Report No. PID6683 Project Name Croatia -Eastern Slavonia (+) Reconstruction Project Region Europe and Central Asia (ECA) Sector ECSIN (Infrastructure) Project ID HRPE48983 Borrower Ministry of Finance Implementing Agency Hrvatske Vode Ulica grada Vukovara 220 10000 Zagreb, Croatia Tel: 385-1-611-0522 Fax: 385-1-611-8570 Date PID Prepared March 18, 1998 Date Initial PID Updated March 18, 1998 Projected Appraisal February 23, 1998 Projected Board Date June 18, 1998 Background 1. Country and Sector Background In order to provide a stable basis for economic development and reintegration of Eastern Slavonia, the Croatian Government has taken important measures to ensure political stability both domestically and internationally. The Dayton Peace Accord of December 1995 signed by the Federal Republic of Yugoslavia (Serbia/Montenegro) (the FRY), Bosnia and Herzegovina, and Croatia brought the war in the former Yugoslavia to a close. As part of the Dayton Accord, a separate peace agreement for Eastern Slavonia (Erdut Agreement) was signed by Croatia and the FRY. Under the Erdut Agreement, a transitional administration was established under the United Nations (UNTAES) with executive authority over the area of East Slavonia, Baranja and Western Sirmium for a period of two years. The UNTAES mandate ended mid-January 1998, whereby all remaining UN troops were withdrawn from Croatia and full executive authority for the area transferred to the Croatian Government. For another year until January 1999, the Organization for Security and Cooperation in Europe (OSCE) will provide a limited monitoring mission, reporting on human rights issues during the immediate post-UNTAES period. In addition, a small UN mission consisting primarily of 180 civilian police will remain in place for nine months until September 1998 to monitor the activities of the Croatian police operating in Eastern Slavonia. Croatia has also taken important bilateral measures to formally open relations with the FRY. In August 1996, Croatia and the FYR signed "normalization" agreements establishing diplomatic relations between the two countries. Under the framework of the normalization agreements, Croatia and Yugoslavia have developed detailed cross-border agreements covering such issues as cross- border railway traffic and issuance of visas. Before the war, Eastern Slavonia was among the richest areas in Yugoslavia, largely due to the highly fertile agricultural land in Baranja and East Slavonia. Along with neighboring Vojvodina in Serbia, the area was considered the "bread-basket" of the former Yugoslavia. Within Croatia, agriculture production and processing represents about one-quarter of national GDP and from this, Eastern Slavonia has traditionally been a major contributor. Before the war, with about two percent of the country's agricultural land and under four percent of agricultural population, Eastern Slavonia contributed eight percent of Croatia's agricultural production. Over 50 percent of the population was directly involved in agricultural production and most of the balance was employed in agro-processing. The fighting in Eastern Slavonia was among the worst in Croatia during the Balkan War and damaged or destroyed much of the area's infrastructure, with direct war damage at over $2 billion, according to Government estimates. The Government has developed a comprehensive program for rebuilding damaged infrastructure, including housing, flood control and drainage, water and wastewater systems, power networks, health and education facilities, and clearing of landmines. The program is coordinated by the Ministry of Reconstruction and Development, a ministry established in 1994 to co-ordinate and supervise reconstruction in war-damaged areas. For calendar year 1988, the Government has budgeted over $100 million to repair and rebuild housing and local infrastructure in the former UNTAES area. 2. Objectives The project's development objective is to repair and rebuild war-damaged water sector infrastructure, critically needed to restart the local economy (and in particular, local agriculture) while mitigating the negative environmental impact likely to be caused to the adjacent nature reserve by the restart of local agriculture. 3. Project Benefits The primary beneficiaries will be the population of Eastern Slavonia, which is currently about 125,000. Over the medium-term, the project will benefit the farmers and local agricultural organizations realizing increased yields and incomes, householders receiving access to wastewater services, and construction crews and others living and working in areas that might be contaminated with landmines. In the area directly benefiting from the flood control and drainage investments, about 65 percent of the land is cultivated by agrokombinats (state enterprises responsible for agriculture production and processing) and the balance by private farmers (versus 20:80 in the rest of Croatia). In light of the Government program to transfer agrokombinat lands to private hands over the next three to five years, it is expected that -- over the medium-term -- the primary beneficiaries of the flood control and drainage investments will be local private farmers. Regarding the wastewater treatment facilities in Vinkovci, of the current population of 50,000 about one-third have no access to the wastewater collection network and they, together with industrial users, discharge untreated wastes directly into the Bosut River. The lack of wastewater treatment potentially threatens the quality of Vinkovci's groundwater acquifer, which is the city's primary source of clean water. During periods of low water, residents also suffer from bad odors emanating from the river. Reduced bio-chemical oxygen demand (BOD) will also improve water quality to downstream, thereby improving the quality of water feeding from the Bosut - 2 - River into the Danube. Since Kopacki Rit is considered a wetlands of global importance, measures to protect the environmental quality of the reserve will benefit not only tourists to the area (which before the war numbered 20,000 per year) but also members of the international community concerned with environmental protection and natural resource preservation. 4. Project Risks Risk Mitigation Measure Land protected from The area is considered to be flooding will be rapidly highly fertile and once placed into production. drained of excess water is expected to be put into production. The Ministry of Agriculture and Forestry Management has taken measures to ensure that sufficient agricultural inputs are available. No unexpected Project implementation arrangements will complications arise in allow the Water Management Enterprise to the clearing of take direct responsibility to contract for landmines. mine clearing. 5. Description Flood Control & Drainage The program will repair and rebuild the primary and secondary flood control and agricultural drainage networks in the Baranja and East Slavonia areas (of Eastern Slavonia). This represents an area of 155,000 hectares with two-thirds of the investments in Baranja and the remaining one-third in East Slavonia. Of the 110,000 arable hectares, currently 9,600 hectares are flooded and another 30,000 hectares cannot be cultivated due to high groundwater levels. The project will: (i) repair dikes to restore a safe level of protection against major flooding in the Baranja area; (ii) repair pumping stations needed to evacuate excess water from the catchment area of the drainage network in Baranja and East Slavonia; and (iii) clean the primary and secondary canals required to efficiently drain water from agricultural fields in Baranja and East Slavonia. Wastewater Management The project will: (i) rebuild in Vinkovci the municipal wastewater treatment plant, that was under construction before the war but destroyed by direct artillery attack during the fighting; and (ii) extend the wastewater collector system. Once the collector system is completed, it will increase service from 65 percent of the municipal population to 85 percent of the population. Clearing of Landmines -3- The project will verify suspected areas, where needed clear of landmines, as necessary to repair the flood control and drainage system, and provide related quality assurance. Nature Protection The project will: (i) prepare a management plan and monitoring program for the Kopacki Rit nature reserve; (ii) provide technical assistance to strengthen the institutional capacity of the State Directorate for Nature and Environment Protection as well as the Kopacki Rit Management Authority; (iii) provide boats, all-terrain vehicles, a geographic information system (GIS), water quality monitoring equipment and other supervisory equipment for the Kopacki Rit Management Authority; and (iv) repair and rehabilitate the blinds (observation areas), fishponds, park management facilities and other infrastructure necessary to provide long-term environmental protection for the area. 6. Financing $ millions Bank 38.4 Government 18.8 Total 57.2 7. Implementation a. Executing agencies: Flood Control & Drainage - The flood control and drainage component will be implemented by the Croatian Water Management Enterprise (HV), which will retain ownership of the facilities once reconstruction is completed. Wastewater Management - The Wastewater Management component will also be implemented by the Croatian Water Management Enterprise (HV). Once completed, the Vinkovci Water and Wastewater (VKK) will assume ownership of the facilities as well as responsibility for operations and maintenance. HV will conduct a technical review of the completed designs, prepare the bidding documents, carry the procurement and assist VKK with contract negotiations. The contracts will be signed by the VKK, which will be responsible for contract supervision. HV will also make periodic inspections and provide technical assistance to VKK while the construction works are in progress. VKK is organized as a joint stock company, owned by Vinkovci (with 73 percent of the shares) and 11 other municipalities. Mine Clearing - Demining will be done, where required, as part of the general construction contracts for the flood control and drainage component. Contractors for contracts with demining components will be prequalified with special attention given to their qualifications to undertake the demining. It anticipated that most demining will thus be subcontracted under the general construction contracts. The Ministry of Interior (or other demining entity acceptable to the Bank) will assist in the prequalification of the demining subcontractors and will undertake supervision and quality assurance of the demining during construction. Nature Protection - The Government authority responsible for environmental management has recently been reorganized as the Directorate for Nature and Environment Protection, with a newly appointed Director. For the Kopacki Rit reserve, the Management Authority for the reserve was initially established as a provisional agency, with a permanent agency established in 1998. The Kopacki Rit Management Authority is supervised by a steering committee, consisting of - 4 - several ministries and government agencies, including the Ministry of Agriculture and Forestry, Hrvatske Vode (HV), and local municipal authorities. Several steps have been taken to strengthen the implementation arrangements for the nature protection component. The project itself includes funding for consultants to provide technical assistance in the preparation of the management and monitoring plans for the Kopacki Rit reserve. In addition, they will provide "on the job" training for the staff of the Directorate, and particularly for the Kopacki Rit Management Authority. While the Directorate (with the assistance of consultants) will outline the technical requirements for the procurement of goods and works contracts, the Project Implementation Unit of Hrvatske Vode will conduct the procurement process. Technical assistance, where needed, will also be provided by the international environmental non-government organizations already active in Croatia. To date, two major NGOs have been active in working with the Directorate, providing analysis and advice. Procurement & Disbursement - Tenders for all procurement will be conducted by HV, with technical specifications developed by the direct implementing agencies, where they are outside of HV (i.e. Directorate for Nature and Environment Protection for nature protection, and Ministry of Interior on mine clearing.) HV will also be responsible for the project's special account and will submit disbursement requests to the Bank on all components. In addition HV will be responsible for all accounting and financial reporting under the project. On-lending arrangements & budget transfers - Grant funds will be transferred to HV for all components and will not require repayment to the central budget. Investments in the Vinkovci wastewater system will be fully repaid by the Vinkovci Water and Wastewater Enterprise (VKK) to the Water Management Enterprise (HV). Note also that the Bank loan will finance three parts of the nature protection component: preparation of the management plan and monitoring program, technical assistance to strengthen institutional capacity, and repair and rehabilitation of park infrastructure. The boats, GIS, and monitoring equipment are expected to be financed by the Global Environment Facility, or from Government funds. b. Project management: Project management will be conducted by the implementing agencies, under the supervision of the Ministry of Finance and with HV as the coordinating agency. 8. Sustainability Wastewater Management - The 1995 Law on Financing of Municipal Water Activities requires full cost recovery for municipal water and wastewater services, including both operating and maintenance expenses as well as capital investments. While most communities in Croatia set tariffs to ensure full cost recovery, those in the former war zones use a phase-in approach to increasing tariffs. Under the project, increased tariffs will be phased in over several years. Flood Control & Drainage - For investments in project of regional importance (such as flood control networks) the central budget generally funds about 30 percent of the capital investment costs, with balance paid from the revenues of the Water Enterprise. For most areas, operating and maintenance costs are - 5 - covered by catchment fees paid by property owners. In the project area, catchment fees are currently about DM 20 (or the equivalent of one kilo of grain), which are estimated to be about half of the actual operating and maintenance costs. Similar to the program for water and wastewater programs in the former war zones, increased catchment fees will be phased in over a period of several years. Nature Protection: While initial funding for operating costs will be provided by the central budget, the nature protection program is expected to eventually become self-financing through collection of user fees and fees paid for hunting licenses. 9. Lessons learned from past operations in the country/sector Looking at other post-conflict reconstruction projects in Croatia, the key lessons are: (i) all agreements on utilization of funds among government organizations should be drafted and agreed before Board presentation; (ii) the mine clearing implementation arrangements should be agreed prior to Board presentation; (iii) any project units to be established should be fully staffed before loan effectiveness; and (iv) the project should provide for an interim review, allowing reallocation of uncommitted funds. The lessons have been incorporated into the project. 10. Poverty Category Not applicable. 11. Environmental Aspects See attached annex. 12. Program Objective Categories Not applicable. 13. Contact Point Sue Rutledge, Program Team Leader or Dick MacEwen, Principal Sanitation Specialist The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 - 6- Annex 1. The project consists six types of investments: - Rehabilitation of war damaged flood control dikes - Cleaning of drainage canals - Repair of pumping stations - Reconstruction of waste water collection and treatment facilities. - Clearing of anti-personnel land mines. - Protection of Kopacki Rit Nature Reserve. 2. The rehabilitation of war damaged flood control dikes will have very little environmental impact and basically be confined to sites where holes have been dug in the dikes to provide shelter to combatants. Increasing the height of the dike or changing its alignment is not foreseen. 3. Cleaning of the drainage canals in the Baranja is necessary to prevent flooding and waterlogging of the agricultural lands. Before the war, the Baranja was a prime agricultural area and it has been destined s destination to become this again. Cleaning will be done mechanically (without the use of herbicides) which forms part of normal maintenance. The main environmental impact will not be on the canals themselves, but on a stretch of low-lying land which is largely situated along the border with a RAMSAR site, (recognized wetland of international importance for biodiversity conservation), Kopacki Rit Nature Reserve. This stretch of land has reverted back to marshland and has become highly valuable as a buffer zone for wildlife in Kopacki Rit, especially when this area is under water when the Danube river is in flood. Cleaning of the canals will allow lowering of the water table and drain the marshlands in the buffer zone. Therefore, the project includes a component partly financed by the Global Environment Facility (GEF) for the management of Kopacki Rit that includes a plan for the creation of a buffer zone in the marshland of the Baranja adjacent to the nature park. Improved drainage of the Baranja will result in reoccupation of the area and increased pressure on the reserve by the inhabitants. The management component for Kopacki Rit addresses this issue and provides financing for awareness raising and guarding of the park. 3. Repair of the pumping stations will result in evacuation of at least part of the drainage water from the Baranja via Kopacki Rit into the Danube. Agricultural drainage water can be expected to be eutrophic from the use of natural and artificial fertilizer and be contaminated with pesticides and herbicides. The quality of the drainage water will therefore be dependent upon the agricultural system in the Baranja. Integrated pest management, a prudent fertilization scheme and the use of biodegradable pesticides and herbicides will be deciding factors for the drainage water quality. The quality of the drainage water at the pumping stations will be carefully monitored under a monitoring programme that will form part of the environmental protection component of the project. Agricultural extension services will be involved in the management plan for Kopacki Rit and be targeted as intermediaries between the park management and the farmers to ensure environmentally benign agricultural practices. They will be alerted when the water quality appears to be sub-standard. 4. The reconstruction of sewage treatment and collection facilities in - 7 - Vinkovci will greatly improve the quality of the water in the Bosut River, a tributary of the Danube. The Bosut is now anaerobic in summer over a considerable distance because of the dumping of raw sewage into it and because flow velocity is almost negligible in summer. The plant has been designed to reduce BOD (Bio-chemical Oxygen Demand) to such an extent that no anaerobic conditions will occur any more. The plant which was under construction when the war started has been badly damaged, but the basic structure is still in place. The plant lies outside of the urban area and reconstruction itself is not expected to have any adverse environmental impact. Because of the plant's design and location, possible odors will be much less of a nuisance than at present where raw sewage is conveyed by the river through a residential area. 5. Mine clearing will be done by hand with minimal disturbance to the surroundings and the vegetation. Mine clearing will be environmentally beneficial because mines kill wildlife as well as people. At present, the threat of mines keeps people out of some areas that are valuable for wildlife. Increased surveillance and awareness raising for conservation as financed under the conservation component of the project are expected to compensate for the lack of deterrent once the mines have been cleared. 6. To not only mitigate the possible adverse environmental effects of the project but to make use of opportunities provided by the project, a separate nature protection component has been designed that will result in improved environmental conditions compared with the expected situation without the project. The component envisages the management and sustainable use of the Kopacki Rit Nature Reserve. Contact Point: The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone No. (202)458 5454 Fax No. (202) 522 1500 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending August 7, 1998. - 8 -