linked to the rehabilitation of the drinkingwater treatment plants (water filtering and treatrnent, and sludge management). In both the Arcuda andthe Ro,u plants, the project would improve filtering, filter washing and chlorination. In the Rosu plant,the project would also finance repairs of the sludge removal system and improvements in aluminumsulphate dosing, and silicate and sulfuric acid stocking (see Annex 5. 1). In addition, the project willpromote better environmental management through the assignment of environmental advisory task to anappropriate senior company staff, who will report directly to the General Manager.

2.2 More specifically, the proposed project is expected to bring environmental and healthbenefits in the following areas:

(i) rehabilitation and improved operation and maintenance of the rwo (Arcade andRace) drinking water treatment plants will assure better drinking water quality,as well as better handling of water treatment residuals;

34

Annex 1(page 2 of 3)

(ii) rehabilitation of parts of the water supply network, complemented with ametering program, and public awareness campaign will reduce water losses andencourage water conservation;

(iii) pumping station rehabilitation will increase the energy efficiency of RGAB'soperations; and

(iv) improvements in the operational management will also contribute to a better day-to-day environmental management (treatment plants waste management;handling of chemicals and toxic substances; improvements in the operation andmaintenance of the sewerage network, including improved emergency response;more efficient use of information from the existing water quality monitoringnetworks; better compliance with environmental regulations).

3. Environmental pmoblems associated with water supply operations in Bucharest

3.1 RC-AB is facing a number of problems related to quality of raw, drinking and wastewater. Raw water quality is influenced by irregularities in upstream water use and treatment.Reportedly, water in the Arges and Dimbovita rivers is often polluted above category I permissible levelsin the vicinity of Bucharest. During the summer period the level of coliform is said to exceed up to 6-7times the standard levels. In the Arges river, explosive development of phyto-plankton biomass causesraw water quality problems from February-March onward. The low quality of raw water results in (i)higher costs of operations and maintenance of drinking water treatment plants; (ii) a need for excessiveuse of chemicals (chlorine and aluminum sulphate in particular) in the treatment process; and (iii) acomparatively poor quality of the drinking water supplied by RGAB. Although the level of pollutionresulting from industrial activities has decreased significantly in the past few years due to the economicdownturn, lax enforcement of environmental regulations and financial constraints have contributed tomaintaining industrial water pollution at a level above acceptable standards. The project would contributeto a significant improvement in the quality of drinking water, but will not be able to address the problemsof upstream pollution, an issue that is not in its area of competence.

3.2 Current water quality standards are defined by two key regulations: STAS 4706-88 ofNovember 1, 1988 for surface water categories and conditions, and STAS 1342-91 of June 1, 1992 forstandards for drinking water quality. In addition, Decrees nos. 414/79 and 14/83 specify the admissiblepollution limits and technical rules for discharge of waste water into open water bodies and for dischargesinto public sewer systems. A permitting and contracting system is in place, requiring a permit for wastewater discharge, specifying the permissible substances and emission levels, and a contract with theauthority in charge of the receiving body (open water body or a municipal sewer). A new water law isunder consideration in the Parliament and will provide the basis for revisions and updating of the existingwater quality regulations. The new law will also introduce a compliance schedule for water companiesand other point source polluters.

4. Monitoring capacity

4.1 Monitoring of water quality, a responsibility of the water department in MOFWEN is welldeveloped. There are, countrywide, 3,070 water quality monitoring stations (divided among 11 riverbasins). In addition, RGAB has its own well-established system (a central laboratory with a number

35

Annex 1(page 3 of 3)

of check points, drinking water plant laboratories, pumping station check points, waste water laboratoryand check points) for monitoring the quality of raw water, drinking water and waste water. The RGAB'slaboratory provides physical, chemical, biological, and bacteriological analysis of both raw and drinkingwater. Moreover, drinking water quality is also monitored and controlled by the Center for PreventiveMedicine of the Ministry of Health (MOH). While RGAB envisages further developing its capacity tomonitor and control water quality, the review concluded that for the purpose of the project the existingcapacity and perforrnance can be considered adequate. As an immediate first step towards improving itscapacity to manage environmental issues, RGAB will establish the position of an environmental advisorto the general director with a view to improve coordination of environmental monitoring and compliance,(see para. 6.1 below).

5. Sewer system and waste water treatment.

5.1 Bucharest has a relatively well developed sewer system, which serves approximately 85 %of the population as well as a significant share of the industries located in the city. Currently there is nomunicipal waste water treatment facility. The waste water is discharged directly in Dimbovila river nearGlina. Downstream from Bucharest both Dimbovila and Arges rivers are heavily polluted, with anegative impact on agricultural production and on the ecology of the Danube, and the Danube delta. Awaste water treatment plant, designed in the late 70s/early 80s, has been under construction since 1985.The plant has two lines at different stage of completion. Line 1 is almost completed -- the primarytreatment is ready for a trial start, the secondary treatment is 85-90% completed, and the sludge treatmentis about 80% completed. Line 2 is only 35-40% completed (so far only basic infrastructure constructionis finished). Since the time the treatment plant was designed, significant changes have occurred in thefinancial position of the central government budget (which funds the construction), as well as in theenvironmental regulations conditions. Additional changes are expected. For example, in the originaldesign, reference is made only to BODS (12 or less mg/I) and suspended solids (20 or less mg/I), andneither nitrogen nor phosphorus removal were considered. To comply with current requirements andtreatment needs, a study to determine the feasibility of updating the design of the plant is underpreparation.

6. Recommendations

6.1 RGAB's performance in environmental monitoring should be strengthened by the creationof a Environmental Advisory position. The environmental advisor should monitor environmentalcompliance, fo!low up on changes in the environmental regulations which may affect RGAB and proposeappropriate actions, serve as a RGAB internal focal point on environmental issues and corresponding stafftraining, and liaise with the relevant Romanian authorities and with other agencies on environmentalmatters. The detailed terms of reference for this task have been discussed during the negotiations.

6.2 Generally, RGAB should develop a more proactive attitude toward issues that are ofconcern for the company but are primarily under control of other entities such as MOWFEN, APELEROMANE, and others and relate to matters such as the implementation of regulations governing industrialwaste water discharge into the sewerage network (enforcement of pre-treatment standards; fines for non-compliance, billing and collection procedures, etc.); negotiation of a compliance schedule for waste waterdischarges by RGAB and harmonization across sectors of compliance requirements.

36

Annex 2[pag. 1 of 1W


Financial Analysis

Bucharest Water and Sewerage Company - RGABHistorical and Projected Financial Statements

1. This annex includes:

(a) RGAB Balance Statements 1992-1995

(b) RGAB Income Statements 1992-1995

(c) RGAB Projected Connections and Metering 1995-2002

(d) RGAB Projected Tariffs and Sales 1995-2002

(e) RGAB Projected Balance Sheets 1995-2002

(f) RGAB Projected Income Statements 1995-2002

(g) RGAB Projected Cash Flow Statements 1995-2002

(h) Financial Projections - Sensitivity Analysis

2. The main assumptions on which the financial projections are based, are the following:

A. Connections and Metering

(a) the number of connections remains constant since no significant urbangrowth is expected in the coming years; and

(b) the number of metered connections is based on the program agreed atappraisal.

B. Tariffs. Sales and Bill Collection Index

(a) the volume of water sold experiences modest increases as a result ofimprovements in RGAB's commercial management, including theexpansion of metering;

(b) the tariff level remains constant in real terms at the August 1995 level;the tariff level will be adjusted within thirty days of an increase of 10%in operating costs over previous levels and a coverage equal to full costs(as defined in the Short-Term Action Program (STAP); and

37

Annex 24pm. 2 of 101

(c) the expected evolution of the ratios of total bill collection (current yearbills + accounts receicvable at the beginning of the year) in relation toamounts billed each year + accounts receivable is as follows:

1996: 70%;1997: 72%;1998 and beyond: 75%;

C. Inetnnts

(a) the RGAB investment program is comprised of the Bank-financedproject, the completion of the Crivina-Ogrezeni Water Treatment Plant,and complementary own-source financed rehabilitation projects, but doesnot include the completion of the Glina waste water treatment plant; and

(b) the investment plan is based central government and Bucharestmunicipality contributions to the Bank-financed project; centralgovernment financing of 100% of the investments for the Crivina-Ogrezeni and Glina plants; and internal cash generation forcomplementary rehabilitation projects.

D. QDeraing Costs, and Depreciation

(a) the operating costs increase with inflation. They also include a provisionfur the funding of a gradual improvement of operation and maintenanceactivities as well for additional costs incurred by RGAB from theoperation of the Crivina-Ogrezeni Water Treatment plant as of 1999;

(b) the losses on accounts receivable are estimated to be the equivalent of7% of sales in 1996 in order to take into account the expected lossesfrom accumulated receivables, and to represent about 5% to 6% of salesin 1997 and thereafter; and

(c) the depreciation charges are estimated at 2.5% of revalued fixed assets.

E. InmeTaxes

the income taxes are estimated on the basis of 'income before taxes pluslosses on receivables' to reflect the fact that RGAB currently is notallowed to make any provision for losses on receivables. [According toRomanian practices RAs cannot make provisions for losses onreceivables. Losses on receivables are accounted-for on a case by casebasis upon prior demonstration that the bill in question cannot becollected].

38

Annex 2(pws 3ot 10)

ROMANIABucharest Water Supply Prolect

Bucharet Water and Sewerge Company - RGAB

Balance Statementf 1992 -05(as o December 31 )1/

Year 1992 1993 1994 1995

- -urment ROL biolln)

ASSETS

Revalued Fixed Assets 86.0 91.1 700.6 681.9Revalued Depreciation 3.6 3.9 8.1 11.5

Net Fixed Assets 82.4 87.2 692.5 670.4

Work in Progress 55.7 66.9 98.4 138.0

Cash and Banks 1.6 1.3 4.0 3.7Accounts Receivable 1.7 4.9 12.2 33.8Inventories 2.0 4.1 8.4 25.8Other 0.0 2.0 9.7 10.8

Total Current Assets 5.2 12.3 34.3 74.1

TOTAL ASSETS 143.3 1W.4 825.2 862.5

EQUITY AND LUABILMES

Paid-in Capital 126.1 126.1 126.1 126.1Central Govemment Grants 14.8 33.3 78.4 119.1Revaluation Surplus 0.0 0.0 602.1 847.3Cumulative Profits (Losses) 0.0 0.6 -6.5 -12.8

Total Equity 141.0 159.9 800.1 830.3

Suppliers 1.8 5.3 20.3 36.9Other 0.6 1.1 4.8 15.3

Total Current Uabilities 2.4 6.4 25.1 52.2

TOTAL EQUITY AND LUABILMES 143.4 166.4 825.2 882.5

1/ The Inandal stamnut ae not fuly compable from yea to yeabecau of canes In US wcoountn systwn hipemetd In 1993.The 1995 figures are prov1ln anid unaudied

39 Annex 2(page 4 f 10)


Bucharest Water and Sewerage Company - RGAB

Income Statements 1992-95 /i

Year 1992 1993 1994 1995

-(current ROL billion) -

Operating Revenues

Potable Water 7.8 21.3 47.5 82.2Industrial Water 2/ 4.2 4.2Sewerage 21 5.6 9.6Other 1.0 0.1 0.0 2.7

Total Operating Revenues 8.8 21.4 57.3 98.7

Operating Costs

Personnel 2.0 7.4 24.6 38.4Energy 1.7 8.0 22.0 27.0Raw Water 1.3 5.2 9.0Contracted Services 0.9 1.5 3.3 6.8Chemicals and O&M Materlals 2.8 2.8 8.4 12.5

Total Operating Costs 7.5 21.0 63.5 93.7

Income Before Depreciation 1.3 0.3 -6.2 5.0

Depreciatlon 0.2 0.3 1.8 5.4

Operating Income 1.1 0.0 -8.0 -0.4

Interest Eamed 0.0 0.1 0.4 0.4Interest Expenses 0.0 0.0 0.0 0.0Other Income and Expenses -0.2 0.0 1.0 0.6

Income Before Taxes 1.0 0.1 -6.6 -0.6

Extra-ordinary Proftts i3 0.0 0.0 0.0 1.2

Income Tax 0.0 0.0 0.0 0.0

Net Income 0.0 0.1 -6.6 0.6

1/ The finnrcil statements are not tily wmparable from year to year because ofdanrgm hI the accoufflng system rnolemented In 1993.

2/ RGABs acoountng system does not cortain a breakdown of revenues by Mype oservice In 1992 and 1993.

3/ Exta-ordinary Pfts are dedved from sale od pubikc fountains to Buchart MunicipalIty

Year 1995 1 1996 1997 1998 1999 2000 2001 2002

(in '000)

C)Total Water Connections 69.1 69.1 69.1 69.1 69.1 69.1 69.1 69.1

Metered 6.8 7.3 8.8 16.2 16.2 16.2 16.2 16.2Unrnetered 62.3 61.8 60.3 52.9 52.9 52.9 52.9 52.5 c WLarge Users Metered (%) 42.2 45.3 54.2 100.0 100.0 100.0 100.0 100.0 0 S

*3~~~=Individual Hous (unmetered) 52.5 52.5 52.5 52.5 52.5 52.5 52.5 62.5

Apwrtment Blocks 11.4 11.4 11.4 11.4 11.4 11.4 11.4 11.4 0 2Metered 5.7 6.2 7.2 11.4 11.4 11.4 11.4 11.4 3 u X

Unmetered 5.7 5.2 4.2 0.0 0.0 0.0 0.0 0.0 C)

Economic Agents 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 Z i ZMetered 0.1 0.1 0.1 3.2 3.2 3.2 3.2 3.2 e >Unmetered 3.1 3.1 3.1 0.0 0.0 0.0 0.0 0.0 CD

i 0 0Standposte (unmetered) 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 3 0

District Heating Boilers 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 7 1 .

Metered 0.8 0.8 1.2 1.2 1.2 1.2 1.2 1.2 3 Unmetered 0.4 0.4 0.0 0.0 0.0 0.0 0.0 0.0 i

0Booster Stations 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 @

Metered 0.2 0.2 0.2 0.4 0.4 0.4 0.4 0.4 aUnmetered 0.2 0.2 0.2 0.0 0.0 0.0 0.0 0.0

1 /Actual figures for 1995

Year 1995 1996 1997 199 1999 2000 2001 2002

War B9bd, Tobl (mI81n m3) 358.3 344.5 349 0 352.3 355.7 3593 359.3 367.1

ndirviduel HoLuee arn BIok3 152.0 89.9 65 6 88.9 72.3 75.9 75.9 83.7 0Econonc Agwft 111.2 111.2 1112 111.2 111.2 1112 111.2 111.2 RADET 19.2 86.4 1152 115.2 1152 115.2 115.2 115.2Irndhl. Raw Water 57 57 57 57 57 57 57 57 !

Taritfs (ROL par m3 at mIdk prie) 0

War 355 355 355 355 355 355 355 355

Induotial Raw Water Cerrca 120 120 120 120 120 120 120 120 1!Induearia RawWaterArgos 52 52 52 52 52 52 52 52 06

Tairnb (ROL per ma at eunwit pricm)

Water 355 400 459 506 549 594 644 C98 3t n>SeWage 41 55 63 70 76 82 89 9e U DX

Induria Raw Water Car- sa 120 135 155 171 185 201 218 236 & > 0Ind-uaria Ra WaterArges 52 59 67 74 80 87 94 102

Talis (USt par m3 el cunwa pric) - -'

Water 0 17 013 0.13 014 014 0.14 014 0.14 1 g

Sewerage 0.02 0.02 0.02 0.02 0 02 0.02 0 02 0.02 -

Irdustrial Raw Water Cerrmca 0 06 0 04 0.04 0 05 0 05 0.05 0 05 0.05Indurial Raw Water Arges 0 03 0.02 0.02 0 02 0 02 0.02 0 02 0.02 D

_____ _____ ______ ~~~~~~~~~~~C)memo _e, W

IrfIlaon Farlnr, Year 131 1.20 1.15 1.10 1 10 1 10 1 10 1.10Irflaon Factor, Arna Average 1000 1255 1 175 1.125 1.100 1 100 1 100 1 100Prn; Deflator (1995=Baae) m&yoar prce 1.000 0.797 0.678 0 603 0.548 0.498 0 453 0 412Average Ea0hange Rate (ROL per USS) 2,033 3,077 3,447 3,694 3,956 4.236 4,529 4,845Erd--period Ertange Rate (ROL per USS) 2,555 3,262 3,571 3,825 4,098 4,383 4,887 5,015

Year 1995 1996 1997 1998 f 1999 2000 2001 2002

. . . .. * j. u n.n.R OL.. . . .n . . . .................... .... .... . . . . . . . . . , . , .,, .. .........ASSETS

Revalued Fixed Assets 682 828 1,003 1,193 1,583 1,783 1,944 2,144Revalued Depreciabon 11 33 60 94 138 194 259 336

Net Fixed Assets 670 795 943 1,099 1,445 1,569 1,685 1,807

Work in Progress 138 239 340 446 261 288 316 348

Cash and Banks 4 11 9 7 5 8 3 3Accounts Receivable 34 41 50 47 51 59 68 76 3Inventory 26 32 38 43 47 52 57 63 wOther 11 1 1 1 1 1 1 1 C

Total Current Assets 74 86 99 98 105 120 129 142 8 U

TOTAL ASSETS 883 1,120 1,382 1,643 1,812 1,977 2,131 2,298 -*

UABLMES I0

Long-term Debt, Revalued Ending Balarce 0 5 32 73 94 110 109 108 IL>Long-term Debt, Current Portion 0 0 0 0 0 7 8 10 C 3

Long-term Debt Long-termn 0 5 32 73 94 102 101 98 8 ,Suppliers 37 35 32 29 28 28 26 25 o <

Other 15 19 23 26 29 33 37 41 m o Long-term Debt Current Porbon 0 0 0 0 0 7 8 10 f 3

Total Current Liabilities 52 54 55 55 57 67 71 75 CD

TOTAL LIABIUTIES 52 59 87 128 152 170 172 174 -

Paid-in Capital 126 126 126 126 126 126 126 126Central and Municipal Government Grants 147 224 313 418 432 440 440 440 C)Revaluabon Surplue 563 725 880 1,008 1,163 1,334 1,519 1,719 >Cumulative Profts (Losses) -6 -15 -24 -37 -61 -92 -126 -162 W

Total Equity 830 1,060 1,295 1,515 1,660 1,807 1,959 2,124

TOTAL EOUITY AND LIABILITIES 883 1,120 1,382 1,643 1,812 1,977 2,131 2,298

Debtl (Debt + Equity) % 0.0YO 0.5% 2.6%/6 5.0YO 5.9%/ 6.3% 5.8% 5.3%Current Rato 1.4 1.6 1.8 1.8 1.8 1.8 1.8 1.9Acid Rabo 0.9 1.0 1.1 1.0 1.0 1.0 1.0 1.1

Year 1996 1l 1996 1997 1998 1999 2000 2001 2002

(Current ROL billion)

Opwtbg Reynue

Potable Water (Excluding RADET) 61 7 805 811 91.2 100.7 111.2 122.9 135.9Potable Water to RADET 20 6 34 6 52.8 58 3 83 2 68.5 74 2 80.4Sewerage Revenues (12% o water billed) 9 6 138 161 17 9 19 7 21 6 23 7 26.0 Wlnrduktial Water and Other Ircome 6 9 8 7 10.2 11 4 12 6 13 9 15.2 16.8

OpwsMgRewnueu 987 1375 160.2 1789 1961 2151 2360 259.0 i

Opeiting Cobt.

PereDnnel 38 4 45 7 52.4 59.0 64.9 713 78.5 86.3 Energy 27 0 32 2 36.8 41.5 45 6 50.2 55.2 80.7 __ aRaw Water 90 107 12.3 139 152 1e.8 184 20.3CortratedServices 6.8 81 93 10 4 11 5 12 6 13i9 15a3Chemicals 3 9 4 6 5.3 6 0 6 6 7 2 8.0 8.8Mateuial for Operation anr Mairtenarce 2I 7 4 8 8 10.1 11 4 12.5 13 7 15.1 16.6Material for Opration and Mairtanarce 3/ 0.0 1.8 2ao 4 5 7 5 9 6 13 6 183 Lomeea on Receivables 0.0 101 10.3 10 1 9.4 7 7 5 9 6 1 0 Z.Other Cas 1.2 3A

Tal Ope-rig Coaf 93.7 126.4 143.4 156 7 173.2 189.2 208.6 227.8 t g"IncomeBefo reDepreiabton 5.0 11 2 16 7 22 3 22.9 25 8 27.4 313 O

Depreciation 5 4 189 22 9 27 4 34 7 41.8 46.3 s1 13 ° T

Opatkhcom -04 -77 -62 -52 -118 -160 -190 -19.8 3

Irtered Earned 04 44Irnlrest and Fee on Bark Loan 0 0 0 3 1.5 4.1 e.6 81 7.9 7.9Foreign Exiche Looss 0.0 0.3 1 4 3.6 517 6.9 7.3 7.3Oter Ioarne and Expenses -0.6 0.0 00 0.0 00 0o0 0.0 0. C

Irnome Befbre Taxes -0.6 -8.3 -9.0 -12 9 -24.1 -30.9 -34.2 -35.0

Etr-odi_ry Pfits (Losse4 1 2

lrrme Tame (38%) 0.0 0.7 0.5 0.0 0.0 0.0 00 0.0

Ms baa1I 0.6 -9.0 -9 5 -12.9 -24.1 -30.9 -34.2 -35.0

YIkdng Rabo 95% 92% 92% 88% 88% 88% 88% 88%

1/ The 1 9N figures are uwiatdd21 Based on 199 standarda a31 Addroael aods froa CtvInea wabr besment pait and improved afndarda. o

Year 1995 | 1996 1997 1998 1999 2000 2001 2002

___ _________ -- __ - (Current ROL billion)

Ircome Before Depreciabon 5.0 11.2 16.7 22.3 22.9 25.8 27.4 31.3Plus Other Inrcome - - - - - - -Less Ircome Taxes 0.7 0.5 - - - - -

Gra. Intenal Cuh Generation 5.0 10.5 16.2 22.3 22.9 25.8 27.4 31.3 c

Loan Repayment (Ptircipal) - - - - - 7.6 8.7Interest and Fees Expense 0.3 1.5 4.1 6.6 8.1 7.9 7.9Total DebtOService 0.3 1.5 4.1 6.6 8.1 15.5 16.6 f

Working Capital Needs 13 0 2.3 4.9 0.2 5.2 8.2 10 5 8.9 O * 2Not lntTl Cah Genewatlon (8so) 7.9 9.8 17.9 11.2 9.6 1.4 5.8 ,

InvestmentCost(IBRD Project) 9 2 51.7 739 316 16.9 - C B DCnvirna Water TreatmerntPlant 29 3 57.2 65.5 72.0 - - D O Glina Sewage Treatment Plant (First Line) 14.6 16.0 - - - - - g 4>RGAB-finariced Network Rehabilitabon -150 100 5.0 5.0 5C0 '> >

Totallnv.stmenbe 439 82.5 117.2 160.9 41.6 21.9 5.0 5.0 21 } c-

Required Finarcing 51.9 74.6 107.4 143.0 30.5 12.4 3.6 (0.8) o O0

Disbursements IBRD Loan 4.6 25.9 36.9 15.8 8.5 3 oGovemment Grants IBRD Project - 2.8 15.5 22.2 9.5 5.1 ; -Govemment Grants Cnvina and Glina 43.9 73.2 65.5 72.0 - - -5

Municipal and other Grants 24.5Municipal Grant IBRD Project 23.2 1.4 7.8 11.1 4.7 2.5 li;

Ttal Lon and Gr.n. - 82.0 114.6 142.2 30.1 16.1 . C)Clug. hI C_h 16.4 7.4 7.2 (0.7) (0.4) 3.7 (3.6) 0.8 w

Debt Service Rato 31.1 10.9 5.5 3a5 3.2 1.8 1.9Year-b-Year Contribubon to Investmet (%) 0% 10% 8% 11% 27% 4-4% 28%e 90%Three-Year Averag. Corirb. to Invetment(%) 11 0% 4% 10% 12% 17% 32% 53% 73%

1/ Baoed on ebtal net irtenl cash generaton and total investment dLring the current and previous years andand planned investment tor following year

A B C D j E

ITEM BASE ALTERNATIVES 1/CASE

C Collection t Combined Deprecation

-5% 85% (B - C) (25% of A) w

current ROL billion

Income Before Depredation 157.5 64.6 133.5 42.4 157.3

Taxes 1.2 0.0 1.2 0.0 33.5

Gross Intemal Cash Generation 156.0 64.6 132.4 42.2 124.3 0 In~~~~~~~4

Debt Service 52.5 52.5 52.5 52.5 52.5 3 Z c n b

Working Capital Needs 40.2 33.7 125.3 111.8 40.2 t

Net Intemal Cash Generation 63.6 -21.6 -45.4 -122.1 31.6 0 0

Contribution to Bank-financed Project 9.1 0.0 0.0 0.0 9.1

RGAB-financed Investmnrts 30.9 0.0 0.0 0.0 30.9

1 / Base Case and varulons around the bass cm dunrng the period 1996 to 20022/ A colection raIo d 85% each year, sarting In 1996 to 2002, compared to the Ba Case of 88% In 1996 and higher

in subsequent yeas.3/ Combined Impect o tarfs lower by 5% to base case assumption plus lower bIll collecthon o 85% each year.4/ Depreciation assumed at 25% of the level projeced In the base case (which Is 2..5% of assets).

46Annex 3

pge I of 41


Economic Evaluation

1. The principal quantifiable benefits that will accrue from the project will consist in areduction of RGAB's operating cost as a result of a reduction in water losses ' and increased productionefficiency (in the form of reduced energy consumption for distribution). As noted in the SAR (see para.1.13) RGAB currently produces about 80% more water than it would need to do under normal operatingconditions (i.e. with a water loss rate similar to that of Western European utilities) or, in other words,it could maintain the same level of service by reducing its daily production from about 1.7 million m'to about 0.9 million ml.

Water production Current situation and long-term objective

1.7 ads as

network louse. C A/*

hou ek looses'~~~~ household' losses

oon. tion Lonsumption

current longierm objective

2. Without the rehabilitation strategy initiated under the project, losses in the network areexpected to continue to rise annually, on average, at a rate of 5%, based on surveys carried out by theconsultant and data provided by RGAB. (They are assumed to rise at, at least, 10% in the neighborhoodsselected for rehabilitation under the proposed project). Assuming conservatively that 'household' losseswould remain at their current level, this would result in total losses reaching a proportion of 75% of totalproduction in a period of about ten years. Given that the two treatment plants of Arcuda and Rosu arealready operating at, respectively, 20% and 40%, above their nominal capacity, a rapid decrease inservice levels will be unavoidable.

3. A cost-benefit analysis was made for the four project components that address the problemof loss reduction and operating efficiency and whose benefits can be identified and estimated separately:

(a) repair of the primary network;(b) repair of the secondary network(c) rehabilitation of pumping stations;(d) program of meter installation.

1 Water losses include (a) losses in the network (25 X of total production) due to leaks, and (b) 'household' loues (35 %of total production) due to, on one hand, defective appliances and building internal leakage and, on the other hand,wasteful consumption practices ('coping strategies') intended at mitigating the 'rationing' effects of unreliable, onlyintermittently available service. Net household consumption is 40% of total production. The sum of 'householdlosses' and net household consumption is referred to as 'gross household consumption (demand)' and equals 75 % oftotal production (i.e. 1.3 million m'Iday).

47Annex 3

(page 2 of 41

The investments related to these four components represent 76% of the total base cost ofthe project. Health benefits derived from the improvement of water quality cannot be quantified withavailable data, but are expected to add substantially to the economic merits of the project. Additionally,the proposed project will also strengthen the operational, customer accounts and financial managementof RGAB and improve the prospects for any future private sector involvement.

4. The following general assumptions were made for the economic evaluations:

(a) the economic rates of return are not sensitive to changes in economic conditions since:

(i) increases in wages will reflect increases in productivity (basically through sheddingexcess labor in RGAB); 2/

(ii) changes in the inflation rate will not affect relative prices, which are expressed asconstant mid 1995 prices; tradeables have been priced at their border prices;

(iii) the exchange rates will follow changes in the international and domestic inflationrates, so that real exchange rates will remain constant;

(b) Financial prices were converted to economic prices by subtracting taxes and duties.Distortions in the domestic labor market, characterized by binding minimum wages andunemployment, have not been taken into account. There is no sufficient information toshadow price labor, an exercise that would have increased the returns of the proposedprojects by reducing the cost of the investments. The same would be true for thecalculation of conversion factors to account for the foreign exchange component of labor.Analogically, the price of electricity which has been somewhat subsidized has not beencorrected for this distortion, (an omission that results in a more conservative estimate ofthe benefits of the project).

(c) Although RGAB has increased tariffs by 400 % in real terms during the last four years,the present tariff still is about 35% below the long-run marginal cost 3/ of providingwater to the consumers; the ensuing excess production results in costs that are higher thanthe benefits derived from wastage, (welfare losses). 4/

2 Although the number of employees per 1,000 people served is high in comparison to Western European countries (1.7for RGAB versus an average of 0.5), and the number of employees per 1,000 connection even higher (46 for RGABversus an average of 1.5), labor costs of RGAB, because of low wages, currently represent 33 % of operating costs(maintenanice and depreciation excluded), which is in line with levels observed in Germany, Great Britain and othercountries. Besides, given the high frequency of breaks experienced by RGAB (about ten times higher than by utilitiesin Western countries) employment of a relatively large workforce of unskilled laborers is justified.

3 See AtLachment no.1 for estimates of the marginal cost of water supply produced.

4 Nomninal tariffs are 355 Lei/m3 (USS 0. 14) for water supply and 41 Lei/m3 (USS 0.02) for sewerage services. Becauseof absenee of metering and the use of normative consumptions (170 I/p/d for cold water plus 110 I/p/d for hot water),water consumption is invoiced as a defaco flat fee. Because of this, it cannot be contended that an increase in tariffsto reduce demand would achieve some of the objectives pursued under the project. Metering is a precondition toimplementatii-n of a pricing policy that eeks to moderate customer demand, (see, however, footnote 6).

48Annex 3

[Pe 3 of 4)

(d) Net household consumption will not be affected. As demonstrated by the experience ofsimilar projects in other countries, the increased reliability of water supply services whichwill result in a reduction of need to resort to 'coping strategies' together with theintroduction of metering which will result in pricing the 'excess' consumption at its cost(instead at zero cost at present) are expected to reduce the 'household losses' and resultin a reduction of 'gross household consumption'.

5. The paragraphs below describe the cost-benefit analysis for each project component:

5.1 Costs and benefits for the rehabilitation of the primary and secondary networks werecalculated, in both cases, based on recent unit prices for similar civil works in Romania. Annualmaintenance costs for the existing network ('without project' case) were calculated on the basis ofestimates for the average unit cost of break repair. Maintenance costs for the networks after rehabilitation('with project' case) were assumed at 1 % of the investment value for the primary network (because ofthe more complex nature and material involved) and 0.5% for the secondary networks. In both casesmaintenance costs were assumed to increase over time to take into account normal wear and tear. Waterproduction cost per unit (i.e. ex-treatment plant cost) was assumed to remain the same with and withoutthe project. Benefits accruing to RGAB were measured on the basis of (a) a decrease in overallproduction costs due to a reduction in the total volume of water to be produced as a result of lossreduction; and (b) a decrease in distribution (pumping) costs due to a reduction of energy consumptionas result of the replacement of existing pumps by more energy-efficient units. All benefits were valuedat the short-run marginal cost of water produced which is US$ 0.04/m3 . Energy consumption of pumpswas estimated on the basis of available data for existing technologies and valued at a cost of US$ 0.55kwh (see Attachment I for calculation details).

5.2 Repair of primary network, The proposed investments of US$ 2.19 million (excludingtaxes) are expected to cause water losses to decrease from 62,000 m3/day to 25,000 m3/day. The resultingIRR which was calculated taking into account both water savings and reduced maintenance costs, is 22%(see Attachment 2). A sensitivity analysis was carried out to assess the affects of (a) possible costoverrun by 25%, (b) a 25% reduction in expected savings from water loss reduction, (c) animplementation start up delayed by one year; and (d) a longer than anticipated implementation period offive instead of three years. The results show that the IRR is robust. In the cases (a) and (b) it woulddecrease from 22% to 17%, whereas in the cases (c) and (d) it would remain unaffected. 5/

5.3 Repair of secondary network . Investments in the repair of the secondary network, withan estimated total cost of US$ 14.0 million (excluding taxes), will result in a reduction of water lossesfrom an actual 522 m3l/km/day (based on surveys carried out by the consultant) to about 50 m3/km/dayfor the net 84 km of network section that will be repaired and/or replaced. The IRR for this componentwhich was is calculated taking into account both water savings and reduced maintenance costs is 129% (seeAttachment 3). The sensitivity analyses shows that (a) a cost overrun of 25% would reduce the IRR to10%, and that like in the case of the primary network, the IRR would not be affected by a delayed startup and/or longer than anticipated duration of implementation.

5 Trhe reason for this is that the network rehabilitation works carried out under the project generate cost and benefits thatare diacrete and strictly proportional and accrue simultaneously on a 'as it goes' basis.

49Annex 3

page 4 of 41

5.4 Rehabilitation of pumping stations. The main benefits of this component whoseestimated total cost is US$ 6.1 million (excluding taxes), derive from the reduction of the energy costsof water distribution. These benefits were calculated taking into account the amount of water that wouldbe necessary to satisfy the demand that would exist if water were priced at its long term marginal cost.In that case, based on the experience of other countries, it can be assumed that gross water consumptionin Bucharest would be about 370 I/capita/day with a corresponding water production of 480 I/capita/day.The benefits represent the difference between the energy costs of existing pumping equipment estimatedat US$ 0.021/m3 and those of new equipment provided under the project which are estimated at US$0.017/m3 . The resulting IRR would be 15%. The sensitivity analysis shows that (a) a cost overrun of25 % would reduce the IRR to 11 % but that a longer than expected execution period would not affectit significantly (see Attachment 4). 6/

5.5 Metering. The project would finance the installation of about 6,000 meters which areexpected to affect the demand for water of about 700,000 consumers. Based on the effects of meteringobserved in other countries, it has been conservatively assumed that the demand for water would bereduced by 10%. u The total cost of this component has been estimated at US$ 4.71 million (excludingtaxes). Given the limited lifetime of water meters (estimated at ten years) the investment effort wouldhave to be repeated every ten years to maintain benefits at their initial level. Benefits were calculatedas the difference between the production cost of the foregone water and the utility generated to theconsumer. The IRR of this component is 48% (see Attachment 5). The sensitivity analysis shows thata cost overrun of 25% (and proportional reduction of the number of meters installed) would reduce theIRR to 37%, whereas it would remain unaffected by a delay in project implementation start up and/ora longer than anticipated duration of implementation. 4/ The IRR of this component is, however,extremely sensitive to consumer response. It would drop to 19% if the expected savings in waterconsumption would be only 5% instead of 10%, as assumed in the base case.

6 Most of the meters will not be installed to individual households but to groups of consumers within apartmentbuildings (staircase units), hence the high number of consumers affected by the program. The rationale for this is that,for technical reasons, the installation of individual household meters in apartment buildings is, in most cases,impossible. Under these circumstance, a consumption reduction by about 10% seemed more realistic an assumptionthan one of about 30% which has been observed in countries that d not have this sort of constraint.

50

Annex 3ATTACHMENT 1

Marginal Cost of Water Supply

A. Short Run Marginal Cost

The short run marginal cost of water produced was estmated by dividing the current daily operating costs by the totalnumber of daily produced m3 of water.

Daily operating costs for 1995 (in US$) were estimated as follows (using the 1995 average exchange rate):

Energy 40,600Raw water abstraction fees 9,600Chemicals and O.& M. expenses 9,100

Total US$/day 59,300

With a current production of 1,690,000 m3/day the resulting short run marginal cost of water produced is:

Short Run Maralnal Cost of Water Produced (US$/m3) 0.04 (excluding taxes)

B. Long Term Marainal Cost

The long term marginal cost of water produced was calculated by taking into account the costs of the new CrivinaOgrezeni Treatment Plant, and the operating costs above.

- Costs of Crivina-Ogrezeni Treatment Plant: US$ 100 million (including taxes)Economic Life: 30 years for civil works (60%), 15 years for mechanical parts (40%)Capacity : 6 m3/sDiscount Rate used: 10%

Costs of Crivina-Ogrezeni - South Reservoir Aqueduct: US$ 30 millionEconomic Life : 50 yearsCapacity : 6 m3/sDiscount Rate used: 10%

Total Capital Costs (US$ million/year) = 6.4 (treatment plant: civil works)6.5 (treatment plant: mechanical parts)3.0 (aqueduct)

Total = 15.9

Capital Cost/m3 produced (US$) = 0.08 (including taxes)Operating Costs/m3 produced (US$) = 0.07 (including taxes)

With a water distribution 'of 1,300,000 m3/day the long term marginal cost of water distributed is:

Long Term Marginal Cost of Water Distributed (US$/m3) 0.17 (excluding taxes)

* waler distributed = total volume of water produced (treated) minus losses in the network = total voluma d watfe consumad by households oplus householdwastage [see SAR para. 1 121

51

Annex 3ATTACHMENT 2

Economic Rate of Return Calculation

Component: Primary Network Repair

Losses Losses Water Investnrent Mairnrtance Maintenance Benefits Beneitwithout with Savings Cost Cost Cost linked LossesPro)rsst Projea With with without with tothe

Years Project Project Project Projec Project(m31day) (ma/day) (3mMay) (USS) (USS) (USS) (US S)

1997 62,000 62,000 0 700,000 0 -700,0001998 62,310 77,500 -15,190 700.000 -90,000 -7,000 -304,774 -997,7741999 62,622 37,200 25,422 791.139 -90,900 -14,000 371,155 -405,9842000 82,935 24.800 38,135 -91,809 -21,911 556,766 578,6772001 83,249 24,800 38,449 -92,727 -22,021 561,360 583,3812002 63,566 24,800 38,766 -93,654 -22,131 5665,977 588,1082003 63,883 24,800 39,083 -94,591 -22,242 570.618 592,8592004 64,203 24,800 39.403 -95,537 -22,353 575,281 597,8342005 64,524 24,800 39,724 -96,492 -22,465 579,968 802,4332006 64,846 24,800 40.048 -97,457 -22,577 584,678 607,2552007 65,171 24,800 40,371 -96,432 -22,690 589,412 61 2 1022008 65,497 24,800 40,697 -99,416 -22,803 594.170 616,9732009 65,824 24,800 41,024 -100,410 -22,917 596,951 621,8682010 66.153 24,800 41,353 -101,414 -23,032 603,756 626,7882011 66,484 24,800 41,684 -102,428 -23,147 608,585 631,7322012 66.816 24,800 42,016 -103,453 -23,263 613,438 636,7012013 67,150 24,800 42,350 -104,487 -23,379 618,316 641,8952014 67,486 24,800 42,688 -105,532 -23,496 623,218 646,7142015 67,824 24,800 43,024 -108,587 -23,614 628,144 651,7582018 68,163 24,800 43,383 -107,653 -23,732 633,096 656,827

Tobl Investment Cost (USS milon) . 2.19 MR. 22%

Swe t Anaiyee

If invesnmern osts are 25% higher, the IRR decreases to 17% ]I the minierrwrtiton takes pice ovw five yerws, the IRR decreases to 21%

Dot al CicuLdioan

Invee_nt Coae Costs taken into count are those siown in the SAR net of taxes and dutes, buit inclusive of physcas and finencalD roningenoes

Invesntcost - ( (1.223d21)+((1.41115)'(23.6/22.6)))/1.18

lMafin_ Coet in the without projecr case: based on repair costs for currern everage rate to 0.9 breaksftm increasng at 0.5% per year

in the with psjed case: 1% of investment most, slrtig with one yea delay end increasing at 0 5% per yeer

Wal lng Water saved u valued at the shor run marginal oDst (US3 0.0401m3)

Beneft - waer saved (m3MayrW 365 days * USS 0,040rn3

Csrent loses in the pnmary network are estmated to be 62,000 mV/day, based on masaures caerd oLt by the oDnsufsant

They are assumed to increase atO.5% pr year

M*JiOMAPA%GREYSAR\ANN-31 X&S

52

Annex 3ATTACHMENT 3


Component: Secondary Network Repair

Losses Losses Water Investment Maintenance Maintenance Bnefits Beit/Without With Savings Cost Cost Cost linked LassesProject Project With With Without With to the

Years Project Project Project Project Project(toSday) (m3lday) (m3/day) (USS) (US$) (US$) (US$)

1997 44,026 44,026 0 4,500,000 -128,606 0 128,606 4,242,7881998 48,429 32,285 16,144 4,500,000 -135,375 -22,500 393,572 -3,971,0531999 53,271 17,757 35,514 4,998,049 -142,500 45,000 706,011 4,149,5372000 58,599 4,150 54,449 -149,625 -69,990 1,014,565 1,164,1902001 64,458 4,150 60,308 -157,106 -70,690 1,108,300 1,265,4062002 70,904 4,150 66,754 -164,962 -71,397 1,210,972 1,375,9332003 77,995 4,150 73,845 -173,210 -72,111 1,323,454 1,496,6842004 85,794 4,150 81,644 -181 ,870 -72,832 1,446,708 1,628,5782005 94,374 4,150 90,224 -190,964 -73,580 1,581,789 1,77Z7532006 103,811 4,150 99,661 -200,512 -75,767 1,731,330 1,931,8422007 114,192 4,150 110,042 -210,537 -78,040 1,895, 1 92 2,105,7302008 125,611 4,150 121,461 -221,064 -80,381 2,074,781 2,295,8452009 138,172 4,150 134,022 -2321z17 -82,793 2,271,638 2,503,7562010 151,990 4,150 147,840 -243,723 -85,277 2,487,460 2,731,1832011 167,189 4.150 163,039 -255,910 -89,541 2,725,815 2,981,7242012 183,908 4,150 179,758 -268,705 -94,018 2,987,182 3,255,8872013 202,298 4,150 198,148 -282,140 -98,718 3,273,824 3,555,9642014 222,528 4,150 218,378 -296,247 -103,654 3,588,222 3,884,4692015 244,781 4,150 240,631 -311,060 -108,837 3,933,108 4,244,1682016 269,259 4,150 265,109 -326,613 -114,279 4,311,483 4,638,096

Total Investment Cost (US$ million) = 14.00 IRR 12%

Sonadvity Analyae

It investment costs are 25% higher and benefits reduced in the same proportion, the IRA decreases to 10%

If the implementation start up is delayed by one year or takes place over 5 years, the IRR is not affected

Dil of Calculatons

tnvesadmnt Coat Costs taken into acount are those shown in the SAR net of taWes and duties, but unclusive of physical and financial contingencies.

Investment cost = ( (8.2-23/21 )+((8.3/1 .15)'(23.6/22.6)))/1 .18

Malnteinnce Cost in the 'without project' case based on repair cost for current average rate of 1.7 breaksA/m increasing at 5% per yearin the 'with project' case: 0.5% of the investnent, starting with one year delay and increasing at 1 % per year over the first five years, at 3% over

the fotowing five years, and at 5% thereafter

Wor srings Water saved is valued at the shod term marginal cost (USS 0.04/mi3)

Benefit = water saved with project (m3/oay)' 365 days * USS 0,04/Tr3

Current losses in the secondary network, for the neighborhoods to be rehabilitaed, are estimated, according to measures canied out by the consultant,at about 500 m3Akm/dayIn the without project case water losses are assumed to increase at 10% per annum in the project neighborhoodsIn the 'with project case network losses expected to decrease 5orm3/m/day (as oDmpared to an average of 30 m3lkm/day in networks with maintenanceacoDrding to Westem Eumpean standards

FJPDRO"APA%GREYSAR'ANN-32.XLS

53

Annex 3ATTACHMENT 4


Component: Pumping Station Rehabilitation

Energy Energy Investentr BaenefihWaler Consumpbon Consumpoon Coss Losses

Production Without WithEnvisaged Project Pro)ect

Years (m= 0day) (US0611r) (US/YeW) (USS)

1997 960,000 8,069,770 1009,770 2,000,000 -2,000,0001998 960.000 8,069,770 7.735,520 2,000,000 -1.85,.7501999 960,000 8,069,770 7,401,270 2,071,804 -1,403,3042000 960.000 8.069,770 7.067.021 1,002,7502001 960,o0o 8,069,770 7,067,021 1,002,7502002 960.000 8.069,770 7,067,021 1,002,7502003 960,000 8,069,770 7,067,021 1.02,7502004 960,0O0 8,069,770 7,087,021 1,002,7502005 960.Q00 8,069,770 7,067,021 1,0o027502006 960.000 8,069,770 7,067,021 1,002,7502007 960.0o0 8,069.770 7,067,021 1,002,7502008 960.000 8,069,770 7,067,021 1.002,7502009 960.000 8.069,770 7,087,021 1,002,7502010 960O.DO 8,069.770 7,087,021 1,002,7502011 960.000 8,069.770 7,087,021 1,002,7502012 960,000 8,069,770 7.067,021 1,002 7502013 960,000 8,069,770 7,067,021 1,002,7502014 960,000 8.069,770 7,067,021 1,0o0a7502015 960.000 8,069,770 7,067,021 1,002,7502016 960,000 8,089,770 7,067,021 1,002,750

Investment Cost (USS millbon)= 6.07 IRR. 16%

Sneldvltty Anemia

It invesment ousts are 25% higher, the IRR decreases to11%

If impoemlManon staM up is delayed by one yew or d the program is implemented over five yewsr the IRR is not afected

Dali of Citone-

hlnwrtw Coase Costs taken into asoourt are those own in the SAS net of lame snd duee but enusive of physical mld finanid oontirngenoies.

Invstment oost = ( (3.3-2312)F(5.1/1.15'(23.62Z6)))/1.18

amlnonce Cost Maklanarwwe otsts are assuffied lo be the ssme with end without prect

Benria Energy savings were valued at US$ 0 55KWh

The energy savings resuh ftrm the replacemet of old dd ing punips with new anergy-efidiint unks,

M'fJVA0PAVAEYARWANN-33.XtS

54

Annex 3ATTACHMENT 5

Economic Rate of Return COculation

Component: Metering

Investnent Operating Benefits BliUCost Cost linkedWith With tD 1the

Yewrs Project Project Prowt(US$) (USs) (US$)

1997 1,500.000 0 -1,500,0001998 1,500,000 15,000 786,500 -7495001999 1,706,979 30.000 1,533,000 -203,9792000 47.070 2,299,500 2,25Z4302001 47,070 2,299,500 2,2524302002 47,070 2,299,500 2,252,4302003 47.070 2,299,500 2,2524302004 47,070 2,299,500 2,25z4302005 47,070 2,299.500 2,252,4302006 47,070 2,299.500 225sz4302007 1,500,000 47,070 2,299,500 7524302008 1,500,000 47,070 2,299,500 752,4302009 1,706,979 47,070 2,299,500 545,4612010 47,070 2,299,500 2,25Z4302011 47,070 2,299,500 2,25Z4300112 47,070 2,299,500 2,2524302013 47,070 2,299,500 2,25Z430201.1 47,070 2,299,500 2,2524302015 47,070 2,299,500 2,2524302016 47,070 2,299,500 2,252t430

Tota Investment Cost (US$ million) = 4.71 IR * 411

SeIqwt Andyde

if irnwsuren roas are 25% hi , tse IRR decr lo 37%

f the project is imnplmented in fie yenm the IRR decreases to 45%

i project impsementaton start up is delayed by one yer. the IRR is not affected

N the prqect austes water consumption to dcreaese by 5% inalead of 10%, the IRA decreases to 19%

Dee of Cssuldon

hnvasbnnt Case Cots taken kit coDurnt are those shzon in the SAR net of taxes and duties but incdusvm of phydcamad financial ornringenes

Invstment cost . ( (3.8-/21)+((2.0I1.15)'(23.6122.6)))/1 18

Average htirmfne of invesfents (meters) is easttnted el ten yers.

Opeatng Cost 1% of the investment, staring with one year delay. No additlDni personnel wouid be required.

B_fl - Benehfts have been ajcated ax the eznomc value of mth difference between current gross per capita household oonstunpbon(610 htwersd) at a marginl prie of US$0 and en expected future onsnmpion (550 e#arsday) tS albng-n.m rgin prid of USb 0.17

Benefit -316 days700,000 pers"on' reduction of grossoonsumptlono z10% (60 Iiterstay) US$0.1511000

Reduction in grass household oonsumpion has been onservatvely assumed at 10% . (dithh es ence with stier progrwrin otrcounties (e.g. Canada) suggest a possibility of higher rates of up to 30%)

M'nJ(MAPAGAEYSAfrAN184 XLS

55

Annex 4


QUARTERLY DISBURSEMENT ESTIMATES

Bank Fiscal Year Date End Quarter Quarterly Cumulative - CumulativeDisbursement Dlsbursement Disbursement(US$ million) (USS million) (in %/6)

FY 97 September 30 1.0 1.0 4%December 31 0.5 1.5 6%March 31 0.5 2.0 8%June 30 2.0 4.0 16%





Initial Deposit In Special Account

56

Annex 5

ROMANIA

Bucharest Water Supply ProjectRegia Generala de Apa Bucure,ti

PROJECT IMPLEMENTATION PLAN

1. Proiect Obiectives: The primary objectives of the project are to: (a) improve thereliability and quality of water supply in Bucharest; (b)progressively reduce water losses both physical andcommercial; and (c) improve RGAB's operational, commercialand financial management.

2. Proiect Descriotion: The project would include the following components:

A. Improvement of water supplv reliability and quality

water treatment plant rehabilitation. aqueduct flow control improvement and reservoir

upgrading. pumping station rehabilitation

B. Reduction of water losses

. primary network repair

. secondary network repair

. metering program

C. Strengthening of RGAB management

. public awareness and water wastage reductioncampaign. customer accounts management improvement. training for operational management improvement. implementation supervision support

3. Proiect ImplementationPlan (PIP) The PIP includes all essential documents prepared with

RGAB, the project beneficiary and implementing agency thatare necessary for following up on, and monitoring progressin, project implementation. The PIP includes:

Detailed project descriptionProcurement planImplementation planDisbursement planRGAB Performance targets and monitoring criteriaReporting planTerms of Reference

57

Annex 5.1

DETAILED PROJECT DESCRIPTION

Comoonents ~~~~~~~~~~~~Description

A Water Treabment Planrt Project activibes indude the emergency rehabilitation of water filtering and treatmrent equipmentRehablltatlon at the treatment plants of Arcuda and Rosu. Specwlkally, the project wil finance:

Arcuda rian

. rehablitation of filter beds including the repair of filtering floorsre>rAement of filters and filtering sandreplaoement of pumps and filter washing equipment

. replacement of chlorination equipment

Rosu plarn

rehabilitation of filter beds including the repair of filtering floors and aeration equipnentreplaenmeat of filtering sand

. replacement of chlorination equipment and repair of chbionation fity buildingrepair of sludge removal systemreplacement of aluminum sulphate dosing and injection equipmentrepair of silicate and suluric acd stocking facilityinstallation of new polyelectrolyte injtion equipment

. raplacement of filter washing equipment

R Aquedhft Flow Cotrol and Project activities Include the supply and installation of flow control equipment on the mainReservoir Upgrading aqueducts, as well as det supply and installation of flow control equipmernt on the Cotrceni

reservoir complex Specifically, the project will finance:

Arcuida pEn

. Installation of (4) manually operated and (2) motorized flow control valves on aqueductsno.1, 2,3, and 5;

Rosu nde

. installation of (4) manually operated and (2) motorized flow control valves on aqueducts no.1,2, and 3;

. constiuction of flow measuring station on aqueduct no. 3

. installation of (2) manualy operated and (2) motorized flow control vahems on aqueduct no.7,9, 10and11;

. consndicuon of flow measuring station

Uverturi pumping station

. installation of (2) manually operated flow control valves

Grivita node and pumping staton

. installation of (3) manually operated flw control valves

Cotroceni reservoirs

. installation of (8) motorized flow control valves on reservoirs 1, 2a, 2b, and 3

C. Pumpig Station Rehbtation Projec acIvWes include the supply and Instalation of new pumping equipment in key pumpigstations. Spedfically, the project wiN finance:

* installation of (6) variable speed pumps in three groups in the pumping stationsNord,'Sud' and 'Grivita'

* instllation of (10) pumps In various pumping stationsrehabilation and repair of electrical and automated contd equipment

58

Annex 5.1

D. Primary Network Repair Project awtvJties incdude the emergency repair of deterrorated sections of the primary dstbutionnetwork as well as the reorganizatlon of the periodic network maintenance system. Speodaly,the project will finance:

systematic leak detection survey for the entire primary network (450 kms) and creation of acomputerized network Information and data baserepair of leaks and replaemernt of deteriorated sections and/or partsresupply of stock of spare parts inuchdng pipes of various dcameters, valves, etc.rehabiliation of spare stocking facility inciuding installation of a oDmputerized inventorymanagement system

E Seoondary Network Repair Works include the systematic rehabilitation and repair of the secondary distribution network insewen neigborhoods with a total population of about 190,000:

- Aviatei 14,328 inhabitants- Beller 2,596 inhabitarns- Berceni-Oltenitel 38,182 inhabitants- Crangasi 40,125 inhabiants- Dristor-Tomis 52,832 inhabitans- Major Bacila 18,042 inhabitants- Tineterulul 24,792 inhabitakns

Specifctally the works consist of:. systematic survey of Vie network and identicicalion of sections and pails to be replaced. supply of pipes of various diameters and network accessories

removal and replacement of deteriorated network secbons and/or elementsInstllation of meters (supplied under component F below)

F. Metenng Project awties include the supply and instlation of about 6,000 meters of various diametersSpecifically, the project will finance:

. supply of about 1,000 meters and accessories for 'residential-type oonsumption to beInstlled in the secondary network rehabilitation areas included in Component E.

. supply and Insalation of about 5,000 meters for lindustrial-type consumption for largehousing comples and feeder points for the hotwater and district heating system.

. supply and installation of meter testing and tuning equtpment

G. Technical Assistance Technical assistance included in the project consist of the folowing four sub-components:

G-1 Public Awwreness and Wastage support to RGAB for the implementation of a water wastage reduction campaignReducion Campraign

. preparation and implemenation of public information and education programs for tiroughmedia (TV, radio, press).deveopment of a program of financial incentives and compensations for consumersachieving significant wastage reduction

G-2 Commercial Management support to RGAB for pursueing the restructuring of its commercia management departmentImprovement initiated with French bilateral technical assistance as of January 1996 and improving the

management of:

customer registrationmeter readingInvoicingcollection

G-3 Technical Training suppoxt to RGAB for improving the performance of its technical operations

professional training for plarnt and network maintenance and operation stalftraming in inventory management for spares and equJpment suppliest raining in managemernt techniques for flow control

. preparation of training modules for equipmernt maintenance

G-4 knpmwntatlon Supwvilon support to RGABs Project Coordination Unit (PCU) for the ooordination and control of projectJmplementaton

Component Contract Nature Number Deadlinesof of Procurement Document Invitation Invitation Contract Contract

Package Contracts Method Preparation Prequalfbication Tendening Signature Completion

A Treatment Plant Rehabilitation A I civil works 1 ICB 06/30/96 07/01/96 11/01/96 04/30/97 12/31/98A 2 goods I NCB 06/30/96 12/01/96 05/31/97 08/31/97A 3 goods I 06/30/96 12/01/96 05/31/97 07/30/97

B Aqueduct Repair B 1 supply/install 1 Cs 06/30/96 11/01/96 04/30/97 12/31/98

C Pumping Station Rehabilitation C 1 supply/,nstall 1 ICB 06/30/96 07/01/96 11/01/96 05/31/97 03/31/99

D Pnmary Network Repair D 1 civil works 1 CB 07/31/96 08/01/96 01/01/97 06/30/97 09/30/98I__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ -

E Seconday Network Repair E 1 civil works 1 ICB 06/30/96 07/01/96 01/01/97 06/30/97 12/31/99E 2 civil wo-ks I ICB 06/30/96 07/01/96 01/01/97 06/30/97 09/30/99E 3 * cimil works I ICB 06/30/96 07/01/96 01/01/97 06/30/97 06/30/99E 4 civil works 1 ICB 06/30/96 07/01/96 01/01/97 06/30/97 12/31/99 m

I_nF iMetering F 1 civl aras I NCB 09/30/96 _ 11/01/96 05/31/97 1Z/31/98

F 2 civil works I NCB 09/30/96 _ 11/01/96 OS/31/97 06/30/99 ZF 3 civ7l works I NCR 09/30/96 _ 01/01/97 07/31/97 03/31/99 F 4 civil works I NCB 09/30/96 _ 01/01/97 07/31/97 09/30/99F S goods I ICR 09/30/96 10/01/96 03/31/97 08/31/9?F 6 goods 1 ICB 09/30/96 10/01/96 03/31/97 08/31/97

G Technical Assistance

Public Awareness Campaign 0-1 I consultant services 1 NBF 09/30/96 10/01/96 02/28/97 09/30/99Commercial Serinces Improvement G-2 1 consultant services I SL 06/30/96 07/01/96 09/30/96 03/31/99Operational Assistance and Training C-3 1 consultant services 1 SL 06/30/96 10/01/96 02/28/97 09/31/99Implementation Supervision G-4 1 consultant services 1 SL 06/30/96 07/01/96 09/30/96 12/31/99

G-4 2 consultant ser,vces 1 SL 06/30/96 07/01/96 09/30/96 12/31/97

Totals 21

contracts to be vrocured on si.ce-and-package basis

ICB - international Con etilwve BiddingNCB - National Cor-peti -r Bidding

IS Irternatlonal ShopoingSL - Shortist tfor G,s,ltant Services

NBF = Nol Bank Financed (sole source)

Ps

60

Annex 5.2 (b)

PROCUREMENT PLANProcurement by Category and Type of work

| contract | Type of Works | Type of 1 Totaln_o jProcurement Amount

Civil Works

A 1 Repair works on filtering and treatment facilities ICBD I Repair of primary network ICBE 1 * Repair and replacement of secondary network ICeE 2 * Repair and replacement of secondary network ICBE 3 * Repair and replacement of secondary network ICBE 4 t Repair and replacement of secondary network ICBF 1 Installation of meters and accessories NCBF 2 Installation of meters and accessories NCBF 3 Installation of meters and accessories NCBF 4 Installation of meters and accessories NC8

Subtotal -2.5

Goods

A 2 supply of filtering sand NCBA 3 supply of filter nozzles ISF 2 supply of meters ICBF 3 supply of installation accessories ICB

| $ei~~~~~~Sbtotal :______ : : __: 5.5: |

Supply andIInstall B 1 supply and installation of valves and accessories ICB

C 1 supply and installation of pumps and accessories j ICB

Subtotal

ConsultantServices {

G 1 preparation of media campaign NBFG 2 customer account management SLG 3 operational assistance and training SLG 4-1 iniplementation supervision SLG 4-2 implementation supervision SL

Subtotal 4.4

Total : s.:

all costs include contingencies taxes and duties

contracts to be procuxd on slice-and-package basis

ICB - International Competitive BiddingNCB * National Competitive Bidding

I S * InternationalShoppingSL * Shortlist for Consultant Services

NBF * Not Bank Financed (sole source)

ContractingItem Obective Possble Prouder Method

Public Awaraness Campaign (a) Preparatton and rmprementaeon of Media consultant wtn experence in Soe source

Financia Incenfives Studiles media carnpaigns on water use Romania (not Bank ttnanced)

issues I

(t) Preparabon of study on tarftts and Consulting ftrm Shortlist rnfinancia incentives for RGAB

cistomers

(c) Compenientary sociological. etc studies Individual consultants Shortlist Q

Customer Account Management Improvement Asst RGAB in the reorganization Consulting firm with spedcic Shortlist O

of is commercial management experience in instutonalt/crmmercial Zsmevces end procedures assistance to water utilites ti

Operational Service Assstance and Training (a) Assist RGAB in the monitonrig of Consulting tim wnth specilic experoise Shortist

resuts ot the network rehabhiltation or water utitty operator Z

program and prugrammrng of )tollow up operations

(b) Asswst RGAB in the management Consulting firm wMth specihc experfse Shortirst

Improvement of ts technical or water utility operator

department

Implementatlon Supervision (a) Assst RGAB,PCU in the supervrson Consultirg firm wih experence in shaodis!

if proect execution TA for Bank prqect Implementation

supervison

(b) Assist RGABPCU in the supervison Irdivicual consultants Shortirst

of project executlon I,tJ"IN3

3.

62

IMPLEMENTATION PLANAnx5.

ll_ _ __ __ _ _

c~~~~~~~~~~~~~ -

_~~~~~ _

c albd

lAh~~~~~~~~ D i *~~~~~~~~~ * a . X

Calendar Year Date End Quarterly DisbursementsQuarter (in USS million and ROL bIlion)

World Bank Govemment Bucharest RGAB Total TotalMunicipality Cumulative

ROL USS ROL USS ROL USS ROL USS ROL USS ROL USS

1996 09/30/97 3,010 1.00 3,010 1.00 I 3,010 1.0012/31/96 602 0.20 361 0.12 181 0.06 60 0.02 1,204 0.40 I 4,214 1.40

1997 03/31/97 602 0.20 361 0.12 181 0.06 60 0.02 1,204 0.40 I 5,418 1.80 006/30/97 5,418 1.80 3,251 1.08 1.625 0.54 542 0.18 10,836 3.60 i 16,254 5.40 _09/30/97 10,535 3.50 6,321 2.10 3,161 1.05 1,054 0.35 21,070 7.00 i 37,324 12.40 W12/31/97 8,428 2.80 5,057 1.68 2,528 0.84 843 0.28 16,856 5.60 54,180 18.00 c

Uj)1998 03/31/98 8,428 2.80 5,057 1.68 2,528 0.84 843 0.28 16,856 5.60 71,036 23.60 m

06/30/98 8,428 2.80 5,057 1.68 2,528 0.84 843 0.28 16,856 5.60 87,892 29.20 c09/30/98 8,428 2.80 5,057 1.68 2,528 0.84 843 0.28 16,856 5.60 104,748 34.80 mz12/31/98 7,826 2.60 4,696 1.56 2,348 0.78 783 0.26 15,652 5.20 I 120,400 40.00 4

1999 03/31/99 6,020 2.00 4,064 1.35 2,032 0.68 677 0.23 12,793 4.25 I 133,193 44.2506/30/99 3,010 1.00 2,258 0.75 1,129 0.38 376 0.13 6,773 2.25 I 139.965 46.5009/30/99 3,010 1.00 2,258 0.75 1.129 0.38 376 0.13 6,773 2.25 , 146,738 48.7512/31/99 1,505 0.50 1,355 0.45 677 0.23 226 0.08 3,763 1.25 i 150,500 50.00

Totals r 71,250 25.00 45,150 15.00 22,575 7.50 7,525 2.50 146,500 50.00

exchange rate used: USD 1 - ROL 3,020 (end june 1996)

note: quarterly disbursements rates may differ from those in Annex 4because of more conservative assumptions used in the latter

U'Ja

64

Annex 5.5

OPERATING PERFORMANCE MONITORING INDICATORS

Regia Generala de Apa Bucuresti

Key Performance Indlcators

indicators 1995 1996 1997 1998 1999

(a) total water produced at treatment plants (million m3/day) 1.69 1.69 1.63 1.57 1.50

(b) large customer metering ratio 41% 44% 52% 75% 97%

(c) total water sold (million m3/day) 0.93 0.94 0.95 0.96 1.00

(d) total loss coefficient [(c)l(a)]) 55% 56% 58% 61% 67%

(e) annual breaks per km of primary network 0.9 0.9 0.8 0.7 0.5(t) annual breaks per km of secondary network 1.7 1.7 1.6 1.5 1.2

(g) number of employees 4,949 4,718 4,498 4,288 4,096

(h) personnel cost / operating cost 0.43 0.42 0.41 0.40 0.40

(i) energy consumpton / ml produced (in kwh) 0 0.45 0.45 0.45 0.40fi) energy cost / operating cost 34% 31% 29% 27% 25%

Operational Monitorlng Data

(k) total metered water produced (million m3/day)

(I) macrometering ratio [(k)/((a)

(m) metered water sold (million m3/day)

(n) micrometering ratio [(m)/(c)]

65

Annex 5.6

REPORTING PLANOutline of RGAB Implementation Reports

1. Quarteuly Project Implementation Reports

1.1 Summary of implementation status:

overall progress in project implementationsigniftant developments in implementation of specific componentsmajor problems encountered

1.2 Project management

changes in project management arrangements (if any)

1.3 Details on project implementation durng past three months

progress in implementabon of individual contracts, including physical results(e.g. number of kms of network rehablitated, number of meters installed, etc..)

. explanation of differences with previous implementation schedules and update of implementation schedule

progresS in procurement (tender documents completed, prequalitication biddings launched, contracts negotiatedandcor signed, etc..) and update of procurement schedule

expenditures, including amount of billing per contract and paymients made

disbursement status, including financial statements on Special Account and tunds received from State budget,municipal budget, and RGAB

. compliance with loan covenants

1.4 Pertomance evaluation of contractors (including consultants)

1.5 Implementation forecast for next three months

contract implementabonprocurement.Expenditures and disbursement

2 Semestnal Financial Reports

21 Financial results of RGAB (according to Romania accounting plan requirements), including selected financial indicators (as perAnnex 5.5)

2.2 Progress in implementation of Financial Improvement Plan (FIP)

23 Progress in commercial improvement program

a Annual Rewrts

31 Summary annual implementation report (synthesis of quarterly reports) including update of major indicators (as per Annex 5.5)(to be made available to the World Bank no later than January 31)

32 RGAB Annual Report

a3 Audit report (to be made available to the World Bank before June 30)

a4 RGAB Budget proposals for following year

4 lImplementabon Completion Reort

66

Annex 5.7 (a)

Bucharest Water Supply ProjectRegia Generala de Apa Bucuresti

PROJECT COORDINATING UNIT (PCU)Terms of Reference

The Project Coordinating Unit (PCU) set up in RGAB will report directly to the Director General. It will bestaffed with adequately skilled RGAB staff including at least two engineers and one financial (accounting) specialist, as well aswith necessary support staff, including multi-lingual secretaries and personnel familiar with computer operations.

The responsibilities of the PCU will include:

1. preparing a Project Implementation Plan (PIP), detailed annual implementation programs, and costs schedulesfor project execution, and following up on their results;

2. coordinating all RGAB units that will intervene and/or participate at different times in the execution of theproject (financing, engineering, contracting and construction supervision, etc);

3. coordinating engineering and construction activities of the investment components of the project with thecorresponding technical units of RGAB and/or other entities of the State or local public administration:

4. carrying out all procurement activities;

5. following-up on the timely availability of counterpart funding for the proposed project;

6. overseeing management of Special Account by the entities designated to that effect and ensuring timelinessof disbursements to contractors/suppliers as well as periodic Special Account replenishments;

7. preparing quarterly project progress reports to be submitted, in accordance with an agreed schedule, theBucharest municipality, the Ministry of Finance and the Bank and which will form the basis for periodicalreviews of progress in project implementation by the Bank;

8. identifying possible gaps in the project and corresponding actions to be taken to for their solution;

9. coordinating project implementation with the restructuring program of the RGAB's Commercial Departmentcarried out with French bi-lateral technical assistance and/or other technical assistance programs possiblymade available to RGAB;

10. monitoring operational and financial targets and indicators included in the PIP and evaluation of overallperformance of the proposed project;

11. maintaining up to date information on all aspects of the project (financing, construction, procurement,expenditures, etc) and organizing required document and data recording system; and

12. maintaining contacts with executing agencies for similar projects being implemented in Romania with theassistance of other bi- or multilateral organizations.

67

Annex 5.7(b)

Bucharest Water Supply ProjectRegia GeneraI6 de Ap6 Bucure,ti

PUBLIC AWARENESS AND WATER WASTAGE REDUCTION CAMPAIGNFINANCIAL INCENTIVES AND TARIFF STUDIES

Terms of Reference

1. Introduction: A major part of the water losses that occur in Bucharest originate at the household level. Because wateris billed on the basis of a normative consumption regardless of the quantity actually consumed households have no incentiveto reduce consumption or repair leaks or defective appliances. The issue of wasteful household behavior has been aggravatedby the necessity for many people to resort, in the context of only intermittent availability of water, to 'coping strategies', thatis to devise solutions to catch and store as much water as possible during periods of availability. The permanence of theseproblems for an extended period of time has created a series of behavioral reflexes that are difficult to change and will, togetherwith the provision of material/monetary incentives and changes in the tariff regime, require an important educational effort.

2. Scope of Proposed Work: RGAB with the support of consultants will develop a three-pronged approach to raise publicawareness for water conservation needs and introduce changes into the water use practices of Bucharest households:

(a) education and information

(I) preparation of advertising campaigns in different media (written press, radio, TV, billboard posters, etc) toinform population on water conservation issues;

(ii) development of educational programs for kindergartens and primary schools;

(iii) association of newspapers for the diffusion of information articles on general water and sewerage issuies,technical and financial aspects of water supply and waste water management, and other related issues(including progress on the implementation of the proposed project);

(b) incentives

(i) identification of possible financial incentives for RGAB customers taking into account the particular fact thatfor technical reasons the installation of individual household meters is impossible for a majority of consumersand water billing can only be done at the level of apartment groups (staircase units) or entire buildings. Sincethese groups often show a great social and economic heterogeneity, socio-psychological aspects will needto be paid careful attention in identifying possible solutions.

(specific terms of reference to be prepared in association with consultants providing assistance for cusromneraccount management improvement).

lii) study and development of pilot programs for repair and appliance replacement promotion programs.

(specific terms of reference to be prepared in association with consultants providing assistance for customeraccount management improvement).

(c) tariff regime

(l) study on possible modifications of the current tariff structure, based on (a) an accurate assessment of thecurrent and expected future water production and distribution costs (taking into account the actions includedin the FIP); and (b) an evaluation of the customers' affordability and ability to pay for public utility services(including, in addition to water supply, district heating and transport).

(ii) development of proposals for a new tariff structure with a view to equate prices with the long run marginalcost.

(specific terms of reference to be prepared in association with consultants providing assistance for customeraccount management improvement and upon completion of the studies under para. 2 (b) above).

68

Annex 5.7(c)

Bucharest Water Supply ProjectRegia Generala de Apa Bucure,ti

OPERATIONAL ASSISTANCE AND TRAINING

Terms of Reference

1. Objectives: At present, owing to the lack of flow metering and automated flow control devices, productionand distribution of water in Bucharest is not operated in with adequate efficiency. Statistical information on production andconsumption is virtually non existent and, in most cases, treated manually. Data on existing networks, especially at thesecondary network level, are unreliable. There are no mechanisms to monitor changes in consumer behavior in reaction to theintroduction of metering under the project. Such mechanisms will have to be set up to enable RGAB to (a) oversee theimplementation of the project; (b) assess the effects on production and consumption produced by the project; {c) draw thelessons from the implementation experience and make changes where necessary; and (d) acquire the data basis for thepreparation of follow up operations.

2. Scope of Proposed Work: The technical assistance will include the following two components:

tat Improvement of water production and distribution management

training of RGAB personnel in the operation of the flow control systems implemented under the project,as well as new water treatment equipment;

preparation, and assistance in the implementation of, new operating programs for production anddistribution, including the use of computerized dispatching programs;

creation of computerized data acquisition and data management programs for operation-relatedinformation, including the monitoring of production and consumption pattern changes in connection withthe introduction of metering; and

creation of a model for demand analysis and forecasting based on (i) the information and socialexperience gained from the implementation of the metering program; and (ii) the data on customerbehavior generated under the technical assistance program for the improvement of RGAB's customeraccount management system.

(b) Monitoring of the effects of the rehabilitation programs

installation of flow meters allowing the measuring of flow regimes and consumption (demand) changesin the areas to be rehabilitated;

comprehensive survey (including mapping and record of technical data on materials, etc..) of all RGABinfrastructure and service connections identified within the areas;

continuous monitoring of changes in the flow regime during the implementation of the rehabilitation;

preparation of monitoring programs for the period following the implementation of the rehabilitation; and

analysis of work implementation experience including detailed evaluation of technical, time and, possibly,legal or regulatory constraints, population reaction, costs Iper type and material of pipes andconnections,..etc).

69Annex 6(page I of 2)

Bucharest Water Supply ProjectRegia Generala de Apa Bucuresti

SHORT TERM ACTION PROGRAM (STAP)

no. Action Timetable Responsible Expected Results / Effects Montoring &Enttles Evaluatlon

1. REVENUE INCREASE MEASURES

A Billing Efficiency Improvement

1 Reduction of timelag for issuance of invoices 1o 30 days 1996 - RGAB-Comm cashflow Improvement quarterly financial resultsafter meter reading

2 Increase in perodicity of invoicing using consumption 1997 - RGAB-Comm cashtlow improvement quarterly financial resultsestimates which will be adjusted semestriallyaccording to actual metered consumption

3 Identification and elimination of illegal connections through 1996 - RGAB-Comm Increase In billing amounts billing amountregulatlzation of legal status of connections quarterly activty reports

4 Shtn to billing ot metered consumption In [1997-991 RGAB-ProJect increase In billing amounts bitling amountconnection with meter installation financed underthe proposed project

5 Renegotiation of contracts with RADET and other customers 1996 - RGAB-Comm Increase in billing amounts biling amountwith a provision that will allow legal enforcement of latepayments due by customers

6 Incorporation into contracts ot provisions allowing the 1996- RGAB-Comm bill colection improvement bill collection ratioenforcement of service suspension to defaulting customers quarterly activIty reports

a Cutomer Account Management Improvement

I Implementation of computerized system of billing [1996-981 RGAB-Comm improved oontrol of customer accountand bill colledion management management

2 tmplerentation of computerized system of (1996-981 RGAB-Ftn improved management infommationaccounting management

C Tarff

1 Tariff adjustments to be carried out by RGA according to the 1996 - RGAB tCLMB/ operating revenue increase income statementfollowing rules In agreement with Bucharest Municipality and MOFMinistry ot Finance(a) water and sewerage tariffs will be adjusted as soon aspossible but not later than 30 days after RGAB's operatingcosts have increased by a minimum ot 10% or more over theoperating costs noted at the date of the previous increase(b) water and sewerage tarIffs will be increased to suchlevels as will allow RGAB to cover its full costs and achievea resonable profit.For the purpose of the foregoing- the reference level of taritfs tor future adjustments Is the

level of tariffs of August 1995- operating costs are detined as the totaJ expendlture tor

salaries and wages, energy, materials (including rawwater), and maintenance

- tull costs are defined including operating costs.non-operating costs, depreciation and provision for bad

I debts.

D Reduction of Receivables and Payables

1 Compensation agreements between RGAB, 1996 - RGAB / MOF Improved accuracy In financial reporting balance statementsuppliers and pubic sector customers for sentinginter-enterprise arrears

2 ReschedulIng or write-off of non-recovered receivables 1997- RGAB-Fln Improved accuracy In financial reporting balance statementoverdue tor more than a year In accordance wtth the annualbudget provisions for exceptlonal losses

3 Swap of RADET debt with RENEL and other economic 1996- RGAB / RENEL Improved accUracy in finandal reporting balance statemfentagents' at a discount to be negotiated between RADET and etc.the respectve 'economic agents'.

E New Revenues

1 Within a resonable period of time after start up of operations [19981 RGAB I CLMB operating cost decrease income statementof Glina waste water treatment plant (first treatment units)prepare draft legislatIon amending local taxation laws orestabilsh other mechanism allowing adequate operationalmanagement of the plant

2 Request and collect cash guarantee deposit equal to the 1996- RGAB-Comm operating cost decrease income statementaverage cost of consumptlon between paymentsinciusive of VAT

70Annex 6(paep 2 of 2)

i. COST REDUCTION MEASURES

F Reduction of Water Production Cost

1 Reduction of aluminium sulphate consumptIon 1997 - RGAB-Tech operating cost decrease Income statement

2 Reduction of chlor consumption 1997 - RGAB-Tech operating cost decrease income statement

3 Purchase ol raw water from boreholes at non- 1997 - RGAB / APELE operating cost decrease income statementindustrial APELE ROMANE tarifs ROMANE

4 Purchase of raw water from APELE ROMANE 1997- RGAB / APELE operating cost decrease income statementaccording to actually supplied (metered) volume ROMANE

G Reduction of Labour Costs

I Non-replacement of retirement departures except when 1996 - RGAB-Pers operating cost decrease payrollinavoidable for operational reasons

2 Non-replacement of voluntary departures 1996 - RGAB-Pers operating cost decrease payroll

3 Non-replacement ot redundancies 1996 - RGAB-Pers operating cost decrease payroll

4 Elimimiatioi ot unnecessary positions at Dimbovita intake [1996] RGAB-Pers operating cost decrease payroll

s Reduction ot oiverstatfing at Rosu treatment plant [1996] RGAB-Pers operating cost decrease payroll

H Inventories

1 Eiimination ol obsolete inventories [1996) RGAD-Tech improved accuracy in financial reporting balance staterment

2 Reduction of aluminium sulphate security reserves to two 1996 - RGAB-Tech improved accuracy in financial reporting balance statenmentmonths ol average consumption

I Elimination of non-essential activitfs

1 Transter ot water supply obligatlons in suburban 11997] RGAB / PMB operating cost decrease Income statementvillages to local authorities

2 Transter of management of lakes and other public water [19971 RGAB / CLMB operating cost decrease income statementbodies to Bucharest municipality

3 Privatization at septic tank emptying services, [1997] RGAB operating cost decrease Income statementincluding sale ot corresponding assets payroll reduction payroll

t966i! one-time actions1966- = ontinuing action

Acronym

RGAB/Comm = RGAB/Customer Account DepartmentRGAB/Fin = RGABAFinancial & Accounting DepartmentRGAB/Tech = RGAB/Technical DepartmentRGAB/Pers = RGAB/Personnei DepartmentCLMB = Bucharest municipalityPMB =Prefecture of BucharestMOF = Ministry ot Finance

Key Orlentative Performance Indicators

Indicators 1995 1996 1997 1998 1999

Bill Collection ratio /1 69% 70% 72% 75% 75%Working ratio '2 95% 92% 90% 88% 88%

1 = Collections against Bills (current year) + Accounts Receivable (beginning of year) / Bills (current year) + Accounts Recelvable (beginning of year)2/ = Total Operating Expenses (including Losses on Receivables and excluding Depredabon) / Total Operating Revenues

71

Annex 7


PROJECT SUPERVISION PLAN

Year Purpose of Supervision Missions Staff Designation Staff Weeks

CY 1996 Launching Seminar Task Manager 10Review Procurement Documents Water/Civil EngineerReview Implementation Arrangements Financial AnalystReview 1997 Investment ProgramMonitor RGAB PerformanceReview Commercial Management Performance

CY 1997 Review Implementation Progress Task Manager 8Review Disbursement Progress Water/Civil EngineerReview Procurement Documents Financial AnalystReview 1998 Investment ProgramMonitor RGAB PerformanceReview Commercial Management PerformanceReview Financial Situation

CY 1998 Review Implementation Progress Task Manager 6Monitor RGAB Performance Financial AnalystReview Commercial Management Performance

CY 1999 Review Implementation Progress Task Manager 6Monitor RGAB Performance Financial AnalystAgree on ICR

72

Annex 8


SELECTED DOCUMENTS AVAILABLE IN THE PROJECT FILE

1. Project Approval by RGAB Board of Administration dated June 6, 1 995IHotararea No. 8,'95 a Consilu/ui de Administra tie RGAB din 22/06/95)

2. Project Approval by Bucharest Municipal Council dated October 10, 1 995IHotar,irea no. 81/95 a Consiliului Local al Municipiului Bucure,stt]

3. Bucharest Water and Sewerage Rehabiliation Study, SAGEGE/LOTTI, 1995lEtudes de Rehabilitation et d'Extension des Reseaux d'Eau Potable et d'Assainissement de Bucarest]

4. Financial lmprovement Plan, RGAB, December 1995IPlan de Redressement et de Developpement Financier]

5. Bucharest Municipal Council Decision no. 11 98 dated December 10, 1990 creating RGAB/Decizia no. 1198 a Consiliului Local at Municipiulut Bucure$til

6. Romania Government Decision no. 181 dated March 21, 1996IHotarare no. 181/96 a Guvernului Romanieil.

7. RGAB Board of Administration Decision dated January 25, 1996 creating Project Coordination UnitIHotararea No. 1/96 a Consiliului de Administratie RGAB din 25/01/96]

8. RGAB Board of Administration Decision dated May 30, 1 996 creating position of environmentaladvisor. /Hotarlrea No.5/96 a Consiliului de Administratie RGAB din 30/05/961

9. Statement on the development of the institutional and legal framework of RGAB including proposal forservice contract between Bucharest Municipality and RGAB, May 1 996[Proiectie de evolutie institutionala a serviciilor de alimentare cu apa ,i canalizare din MunicipiulBucuresti inclusiv proiect de contract de prestare de servicii intre Primaria Municipiului Bucures ti siRegia Generalj de Apa Bucurestil

1 0. RGAB Investment Plan 1 996-2000

11. Preliminary external audit report for RGAB 1995 financial statements, Arthur Andersen, May 1996.

73

CHART AROMANIA

Bucharest Water Supply Project

Regia Generala de Apa Bucuresti

Organizational Structure

BucharestMuntcipal'ty

| RGABAdministration

Board

E----------- GeneralDrco

DepafMieM Depar erdI D eepartn lenl

D e t

OWB >01/07/96

IS \ 2 2\- 26' ,/2J2 24

0 so3 TOIO MlIIE5 s \ULR IN. 'S ROMAN IAo Io 60-E , ) \S, BUCHAREST WATER

418 J8 >J'+f \v<__e42_Sa [~~~~'~' >S OTOSANI SUPPLY PROJECT

H U N G A R Y* PROJECT EOCATION0 SELECTED CITIES

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MAJOR ROADS

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11 BOUNDARIES

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R 7. B U L G - A 7

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FEDERAL REPUBLIC ILI> Jr _ B PM ATEON AOADJ IS A

OF YUGOSLAVIA ,) .C'L

(SERBIA /MONTENEGRO) aaa .j Maa, SEA

2 B2 IA R I A

704 25 50 26 00 2, 01

R 0 M A N I A - DAMS U INTERCONNECTIONS

PRIZA ~ BUCHAREST W ATER .!2LB WAELL FIELDS ~-- - AOUADIJ':TS--POTARLE WATER~REEZOAEIF EXISTING TREATMENT PLANTS F JTUEE AQIIA,lTJCT, POTABLE WATEP*SUPPLY PROJECT M, PUM ING STATIONS ArUDU TS _RW WE.

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I'AAi INTAKE ZAVE5'A

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' C u I e l,TPUC TIC)TMUNICIPALITY

Alunsu ~~~~~~~~~BUILT-UP AREAS

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IMAGING

Report No: 15307 ROType: SAR