FOR OFFICIAL USE ONLY

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of the The World Bank FOR OFFICIAL USE ONLY PROJECT PAPER INTERNATIONAL DEVELOPMENT ASSOCIATION PROPOSED ADDITIONAL FINANCING OF SDR 3.3 MILLION (US$5.0 MILLION EQUIVALENT) TO BOSNIA AND HERZEGOVINA FOR AN URBAN INFRASTRUCTURE AND SERVICE DELIVERY PROJECT Sustainable Development Department South East Europe Country Unit Europe and Central Asia Region May 22,2007 Report No: BA This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective as of May 22,2007) Currency Unit = Convertible Mark (BAM) 1 BAM = US$0.70 US$ 1.52 = SDR 1.00 FISCAL YEAR January 1 - December 3 1 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS BiH CAS EBRD EA ECA EFP EMP ESEP EU FBH FMR GDP GEF IAS IDA IF1 MoF MoF&T MFTER MTDS NGO OP PAD PIT PMT PRSP RS SIDA SOE TOR UISDP UMDP USAID WSN Bosnia and Herzegovina Country Assistance Strategy European Bank for Reconstruction and Development Environmental Assessment Europe and Central Asia Environmental Framework Policy. Environmental Management Plan Environmental Screening and Evaluation Procedures European Union Federation Bosnia and Herzegovina Financial Monitoring Report Gross Domestic Product Global Environment Facility International Accounting Standards International Development Association International Finance Institution Ministry of Finance State Ministry of Finance and Treasury Ministry of Foreign Trade and Economic Relations Medium Term Development Strategy Non-Governmental Organization Operational Policy Project Appraisal Document Project Implementing Team Project Management Team Poverty Reduction Strategy Paper Republika Srpska Swedish International Development Association Statement of Expenditures Terms of Reference Urban Infrastructure and Service Delivery Project Mostar City Urban Management Development Plan United States Agency for International Development Water Supply Network Vice President: Country Director: Sector Director: Sector Manager: Task Manager: Shigeo Katsu Orsalia Kalantzopoulos Peter Thomson Sumter Lee Travers Vesna Francic

3 FOR OFFICIAL USE ONLY BOSNIA AND HERZEGOVINA URBAN INFRASTRUCTURE AND SERVICE DELIVERY PROPOSED ADDITIONAL FINANCING TABLE OF CONTENTS I. INTRODUCTION... 1 I1. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING... 1 A. Background... 1 B. Progress to Date... 3 C. Justification for Additional Financing... 4 I11. PROPOSED CHANGES:... 5 IV. CONSISTENCY WITH THE CAS... 6 V. ECONOMIC ANALYSIS OF FINANCING GAP VI. Expected Outcomes VI11. BENEFITS AND RISKS VI11. Financial Terms and Conditions A. B. C. Effectiveness Conditions Financial Covenants., Environmental Covenant This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

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5 PROJECT PAPER DATA SHEET Is approval for any policy exception sought from the Board? oyes XNo 1 Not applicable Does the scaled-up or restructured project trigger any new safeguard policies? No

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7 I. INTRODUCTION BOSNIA AND HERZEGOVINA URBAN INFRASTRUCTURE AND SERVICE DELIVERY PROPOSED ADDITIONAL FINANCING 1. This Project Paper seeks the approval of the Executive Directors to provide an additional credit in an amount of US$5 million equivalent to Bosnia and Herzegovina (BiH) for the Urban Infrastructure and Service Delivery Project - Additional Financing (P ), Credit to supplement the earlier Urban Infrastructure and Service Delivery Project (UISDP) (P083353). The Project Paper has been prepared in compliance with the Guidelines for Additional Financing OP/BP The objectives of the Urban Infrastructure and Service Delivery project are to: (i) improve the availability, quality and reliability of delivery of basic municipal services and in particular, water supply and sanitation; (ii) strengthen the ability of cantonal and municipal governments to improve management and institutional capacity for infrastructure development through urban management development plans; and (iii) foster deeper social cohesion through improvements in overall living conditions. 3. The proposed additional financing will finance: (1) the costs associated with implementation of investments identified under the Mostar City Urban Management Development Plan (UMDP) (US $4.0 million); and (2) investments in Group C utilities (Srebrenica, Stolac and Vares) under Component C for water supply and sanitation investments (US$1.O million). The additional financing will help finance infrastructure projects that are identified as priority investments in the UMDP, but for which financing could not be made available from the ongoing Credit or from other sources. The additional financing will also support least-cost priority investments in Group C water supply and sanitation utilities based on system improvement for which financing could not be made available from the ongoing Credit or from other sources. 4. The additional financing will not change the project development objectives, implementation arrangements, fiduciary arrangements or Operational Manual. The closing date is being extended by one year, leading to a closing date of December 15, Implementation of the project is rated as Satisfactory in all of the Implementation Supervision Reports and has disbursed US$8.7 million equivalent or 38% of the funds to date. 11. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING A. Background 5. The Urban Infrastructure and Service Delivery Project was approved by the Association s Board of Executive Directors on July 8, 2004 and became effective on February 23, It has a current closing date of December 15, The original credit was for SDR 13.8 million on Modified IDA terms for Bosnia and Herzegovina (20 year maturity, 10 year Grace period). 1

8 The ongoing project consists of the following components: (a) Institutional Strengthening (US$ 1.12 million) This component is financing provision of and training on financial management for institutional strengthening and capacity building; drafting of annual Business Plans for each Utility; training on preparing Urban Management Development Plans; a study of the institutional capacity and role/responsibility of the different levels of Government; and other appropriate capacity building. (b) Urban Management Development Plans and Investments (US$8.40 million) This component is financing: (i) the preparation of Urban Management Development Plans (UMDPs); and (ii) investments in selected service sectors based on the conclusion of the UMDPs. The UMDPs are being prepared for selected areas to identify priorities to improve operations and maintenance and maximize investment benefits. These Plans analyze the present levels of operational efficiency; detail the past levels of maintenance; identify those physical assets that need to be rehabilitated; and determine components in the existing systems that meet service standards. (c) Investments for Improved Efficiency (US$ 9.38 million) This component is financing least-cost priority investments based on system improvement, lowering energy usage and related investments to water supply and sanitation utilities. Water investments for improved efficiency targets: Group A utilities - Banja Luka, Posusje and Lukavac, and Group B utility - Cazin. Srebrenica, Stolac and Vares formed the Group C utilities. Small amounts were allocated under the original credit to Group C utilities ($350,000) while co-financing from other donors and grant financing was being sought. (d) Consulting Services (US$ 0.30 million) This component is financing planning and design; engineering for the preparation of final designs and bidding documents; and assistance with procurement and supervision of construction for investments. (e) Project Management (US$ 0.80 million) This component is financing implementation of the project, primarily the incremental operating costs of Project Management Team (PMT) established inside Ministry of Foreign Trade and Economic Relations (MFTER) and Project Implementation Teams (PITs) established in regions and water utilities. The PITs for Mostar and Group C utilities have been established. The financing includes all relevant expenses of the PMT and PITs -- salaries, audits; guidance and training for Utilities and local governments on project implementation; and a stakeholder education campaign on linkages between improved service and willingness to pay. 2

9 B. Progress to Date 6. Overall, progress towards the attainment of the Project Development Outcome remains satisfactory and the ratings of implementation progress have been satisfactory. Approximately, US$8.7 million equivalent has been disbursed through the project after two years of implementation. As of March 30, 2007, an additional US$6.7 million equivalent had been committed. The project is meeting its development objectives and remains consistent with the Country Assistance Strategy of November All existing covenants are being substantially complied with. 7. The implementation arrangements for the additional financing will remain the same as for the original Credit. Implementation will take place under the overall responsibility of the Ministry of Foreign Trade and Economic Relations (MFTER) at the State level. The Project Management Team (PMT) implementing the original Credit will continue to implement the additional financing and handle procurement and financial management aspects. 8. This is the first time that implementation of an Association-supported project has taken place through a Project Management Team (PMT) at the State level within MFTER. The PMT staff are becoming increasingly more familiar with Association s procedures and regulations. The PMT staff have participated in different workshops and training on the Association s procurement and financial management guidelines and all team members have gained significant experience and on-the-job training during the implementation of the ongoing Credit. This has resulted in development of a fully qualified and functioning PMT to deal with the remaining procurement under the project and with procurement under the forthcoming additional financing. 9. The original Credit finances the preparation or updating of Urban Management Development Plans to identify priority measures and investments to help improve service coverage and quality. The urban management component targets: Banja Luka, Livno, Mostar, Sarajevo, Tuzla and Srebrenica. The urban management plans were prepared and public consultations held in Tuzla and Banja Luka. The outcome of the Tuzla plan is the proposed priority investment in rehabilitation of water supply systems in two municipalities. The outcome of the Banja Luka plan is the proposed priority investment in upgrade of urban roads. The spatial plan for the Republika Srpska is in the final process of being adopted by the Republika Srpska (RS) Parliament. Preparation of Plans has started in Sarajevo, Mostar, Srebrenica and Livno. 10. Implementation of the investments for Improved Efficiency under Component 3 is well underway in Group A water utilities - Banja Luka, Posusje and Lukavac. Implementation is also underway in Cazin, the Group B water utility, which was selected in the first year of the project implementation according to the selection criteria used to select Group A Utilities. The investments in this component are leading to the improvement of the availability, quality and reliability of basic municipal services and in particular, water supply and sanitation m of water pipeline were rehabilitated in 2006 in Cazin. The rehabilitation of the first phase of water treatment plant in Banja Luka contributed to an increased share of population benefiting from continuous service from 92% in 2005 to 100% in In addition, 10,000 people benefited 3

10 from new connections to the system by rehabilitation of the plant. Group C utilities - Srebrenica, Stolac and Vares were selected under the original credit. However, small amounts were allocated for investments under the original credit to Group C utilities ($350,000). Co-financing from numerous donors and grant financing has been sought during preparation and implementation of the original credit. The project design tried to reflect this by assuming that some of the investments funds being identified and developed through the ongoing credit will be co-funded by other donors. Unfortunately, this donor support has not materialized as yet All fiduciary, environmental, social, or other safeguard issues are in compliance with the Association s standards. The borrower, BiH Ministry of Finance and Treasury, Entity Governments and Mostar City are fully committed to the project, and the proposed additional financing. C. Justification for Additional Financing 12. The proposed additional financing for the ongoing UISDP is consistent with the Association s Guidelines for Additional Financing (OP/BP 13.20) - (i) allowing the completion of original project activities in the event of an unanticipated financing gap; and (ii) the implementation of added or expended activities for which other financing sources are not available under the original credit to scale up a project s impact or development effectiveness. 13. The closing of the financing gap in the ongoing project through the proposed activities would enhance the development impact of the project in two ways: (i) it would support the implementation of priority investments identified in the UMDP for Mostar; (ii) it would also support investments based on system improvement in Group C water supply and sanitation utilities to improve basic municipal services to provide better living conditions. 14. The city of Mostar aims to provide the framework for achieving financial sustainability for Mostar, creating a stable source of public revenues, rationalizing public spending by improving budget management, restructuring city administration, public institutions and utilities in the City to improve efficiency in service delivery. Their UMDP is being developed on the basis of these principles. The additional financing will support their UMDP implementation, including financing of infrastructure investments that will be identified as high priority in the Plan. 15. The Group C utilities - Srebrenica, Stolac and Vares- will use the additional financing on rehabilitation of water supply, sanitation and related infrastructure as well as electro mechanical equipment. During the preparation of the project there was overwhelming donor interest in these municipalities, especially in Srebrenica. The project design tried to reflect this donor interest by assuming that some of the investments funds being identified and developed through the ongoing credit will be co-funded by other donors. Unfortunately, this donor support has not materialized, creating a financing gap and leaving these relatively poor municipalities in a difficult situation. 4

11 111. PROPOSED CHANGES: 16. The development objectives of the additional credit for the Urban Infrastructure and Service Delivery Project are the same as for the original credit. The development objectives are to improve the availability, quality and reliability of delivery of basic municipal services and in particular, water supply and sanitation; and strengthen the ability of cantonal and municipal governments to improve management and institutional capacity for infrastructure development through Urban Management Development Plans. In accordance with recent guidelines, the results framework has been simplified, and modified to ensure that all indicators are appropriate and can be readily measured. Components of Additional Financing (a) Component 2. Urban Management Development Plans and Investments This component is financing the implementation of Urban Management Development Plans for selected areas to identify priorities to improve operations and maintenance and maximize investment benefits. The additional financing will cover the needs for Mostar under component 2. More specifically, it will support implementation of the UMDP for Mostar focused on improvement of the efficiency and administration of service delivery and sub-projects that will be identified as priority investments in the UMDP for Mostar. (b) Component 3. Investments for Improved Efficiency This component is financing least-cost priority investments based on system improvement, lowering energy usage and related investments to water supply and sanitation utilities. The additional financing will finance rehabilitation investment needs for three utilities from Group C, i.e. Srebrenica, Stolac and Vares. More specifically, the funds will cover rehabilitation of small scale (fewer than 10,000 inhabitants) water supply and sanitation facilities (approximately US$ 1 million allocated to Group C utilities). Specific investments include rehabilitation of the water intake structure and main supply pipeline, rehabilitation of the settling tank and filter units, rehabilitation of the water supply network, rehabilitation of the telemetric system at the pumping station at the main water source, provision of a sewerage network-cleaning vehicle with sludge pump, equipment, water-flow meter, household meters and materials for repair and maintenance of the primary distribution network. 5

12 Project Costs Additional Financing Project Cost In US$ thousand) Component Local Financing Bank- Total Cost Financing A. Institutional Strengthening B. Urban Development Management Plans Priority Investments (Mostar) 200 3,000 3,200 Technical Assistance C. Investments for Improved Efficiency (Vares, Srebrenica and Stolac) ,050 D. Engineering Services E. Operating Costs Total Project Costs 650 5,000 5,650 Total Financing Required 650 5,000 5,650 IV. CONSISTENCY WITH THE CAS 17. The current CAS covering fiscal years has the following objectives: (i) improving public finance and strengthening institutions; (ii) promoting private sector led growth; and (iii) investing in key social and economic infrastructure, The project supports the objectives of the Country Assistance Strategy (Report No BA, dated August, 2004). First, it would strengthen weak and fragmented Government structures by improving the delivery of basic urban services and by focusing on cost recovery and efficiency. Second, it would help build social sustainability by concentrating where possible, on the areas most affected from economic and social dislocation. The Medium Term Development Strategy (MTDS) shows that close to 80% of the population is now urban and well-targeted programs of improved service delivery are key to improving their standards of living. The MTDS highlights the need for improved and efficient urban management, not only for improved services to the citizens but also for enhancing the business environment. 18. The new CAS covering fiscal years is under preparation and is expected to be finalized and submitted for endorsement in the fourth quarter of The project, as proposed, is also in line with the overarching themes expected to be highlighted in the next CAS: 6

13 employment and improvement of public services, under the cross cutting theme of EL1 Integration and issues related to governance and strategic partnership with other donors. The project seeks to improve quality of public services by targeting investments that would help improve service coverage and quality. It addresses governance issues by the completion of Urban Development Plans that require more systematic priority planning as well as aligned interventions from all levels of government. A. Appraisal of Project Activities 19. All additional financed sub-projects would fall under the existing appraisal procedures established during project preparation for the ongoing credit. 20. Group C utilities have been appraised during the appraisal of the original credit. The team will appraise the proposed additional investments for Mostar during project implementation upon completion of UMDP and as sub-project feasibility studies are completed, B. Implementation Arrangements Institutional 21. The implementation arrangements remain the same as for the original credit. The Project Management Team has overall responsibility for implementation, including procurement, financial management actions and liaison with the Association. The PMT is staffed by qualified personnel. The PMT consists of a PMT Head, Procurement Manager, Procurement Officer, Financial Manager and Assistant. Even though the PMT has overall responsibility for implementation, Project Implementing Teams (PITs) located in each of the utilities and cantonal ministries handle day-to-day project matters, The PITs for Mostar and Group C utilities have been established. The PITs consist of a Procurement Officer and Financial Officer. The PITs conduct all procurement in coordination with the PMT and then submit to the PMT for clearance. Once the PMT has cleared, the procurement documents are submitted to the Association for clearance. The contracts can only be signed by either the utility Director or the PIT member from the cantodmunicipality, as the actual Borrower should ultimately be the one signing the contracts. 22. The financial management arrangements of the additional financing will be the same as for the existing UISDP, which are considered to be satisfactory. The Financial Management function i s adequately staffed with an experienced and qualified specialist. 23. On-lending arvangements. The Federation Government and the Republika Srpska Government, through their respective Ministries of Finance (MoF), would on-lend the credit to the City of Mostar and Group C water utilities in the Federation and Republika Srpska. The Borrower would receive the modified IDA terms with 20 year maturity, 10 year Grace period, service charge of 0.75%, and commitment fee up to 0.50%. The on-lending arrangements for the additional financing will remain the same as for the original credit. 7

14 24. Fund flows. The financial flows consist of (i) the Credit, via a single Designated Account being replenished on the basis of a replenishment application or by Statement of Expenditures (SOEs) or by direct payment on the basis of direct-payment withdrawal applications; and (ii) the participating utilities, cantons and municipalities towards the counterpart funds for the water supply and sanitation component and cantons/municipalities for the urban component. The funds flow for the additional financing will remain the same as for the original credit. 25. Disbursements. It is expected that the proceeds of the additional financing will be disbursed over a period of four years from 2007 through Disbursements from the IDA Credit will follow the transaction-based methods, i.e. the traditional Association s procedures including reimbursements with full documentation, SOE, direct payments and special commitments. The Government has established and is operating a single Designated Account denominated in Euros. Disbursements from the Credit proceeds will be administered by the PMT. The PMT is responsible for retaining supporting documentation for SOEs and making them available to IDA supervision missions, as well as to the auditors. The disbursements for the additional financing will remain the same as for the original Credit. 26. Fiduciary. The project will continue to be implemented by an experienced project team with adequate involvement in the internal control processes by the utilities benefiting from the project. The adequacy of the control framework has been documented in the timely annual audit reports, the quarterly financial reporting, and the Association s own supervision. The internal control framework ensures that goods, works and services are delivered as contracted using transparent procurement methods, The Association s supervision is designed to follow-up on these procedures and monitors the achieved outputs of the project, Attentive supervision is needed, given the low financial management capacity and accountability in the public sector. 27. Social. A social assessment was conducted during project preparation in 2004 to identify primary and secondary stakeholders; collect baseline data including socio-economic data and access to services; assess the state of social capital; identify and prioritize the most critical interventions to improve urban service delivery; identify community perceptions of the negative impact that inadequate service delivery has on the community from a social perspective, including poverty, health, and employment; and develop a communication strategy for project implementation including a monitoring plan. 28. The findings of this assessment validated the design assumptions of the project concerning social impact and perceived needs. In terms of social consequences, respondents maintained that the return of displaced persons and refugees would be greater if communities had adequate infrastructure and service provision. Disparities in service levels within municipalities were also causing congestion problems as residents clung to those areas with better services. They also saw disputes over service provision as a drain on social capital. Respondents also saw improved service delivery as not only important for poverty reduction, but also as a precondition for a return of economic and cultural vitality. Community members were willing to be involved in community action to support improvements in service delivery, and were willing to pay for it. 8

15 29. In addition, the majority of respondents in the three categories discussed above placed water, sanitation, and solid waste services high on the list of needs. They saw these as directly related to issues of health and community stability. 30. In conjunction with the rehabilitation begun under the UISDP, an educational campaign was initiated to improve service and willingness to pay. The strategy for the campaign built upon such existing institutions as the former neighborhood council, or mjesna zajednica. A scorecard system has been introduced to enable the monitoring of the progress in meeting project objectives. The utilities selected for investment are developing user-oriented work cultures and instituting Customer Service Departments Environment. In accordance with the Association s policies and procedures (OPIBPIGP 4.01 the Environmental Assessment), the project has been assigned a Category B rating. A Consolidated Environmental Assessment (EA) was prepared for the project in 2004 with a separate Environmental Management Plan (EMP) for each sub-proj ect identified for inclusion under the project before Appraisal (Group A utilities). The EA, including the attached EMPs, was submitted to the World Bank Infoshop and disclosed publicly,in local language in the respective regions by April 22, Each EMP should include a: (i) mitigation plan, (ii) monitoring plan, (iii) implementation schedule, (iv) institutional arrangements for effective environmental management, and (v) record of the public consultation. Chief issues identified during construction included: dust, noise, engine exhausts, disruption to traffic and disposal of non-hazardous construction debris and management of asbestos waste. For the operation phase, the main issues identified include storage and handling of hazardous chlorination chemicals, and disposal of sludge arising from water purification and wastewater treatment. 32. All sub-project investments identified after project appraisal would be subject to an environmental management process framework that would be consistent with Entity and the Association s environmental policies, procedures and regulations. This framework, entitled Environmental Screening and Evaluation Procedures (ESEP) was submitted to the Association and disclosed publicly in the local language at each Entity by April 16, The document has been incorporated as a chapter into the UISDP Operations Manual. This document includes procedures and institutional responsibilities for screening, EA documentation, consultation, disclosure, and implementation of the project specific EMP. Since the works to be covered by the additional financing would be identical in nature to those of the original project, it was agreed that the same framework approach would be carried over. 33. An Integrated Safeguard Data Sheet has been prepared and MFTER has issued an Environmental Framework Policy (EFP) similar to the one prepared for the original Credit but updated to reflect the current conditions. The updated EFP for the additional financing was submitted to the World Bank Infoshop on April 20, 2007 and disclosed publicly in local language on April 20, The EFP will serve as a guide for the preparation of site specific EAsIEMPs. 34. During project implementation, site specific EAsIEMPs will be prepared on the basis of the EFP. The consultatioddisclosure of these documents will take place respectively on a sitespecific basis as well as include disclosure at the Infoshop. The EAsiEMPs will be prepared and 9

16 presented to the Association for no-objection before the disbursement of any funds for site rehabilitation works. 35. The project would not affect natural habitats. No dams are in the project scope. No resettlement nor land acquisition is required, as all sub-projects to be financed include no new construction, but only rehabilitation of existing works. Mitigation related to the EMPs would include requirements in scope of work for in the minimization of dust and noise and assurance of access rights of citizens to sources of employments and utilities. 36. As provided by OPiBP 7.50 the project qualified for exception to the requirement of notification of riparian states, and exception was granted by the Office of the Vice President, ECA. The investments to be supported by the additional financing would target the same river basins and the type of investments is identical to the ones in the Original Project. MFTER has confirmed that BiH has not entered into any new international agreement with (an) other riparian(s) since the date of the original project, Following review by LEG, it has been determined that the exception from the notification of riparian would carry over to the additional financing. V. ECONOMIC ANALYSIS OF FINANCING GAP 37. Each sub-project will be analyzed economically as part of the preparation process. However, conventional economic analysis is not suitable for some of these investments. For example, the Group C utilities are those areas lacking social cohesion or badly affected during the postwar period. Lack of data in these utilities does not permit a rigorous cost-benefit analysis. During the preparation of the project, for financial, social and economic reasons, it was concluded that it would be unreasonable to assume that these utilities could reach financial viability during project implementation. Group C Utilities will need extra management, financial and procurement training during the project implementation to further enhance capacity. It will be important to work closely with these utilities during the project implementation to ensure that they become financially stronger and operate and maintain water systems more efficiently. Training on financial viability, tariff policy, environmental, procurement and implementation issues will be organized, as under the ongoing project on annual basis. 38. The method of charging for water supply and sanitation is on the basis of number of persons benefiting or on the basis of area of the properties served. Such a billing method creates difficulties for the economic cost-benefit analysis because consumers cannot signal their incremental satisfaction with the incremental amounts of improved service. Cost effectiveness analysis of the investments under the project will be undertaken. It presumes that the respective project beneficiary populations require municipal services in order to safeguard their health and the environment. It then analyzes per capita investments to confirm that investments are efficiently sized to meet the demand for municipal services. 39. The investment costs for Group C utilities should be weighed against the benefits of reduction in poor water quality and sanitation, environmental damage, and public awareness on the need to improve the environment. Some of these are captured through the fees that consumers pay although consumers are likely to underestimate the full environmental and health 10

17 benefits. In addition, intangible aesthetic benefits arise from having cleaner cities and surrounding areas, through the reduction of poor sanitation and uncontrolled dumping. VI. Expected Outcomes 40. The outcomes of the proposed additional investments will be: (i) the investments in selected service sectors to improve operations and maintenance and maximize investment benefits; (ii) for the Group C utilities, an increase in the share of population connected to public water supply, service efficiency (to reduce cost and make tariffs more affordable), reduced energy consumption (kwh per m3 of water supplied), and a satisfactory survey outcome on community scorecards. Group C utilities have been appraised during the appraisal of the original Credit. The team will appraise the proposed additional investments for Mostar during project supervision, as sub-project feasibility studies are completed. 41. The monitoring and evaluation of outcomes and results during implementation would follow current project practice. The PMT would collect and present data and reports from the PITS for periodic review by the Association in conjunction with supervision missions. Data would also be provided by the PMT data management systems. Group C Utilities would be monitored in terms o f the financial and action plans they produce. VIII. BENEFITS AND RISKS Risk Risk Mitigation Strategy Rating Engaging in policy M In the particular case of Mostar, the Association supported dialogue in politically the reconstruction of the Mostar Old Bridge that had been sensitive environment is complex.. destroyed during the war; and approved the Mostar water supply and sewerage project, both of which were successfully implemented and completed. The Association also financed the Solid Waste Management Project, the Urban Service Delivery Project (with a component on urban management in Mostar), and facilitated GEF financing of improvements in the Neretva River. The continuous and widespread support for the rebuilding of the City of Mostar built trust in the Association as a development partner and facilitated the acceptance of the advice and assistance provided by the Association on policy dialogue as well as investment projects. Public is potentially S Improvement of service quality through project unwilling to pay for investments and early implementation of the stakeholder improved services. education campaign would ensure stakeholder involvement in the project. Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligib1e or Low Risk) 11

18 VIII. Financial Terms and Conditions 42. The proposed additional financing of US$ 5 million equivalent is provided on the same modified IDA terms, (20 year maturity, 10 year Grace period) as for the original project. Effectiveness Conditions The Federation Project Agreement and the RS Project Agreement have been executed on behalf of the Association and each Entity, respectively. The Federation Subsidiary Credit Agreement and the RS Subsidiary Credit Agreement have been executed on behalf of the Recipient and each Entity, respectively. A Subsidiary Financing Agreement has been executed on behalf of an Entity and a Participating Utility. A Subsidiary Financing Agreement has been executed on behalf of an Entity and a Participating Canton or a Participating Municipality. Fin an cia1 Coven ants Ensure that the utilities do not incur any debt unless a reasonable forecast of the utilities revenues and expenditures shows that the estimated net revenue of the utilities for each fiscal year during the term of the debt to be incurred shall be at least 1.3 times the estimated debt service requirements of the utilities in such year on all debt of the utility, including the debt to be incurred. Ensure that the records, accounts and financial statements of the utilities for each fiscal year are audited, in accordance with consistently applied locally applicable audit standards by independent auditor s and furnish to the Association and Borrower not later than six (6) months after the end of such year certified copies of the financial statements for such year so audited and the report of such audit by the auditors, Environmental Covenant The Environmental Management Plan for each site, in accordance with the Environmental Management Plan Framework, will be prepared and presented to the Association for no-objection before the commencement of any of the site rehabilitation works. 12