World Bank Document · 1. Project Data I 2. Pnncipal Performance Ratings I 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective

Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No: 24041

IMPLEMENTATION COMPLETION REPORT(CPL-39640; PPFB-P2850)

ON A

LOAN

IN THE AMOUNT OF US$27.3 MILLION

TO THE REPUBLIC OF

LATVIA

FOR A

MUNICIPAL SERVICES DEVELOPMENT PROJECT

December 26, 2002

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

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ClURRENCY EQUIVALENTS

(Exchange Rate Effective April 23, 2002)

Cwrrency Unit = Latvian Latslats 1 = US$ 1.58US$ I = Lat 0.63

FISCAL YEARJanuary 1 - December31

ABBREVIATIONS AND ACRONYMS

CAS - Country Assistance StrategyDMEU - Daugavpils Municipal Enterprise UdensvadsDWWW - Daugavpils Water and Waste WaterEBRD - European Bank for Reconstruction and DevelopmentEMP - Environmental Management PlanERR - Economic Rate of ReturnEU - European UnionEU PHARE - European Union Assistance Program for Eastern EuropeHELCOM - Baltic Marine Environment Protection Commission (Helsinki Commission)IBRD - International Bank for Reconstruction and DevelopmentMDF - Municipal Development FundMOERD - Ministry of Environmental Protection and Regional DevelopmentMOF - Ministry of FinanceNEFCO - Nordic Environment Finance CorporationPTU - Public Transportation UnitRBMST - Riga Board of Municipal Services and TransportationRUT - Riga Urban TransportSA - Special AccountSIDA - Swedish International Development AgencySOE - Statement of ExpenditureTTP - Riga Tram and Trolleybus Park

Vice President: Jobannes F. LinnCountry Director: Roger GraweSector Manager: Sumter Lee Travers

Task Team Leader: Jeffrey Balkind

LATVIAMUN SERVICES DEVT

CONTENTS

Page No.1. Project Data I2. Pnncipal Performance Ratings I3. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 65. Major Factors Affecting Implementation and Outcome 116. Sustainability 127. Bank and Borrower Performance 138. Lessons Learned 179. Partner Comments 1810. Additional Information 19Annex 1. Key Performance Indicators/Log Frame Matrix 20Annex 2. Project Costs and Financing 22Annex 3. Economic Costs and Benefits 27Annex 4. Bank Inputs 43Annex 5. Ratings for Achievement of Objectives/Outputs of Components 46Annex 6. Ratings of Bank and Borrower Performance 48Annex 7. List of Supporting Documents 50Annex 8. Comments from Borrower/ Implementing Agency 52

Project ID: P034584 |Project Name: MIJN SERVICES DEVTTeam Leader: Jeffrey Balkind TL Unit: ECSIE

ICR Type: Core ICR Report Date: December 26, 2002

1. Project Data

Name: MUN SERVICES DEVT L/C/TFNunber: CPL-39640;PPFB-P2850

Countiy/Department: LATVIA Region: Europe and CentralAsia Region

Sector/subsector: General transportation sector (61%); Water supply(13%); Sewerage (13%); Sub-national governmentadministration (13%)

KEY DATESOriginal Revised/Actual

PCD: 01/05/1994 Effective: 05/25/1996 05/28/1996Appraisal: 06/26/1995 MTR: 06/30/1998 11/25/1998Approval: 12/14/1995 Closing: 06/30/2001 06/30/2002

Borrowt er/lnIplemtenting Agency. REPUBLIC OF LATVIA/Ministry of Environment and Regional DevelopmentOther Partners: Danish Environmental Protection Agency (DEPA), EU Phare, Swedish

International Development Agency (SIDA), Nordic Environment FinanceCorporation (NEFCO)

STAFF Current At AppraisalVice President: Johannes F. Linn Wilfried ThalwitzCountry Manager: Roger Grawe Basil KavalskySector Manager: Sumter Lee Travers Thomas A. BlinkhomTeam Leader at ICR: Jeffrey Balkind Kristin GilbertsonICR Primary Author. Jeffrey Balkind; Inesis Kiskis;

Kari Johansson; William B.Denning

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=HighlyUnlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: S

Sustainability: UN

Institutional Development Impact. M

Bank Perforniance: S

Borrower Performance: S

QAG (if available) ICRQuality at Entrv: S S

Project at Risk at Any Time: Yes

The project is rated as marginallv satisfactory, based on the outcomes of the Riga Transport andDaugavpils Water and Wastewater components. Sustainability of Riga Transport approach and

Daugavpils Water/wastewater depends on getting a tighter handle on the cost side of the enterprises andtheir financial performance. The third component (the Pilot Municipal Development Fund) achieved abetter performance, but was not able to develop any institutional sustainability since the Ministry ofFinance and Ministry of Economy ended the operations of the MDF after the Bank loan was implemented.The reasons for the unlikely sustainability are discussed in the report.

3. Assessment of Development Objective mad Design, and of Quality at Entry

3.1 Original Objective:The project was the first municipal development project for the Bank in the Baltics. The 1994

CAS for Latvia focussed the strategy on:i. enhancing private sector development;

ii. improving public infrastructure services;iii. strengthening the social safety net and improving social services; andiv. addressing pressing environmental concerns - in particular the clean-up of the Baltic Sea as a

potentially "hot spot" that had become a major area of focus of neighboring bilateral aid programs,especially among the Scandinavian countries.

Investments in municipal infrastructure and environment had been identified as a priority in theGovernment's Public Investment Program (PIP). Since Latvian independence in 1991, policymakers in thecountry had embarked upon an ambitious program of decentralization, reversing decades of Sovietcentralization of authority. Local governments were becoming self-reliant and accounted for almost half oftotal public sector spending. Latvia had two tiers of government: national and municipal - there were noprovincial layers. The seven Republican cities - Riga, Daugavpils, Ventspils, Liepaja, Jelgava, Jurmala,and Rezekne - had rajon status (Regional districts) but they functioned as large municipalities. Besides theseven Republican cities, Latvia had 69 town municipalities and 493 pagasts or smaller urban and ruralmunicipalities. Understanding this structure is key to understanding the design of the project

The overall project aimed at supporting ongoing decentralization and inter-governmental fiscalreforms by providing access to investment financing and technical assistance needed for rehabilitation andimproved management of municipal services in the two largest cities - Riga and Daugavpils - andinvestment financing and technical assistance to a range of smaller municipalities, through the creation of aPilot Municipal Development Fund. The specific objectives (as stated in the SAR and Loan Agreement) arebuilt around three key components, which were to:

i. improve efficiency and quality of public transport services in Riga, improve the financial conditionand promote further corporatization of the three public transport companies in Riga;

ii. improve the quality of quality of drinking water in Daugavpils, reduce the discharge of untreatedand partially treated wastewater into the Daugava River and the Baltic Sea, and improve thefinancial management and promote further corporatization of the Daugavpils Water Enterprise(Udensvads); and

iii. pursue similar objectives in other communities in Latvia through the creation and financing of aPilot Municipal Development Fund (MDF).

Assessment of Development Obiectives and Project Design. The project was consistent with the CAS,which emphasized the need to develop efficient public services, including at the local level. The Loancombined a strong project focus in several different locations in the country. The basic objective was tosupport the decentralization and intergovernmental fiscal reforms instituted by the Government, byproviding access to investment financing, institution building and technical assistance for neededrehabilitation and improved management of municipal services.

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Sub-proiect Specifics: Ri2a Urban Transport. Public transport carried up to 80-90 percent of daily tripsin and around the city. Underlying the urban transport problems was the continuation of a public policy oflow fares and fare exemptions, in tandem with the inability of the local and/or state governments to makeup the difference between fare revenues and operating costs of public sector owned transport enterprises, asthey had done in socialist times. In Riga, the majority of public transport services are provided by threepublic transport enterprises owned by the Riga City Council. Bus services are provided by ImantaAutobus Park and by Talava Autobus Park, and tram and trolleybus services by the Tram and TrolleybusPark (TTP). In addition private operators are free to apply to the municipality for licenses to run publictransport services in Riga. At the time of appraisal, the private services were seen as marginal and indecline. The key objective was to support Riga City's approach to provide affordable public transportservices, subject to also attaining an improvement in the finances of the city's transport enterprises, andgreater efficiency in the delivery of public transport services in the city.

Project design was based on strengthening the traditional public utility approach to serviceprovision. Riga allows competition from private operators but public transport continues to serve keygroups - the two bus companies in particular (Imanta and Talava) serve outlying areas where poorerresidents live. The trolley bus and tram service of TTP is more for the inner city. The goal was to developthe three public service providers to the point where more commercial transport operations would becomepossible through service agreements, concessioning, or partial or full privatization, with the existing or adifferent set of operators. The design was relevant to achieving this goal because it dealt with each majorarea requiring attention: (i) immediate operational efficiency - through needed operational investments; (ii)longer-run change of enterprise orientation to more commercial approaches - through financial discipline;and (iii) change in public sector orientation - through political recognition and commitment of tariff levelsand/or subsidy levels necessary for on-going, financially sustainable, supply of transport services.Institutionally, the design foresaw that the municipal enterprises could be privatized in the medium-termafter: (i) liberalization of fares allowed them to become financially viable; and (ii) after strengthening theregulatory capacity of the existing Riga Board of Municipal Services and Transportation (RBMST) toensure a minimum level of competition, safety and coordination of routes. The design did not provide for anintegrated view of transport planning and operations within a strategic land use and municipal operationsperspective, important given the changes in spatial interaction and structure that would be expected throughthe transition to a market economy and increasing use of private automobile transportation. It also did notaddress the issue of coordinating existing regional (suburban) passenger services of the national railwaywith municipal services.

DauQavDils Water/Wastewater. The objectives of the Daugavpils water and wastewater components wereappropriate to the development needs at the time. A changeover of water intake from the Daugava River toground water wells was justified due to the poor quality of the river water. Also, there was a securityaspect: Daugavpils is located just 50 km down river from Belarus, and industrials spills from Belorussianproducers into the river had already taken place prior to 1995. Latvia had joined intemational agreements(HELCOM), which required improvements in the way the waste water was being treated and discharged.At the time of design of the project, the local services operator, SIA Daugavpils Udens (known as DMEU)was not an enterprise at all, but part of the municipality. It was unable to fully maintain its facilities withthe collected revenue and it depended upon receiving municipal subsidies.

The design forecast a flat water demand curve, and not what later turned out - sharply fallingwater consumption as a result of project metering (good feature) and industrial recession in the Daugavpilsarea (negative feature beyond the control of the project). The appraisal team envisaged that the utilitywould reach full cost recovery in 2000 and onwards, and that the entity would be able to undertake the

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financing of its further network rehabilitation out of own revenue. The physical facilities and financialprojections were based on flat demand. When metering, tariff increases and industrial recession decreasedspecific consumption in Daugavpils much faster than thought - down to about one-quarter of the Sovietlegacy level (i.e. 125 litres per capita/day instead of 500 Ipcd), the consequent need to steepen the tariffincreases (to make up for falling total revenues) became politically difficult to implement in a timelymanner each year, and the consequent revenue lag, combined with the over-design of the entity's fixed plantmeans that the attainment of full cost recovery is still several years away.

MuniciiDal Development Fund (MDF). The MDF component involved 34 municipalities all around thecountry, with technical assistance carried out by a new Unit in the Ministry of Economy. After theappraisals of the subprojects, the subloans in fact were concluded by the MOF (which disbursed the fundsto the municipalities). This split of functions later created difficulty as regards sustainability - see latersection. The design of the MDF was demand-driven, whereby municipalities had to state their preferredinvestment and why. Projects eligible for financing from the MDF had to be investment projects in the areaof municipal services needs that reflected both local communities' and national priorities.

3.2 Revised Objective:The project objectives were not revised.

3.3 Original Componenzts:The project had three main components, Riga Urban Transport (RUT), Daugavpils Water and

Wastewater (DWW), Municipal Development Fund (MDF), as well as an Institutional DevelopmentComponent to support the MDF.

MSDP - Summary of Original Components and Costs (US$ millions)Component Sub-Component Total cost Bank financedRiga Urban Transport

new bus maintenance facility 0.9 0.5new buses, trolleybuses 12 1 11.0tram electncal components 2.4 2.2spare parts, maintenance equipment, ticketing 2.9 2.7equipment

Riga Urban Transport PTU 0.3 0.3Sub-total 18.6 16.7

Daugavplls Water and Wastewatermetenng, Vgri upgrading 0.4 0.3groundwater well development and pipeline 9 4 5.5rehabilitation of wastewater treatment plant 9.4 0.0and pumping stations

Daugavpils PMU 0.7 0 6Daugavpils design and twinning 2 4 0 5Sub-total 22.3 6.9

Municipal Development Fund________ _______ ________ ______ works 4.3 3.4

consultancies 0 1 0.1Sub-total 4.4 3.5

Project Coordination Unit 0.1 0.1

TOTAL 45.4 27.3Source SAR, page 16

The Rica Transport component included the following sub-components. The costs of each wereprovided in the general summary above.

New Buses. Purchase of 36 new articulated buses (18 each) and the disposal of 95 of theoldest buses (49 Talava, 46 Imanta);New Trolleybuses. Purchase of 30 new large and more energy efficient articulated

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trolleybuses and the disposal of some 56 of the oldest and small trolleybuses with no loss ofpassenger carrying capacity;Tram Electrical Equipment. Purchase of 60 thyristor chopper traction control systems,suitable for the newer t-rams in the fleet;Capital Repair Programs. Rehabilitate 80 buses at each enterprise (Talava, Imanta);Spare Parts. Purchase of spare parts for general maintenance and capital repairs;Relocation of Imanta Workshop. Close of one of Imanta's three maintenance sites and thebuilding of a new workshop at the main depot;Workshop Plant and Equipment. Purchase of new plant and equipment;Training and Technical Assistance. Provide the Riga City Council and the three publictransport enterprises with training and technical assistance to:

(i) facilitate implementation of the project including procurement;(ii) oversee a pilot program to evaluate proposed implementation of a new ticketingsystem;(iii) oversee implementation of agreed action plans; and(iv) support capacity building of the Public Transport Unit (PTU) and its implementationof policy reforms agreed to and enacted by the Riga City Council in the attached PublicTransport Policy Statement.

The City of Riga agreed to implement all measures outlined in the Public Transport PolicyStatement including payment of compensation due to the public transport companies in connection withconcessionary fares that may be required from time to time by the City of Riga.

The Daugavvils component included two major physical subcomponents: (i) development,treatment and rehabilitation of groundwater sources, which would enable the discontinuance of theDaugava River as a water source for the town. Even after treatment, Daugava water was visibly andtechnically substandard and a threat to health; (ii) rehabilitation of the existing wastewater treatment plantwould improve the adherence to HELCOM recommendations and improve raw water quality for potablewater production in and around Daugavpils, Latvia's second largest city. Small subcomponents were aimedat improving wastewater pumping stations, monitoring and metering. Twinning and TA components weredesigned to support institutional development and project implementation.

The MDF objectives were to help finance priority municipal investments. A related objective wasto help municipalities improve their project preparation capacities- strengthening the operational capacityand efficiency of municipalities by assisting them in the design, appraisal, and execution of investmentprograms; rationalizmg programs moving away from the ad hoc investment practices; and injecting rationalcriteria into the geographical and sectoral distribution of investment funds. Although only some of thelarger cities were able to access loan financing for rehabilitation from IFIs, most municipalities were not ofsufficient size (nor did they have any experience with IFIs) to justify direct involvement. Thus, in order toreach secondary cities and towns and to spread economic benefit, the creation of a MDF was chosen. Thedesign was an appropriate pilot size ($3.4 million) aimed at assessing experience as the project movedalong.

3.4 Revised Components.The components of the Loan were not revised. The closing date of the loan was extended for one

year until June 30, 2002 to enable the rehabilitation of the Talava Maintenance workshop. This was donebecause Talava's performance was lagging behind that of TTP and Imanta, partly on account of poormaintenance facilties, which was putting at risk buses procured under the loan. This has been correctednow.

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3.5 Quality at Entry:There was no QAG assessment of entry. This ICR rates Quality at Entry as SatisLactor with

caveats. The respective components' physical and institutional design choices were satisfactory from aservice perspective, and they represented a sound reading of what were the priority problems to tackle inthe two cities, recognizing that other IFIs were also involved (e.g. EBRD financed a water/wastewaterproject in Riga). However, the Bank project encountered financial sustainability issues as regards theoperating enterprises (see next section). As explained below, the financial indicators reflected excessiveoptimism in both the transport and water subcomponents. But given the knowledge available to Bank andborrower at the time, especially in these early days after the fall of the Soviet Union, and the poor database, we rate QAE as satisfactory, although if we were judging design and outcomes with the benefit ofhindsight, we would rate the QAE as marginally satisfactory. Safeguard assessment at entry wassatisfactory with detailed attention given to the impact of traffic congestion on air pollution (Riga) andwastewater treatment on surrounding firms and households (Daugavpils). The MDF too looked atenvironmental safeguards.

The financial covenants and their corresponding three financial indicators did not work well inpractice. Three main indicators were chosen: (i) rate of return on assets of not less than ten percent for thetransport companies and 1.5 percent for the SIA Daugavpils Udens in the water case; (ii) positive netincome; and (iii) positive internal cash flow sufficient to service the debt (cash revenues/cash expenses of1.3). The rate of return covenant sought financial performance far better than that enjoyed by similarcompanies in most advanced market economies. This "stretch" goal was in retrospect patently unattainable.

Inadequate Monitoring Indicators. In the case of transport, 17 indicators were specified in theProject Implementation Plan (PIP, shown as a 71 page Annex C to the SAR). Of these, 5 were with targetvalues unique to each operator, 3 were with target values the same for each operator (these were the threefinancial indicators), and 9 were with no target values specified. There was no differentiation betweenoutput and outcome indicators. There was no substantive discussion linking the choice of indicators in thePIP to the issues and project description in the main text of the SAR.

In summary, the QAE for both the Riga Urban Transport component and the Daugavpils watercomponents was satisfactory with reservations noted. The QAE of the Pilot MDF was satisfactory.

4. Achievement of Objective andi Outputs

4.1 Outcome/achieventent of objective:Overall the project outcomes were mixed, with some satisfactory, some not. The overall evaluation issatisfactory. A disaggregated view is presented below.

Riga Urban Transport. All physical activities within this component were implemented as planned. Thespecific objectives were to: (i) improve efficiency and quality of public transport services in Riga, (ii)improve the financial condition, and (iii) promote further corporatization of the three public transportcompanies in Riga. The efficiency gains were mixed. Several physical operational parameters haveimproved. Where improvements have not been found is in the cost of operation. Details are provided in the"Additional_Tables.doc" document attached electronically in Annex 7, List of Supporting Documents.

Transport energy efficiency has been improved. Quantity of energy used per vehicle km hasdeclined by 14%, 15%, and 16% for TTP, Talava, and Imanta respectively. Slight increases in recentyears could mean that the maintenance programs are not sustainable or that the longer run "steady-state" of

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maintenance has not yet been reached. Aside from energy use, overall operating costs have not beenreduced. At completion, the number of vehicles in the bus fleets has not declined as expected, nor has thenumber of employees. Questions of fleet size and labor are considered under Section 5.3. The rating forenvironmental aspects of the project is substantial.

The quality of transport has also been improved. The rehabilitated trams and the new buses andtrolleybuses are more comfortable to ride and more reliable to operate. The rating for physical aspects ofthe project is high

Improved finances. The outcome here is marginallv satisfactorv as the revenue side hasimproved. The increase in passenger tariffs at a rate faster than inflation was accepted by the City of Rigaand ultimately was implemented. The proportion of passengers riding without paying has been reduced bybringing in conductors and inspectors. On TTP, fare evasion has dropped from 30% of passengers to 7 or8% now. The proportion of passengers riding with a reduced tariff has decreased somewhat (from about41% at appraisal to about 38% at completion). However, costs of operation, especially staffing, have notyet been restructured with the result that enterprise finances have not improved to the extent needed forsustainable operations. The rating for financial aspects of the project is modest

Corporatization. The Riga Transport Project achieved its objectives of increased corporatizationof the companies. Over the implementation period the companies developed business plans, engaged ininternational competitive bidding, delivered an improved quality of service, and improved their financialposition. The companies do not seem to be governed by the results of their business planning processes.To some extent, this is due to the City of Riga requiring operations in addition to those envisaged in thebusiness plans. The rating for sector policy aspects of the project is negligible.

Daugavpils Water and Wastewater Component. All physical activities within the component wereimplemented as originally planned. The specific objectives were to (i) improve the quality of quality ofdrinking water in Daugavpils; (ii) reduce the discharge of untreated and partially treated wastewater intothe Daugava River and the Baltic Sea; and (iii) improve the financial management and promote furthercorporatization of the Daugavpils Water Enterprise (Udensvads).

The quality of drinking water has improved with people no longer dependent on water from theriver. Also, untreated wastewater is not being run into the Daugava River, which improves the impact onthe Baltic Sea. These improvements are substantial. However, as regards the third objective, by closingdate the SIA "Daugavpils Udens" has not become a financially viable entity. As shown in Annex 3, itsfinancial position has remained precarious for most of the years. It is expected that the company willachieve full cost recovery no earlier than 2005. Until then, the company will remain dependent uponexternal grants and budget financing from the Municipality, even if no replacement investments will becarried out. The situation-is especially critical during the coming years as the company may not be able tofully service its debt. The company's financial situation becomes even more fragile should the Regulator ofMunicipal Service Tariffs and Municipality decide not to follow the required tariff adjustments path or ifthere will be further significant decline in water consumption. Impact here is therefore negligible.

Institutional progress. Institutional impact is substantial. In the course of implementation, the formerDMEU enterprise was reorganized into a shareholding company with limited liability SIA"DaugavpilsUdens". A Company Board consisting of the owner (Municipality) representatives rather than the seniorcompany executives, was created. The NEFCO, as a major creditor, was offered a seat in the Board of SIA"Daugavpils Udens", which will help both the Municipality and the management of SIA "Daugavpils

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Udens" to overcome current financial difficulties. A management infornation system based on SCALAsoftware was introduced and currently is fully used as a tool to manage both day-to-day operations as wellas the strategic planning process. The Strategic Plan has become a major management tool within the "SIADaugavpils Udens". During the project implementation, staff reduction was 27%, mostly due to retirementof the pension age staff. 45 staff members were transferred to other municipal-owned enterprises.

The main tool in the institutional support was twining with a similar size water company, TampereWaterworks, in Finland. The activities included operational support, training, visits, support for strategicplanning process, and a computerized billing system. SLA "Daugavpils Udens" has appreciated thisactivity, which opened new ways and visions to the traditionally stagnant utility environment. One of theinstitutional efficiency indicators is the number of staff per served population. SIA Daugavpils Udens hasbeen able to steadily rationalize activities, so that the mid-1990's staff of 457 has declined to 319 in 2000.But the western benchmark value of 1.2-1.5/1000 population served, giving the target staff for SIA"Daugavpils Udens" as 120-150, is still far off.

Municipal Development Fund. The MDF achieved its physical investment and institutional objectives asregards helping municipalities to prepare and implement projects. The MDF did not achieve a longer termsustainable objective for itself, because once the project was over, the MOF decided that lending tomunicipalities and the appraisal of such projects should be done through the State Treasury window - theMOF saw no need for preserving a MDF Unit within the Ministry of Economy. Details on the subprojectachievements are shown below.

4.2 Outputs by components:

Riga Urban Transport. The project costs, as they turned out, are summarized in Annex 2. Furtherdetails are provided in the "disbursements_PTU_03.xls" spreadsheet attached electronically in Annex 7.Specifically:

' new buses were procured and trams were rehabilitated (about 15 years have been added onto theeconomic life of each tram);v maintenance workshops at Imanta and Talava Bus companies were rehabilitated, while another oldworkshop at Imanta was closed;. conductors were placed on all buses and trams, who were checked by inspectors randomly on dailytrips; and. new ticketing system evaluations were completed and implemented.

Thus, the physical output of the Riga transport component of the Loan is rated as high. As regards theinstitutional development and public sector management outputs, these are rated as modest. The specificresults obtained were:

. a Public Transport Unit (PTU) was set up to coordinate planning and policies, and intemationalconsultants assisted to refine the company business plans;o accounting was improved and international accounting standards were adopted (especially importantfor depreciation)" Unified Accounts" were adopted for all three public operators; ando the companies started to use ICB procedures for buses and equipment bought outside of the projectas well.

Negative results were that there is no significant operating cost decline in the companies, nosustainable subsidy mechanism for riders, business plans were not followed through, and the PTU seems tohave had little policy influence on the transport companies or on the Riga City Council. So the policyimpact of this component of the Loan is rated as negligible.

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Daunavuils Water/Wastewater. To improve water supply and distribution, the wellfield development andiron removal plant with a capacity of 30,000 m /d was successfully completed and commenced operationon January 2001. Produced water quality meets all relevant standards (see Annex 2). The TransmissionMain between Ziemelu Weilfield and Iron Removal Plant (EU PHARE funded line) was successfullycompleted in 2000. Pumps were replaced at Vingri Intake with a result that electricity consumption washalved. Furthermore, bulk and block meters were procured and installed and water quality monitoringequipment taken into use.

As regards the sewerage and wastewater treatment (Kandavas and other pumping stations, andsewer rehabilitation), key facilities were upgraded with mainly Danish-financed components. Regarding theupgrading of the wastewater treatment plant, the Swedish, NEFCO and Latvian financed plant upgradingwas handed over by June 2000, but has had some design issues delaying the attainment of full treatmentefficiency. The plant does not yet meet the guaranteed treatment efficiency, although it is very near meetingHELCOM recommendations. The project did not include sludge disposal management, as that would haveby far exceeded the borrowing limits of the DMEU. Sludge is currently disposed in earth basinsconstructed on permeable soil in the old municipal landfill. The new Ziemelu wellfield is less than threekilometers from the disposal site. Numerous hydro-geological studies have concluded that the disposal sitewill not affect the new wellfield. The graph in Annex 3 shows the significant reduction of pollutant loadfrom Daugavpils to river Daugava during the past ten years, first through the declining industrial activitiesand then through the improved treatment

Municipal Development Fund. The MDF part of the loan was committed in 34 subprojects, all of whichhave been completed. Two thirds of the subprojects were for district heating and energy insulation inschools. One third were for renovation of municipal buildings, mainly with energy efficiency items, smallwater works, and environmental improvements. The distribution of subprojects financed by sector isshown below, with schools renovation (installing energy efficiency boilers and insulation of class roomwindows) subprojects taking up nearly half (48 percent) of the credit line (see Annexes 2 and 3. The nextlargest group (35 percent) was municipal boiler houses, reconstruction of heat routes, installation ofmetering and regulating equipment, as greater insulation of buildings.

Chart 1. Share ofproject sectors by amounts of loans accepted; to 2001

1% * Energy

4X) 35% * Education

7' 35. 0 Environment and regionaldevelopment

o Healfth

48% * Transport

O Culture

Environmental projects, transport sector and health projects accounted for small percentages.

The 34 MDF projects were implemented in 33 municipalities, which shows a good geographicdistribution. Details are shown in Annex 2.

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4.3 Net Present Value/Economic rate of retturn:The economic evaluation for the project at the time of appraisal was done separately for each component.This approach will be continued here.

1ita Urban Transporta Urban Transport - Summary Economic Evaluation Results (figures m Lats millions unless indicated)

At Appraisal At CompletionAll three transport operators All three transport operators Two bus operators Tram & Trolleybus only

together togetherCost of this component 9.4 7.3 4.1 3.2Evaluation Penod 1996-2007 1997-2008 1997-2008 1997-2008EIRR 22 % 12% 3 % 22%NPV (at 10%) 4.4 0.9 -1.4 2.3

The EIRR at completion is roughly half of what was expected at appraisal (12 versus 22 percent). Atappraisal, the assumed 1% decrease in operating costs included all aspects of operating costs includinglabor. Since then labor costs have increased, not declined as projected, because the number of staff has notbeen reduced. Information provided does not allow the separation of the cost of employment ofmaintenance-related personnel from other personnel. Accordingly staff costs have been excluded from theeconomic re-evaluation since their non-specific nature may skew the results. Once only "physical"maintenance and operating costs are considered then the absolute size of the potential savings is smallerthan assumed at appraisal. This results in a lower benefit per project year and the lower IRR and NPVvalues. Details are provided in Annex 3.

On the Daugavpils Water/Wastewater part, a least-cost approach was pursued. The technicalsolutions adopted for both the water upgrading part and the wastewater treatment part were the lowest costsolutions. The complication later was that water consumption fell, which meant that the design norms couldhave been possibly lowered (see Annex 3).

On the MDF part, NPVs ranged from 10 to 40 percent, (see Annex 3).

4.4 Financial rate of return:liga lUrban Transport. A financial rate of return was not calculated at appraisal. After 1999, thefinancial monitoring target was an operating margin of at least 30%. This is calculated as the surplus oftotal income (passenger revenue, other revenue, and public support) over operating costs (excludingdepreciation) as a percent of total income. TTP managed to reach an operating margin of 24 percent by2000, but this declined to 16 percent in 2001. Talava managed to attain 22 percent in 1999, but it declinedto 16 percent in 2000 and 3 percent in 2001. Imanta has been in single digits in all years. The primarydifference between expectations and outcome has been that costs have not decreased, in part due to runningadditional services required by the city. All of the operators are reporting poorer results for the most recentyear (2001). More details are provided in Annex 3.

For SIA Daugavpils Udens, a financial rate of return was also not calculated at appraisal. Key variablesare as follows: the enterprise has made significant efforts to gradually reduce outstanding receivables. Billcollection in the commercial customer group has improved significantly and it has been able to recoversome old debts accumulated during the years of business difficulties. The enterprise has made someprogress in costs savings. The total O&M costs have increased modestly by 4.5% during 1996-2001period. In real tenns total O&M costs have actually declined by 13 percent during the same period.Overall financial performance of SIA "Daugavpils Udens" showed improvement until 2000, but has beendeclining since then. The operating margin was 24% and 25% in 2000 and 2001 respectively. Based on aprojection of costs, tariff development and income projections, the enterprise will remain dependent upon

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external grants or the Municipal budget until 2005 even if no replacement investments will be carried out.The situation is especially critical during the coming 3 years.

For the MDF component, where possible on the small subprojects, ex-post IFRRs were calculated,ranging from 10 percent to 44 percent (Marupe District Heating Rehabilitation). Details are given in Annex3. The schools renovation part helped the Bank gain useful experience for the ongoing Education Project inLatvia. There are no IFRRs for the schools part.

4.5 Institutional development impact:The institutional impact of the Risa Transport part was modest. Through the project, the Riga

Public Transport Unit (PTU), was created within the Traffic Department of the Riga City administration.It is made up of a with a small staff: a director and two analysts. The original recommendation atpreparation was a staff of about 8, including one seconded from TTP. The PTU developed capacity tocoordinate the work of three quite different companies, to advise them on their business plans, to carry outthe bidding process, and to be the main line of communication with the Bank team. This result issustainable as the PTU has become a regular part of the Riga transport framework.

Daugavpils Water and Wastewater Component. The institutional development impact of the DaugavpilsWater and Wastewater component was high: the SIA "Daugavpils Udens" improved substantially over theproject implementation period, and it is better equipped to operate within the challenges of a marketeconomy. It is not at the point of having privatization potential, but has certainly achieved corporatizationobjectives. A project implementation unit was set up within the SIA "Daugavpils Udens", which hasmastered international procurement.

Municipal Development Fund. The institutional impact of the MDF was high in helping municipalities toprepare feasible projects, but it had no sustainability as a municipal fund because the MOF decided that thework of the MDF should cease once this project was implemented. The MOF took the view that the MDFwas set up for the project alone and did not see it as a regular part of the governmental financial agencies.The MOF prefers to lend to municipalities through the State Treasury.

5. Major Factors Affecting Implementation and Outcome

5.1 Factors outside tle control of governmnent or implementing agency:Differences in economic growth by region have had an impact on the project. In the region of

Daugavpils, close to the border with Russia, economic performance has been especially depressed. Anumber of state enterprises have closed or are operating at very low capacity. This has affected waterdemand. In Riga, economic conditions are more buoyant and public transport ridership, while it fell in themid-1990s has remained steady since. Motorization has continued strongly, providing an alternative modefor Riga residents.

5.2 Factors generally' subject to government control:The need to raise tariffs on both the Riga Transport and the Daugavpils Water/Wastewater

components was a key issue. This function is the responsibility of the respective City Councils. In bothcases, Departments of Social Protection exist in the municipality administrations, which look closely at thesocial impact of tariff increases on households. As discussed in other sections of this report, the delicatebalance between the financial need to make tariff increases and their social impact is a complex issue. Inboth cities, Municial officials (the Mayor and Council members) are elected positions, and the "pulse of thepublic" is a very important consideration.

5.3 Factors generally subject to implementing agency control:

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RiUa Urban Transposrt. Revenue Collection has improved substantially. Conductors were introducedduring fall 1996 and 1997. Revenues from single ticket sales increased about 30%. Revenueadministration has improved as well. The extent of fare evasion has decreased from an estimated 10-30%at appraisal to 7-8 % now.Fleet Size. The SAR foresaw the total vehicle fleet size for each operator shrinking substantially asnon-operational vehicles were scrapped and taken off the books. As their financial position improved, thecompanies would themselves invest in new equipment and continue modernizing their fleets and scrappingolder vehicles. The cost of these investments was included in the project cost used in the economic analysisat appraisal. The total size of the fleets would remain at the lower level as operators rationalized routes toconcentrate only on those with the highest ridership. At completion, the number of vehicles in the bus fleetshas not declined as expected and bus operators have not reduced their routes. Most recent figures (2002)show growth in the fleets of both bus companies. A summary is provided in the "Additional_Tables.doc"document attached electronically in Annex 7, List of Supporting Documents.Labor has not declined as expected at appraisal. Employment has increased at all three of the operators.Details on employees, including several efficiency ratios, are found in the "Ops Data" spreadsheet attachedin Annex 7.

Dzgsavpils Water and Wastewater. Like everywhere else in the Baltic countries and Eastern Europe,Daugavpils experienced a significant decline in water demand. This decline started first due to slowingindustrial activities, but was intensified later by metering of water sales, by increasing tariffs and by theopportunity to significantly cut consumption by fixing leaking toilets. Currently, SIA "Daugavpils Udens"bills about 173 Vip/d (liters/person/day), while cities like Tallinn, Riga and Siauliai bill between 70 and 130lip/d (pre-collapse level was about 400 VIp/d). But sales are continuously declining in Daugavpils towardthe figures of the other Baltic towns. Because these declines were not anticipated, the upgraded facilitieswere significantly overdimensioned compared to the present actual needs. The magnitude of theoverinvestment is around 30-40 %. About half of the city's household have water meters, which is less thanin other Bank projects in the Baltics, implying that water consumption in Daugavpils is still higher than ifthere was wider coverage of meters. Nevertheless, the declining trend of water sales meant that SIA"Daugavpils Udens" and Municipality of Daugavpils needed to accelerate tariff increases by more thanwhat was planned in order to keep the revenue in line with the planned development. However, this provedpolitically difficult and caused tension between the Borrower and the Bank during implementation, and itled to unsatisfactory PSR ratings in some years.

Municipal Development Fund. There were no major factors that affected implementation outcomes on thiscomponent other than the functional issue between the MOF and MOE as discussed. Split responsibilitiesundercut the obtaining of a unified view.

5.4 Costs andfinancintg:Riga Transport. There were no other major factors affecting project costs and financing for thiscomponent.Dsaugavpills Water and Wastewater. The project faced a decline in water consumption. This reduced thefinancial performance as discussed in Annex 3.Municipal Development Fund. No special factors.

6. Sustainiability

6.1 Rationalefor su(stainabiliht r ating:Due to financial performance problems, the project has not proved sustainable as a long-term

approach to handling municipal service delivery.

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Riea Urban Transport. The rating for this component is unsustainable. On the positive side, the servicesof Riga transport system are proving so far to be very resilient. In an era where many public sectortransport companies in the region, especially in the CIS countries, have seen rapid deterioration of serviceand financial viability, Riga's transport system has witnessed substantial improvement in quality of service,accompanied by modest, if still inadequate, improvement in the financial situation of the three operators.The PTU has proven to be quite sustainable in that for the first time the sector is able to benefit fromcoordinated planning and information exchange sharing. Prior to the project, the three companies operatedin isolation and did not share information. Today each one is able to receive information from the PTUabout the operations of the other companies. This peer group pressure has acted as a focal point to obtainservice improvements.

On the negative side, financial viability depends on the operating companies receiving newequipment and/or capital grants from the municipal government on an ad hoc basis. In 2001 the number ofspecialty categories for subsidies increased, giving rise to the view that the potential for politicalinterference will increase as the number of ad hoc mechanisms grows. More recently discount fares havebeen ordered by the City for younger school children. The operators still perform very much likegovermment departments, subject to political, not market forces. Overall, this financial unsustainabilityreduces the physical and efficiency gains of the project

Dauaavpils Water and Wastewater Component. While there have been technical and efficiency gainsand institutional improvement, they are not of sufficient magnitude to make this component sustainable.Sustainability would be achieved if: (i) the current unaccounted water volumes are significantly reduced(recently, some positive trends in reducing the UFW were recorded); (ii) further cost-cutting in theenterprise is vigorously performed; and (iii) tariff decisions are not postponed. The wastewater sludgedisposal needs further costly attention. SIA "Daugavpils Udens" is already working on preparing the nextproject, together with other Latvian towns, and hopes to obtain grant financing from The European Union'sISPA Fund of at least 50 percent, and possibly 70 percent, of the investment costs. Without this, the projectprogress achieved so far will be unsustainable.

Municipal Development Fund. The MDF has turned out to be institutionally unsustainable as explained.There was no revolving fund set up under the loan and therefore no chance of channelling the reflows backto municipalities for other investments. The MDF did help to impart valuable project preparation andappraisal skills to the municipalities.

6 2 Transition arrangement to regular operations:Under this project, there were no special Project Implementation Units (PIUs) set up other than the

PCU in Riga, and a Project Unit within SIA Daugavpils Udens - the project design used existing operatingcompanies in Riga and in Daugavpils. In that sense, there is no difficulty in transition arrangements toregular operations for the two cities. Riga's PTU has "transitioned" already into a regular feature of theCity's transport work.

The MDF did not transition into a regular feature, as the MoF and the Ministry of Economyeliminated it as a special Unit.

7. Bank and Borrower Performance

Bank7.1 Lending:

The Bank's performance in identifying and helping to prepare the loan was satisfactory,

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considering that these were the early days of post-Soviet Union and little hard data were known. The loandesign was ambitious, tackling transport, water/wastewater and a pilot municipal development fund (as aseparate activity) in one loan. From the first identification mission (November 1993) to Negotiations(November 1995), it took two years, which was reasonable. Bank staff inputs were intensive in this periodbecause the different components required inclusion of transport and water specialists, a municipal fundspecialist, an environmental engineer, a building engineer, an urban architect, and a waste managementengineer. The mission teams lacked an urban planner or urban geographer, who could have given amuch-needed perspective on growth points in and around Riga, which would have been very useful forplanning the transport operations. International consultants with a bus operations background worked toprepare detailed business plans for each transport operator in Riga. These were agreed and adopted by theBank, transport operators, and the City as the basis for the financial and operational assumptionsunderlying this component of the project. The problems in the financial covenants and indicators (for boththe Riga and Daugavpils parts) have been fully discussed. Annex 6 summarizes the following ratings:

Overall SatisfactoryRiga Urban Transport Marginally SatisfactoryDaugavpils Water and Wastewater SatisfactoryMunicipal Development Fund Satisfactory

7.2 Supervision:This was a complex task as borne out by the fact that over the six years (May 1996-June 2002) of

project implementation, seventeen missions were required - about three per annum. The Bank's residentstaff in Riga and Vilnius carried out day-to-day supervision in the case of the Daugavpils water project,while HQ staff were responsible for the Riga Transport and Municipal Fund work. The Daugavpils Waterand Wastewater Component, given the importance of Baltic Sea issues, was able to attract significantdonor support through trust funds, which aided the supervision task. On both Riga Transport andDaugavpils Water, the supervision teams showed good flexibility in adapting the financial tests to fit theactual situation, and they showed realism in dropping the requirement for an overall PCU to be located inthe Ministry of Environmental Protection and Regional Development.

The supervision of the Riga Transport component is rated as unsatisfactory. With the exception of thefinancial indicators, the numerous and not very useful monitoring indicators were not reexamined, norrestructured. The Bank correctly made reform of the passenger tariff and revenue side of the financialpicture a priority. The poor indicators and the little use made by the Bank of the transit operationsconsultants who were helping the PTU, led perhaps to less focus on the cost control performance of thetransport operators. Alternatively project supervision could have made use of bus and tram operationalexpertise by bringing in Bank consultants for this purpose. As regards the accuracy of the project's team'sreporting and the timeliness of calling attention to problems when they occurred, the Bank performed well.The project was rated as Unsatisfactory overall in 1998 and financial compliance was judgedunsatisfactory in most years. The final PSR in June 2002 just prior to the Closing Date rated the project asonly marginally satisfactory. It is consistent with this ICR.

Overall SatisfactoryRiga Urban Transport UnsatisfactoryDaugavpils Water and Wastewater SatisfactoryMunicipal Development Fund Satisfactory

7.3 Overall Bank performance:Despite the problems with financial indicators, in looking at the whole picture of all components and

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looking at preparation, appraisal and supervision, overall Bank performance is rated as satisfactory. TheBanks intensive effort and dialogue with the Borrower and the implementing agencies, backed up by keybilateral support in the case of Daugavpils, has produced important positive results. This was recognizedwhen the Bank team won an "Excellent in Supervision Award". The strongest gains were in the institutionalprogress made by SIA Daugavpils Udens, which in many ways had to operate in the most difficult setting(economically depressed region). Bank supervision teams are to be credited with a pro-active stance,recommending that modifications be made to the financial covenants, and Bank Regional Management is tobe credited with a proactive stance, visiting Daugavpils on several occasions. Bank management stressedthe need for the Municipality to take actions in a timely manner, i.e. when tariff increases were to beadopted, these should be in the beginning of a year and not wait until most of the year had gone by. Moretimely action was essential to improving the financial situation in SIA Daugavpils Udens. Bankmanagement, did note, however, that the constant push for higher tariffs (itself driven by falling revenuesbecause of collapsing water demand) was placing an undue social hardship on families in the economicallydepressed areas. A social assessment was launched in 1999 to measure the social impact and it confirmedthat a balance had to be struck between tariff increases and social protection. Daugavpils city improved itsincome-means testing of households qualifying for subsidies, as did Riga City.

Overall SatisfactoryRiga Urban Transport Mixed, some satisfactory, some unsatisfactoryDaugavpils Water and Wastewater SatisfactoryMunicipal Development Fund Satisfactory

Borrower7.4 Preparation.

There was no formal preparation requested of the Borrower - the MOF. The preparation missions dealtmainly with the Ministry of Environmental Protection and Regional Development and the Ministry ofEconomy. The details were left to the implementing agencies. Preparation from Riga City was fair.However, there was no coordination of the work of the three transport companies - this only began toemerge when the Public Transport Unit (PTU) was created in 1996. The City of Riga prepared asatisfactory transport policy statement and detailed business plans for each transport operator were agreedto. Preparation by SIA Daugavpils Udens was reasonable, but pursuit of overly large design standards wasa problem The Municipal Fund was set up as a pilot, and criteria were agreed at Negotiations. Thecoordinator of the MDF was recruited in early 1996, and the basic manual for the MDF's operations wasdeveloped in the first year of implementation. Criteria for subprojects were agreed at Negotiations, and thefirst few subprojects were appraised by the MDF when it was staffed in early 1996.Overall Satisfactory

Riga Urban Transport SatisfactoryDaugavpils Water and Wastewater SatisfactoryMunicipal Development Fund Satisfactory

7.5 Government implementation performance:The MOF handled all withdrawal applications for the MDF part, but had little to do in implementing

the loan's transport and water parts other than to review the few loan amendments and re-allocations ofloan disbursement categories that were made in the course of implementation. The MOF showed interest inthe project throughout implementation: officials of the MOF/Treasury met with each supervision mission toreview the mission's findings. Under pressure from the Bank the City of Riga raised the passenger tarifflevels faster than inflation and subsidy amounts were paid. However the City has also required moretransport services to be run, helping to keep operating costs above the projected levels. The Ministry ofEnvironment played a more detailed role on the Daugavpils Water Project by ensuring that the project

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designs were in compliance with national environmental standards and polices. Municipality of Daugavpils

was slow in providing required help to SIA "Daugavpils Udens". As a result, tariff adjustments alwayswere lagging behind, thus aggravating the financial situation of the water utility. As regards the MDF part,

tensions began to emerge between the MOF and the Ministry of Economy in the third and fourth years, and

as a result, the MDF was discontinued as an entity beyond the loan's implementation period. There was no

revolving fund set up for channelling loan repayments from the municipalities back out to the communities.

Repayments were made to the MOF by municipalities, who could only get future funds out of the

Treasury's loan window. The review of lending to municipalities (and the appraisal of such projects) was

consolidated in the MOF/Treasury, specifically in the functions of the Treasury's Local BorrowingsCommittee.

Overall SatisfactoryRiga Urban Transport Riga City - Mixed: some satisfactory, some not satisfactory

Daugavpils Water and Wastewater:Ministry of Ernvironment and Regional Development SatisfactoryMunicipality of Daugavpils UnsatisfactorySIA Daugavpils Udens Satisfactory

Municipal Development Fund Satisfactory

7.6 ImiplemenitingAgency:Riga Transport. The PTU did a good job in coordinating the needs of the three transport companies and

serving as the main communication channel with the Bank, although planned quarterly operational reportsand air quality reports were not issued.SIA "Daugavpils Udens" showed substantial improvement as an entity. By the end of the project, its

operations in terms of management style and efficiency (water metering, billing, accounts receivables)compared well with that of the other water utilities in the Baltics. Among the Baltic water utilities which

participated in Bank-financed projects, SIA Daugavpils Udens made the greatest progress in improving its

operations.The MDF was highly efficient. It was staffed by just two persons, who carried out a large workload in

appraising 34 subprojects and helping to oversee their implementation. The MDF staff were responsible foroverseeing procurement and they advised the 34 small municipalities on Bank procurement procedures, and

on project reporting and monitoring.

Overall SatisfactoryRiga Urban Transport SatisfactoryDaugavpils Water and Wastewater SatisfactoryMunicipal Development Fund Satisfactory

7.7 Overall Borrowier performance:

As regards the Borrower (defined as the MOF under the loan), performance was satisfactory. Areas of

weakness were a lack of coordination between the respective Ministries (MOF, Ministry of Economy, and

Ministry of Environment Protection and Regional Development) and with the cities.

Overall SatisfactoryRiga Urban Transport SatisfactoryDaugavpils Water and Wastewater SatisfactoryMunicipal Development lFund Satisfactory

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8. Lessons Learned

1. An "early generation project" that included a view of fiscal decentralization. The Baltics countrieswere among the first in the FSU to embark on developing a framework for fiscal decentralization, underwhich municipalities would be accountable for their own borrowing decisions and would be judgedaccordingly. The MoF would no longer be the decision-maker of municipal investment needs. This projectwas therefore a forerunner, in which the Bank and the Government grouped together three sectors (urbantransport , water/wastewater, and district heating/energy efficiency in schools) in several different locations(Riga, Daugavpils and more than two dozen smaller municipalities). But with the innovative approach,came a set of unanticipated difficulties. One was how to ensure coordination and consistency between thevarious parts of the loan. The lack of a project coordinating unit in the Ministry of Finance prevented theGovernment from playing an overseeing role on the project. Thus, the coordination role fell more on theBank's shoulders. Another problem was how to cope with revenue problems in SIA Daugavpils Udens inthe face of falling water demand. The Bank's linkages with other water projects helped to provide aconsistent approach, e.g. a web site was maintained showing the comparative tariff structures in otherwater/wastewater projects in the Baltics. The web site proved useful for city officials to monitor and forreminding the Municipal Council of its need to take action.

2. Use of Indicators. Project experience reinforces the essential need for meaningful and timely indicatorsto guide the management of the project. The rate of return on assets measure (10 % for Riga transportcompanies, and 1.5 % for SIA Daugavpils Udens) aside from the excessively high target values, were notreliable or practical indicators because the enterprise assets had not been revalued and there were problemsin interpreting accrual and cash flow accounting definitions. Tighter controls could have been put in placeto keep the transport operating companies on track with their cost control efforts if Riga City had used acost-related absolute-value indicator, such as number of staff employed in each of the three transportenterprises, rather than only summary financial indicators. The Bank showed flexibility, substituting theoperating margin for the rate of return on assets, but even the operating margin mixes both cost andrevenue effects.

3. Demand Estimates. The water demand curve of 1991-94 indicated that demand was falling. Thecollapse of industrial production was hitting state enterprises around Daugavpils especially hard. Thereduction in early 90's was largely due to a decline in the industrial water use. The debate between theappraisal team and the client was that while the client believed industry would pick up in the near future,the appraisal team argued that even in that case new industries would use less water. The other argumentwas that the norm of 250 VIc/d was too high for domestic use and should be closer to westem averages of150-180 V/c/d. The adopted design figures (these could not be based on average consumption at the time)especially for the Bank-financed iron removal plant were not far from those Westem country norms. Noone at the time predicted that people would start within five years to install water meters in their ownhomes. There was a faster than expected response to installing metering and higher tariffs combined toimpact on unit water consumption. People started to show consumption of 60-80 V/c/d, which is in linewith urban Western Europe. In Daugavpils, the project's designed water production capacity was in linewith initial demand, but not metered demand under higher tariffs.

4. Utiflity Performance Regulation and Evaluation. The difficult questions of evaluating municipal publicutility performance need to be reviewed by a nationally appointed Public Service Utility Regulator. Underthe Bank's Programmatic Structural Adjustment Loans (PSAL), much attention has been focussed on a

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national level regulator. The PSAL experience shows that the national approach also needs to be extendeddown to the purview of municipal utilities.

5. The Municipal Development Fund. There should not have been a split of the subproject appraisalfunction (with the MDF) from that of concluding the actual subloans with the municipalities, disbursingfunds to them, and collecting repayments (these functions were with the MoF/Treasury). Municipaldevelopment credit lines to Lithuania and Georgia have benefitted from the lesson leamed here, as theyconcentrate all of the key functions in one entity.

9. Partner Comments

(a) Borrower/inipleynenting agency:Riga Transport

Detailed comments were provided by the Riga Public Transport Unit (PTU), which have been placed inAnnex 8.

Daugavpils Water

Detailed commnents were provided by SIA Daugavpils Udens, which have also been placed in Annex 8.

Municipal Development Fund (MDP)

The MDF completed its ICR of the project. The MDF's ICR rates the project outcome as"satisfactory", the Sustainability as "Likely", the institutional impact as "High", the Bank performance as"Highly Satisfactory", the Borrower's performance as Satisfactory, and the quality of entry as"Satisfactory". The MDF says that the project was not at risk at any time.

(b) Cofinanciers:

Four donors - Sweden SIDA, Denmark's EPA Department, the Finnish Ministry of theEnvironment, and the Nordic Environment Finance Company (NEFCO) - have followed project progress atall times; they joined the Bank in missions, they helped to address issues and bring them to the attention ofpolicymakers in Daugavpils and at the national level in Latvia's Ministry of Environmental Protection andRegional Development, and in the MoF. The donors agreed with the Bank's analysis on key project issuessuch as the need to raise tariffs, the need to keep the physical implementation moving, and the need to focuson institutional improvement of the SIA Daugavpils Udens. Their mutual role was crucial to the projectoutcome.

The following comments were received from the Finnish Ministry of the Environment on theDaugavpils component (the comments of the other donors will be available in January and will be part ofthe official record):

As part of the project, the Finnish grant amounting to US$ 1.2 million was targeted to theTwinning cooperation between Tampere Water Works and Daugavpils Water and Wastewater Enterprise(DWWE) for a three year period. The cooperation was focused on formulation and implementation of (a) ofa new External Relationship Policy; (b) a new Management and Administration Procedures, Systems andOrganizational Development of DWWE; (c) an improved Operation and Maintenance Practice; and (d) aTraining Program.

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The Twinning component was implemented successfully according to the plans and targets.Resources reserved by the Finnish partner and the Finnish Ministry of the Environment were adequate forattaining effectively the targets set in the project: Cooperation worked well and in line with the principles ofTwinning cooperation, which has led to continuous partnership. The participating personnel of TampereWater was highly committed to the task. The outcome of the construction of the waste water treatmentplant would have been more successful if the comments by the Twinning partner would have been bettertaken into account before the implementation phase.

Cooperation between the Twinning partner and the construction company needs to be improved.Delays in the project meant that the Twinning partner was not necessarily in place when mostly needed.

Kristiina IsokallioDirector, Central and East European Cooperation;Ministry of the Environment, Helsinki, Finland

(c) Other partners (NGOs/private sector):

Not applicable

10. Additional Information

The project was conceived in the era when social assessments were still in their early days. Thus, thedesign of the tariff conditionality (Riga Transport, Daugavpils Water/Wastewater) reflected anoverwhelming concem for financial viability of the enterprises, but insufficient attention to the impact ofrepeated tariff increases on affected households. However, as a result of adjustments made during loanimplementation, and with the help of a detailed social assessment done in Daugavpils in 1999, when morethan a thousand households were interviewed, the tariff conditionality became more flexible with theadoption of the operating margin test.

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Aunne 1L. Key Performanmee InDdicatolrs/Log Frame Matrix

Outcome I Impact Indicators:

IndtcatorlMatzix Projected in last PSR ActuaULatest Estimate

(i) Riga Urban Transport The project files and spreadsheets listed inAnnex 7 contain the indicators that were

Indicators as 12/95 vs. 12/97, 12/98 (where used. They are more detailed (such as staffavailable) employed at the three companies, see below)

than were the original ones coming from theSize of fleet (peak vehicles plus reserve): SAR.Owned Vehicles. (TTP 628, 586: Imanta172,197; Talava157, 179)Peak Vehicdes- (TTP 445, 425; Imanta: 120,120; Talava 105(i) StaffNehicle ratio (peak vehicles):TTP. 6.07, n a; Imanta: 6 43, 8.84; Talava6.95, 8.14.(i) Passenger cost/kilometer (santimes):TTP: .24, .41; Imanta .27, 41; Talava. 26,.40 (excludes depreciation)

(i)Passenger revenue/kilometer (santimes):TTP: 19, 35; 1manta .17, 25; Talava: .14,25)

(i)Passengers evading fares: This indicatorhas improved considerably with theintroduction of conductors. Practically, riderscannot evade payment anymore.

Riga Urban Transport - Staff Employed

1994 1995 1996 1997 1998 1999 2000 2001TTPSAR projection 2,639 2,702 2,583 2,496 2,496 2,496 2,496 2,496Actual, total 2,858 3,282 3,893 3,960 3,904 3,901drivers 891 854 861 880 886 900conductors 0 498 1,120 1,136 1,135 1,147maintenance, technical 1,930 1,897 1,876 1,906 1,845 1,817TalavaSAR projection 730 730 664 618 618 618 618 618Actual, total 697 740 700 930 910 942 948 969drivers 260 531 543 568 302conductors 0 0 531 56 271 593maintenance, technical 399 376 387 387 370llmantaSAR projection 685 772 714 646 646 646 646 646Actual, total 683 760 700 1,075 1,026 1,045 1,086 1,131drivers 336 0 593 577 596 324 619conductors 0 0 1___ ___ 266 ___

maintenance, technical 452 419 419 465 478Note: non-zero entries where data is not available have been left blank, total employment also includesOther employees not shown separatelySource: SAR, PTU

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Output Indicators:

Indicator/Matrix Projected In last PSk Actuali/atest C-stimito

End of project

DWWW IndicatorsIndicator Year 1996 1997 1998 1999 2000 2001 2002

EndingUnaccounted for water Target 3.5 3.5 1.0 1.0 1.0 1.0 1.0(million m3 per year) (25%) (25%) (8%) (8%) (8%) (8%) (8%)(percentage of total Actual 4.6 4.1 4.0 4.7 4.2 3.9production) (31%) (30%) (31%) (37%) (37%) (36%)

Number of employees Target 416 395 375 375 375 375 375(total number) (5%) (5%) (0%) (0%) (0%) (0%) (0%)(percentage reduction in total) Actual 420 385 369 350 327 319

Combined Tariff (santimes) Target 14.5 16.3 17.0 21.3 21.4 23.4 23.5(1995 santimess) 33

ActualCombined tariff Target 10.5 16.0 16.0 19.0 21.0 27.9 29.7-adjusted for inflation- Actual 14.5 17.1 23.6 27.7 30 33(current santimes)Billing collection Target 85% 90% 90% 90% 92.5% 95% 95%performance Actual 85% 101% 97% 97% 100% 105%(percentage)Consumer receivables Target 135 60 60 60 60 60 60(days) Actual 161 87 80 80 94 90

Debt service cover Target 1.3 1.3 1.3 1.3 1.3 1.3 1.3(minimum) Actual

Return on assests Target 1.5% 1.5% 1.5% 1.5% 2% 2%(percentage) Actual

Note: The setting of the leakage indicator (Unaccounted-for-water) has been flawed. The initial levels arebased on pure estimates. The production was not accurately metered, and the consumption was onlypartially metered, domestic consumption not at all. Consequently, the difference (UAFW) remained a wildguess. Furthermore, the project did not include water distribution network rehabilitation, so the targeted

drop in UAFW, from 3.5 million m3/y down to 1.0 million mr/y was baseless. Anyway, the actual UAFW,40% of production, is high and in need of special attention and significant investment in the near future.

The quality of drinking water quality in Ziemelu Wellfield at the end of the project is muchimproved.

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Annex 2. Project Costs and Financing

Project Cost by Component (in US$ million equivalent) A rs, ca tt Pe__. j t. . ~~~~~~~~Appraisal . Actual/Latest Percentag~ of

Estimate Estimate AppraisalProject Cost By Component US$ million US$ million

Riga Urban TransportEquipment Purchase 17.40 19.40 43.2Technical Assistance 0.50 0.33 1.2DWWWWater Supply and Distribution 7.95 9.49 19.5Sewerage and Wastewater Treatment 7.55 8.85 18.7Technical Assistance and Ancillaries 2.60 3.48 6.5

MDFProject Investrnents 4.30 4.25 10.6Institutional Development Component 0.20 0.20 0.5

Total Baseline Cost 40.50 46.00Physical Contingencies 1.80Price Contingencies 3.10

Total Project Costs 45.40 46.00Total Financing Required 45.40 46.00

ProJect Costs by Procurement Arrangements LAppralsal Estimate) (US$ million equivalent)

Prouroment MethodBExpendlture Category CNC OtherNBF. Total Cot

1. Works 0.90 4.30 0.00 0.00 5.20(0.50) (3.40) (0.00) (0.00) (3.90)

2. Goods 14.80 0.00 3.00 0.00 17.80(13.50) (0.00) (2.70) (0.00) (16.20)

3. Services 0.00 0.00 1.80 1.80 3.60(0.00) (0.00) (1.60) (0.00) (1.60)

4. Supply and Install 6.90 0.00 0.30 11.60 18.80

(5.30) (0.00) (0.20) (0.00) (5.50)5. Miscellaneous 0.00 0.00 0.00 0.00 0.00

(0.00) (0.00) (0.00) (0.00) (0.00)6. Miscellaneous 0.00 0.00 0.00 0.00 0.00

(0.00) (0.00) (0.00) (0.00) (0.00)Total 22.60 4.30 5.10 13.40 45.40

(19.30) (3.40) (4.50) (0.00) (27.20)

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Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent)

Procurement MethodExpenditure Category ICB NCB Other

1. Works 2.04 0.39 0.00 0.00 2.43(0.93) (0.27) (0.00) (0.00) (1.20)

2. Goods 14.52 0.00 2.65 0.00 17.17(13.27) (0.00) (2.30) (0.00) (15.57)

3. Services 0.00 0.00 3.61 2.13 5.74(0.00) (0.00) (1.51) (0.00) (1.51)

4. Supply and Install 6.38 0.00 0.08 9.75 16.21(5.43) (0.00) (0.00) (0.00) (5.43)

5. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

6. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

Total 22.94 0.39 6.34 11.88 41.55(19.63) (0.27) (3.81) (0.00) (23.71)

'Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies.2 Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff

of the project management office, training, technical assistance services, and incremental operating costs related to (i)managing the project, and (ii) re-lending project funds to local government units.

Project Financing by Component: Overall Project (in US$ million equivalent)Percentage of Appraisal

Component: Overall Appraisal Estimate Actual/Latest EstimateProject___ _ =__=,_--_

Bank Govt. CvF. Bank Govt,- (C oF, Baink (.ovt. CoF.Riga Transport 16.80 1 .90 0.00 16.91 2.82 0.00 10.7 148.4 0.0

DW'WWWater Supply 6.55 1.61 2.31 6.34 1.20 1.95 96.8 74.5 84.4Wastewater 3.03 7.10 2.91 5.94 96.0 83.7TA and etc. 0.45 0.24 1.17 0.47 1.85 1.18 104.4 770.8 100.9MSDP TOTAL 27.30 7.10 11.00 0.0 0.0 0.0

The SAR did not include financing break-down by component, just a Summary Financing Plan. Daugavpilshad 5 foreign co-financiers.Details on Riga Transport are shown below.

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World Bank disbursements Loan No. LV-3964 for rehabilitation of Riga public transport and co-financing of Riga CityCouncil and municipal bus companies Imantn and Taiva (1996-2002):

Total WB Tanlava Imanta TTP Cofinnncing Talasv Imanta .TPDisbursements of RCC and

buscompanies

ServicesConsultants $302,998.21 $72,719.57 $81,809.52 $148,469 12servicesPTU $26,974.58 $6,473.90 $7,283.14 $13,217.54

sub-total, $329,972.79 $79,193.47 $89,092.65 $161,686.67services

Goods . _ _ _

Spare parts $1,287,079.60 $318,645.58 $344,251.25 $624,182.77 89,913.54 26,475.68 63,437 86LVL LVL LVL

Mercedes $469,664 15 $271,628.79 $198,035.36 73,257.97 42,338.28 30,919.69Benz spare LVL LVL LVLpartsTrolleybuses $5,083,752.81 $5,083,752.81 292,813.51 292,813.51

LVL LVL

Mercedes $6,023,057.75 $3,011,528.88 $3,011,528 88 304,744.00 152,372.00 152,372.00Benz buses I LVL LVL LVLBus washing $54,239.08 $54,239.08machineBus lift $12,054.02 $12,054.02 2,960.73 2,960.73

LVL LVLBus systems $7,742.59 $7,742 59 1,210.00 1,210.00tester LVL LVL

Other bus $270,260.86 $270,260.86 43,695.22 43,695.22equipment LVL LVLTram $2,159,899.30 $2,159,899.30 142,472.68 142,472.68refurbishment LVL LVL

sub-total, $15,367,750.16 $3,946,099.80 $3,553,815.48 $7,867,834.88 951,067.65 411,524.59 246,729.55 292,813.51goods LVL LVL LVL LVL

Works

Imanta $934,852.98 $934,852.98 677,466.00 677,466.00maintenance LVL LVLworkshop

Talava $274,120.90 $274,120.90 70,704.02 70,704.02maitenance LVL LVLworkshop

sub-total, $1,208,973.88 $274,120.90 $934,852.98 $0.00 748,170.02 70,704.02 677,466.00 0 00 LVLworks LVL LVL LVL

Total $16,906,696.83 $4,299,414.17 $4,577,761.12 $8,029,521.55 1,699,237.67 482,228.61 924,195.55 292,813.51I__ _ __ _LVL LVL LVL LVL

Table 2: Summary of the MDF Implemented ProjectsTable: Number of Projects and Amounts Accepted by Sectors; to 2001

Sector Number of projects Total amount of loans required (LVLsubmitted (USS)); (1USS- 0,595 LVL)

ENF Energy 12 712 836 (I 198 043,69)EDF Education 15 972 461 (I 634 388,23)EVF Environment and regional development 1 135 000 (226 890,76)WEF Health 1 79 025(132 815,12)TRF Transport 15 000 (25 210,08)CUF Culture 4 106 042 (178 221,84)

_TOTAL: 34 2 020 364 (3 395 569,75)

Project title Municipality Project crso.St W'orhl RanALtian aintitont

Reconstruction of district heating Council of Marupe parish (Riga Ls 252 337 Ls 201 874supply network in Jaunrarupe village region)

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Heating supply and water supply of Council of Rundale pagasts (Bauska Ls 40 000 Ls 32 000Pilsrundale Secondary school region)Reconstruction of Allazi parish Primary Council of Allazi pagasts (Riga Ls 120 000 Ls 30 000school region)Improvement of physical and education Council of Belava pagasts (Gulbene Ls 35 000 Ls 28 000work of Belava parish Ozolkalna region)Primary schoolImprovement of central heating system Council of Roja parish Ls 50 000 Ls 40 000in Roja parish (Talsi region)Reconstruction of boiler house in Council of Valmiera parish Ls 128 000 Ls 104 000Valmiera parish (Valmiera region)Reconstruction of boiler house and Council of Lejasciems parish Ls 49 350 Ls 40 000heating supply system in Lejasciems (Gulbene region)parish

Setting up of sport complex in Trapene Council of Trapene parish Ls 54 036 Ls 29 000parish (Aluksne region)Reconstruction of Siksni Primary Council of Dunika parish Ls 46 020 Ls 23 276school (Liepaja region)Reconstruction of heating supply Council of Lizums pagasts Ls 152 000 Ls 50 000system in Lizums parish (Gulbene region)Completion of construction works of Council of Adazi parish (Riga Ls 350 000 Ls 280 000assembly and sports hall of Adazi region)Secondary schoolReconstruction of district heating Council of Grobina parish Ls 71 000 Ls 56 800supply system Grobina parish (Liepaja region)Increasing of heat resistance of Preili Council of Preili region Ls 98 781 Ls 79 025polyclinicReconstruction of heating supply Council of Bauska town Ls 75 400 Ls 60 320system in BauskaConstruction of sports hall and Council of More parish (Cesis Ls 25 573 Ls 15 000reconstruction of culture hall in More region)Completion of construction works in Council of Garkalne pagasts (Riga Ls 250 000 Ls 190 000Garkalne Primary school region)Reconstruction of the roof of Secondary Council of Durbe appanage (Liepaja Ls 17 735 Ls 15 000school in Durbe region)Reconstruction of heating supply Council of Amata appanage (Cesis Ls 60 000 Ls 25 000system in Amata parish "liksi" village region)Construction of Mazozolu primary Council of Mazozolu pansh (Ogre Ls 90 000 Ls 14 800school for 180 pupils region)Il-stage of reconstruction of central Municipal services enterprise of Ls 86 303 Ls 69 042boiler house, setting up of heat Malta municipality (Rezekneconsumption meters and construction region)of new distnct heating network inMalta panshReconstruction of culture hall in Selpils Council of Selpils parish Ls 25 781 Ls 19 652

(Jekabpils region)Improvement of water supply system Council of Olaine town Ls 234 000 Ls 135 000and water metenng system in OlainetownI stage of reconstruction of central Council of Pavilosta town (Liepaja Ls 16 000 Ls 12 800boiler house in Pavilosta town egion)Modernisation of central boiler house Municipal services enterprise of Ls 37 000 Ls 29 000

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in Dobele Dobele municipalityReconstruction of Primary school in Council of Virga parish (Liepaja s 51 319 Ls 28 600Virga parish region)Reconstruction of pedestrian bridge Council of Skankalne parish Ls 21 347 Ls 15 000over Salaca in Skankalne (Valmieras region)Reconstruction of heat supply system in Social Care centre "Tervete" s 30 000 Ls 24 000social care centre "Tervete" (Dobele region)Reconstruction of Berzgale Primary Council of Leimaoi parish Ls 18 399 Ls 12 785school I (Jekabpils region)Construction of the structure of roof of Council of Rujiena town (Valmiera Ls 103 048 Ls 50 500library in Rujiena town region)Construction of sports hall of Council of Koknese parish Ls 307 000 Ls 210 000Secondary school in Koknese (Aizkraukle region)Reconstruction of Primary school in Council of Kuku parish (Jekabpils Ls 19 700 Ls 14 000Kuku parish region)Construction of sports hall and culture Council of Nautreni parish Ls 50 000 Ls 40 000centre in Nautreni parish (Rezekne region)Reconstruction of roof of culture club i Council of Karsava town (Ludza Ls 26 113 Ls 20 890Karsava town region)Conncetion of sanitation-hygiene Council of Belava parish (Gulbene s 36 297 Ls 25 000rooms, canteen, cabinet of chemistry of region)the Kr.Valdemars primary school of theBelava parish to the sewage of thevillageTOTAL--No. 34 - - -, - Ls2 02036

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Annex 3. Economic Costs and Benefits

The economic evaluation for the project at the time of appraisal was done separately for each component.This approach will be continued here.

Riga Urban Transport

First, we look at some key trends:Passenger Tariff Levels With some "lumpiness," these have been increased faster than inflation. Theincreases in tariffs have not been excessive compared to increases in GDP per capita.Riga Urban Transport - Passenger Tariff (figures In Lats unless noted)

1991 19951 199 1997 1991 199 2000 20011Single Fare tanff 008/ 008q 014 0140 0.18( 0.180 0.20 0.200Date of fare mcrease June I June I Feb 11Average fare per fare paymng passenger 0.02 0.042 0.06 0.06 0.07 0 08 0 094 0.098Average asa % of single farc 31/ 530/4 48° 48%I 430, 47%/c 48!/1 49%Smgle fam tanff per GDP per capita 0.0091/4 0012 0 011'/4 0.0120/ 0.011 0/ 0.0110/c 0.010%Source: SAR, PTU

Discount riders. These have decreased slightly due to better fare collection discipline and changes in Cityof Riga fare policy. Discount fare in this context means reduced fares mandated by social policy, not thediscounts that may arise from the use of monthly passes or marketing promotions. The structure of thediscounts are politically influenced. Since fall 2001 all schoolchildren in grades I to 4 are carried free ofcharge. For a limited period, prior to elections in early October 2002, all pensioners were able to ride freeof charge on weekends.Riga Urban Transport - Discount Passengers (Three Public Operators) (figures in passengers millions unless noted)

1994 1995 1996 1997 199 1999 2001 2001Total revenue passengers 316.5 212.5 232 o 256 6 247 1 229.71 219.31Passengers travellmg with discount fam 94 8 109.14 108.7 83 838Discount passengers as a % ofttotal disou41ntcr 43i q 44108 37./4 381Source: SAR, PTU N.B these figures exclude passengers travelling free of charge (children under age 7, invalids, people over age 80).These represent 3 to 5 % of total passengers until 2001 and may represent a higher proportion now

Public Subsidy Levels. These have increased in nominal terms, with slight decline since 1998 in constantterms. There has been no decline in constant terms per passenger. Subsidies have become more complexwith new categories of subsidy added in 2001 to facilitate equipment purchases. New buses in bothcompanies are being purchased with 20% of the cost met by the City at the time of purchase and theremainder is financed as a lease over seven years. The lease payment amounts are being paid to thecompanies by a new category of subsidy.Riga Urban Transport -Subsidies Provided (Three Public Operators) (figures in Lats millions unless noted)

1 991 1995 199( 1997 1998 1999 2000 2001Ticketrevenue 7.7 14.5 15.7 19.7 20 8 21.7 21.5Other revenue 0.5 0 3 l l 2.7 3 2 3 3 1T7Subsidies 3.(4 _____ [ 3. 4.2 4.7 48 4.8 4 9Total income 113 18.0 20.9 27.1 28.8 29 8 28 2Subsidies, constant value (1995 base) 3.5 2.8 33 3 6 3.4 3.3 33Subsidy (constant value) per trip (Lats) 0.011 0 013 0.01' 0.014 0.014 0 01i 0.015Source: SAR, PTU

The summary results of the economic analysis, ex-post, are presented below:

Riga Urban Transport - Summary Economic Evaluation Results (figures in Lats millions unless indicated)At Appraisal At Completion, ,

All three transport All three transport I Two bus operators I Tram & Trolleybus

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operators together operators together onlyProject cost 7.3 4.1 3.2

9.4(IBRD & local,plus later local

investment)

Evaluation Period 1996-2007 1997-2008 1997-2008 1997-2008EIRR 22 % 12 % 3 % 22 %NPV (at 10%) 4.4 0.9 - 1.4 2.3

Details on the economic, financial, and operational data are provided in spreadsheets attached

electronically to Annex 7, List of Supporting Documents.

Project Benefits

At Appraisal. All calculations were based on constant currency values and net of taxes. There was noresidual value assumed at the end of the evaluation period. NPV was calculated at 10%. Economicbenefits in the SAR were based on reduced vehicle operating costs and reduced passenger waiting time.Vehicle operating costs were assumed to increase 1% p.a. whether or not there was a project in place.However with the project there was an assumed one time drop of 10% in vehicle operating costs.Passenger waiting time was assumed to be growing at 2% p.a. in the without project case. With the project

there would be a one time 90% decrease in waiting times followed by a further 1% p.a. decline. Howeverthe passenger time cost was relatively unimportant, accounting for only 7% of the present value of the netbenefit stream.

Values of the costs and benefits flows (undiscounted or discounted) were not separately provided in theSAR, only the net benefit flow. This makes it more difficult to assess the appropriateness of the

assumptions.

Economic Analysis AssumptionsSAR SAR ICR ICR

with project without project with project without projectevaluation period 1996-2007 1996-2007 1997-2008 1997-2008investment costs 9.374 0.0 7.331 0.0(million Lats)annual change in 1% p.a. 1% p.a. actual 1997-2001, 3.5% p.a.vehicle operating costs (3.5 to 4% wtd avg in followed by 1% p.a.

financial evaluation)

one-time change in - 10% none actual 1997-2001 nonevehicle operating costsannual change in -1% p.a. 2% p.a. not evaluated not evaluatedpassenger waitingtim e_ _ _ _ _ _ _ _ _ _ _ _ _

one-time change in -90% none not evaluated not evaluatedpassenger waiting

Source: SAR, ICR (spreadsheet "OpsData.xls")

The economic analysis was based on simple, clear, assumptions. The financial forecast was based

on the detailed business plans developed during preparation. These examined revenues, expenditures,

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staffing, etc. in considerable detail. Some older spreadsheets of the financial analysis have survived toprovide evidence of this work. In the time available it has not been possible to reconcile in detail theassumptions used in the two analyses. Generally the financial forecast was done constant currency valueterms. The assumed rates of increase in maintenance costs without the business plan actions were higherthan the 1% p.a. assumption of the economic analysis. Individual line items were given different costincrease rates. A weighted average of these yields overall cost increases without taking action of 3.5% to4% p.a. There was no financial IRR, nor NPV calculated in the SAR.

The principle business plan and financial analysis assumptions were:. purchase of new vehicles (in addition to the 66 project vehicles, another 184 vehicles under eachoperators own funding, save one mechanic per year per new bus))* retirement of old vehicles (save Lats 2,000 annual operating cost per bus)* reduce fare evasion by 50% (from 10% of riders to 5%, generates 5% more revenue)

compensation for concessionary fare* redefining the route network (one-time 5% revenue improvement)* investment in parts and spares* investment in new plant and equipment* in the base case (do nothing) operating costs would increase as follows:

- maintenance and repair staff cost: TTP 2.5% p.a., Talava/Imanta 5% p.a.- stores and materials cost: TTP 2.5% p.a., Talava/Imanta 7% p.a- fuel consumption increases 2% p.a.- revenues fall 2% p.a. due to car ownership- revenues fall 1% p.a. due to population decline- revenues fall 1, 2, 3, 4 % in 1 st through 4th years (and presumably at 4% p.a. after that)due to increasing vehicle unreliability

At Completion. All calculations are based on constant currency values and net of taxes. No residualvalues were assumed. The project benefits are again be based on the reduction achieved in vehicleoperating costs. Information on reductions in breakdowns or trip reliability has not been provided to allowfor a meaningful calculation of passenger time savings. Given that these savings represented a very smallpart of the initial quantitative justification for the project they will be dropped from the benefits calculationat completion.

Excluding staff costs. If anything, including staff costs would have made the returns lower from the dataprovided one is not able to separate the cost of labor related to maintenance from the cost of other labor.Operations and financial data prepared by Bank consultants during supervision were not available inelectronic format.

Transport energy efficiency has been improved although not quantified for this analysis. Quantity ofenergy used per vehicle km has declined by 14%, 15%, and 16% for TTP, Talava, and Imanta respectively.Details are provided in the "Additional_Tables.doc" document attached electronically in Annex 7, List ofSupporting Documents. Slight increases in recent years could mean that the maintenance programs are notsustainable or that the longer run "steady-state" of maintenance has not yet been reached.

Project Returns. Differences in results for TTP and bus companies. The project investments were asmaller proportion of TTP's activities than they were for the two bus companies. Nevertheless the resultsfor TTP were much better than for the two bus companies. The TTP investments were primarily directedtoward significant operational improvements in an existing heavily used fleet, which continues to be heavilyused.

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Financial indicators results. A financial rate of return was not calculated at appraisal. The followingtable provides summary results of financial indicators. After 1999 the financial monitoring target was anoperating margin of at least 30%. This is calculated as the surplus of total income (passenger revenue,other revenue, and public support) over operating costs (excluding depreciation) as a percent of totalincome. TTP has managed to reach around 50 to 70% of this target. Talava managed to attain about 50%of the target between 1998 and 2000. Imanta has not been able to achieve the target. All of the operatorsare reporting poorer results for the most recent year (2001).

Financial Results (Lats millions, current values, unless noted) l1 99 1995 1996 1997 1998 1999 2000 2001

TTPPassenger revenues 4.82 9.52 10.73 13.70 14.47 15.12 14.95Total revenues and support 6.54 10.97 12.3 16.29 17.31 17.81 17.03Operating costs 6.52 10.38 10.95 13.00 13.91 13.58 14.28Operating margin 0.02 0.59 1.4 3.28 3.4( 4.23 2.75Op margin % 0.30/ 5.40/ 11.6°/ 20.2° 19.70/ 23.70/ 16.1%

TalavaPassenger revenues 1.4 2.46 2.15 2.69 2.87 3.05 3.17Total revenues and support 2.26 3.56 4.2 5.61 6.09 6.10 5.37Operatingcosts 2.2 3.19 4.18 4.79 4.78 5.11 5.23Operating margin 0.01 0.36 0.46 0.82 1.32 0.99 0.14Op margin % 0.6/ 10.2°/ 1.1/ 14.7% 21.60/ 16.2°/ 2.6%

ImantaPassenger revenues 1.5( 2.48 2.79 3.30 3.43 3.49 3.41Total revenues and support 2.47 3.47 4.34 5.15 5.41 5.86 5.78Operating costs 2.46 3.36 4.20 4.74 5.08 5.49 5.68Operating margin 0.01 0.11 0.14 0.41 0.33 0.37 0.10Op margin % 0.6/ 3.20/ 3.1/ 7.9% 6.20/ 6.30/ 1.70/

Source: SAR, PTU

Explanation of Project Returns

Demographics. The Latvia national population and the City of Riga population is declining. The onlyarea showing slight population growth in recent years is within the Riga District but outside of existingbuilt up areas, a market almost impossible to serve by public transport. Details are provided in the"Additional_Tables.doc" document attached electronically in Annex 7, List of Supporting Documents.

Revenue and Passenger Trend. The proportion of passengers travelling on discounted fares has not declinedin a significant way. Declining overall ridership over the last four years (1998 to 2001). The privateoperators increasing numbers, share, and share of revenue. The official data here may understatepassengers by two or three times. A change-over is occurring within the private operators as they move outof "taxibuses" and into "minibuses". The SAR forecast passengers much higher than actually wasexperienced, although the SAR did correctly evaluate two important influences. The number of ridersappears to increase during the early years of the project as better inspections result in more riders beingcounted. However the longer run trend of declining public transport use due to declining population andincreasing use of the automobile eventually begins to force the numbers down.

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RIGA URBAN TRANSPORTPassengers (994 -2001

400,000 100%

350.000 90%-*_- --- -- --- - ---- - - --* __ - 80%

300,000 7 .0%

250,000 \ - 60% l* 200,000 50%

1W,00040 ~~~.ooo __ 4~~~~~~~~~~~~~~~~~0%

20%

50,000 0

0 t . t , 0%

s00 1900 s00 900 S100 100 o00 1900

| Sorio1- - - -SARprOj _ oPublic - - Private - -Totl iO01icount

R ga Urban Transport - Motorization in Latvla199 199 199 199 199 I999 2000 2001

Motor vehicles per 1,000 population 1 127.61 16571 188.7 213.51 236.51 260.31 280.51Annual change (%) 300/ 140/ 131/4 11X/4 lo0/ 80/Source: SIMA

Private bus operators. Theses have been more successful than anticipated, although they still represent asmall share of the market. The private operators are licensed by the City of Riga Traffic Department tooperate on specified routes, which can overlap with each other and with routes provided by the three publicoperators. They charge a fare-by-distance ranging from Lats 0.20 to 0.30 per trip. There are nodiscounted fares. The private operators are picking up the high value and growing part of the market. Arestructuring of these operations is occurring as "taxibuses" (25-30 seats) are being replaced by"minibuses" (14 seats). Some commentators mentioned that the passenger numbers could be underreported by a factor of two or three times. Licenses for taxibuses are not being renewed by the City (sinceMay 1, 2002). The two public bus companies have been required by the City to operate more services onroutes were taxibus services have been withdrawn.

Riga Urban Transport - Private Bus O erators, Passengers pe year (0oos)1 99~ 1995 1996 1997 1998 199S 200( 2001

Pnvate OperatorsTaxibuses 5,50( 5,30( 4,525Mimbuses 12,90( 14,90( 17,092Total passengers 18,40( 20,20( 21,618Annual change _ 9.8/ 7.0 0/

Publc Operators 316,46 1 231,999 256,610 247,055 229,661 219,281Annual change 10.60/ -3 70/ -7 OV -450/

Pnvate + Public _ 265,455 249,861 240,899Private as % oftotal I - 50/ 6.90/ 8.1 9.00/Source: SAR, PTU, discussions with operators

Daugavpils Water Company (Idensvads): Past and Future Performance

There are four key factors that have affected project performance and are critical to the project's

-31 -

IFRR and IERR: (i) revenue growth (water sales, billing, and tariffs); (ii) costs of running the water entity;(ii) physical loss of water in the system (unaccounted for water); and (iv) the wider environmental benefitsof water sewerage treatment.

Water Demand. Demand for water services in Daugavpils in terms of billed water sales has decreased 39percent during 1996 - 2001 period. Decline of billed water for domestic customers was 38 percent,declining from 198 Ipcd in 1996 to 127 Ipcd in 2001. These figures may, however, overestimate the realdecline of residential water consumption as it includes also large in-house water losses in apartment blocks.The largest decline of water consumption, however, occurred among commercial customers (45%) as manyenterprises were closed for business during Russian economic crisis. Decline among budget institutionswas least affected (29%). There are signs of stabilization of water consumption based on the first quarterdata of 2002. However, some 50% of water bills are still calculated using consumption norms, which maylead to significant differences with actual or flat meter consumption. While the domestic water consumptionis expected to further decline some 5% in 2002, consumption of institutional and commercial users isexpected to increase some 8-10 percent compared to the first quarter of 2001.

Total water production declined by 27 percent during 1997-2001 period, while unaccounted forwater increased from 32 percent to 41 percent during the same period. The latter includes also largein-house water losses. According to a technical study carried out by the SIA "Daugavpils Udens", the totalunaccounted for water in the first quarter of 2002 was 36 percent, out if which some 16 percent werein-house losses, mostly as a result of manipulation of water meters.

Table 1. Water roduction and consumption in Dau avpils (1996-2002)P _____ 1996 1997 1998 1999 2000 2001 2002 |

Water Production 1000 m3 n/a 13,361 12,830 12,733 11,351 9,758 8,693Water sales:

- Domestic billings 1000 m3 6,737 6,047 5,690 5,159 4,651 4,166 4,109- Institutional billings 1000 m3 927 964 960 929 717 654 685- Commercial billings 1000 m3 1,713 1,567 1,609 1,206 1,076 935 940

Total water sales 1000 m3 9,377 8,578 8,259 7,294 6,444 5,755 5,707Domestic water Ipcd 198 180 169 154 140 127 125consumptionUnaccounted for water % n/a 36 36 43 43 41 34

* Estimate, based on the first three quarter data and 2002 budget.

Tariff development. Tariff adjustment in Daugavpils has been in line with the SAR projections. In 1996the combined water tariff was 16 santimes/m3 (VAT excluded). In relation to present level of 33santimes/m3, the nominal rise has been two-fold (Figure 1). Currently, some 50% of domestic water billsare still calculated using individual meters. The rest is based on a complicated system of consumptionnorms. There are twelve norm categories varying from 33-250 liters per capita per day. The MunicipalGovernment has approved the plan to start billing of residential customers based on master meters. It isexpected that the switch to master meters would reduce water losses in apartment blocks and will increasethe volume of billed water to domestic. However, further tariff adjustment would also induce waterconservation - net effect on the volume of billed water may remain neutral.

As a result of continuing delays of tariff decisions in the past, the current combined tariff of 33santimes/m3 has remained behind of growing needs of the SIA "Daugavpils Udens" caused by decliningwater demand, debt service and incremental operating costs of new production facilities. In May 2002 theSIA "Daugavpils Udens" proposed a new tariff of 41 santimes/m3 to Daugavpils Municipality (24 percentincrease). The proposal was rejected by the Public Services Regulatory Agency on the grounds of overly

- 32 -

large water losses in the networks.

Figure 1: Nominal tariff development40-

25santi

ei i 20 = 7 - | SAR projected tanff levels

315

10

5

0 -1997 1998 1999 2000 2001

The above graph depicts nominal tariffs.-In real terms the slope would be negative becauseDaugavpils water entity was not able to keep pace with inflation because the City Council was often late inapproving the tariff increase. The company needs to make more progress in addressing the large waterlosses in order to appropriately justify future tariff increases. Current tariff levels barely cover operatingcosts and are not sufficient to undertake any cash-flow based maintenance and rehabilitation works. Thecompany will not be able to undertake any rehabilitation works in the years to come. unless appropriatetariff adjustment will take place.

The graphs below illustrates the SIA "Daugavpils Udens" institutional resolve for high billingcollection in the environment of steeply increasing tariff and high unemployment. At the end of the Project,the billing collection rate from residential sector in Daugavpils was in range of 97-98%, while the billingrate from Industrial and Commercial sectors exceeds 100% as the companies are paying the old debts.

Tariff, Billing Collection and Unemployment Development InDaugavpils

120 -7 035. - O .50.33

- ~~~101 _03ito 99 03

2770 25

s0

-:- Unemployment % 0 2At -- -v lIng Colle60on %

4-.- Combined tanff, LWm3 015 -i

400103 . _ - t - r ~ ~ 01

20089 85 75 106 13 99 8&7 005

0 01995 199i 1997 1998 1999 2000 2001

33 -

The graph below shows consumption, unaccounted for water (physical losses in the system) andapartment metering:

Specific Consumption, Unaccounted-for-Water and ApartmentMetering

400 100

350 - so

300--3ti 301 - - 80~~ Zs3 - - _-70- 242 7

250 2 .0Spedfic Total Biling lUp/d 215 - -

200 .-- Unaccounted- r-Wateripid s - 50 S

-6-. Metered Apartments % 49 t 17 3o50 - 127 * 40

- 1 89 t01-7 m 1 30100-

so -- 7i2 , 120

0o~ 1 3 4 101991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Production, Billing and Treatment Capacities

70,000- -. .

60,000

60,000

50-000 -- 50,000 t

50,000

. 47 41,200 41,20040,000 50 -- . _- - , .-. -

40.740 X1;78 - 34.801-7 40,200

30,000 -t -i 2 61310~00

,2,3 8~~~~~~~30 2&.73(

20,000 - Water Production m3d

-GWater Billing m3/d

10,000 - -Water Treatment Capacity m3/d

D E-Wastewater Treatment Capacity m/

01991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Financial performance during the project period. Table 2 summarizes the financial performance of theCompany as realized in 1996-2001, and shows expected results for 2002 based on the first 3 months'actual development and the estimated budget for 2002. Financial performance of SIA "Daugavpils Udens"showed improvement until 2000 and has been declining since then. The operating margin, which is ameasure of company's full cost recovery from operations, was 24% and 25% in 2000 and 2001respectively. The company showed net loss of 0.3 mill/ LVL in 2001, mainly as a result of delayed tariffdecisions. The company will face even larger loss in 2002 if no tariff adjustment takes place.

Delayed tariff adjustrnent decisions would have a serious impact on the SIA "Daugavpils Udens"financial sustainability, and could hamper the company's debt service causing a postponement of necessaryreplacement investments. Cash flow based replacement investments have already been lagging behind. In2001 the amount of replacement investments was only 49 thousand LVL, well below the investment

- 34 -

requirements that is necessary to maintain the current level of services. According to the 2002 budget, thecompany's planned replacement investments were 75 thousand LVL. However, it is expected that thecompany will not be able to carry out any investments this year due to the shortage of funds.

Table 2. Financial lerformance of the S[A "Daugavpils Udens" (199 002)1996 1997 1998 1999 2000 2001 2002*

Average service tariff LVL/m3 0.16 0.17 0.25 0.28 0.3 0.33 0.33Net Revenues MLVL 1.6 1.6 2.2 2.1 2.1 2.1 2.1

- O&M costs MLVL 1.5 1.8 1.8 1.7 1.6 1.6 1.6Operating margin MLVL 0.1 -0.2 0.4 0.4 0.5 0.5 0.5

- Depreciation MLVL 0.1 0.1 0.1 0.1 0.2 0.7 0.7- Interest payments MLVL 0 0.1 0 0 0.1 0.2 0.3- Other income MLVL 0 0 0 0.1 0.1 0.1 0.1

(costs)Net profit before MLVL 0 -0.3 0.3 0.4 0.4 -0.3 -0.5taxesOperating margin 5 -12 16 20 24 25 24(>40%)Working Ratio % 95 112 84 80 76 75 76(<65%)Operating Ratio (<85 % 100 117 88 86 85 109 111* Estimate, based on the first quarter data and 2002 budget.

Cost savings. The SIA "Daugavpils Udens" has made some progress in costs savings. The total O&Mcosts have increased modestly by 4.5% during 1996-2001 period (Table 3). In real terms total O&Mcosts have actually declined by 13 percent during the same period. The largest increase has beentransportation cost: 78 and 48 percent in current and real terms respectively. The largest cost declines haveoccurred in resource and pollution charges (30 and 42 percent in current and real terms respectively),which reflects the impact of project investments into wastewater treatment facilities. The cost of electricity,another major production input, has increased only 4 percent in current terms (13 percent reduction in realterms). However, it is expected to increase by 10% in 2002 as a result of commissioning additional wellfields and operation of wastewater treatment plant.

Table 3. Selected operating and maintenance costs of SIA "Daugavpils Udens", 1996 - 2002 (currentterms)

1996 1997 1998 1999 2000 2001 2002*Resource/Pollution 1000 LVL 211 215 305 183 254 147 176TaxesTotal Staff Cost 1000 LVL 547 643 602 605 588 596 601Materials and 1000 LVL 129 188 196 172 124 109 108MaintenanceElectricity 1000 LVL 252 287 294 275 172 263 289Transport 1000 LVL 27 33 39 48 52 48 50Other Costs 1000 LVL 279 308 280 277 274 277 280Miscellaneous IOOOLVL 52 129 109 104 118 125 120(administration cost)rotal O&M Costs 1000 LVL 1,497 1,803 1,825 1,663 1,583 1,565 1,624* Estimate, based on the first quarter data and 2002 budget.

Bill Collection. The SIA "Daugavpils Udens" bill collection has been relatively good during the projectperiod. The company have made significant efforts to gradually reduce outstanding old debts. Billcollection in the commercial customer group has improved significantly and SIA "Daugavpils Udens" has

- 35 -

been able to recover some old debts accumulated during the years of business difficulties (Table 4). Thecollection rate of among budget organizations has declined to 95% during the first quarter of 2002.

Table 4. Bill collection in SEA "laugavpils Udens" (1997 - 2002)Units 1997 1998 1999 2000 2001 2002*

Domestic users _ 90 94 95 98 102 99Institutional users % n/a 93 101 107 117 95Commercial users % N/a 78 96 93 103 107

Total collection rate _ 101 89 96 100 105 99' Estimate, based on the first quarter data and 2002 budget.

Future financial performance of SIA "Daugavpils Udens". The future financial performance of SIA"Daugavpils Udens" is primarily determined by the development of water demand, Municipality's tariffpolicy, savings in operating costs and improvements in network system efficiency (mainly reduction ofunaccounted for water). Based on 9 months operations data in 2002, it is assumed that the total water saleswill be similar to 2001 sales at the level of 5.7 mill. m3 per year. Domestic water consumption is expectedto decline to the level of 4.1 mill. m3, or about 124 Ipcd, and remain constant thereafter. Total waterproduction is assumed to stabilize at the level of 8.5 mill. m3, leaving the level of unaccounted for water32%.

The adjustment of tariff development is based on the assumption that the company will reach thetarget financial indicators as specified in the SAR by year 2005, which is four years later than what theSAR envisaged (Table 5). After that, tariff adjustments will still be needed but at a slower pace, tomaintain SIA "Daugavpils Udens"' financial health and allow proper cost recovery (including revaluation ofassets) and debt service. The actual tariff decisions will of course depend on the company's managementdecisions on performance improvement, such as cost cuttings and reduction of water leakages, and on thedynamics of future water demand.

Table S. Major assumptions of he projecti ns of water demand (2002 -2010)2002 2003 2004 2005 2006 2007 - 2010

Total population 1000 114 114 114 114 114 114Water Production 1000 m3 8,880 8,700 8,600 8,500 8,500 8,500Water sales:

- Domestic billings 1000 m3 4,106 4,065 4,065 4,065 4,065 4,065- Institutional 1000 m3 737 741 741 741 741 741

billings- Commercial 1000 m3 939 940 940 940 940 940

billings

Total water sales 1000 m3 5,782 5,746 5,746 5,746 5,746 5,746Domestic water lpcd 125 124 124 124 124 124consumptionCombined tariff LVL/m3 0.33 0.37 0.41 0.45 0.47 0.47Change in combined % 0 11 10 9 4 0tariff

Other main assumptions underlying financial projections include: (a) average cash turnover - 120days; (b) average inventories turnover - 60 days; (c) average liabilities turnover - 35 days; (d) averagetarget collection period - 45 days; and (e) average annual inflation rate - 2%. The projections assume aslightly increasing O&M costs in real terms, as it is expected that gains in cost efficiency will be offset byreal price increases of electricity and increasing maintenance costs.

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The projected financial flows and indicators are shown in Table 6. It is expected that the companywill achieve the full cost recovery by 2005.

Table 6. Projected financial performance of SIA "Dauvpils Udens" X2002 - 2010)2002 2003 2004 2005 2006 2007 2008 2009 2010

Net Revenues MLVL 2.1 2.3 2.5 2.8 2.9 3.0 3.0 3.0 3.0- O&M costs MLVL 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.7 1.7

Operating margin MLVL 0.5 0.7 0.9 1.1 1.3 1.3 1.3 1.3 1.3- Depreciation MLVL 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7- Interest payments MLVL 0.3 0.3 0.3 0.3 0.3 0.2 0.2 0.2 0.1-Other income (costs) MLVL 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

Net profit before taxes MLVL -0.5 -0.3 -0.1 0.2 0.3 0.4 0.4 0.5 0.5Operating margin (>40%) % 23 30 36 41 44 45 45 44 44Working Ratio (<65%) % 77 70 64 59 56 55 55 56 56Operating Ratio (<85) % 112 101 93 85 81 80 80 80 80

Based on these assumptions, the company will remain dependent upon external grants (e.g. frombilateral donors) or the Municipal budget until 2005 even if no replacement investments will be carried out.The situation is especially critical during the coming years as the company may not be able to fillv serviceits debt (Table 7). Total annual debt service costs will reach 0.8 mill LVL in 2004. The company'sfinancial situation becomes even more fragile should the Municipality (regulatory agencies) decide not tofollow the assumed tariff adjustments paths or there will be further significant decline in waterconsumption.

Table 7. SIA "Daugavpils Udens" proiected cash flow for 2002 - 20102002 2003 2004 2005 2006 2007 2008 2009 2010

Cash from operations 000 233 409 624 897 1,042 1,123 1,148 1,175 1,202LVL__ _ _ _

- Working capital needs 000 1 30 23 31 15 7 0 0 -ILVL ___

- Total debt service 000 632 703 764 765 765 770 771 775 779LVLI

Change in net working 000 1 30 23 31 15 7 0 0 -1capital LVLCash surplus/deficit 000 -401 -354 -186 70 247 339 377 400 425

LV L I _ _ _ _ _ _ _ _I_ _ _

The table below shows O&M costs in relation to investment costs and net working capitalprojected until 2015.

Table 8: Results of Financial Anal ysis ('000 LVL)Year Investment Cost Net Working O&M Costs with O&M Costs Incremental O&M

Capital Project without Project Costs1995 1,049 1,049 0

1996 1,891 -2 1,497 1,101 3961997 3,782 -368 1,803 1,156 6471998 3,782 1,240 1,825 1,214 6111999 4,188 -1,806 1,663 1,275 3882000 4,112 672 1,583 1,339 244

-37 -

2001 707 502 1,565 1,406 1592002 1 1,651 1,491 1602003 30 1,655 1,550 105

2004 23 1,660 1,613 472005 31 1,664 1,677 -132006 15 1,668 1,727 -592007 7 1,672 1,779 -107

2008 0 1,676 1,832 -1562009 0 1,680 1,887 -207

2010 _-I 1,684 1,944 -2602011 0 1,688 2,002 -3142012 1 1,692 2,062 -3702013 0 1,696 2,125 -4292014 0 1,700 2,188 -4882015 1 1,704 2,253 -549

Environmental Amenity Values. The wastewater treatment investments have improved the water quality inDaugava River. Improved water quality in downstream areas are generating direct use benefits, which arerelated to people's recreation activities, such as swimming, angling, birdwatching, etc. People may thushave a positive willingness to pay (WTP) for improvement in environmental quality in the river.Aggregating WTP across individuals who directly benefit from this environmental improvement would giveus a measure of the total environmental amenity benefits. However, evaluation of environmental amenitybenefits from improved water quality is complicated, since the quality of water in downstream areas maybe affected by a variety of factors. For example, water quality may have improved due to reduceddischarges from point and non-point sources of pollution as many industrial and agricultural enterpriseshave scaled down their (polluting) production activities or have been terminated altogether. Evaluatingenvironmental amenity benefits in downstream areas requires separating the changes in water qualityresulting from project wastewater treatment activities from changes in water quality resulting from generaleconomic improvement and less discharge by polluting industries. Although no formal model wasconstructed, spot checks among users and physical tests conducted by the entity on sample water specimensrevealed a significant improvement in water quality.

Effluent Load from Daugavpils fo River Dauga

3=0

3000

axo11 --- oEffluent bad BOD, tyEffluent --ad P.-

zi .' , - =a= Effluent load N, tVy

150 14501937 '- -/

- tlO O 9~~~~~~~~~~130 §31000~ ~ ~ ~ ~~~10 -3

' s - 9;~~~~~~~~~~~~~~~10

50- 295, 8 247 232 2D5 2S5 175 2t\7 31 21

1991 1992 1993 1994 1995 199 1997 1998 1999 ZIO 0l1

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Health benefits. Health benefits were not quantified in the analysis, but many studies have shown theimportance of such benefits. In a world of full information, such benefits should be reflected in the higherWTP for water that the people currently pay through water tariffs. To the extent that people use poorquality water because they are not informed about its health effects, we have an additional benefit that canbe added to the normal economic benefit. However, unlike some countries in ECA region the motivationfor this project was not the poor quality of the water in terms of organic or microbial pollution, but in termsof unreliable supply and irnproved taste properties (i.e. smell, hardness and high iron content). As a result,WTP for improved water quality (and resulting consumer surplus) may still not be sufficient to generate anacceptable rate of return.- This is exactly what the recent Bank-financed contingent valuation study found.The study estimated consumer WTP for improved water quality in three Bank project cities: Klaipeda(Lithuania); Liepaja (Latvia) and Haapsalu (Estonia) reference: Valatka S. and R. Lenkaitis. 2002.Estimating Benefits for Water Quality and Wastewater Treatment and Recreational Improvements in theBaltic States. Report prepared for the World Bank. The results show that the population's WTP forimproved water quality is rather low. For example, the median WTP estimate in Liepaja (a city with ahigher average income levels than Daugavpils) was only 0.3 Lats per m3 of water. However, the resultsmay be biased downwards due to the retrospective nature of questions and low current tariff levels.

Another contingent valuation study carried out in Sigulda (a medium sized city located 50 kmnnorth from Riga) in 1997 estimated the population's WTP for improved drinking water quality (healthbenefits) and improved water quality in Gauja River (environmental amenity benefits) reference: J.Malzurbris, S. Senkene, and R. Ready. 1997. A Contingent Valuation Study Estimating Willingness toPay for Improved Water Quality in Sigulda, Latvia. Report prepared for the Harvard Institute forInternational Development. The analysis suggested that although almost all respondents had some positiveWTP for the drinking water improvement, the WTP was generally low. The median WTP for the drinkingwater improvement was estimated at 0.42 Lats per person per month. Assuming that there is in average3.2 members in the household, the monthly WTP per household would be some 1.34 Lats. Forcomparison, average household monthly cost of water services in Daugavpils was 2.08 Lats in 1997. Therespondents' WTP was even lower for the improvements of water quality in Gauja River (i.e. sewerageservices). Estimated median WTP for the Gauja River improvement was 0.13 Lats per person per month,or 0.42 Lats per household. The average monthly household cost of sewerage services in Daugavpils was1.21 Lats in 1997.

Municipal Development Fund

In order to assess the outcome of the MDF component, two of the types of subprojects carried outby the MDF were reviewed ex-post: (i) district heating; and (ii) schools renovation.

The ICR reviewed the project analysis regarding the "Reconstruction of the District Heating SupplyNetwork in Jaunmarupe"

Sub-Borrower: Marupe Parish CouncilPrincipal Performance Rating: Highly Satisfactory

Original Objective. The subproject's main objective was to extend the life and increase the lifetime theoperating efficiency of the Jaunmarupa village heating system, and improve environmental conditions in theaffected area.Secondary objectives were institutional improvements in the company

The project objectives were clearly defined and in line with the State's energy sector policy and theMarupe Council development strategy. The State energy sector gave priority to increase energy efficiencyin local boiler houses and heating systems, especially with a focus on better understanding new technologies

- 39 -

before undertaking large- scale investment projects. In addition, the local government and the DH companyhad shown interest in working together to implement changes in the way heat supply was delivered tohouseholds in the Jaunmarupe village.

Original Components. The projects for the construction of Jaunmarupe village district heating supplynetwork included:

o replacement of pipelines of underground district heating ducts and part of pipelines ofoverground district heating ducts by prefabricated district heating pipes with polyurethane foaminsulation;o dismantling of 28 existing heat substations and replacement by new automaticallyadjustable equipment for district heating and domestic hot water supply;o replacement or reconstruction of damaged insulation of pipelines (1700 m span) ofoverground heating network of the village;a installation of 920 hot water meters and spherical taps in 453 apartments in Jaumnfirupevillage apartment-houses.

The project was financed by a subloan out of the MSDP Loan, and by Lats 51,000 Marupe localself-government contribution.

Implementing Agency. SIA "Marupe"(Marupe Ltd). They managed the implementation process verywell. The cooperation of the staff of the company with the municipality was highly satisfactory. This wasone of the integrated, complex projects in which heat supply system reconstruction of Jaunmarupe villageincluded improvements to the supply of both heat and hot water to residents of individual houses and blocksof apartment houses, companies, and also to a complex of greenhouses of "Marupe, Ltd". As a result ofbeneficial experience of this subproject, which was financed by the World Bank, the municipality carriedout heating system rehabilitation in other villages - Marupe and Skulte.

Tariff and Regulatory Policies. A correctly chosen tariff is one of the most significant aspects of aproject that is related to service rendering, it is important when speaking about possibilities of new projectimplementation and it is important from the point of view of the existing energy sector system maintenanceand from the point of view of the paying capacity of inhabitants. In the project implemented in Marupevillage the extra charge above the net cost of a heat unit for consumer groups in 2000 constituted: forinhabitants - 14 %, for enterprises - 18,6 %, but for the hothouse complex -0 %. Evaluating the project,inhabitants are the winners after all, because in order to repay the credits without the hothouse join-up, thetariff would have had to be raised much higher than it was. The Marupe hothouse complex is the largestconsumer of heat energy in the area. Were it not for this consumer, the required supply of heat would bemuch lower, annual turnover of the heat producer would be less and this would have caused the necessity tofix a higher heat supply tariff.

"Marupe, Ltd" on its side invested in modernizing the boiler house. The enterprise "Marupe, Ltd"hothouse (or greenhouse) complex (produces tomatoes and cucumbers) became more competitive on thelocal market and in markets of neighboring countries. In its turn it ensures the municipality's tax revenueswere given more stable flows. As result of the project implementation, the residents in Junmarupe wereprovided with hot water all year round, and the tariff levels were rationalized. The tariff of hot water is nowbased on objectively higher production costs, but take into account seasonal variations, e.g. in the summerperiod when heating practically is not used. The project enabled all of the produced heat to be rationallyused, yielding sound efficiency indicators.

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Rehabilitation of the Marupe District Heating System. According to the feasibility study, a rapidimprovement in performance was to be realized after implementation of the project components. Thedemand forecast was that consumption of heat, would first go down while the network was being upgraded,and then it increase again from the lowest point of the 1997/98 winter to present. The project was a basis ofa continuation of a large investment project in Jaunmarupe village. The arranged routes and installed heatunits helped to demonstrate why a cogeneration station needed to be set up in the territory of "Marupe,Ltd". Parallel funds from Denmark were arranged, with the Danish support covering 25 % of the total costsof the subproject. This allowed the boiler house to be rehabilitated.

Table 9. Subproject Cost and Financing by Componen C thousand t s)Appraisal Actual/Latest

Project Cost By Component Estimate EstimateLats Lats

Network Rehabilitation 202.107 136.267Consumer Heat Meters 85.000 63.262Consumer Hot water Meters 40.000 25.035Maintenance Function Enhancement 0,000 23.430Other* 7.000 4,342Total Baseline Cost 334.107 252.337Total Project Costs by:World Bank loan 252.337 201.87Marupe parish Council - own contribution 81.77 51.0

Improvement of environmental conditions in affected areas. The Project has been able to help reducelocal air pollution, as well as emissions of greenhouse gases (C02). Here the largest effect ofenvironmental improvement is achieved by decrease of emission amounts of C02 gases into theatmosphere.

The following table illustrates the reductions at the project completion (tons of pollutantlyear).

Dust S02 N02 C0247 _ 1,18x 10 (-3) 1,77 x 10(-3)

kg/m3 kg/m3

Net Present Value/Economic rate of return. The subproject has had significant economnic benefits.Thekey benefits have been the extended life of the DH assets, reduced fuel consumption, reduced water andelectricity costs, improved efficiency of automated consumer substations, and improvement ofenvironmental conditions in the affected areas. The MDF calculated the ERRs (ex-ante, ex-post) assummarized in the following table 4:

Economic Rates of Return, Summary Table ERRsAt appraisal 58.0 %At completion 44.2 %with intemational valuation of environment benefits 45.9 %

The main benefits comprised reduction of heat losses and the extended life of the DH assets. The MDFestimates that the DH network average life was extended from about 5 years to 30 years. This explains whythe ERR is so high. also because of the produced heat energy is almost hundred percent used, thanks to the

-41 -

capacities taken by the greenhouses and minimal heat losses in the profoundl& insulated heat networks. Thebenefit of reduced fuel consumption in heat production also is a very important issue. Comparing years1998 and 1996, decrease of the amount of exhaust from the boiler house is 12 %, but comparing years2000 and 1996, the decrease is already 14 %. In addition, electricity savings amounting compare1996/2000 to 461,795 MWh/year of electricity were assumed or 8 345 Ls/ year. Reduction of electricenergy consumption was as follows: 1996- 45,93 kW/h/Gcal, 1998 - 22,17 kW/h/Gcal, 1999- 24,71kW/h/Gcal, 2000- 26,22 kW/h/Gcal, where the average decrease was 46 %. The high rates of return weretested for sensitivity. The life of the renewed assets was decreased by half to 15 years, and the rate ofreturn falls to around twenty percent, which is still acceptable.

Emergy EiFciency in Sclouls aind School IBuildings Reuovation. One of the indicators of effectivemunicipality development concems the quality of schools in local areas. In small urban areas, schools oftenserve also as a municipal culture center. In the majority of small municipalities (parish) there is usuallyonly one elementary school. In many cases the school buildings were built decades ago and are close to abreakdown, and the technical provision within the schools is obsolete. At the same time there aremunicipalities where there are unfinished school buildings in structure but municipalities lack funds tofinish them. Many rural schools do not have an adequate sports hall or do not have them at all, impairingthe opportunity to get exercise among the children. The MDF component sought to address some of thesedeficiencies. Assembly halls or some other larger schoolroom were adapted for the needs of physicalculture and sports.

In order to carry out capital investments in construction of unfinished school buildings and make themefficient and justified, a number of preconditions had to be ensured:

o the object (a sports hail, an assembly hall, computer class in a school) developed by a municipalityshould become a service center for the vicinity. Different sports and cultural activities would go onthere, gathering people from the whole parish and also from neighboring parishes (thus actually severalmunicipalities would cooperate in maintenance and use of the objects);

o by uniting neighboring parishes the parish infrastructure would be used jointly and the majority ofchildren from former neighboring parishes would study in the new schools, in convenient and modemcircumnstances, just because this is going to be their new common school now;

o the quality level of school programs would be increased, new teaching staff would be attracted, moreattention would be paid to languages and infornation, basis of entrepreneurship, and optional trainingwould be offered according to the requirement.

The MDF enabled school renovation works to be carried out in 15 municipalities. Some Lats 1.634million together with the World Bank credits totalling about $1.63 million (48 percent of the $3.4 million ofMDF loan funds) were allocated to the schools renovation program, including construction of sports hallsin 5 municipalities. The project does not have rate of return analysis for this part of the MDF component,but user satisfaction surveys conducted by the schools among parents and students showed very favorableresults.

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Annex 4. Bank Inputs

.a) Missions:Stage of Project Cycle No. of Persons and Specialty Performance Rating

(e.g. 2 Economists, I FMS, etc.) Implementation DevelopmentMonth/Year Count Specialty Progress Objective

Identification/PreparationNovember I Division Chief T. Blinkhorn;1993/February 1 TTL K. Gilbertson, Fin. Econ.19 94 1 Municipal Fin. Jorge Martinez;

I Urban Transport Iles;I Buildings/Energy C. Kaergaard;I Water/Env. Engineer Homanen;I Municipal Engineer OssenI Mun. expenditure E BetubizaI E. Peterson Housing

May 1994 1 TTL K Gilbertson (Fin. Econ.)I Solid Waste S. CointreauI Env. Specialist D. VetterI Economist S. CorneliusI Bldgs. Engineer C. Kaergaard1 Urb. Transport Armstrong1 WrightI Financial Analyst G. DhallaI Water/Env. Engineer K.

HomanenTWUWS specialist Balkalian

September 1994 1 TTL K Gilbertson (Fin. Econ.)I Env. specialist B. BaratzI Solid waste S. CointreauI Urb. Transport

Armstrong-WrightWater/Env.Engineer K.Homanen

June/July 19 95 1 Env./Social specialist E. McGean

Appraisal/NegotiationAugust 1995 1 TTL Gilbertson (Fin. Econ.)

I Water/Env. Eng. KI HomanenI Social specialist: E. McGean1 Env. M. GambrillI Fin. Analyst G. DhallaI Urb. Transport Armstrong3 Wright

Sweden SIDA, DenmarkEPA and EU PHARE joinedthe mission

SupervisionFebruary 1996 1 TTL Gilbertson Fin. Econ. S S

I Water/Env. Eng. K.

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HomanenApril 1996 1 TTL K. Gilbertson (Fin. Econ.) HS S

I Urb. Transport ArmstrongWright

October 1996 1 TTL K. Gilbertson (Fin. Econ.) S S1 Operations Analyst M. ArmalyI Env. Engineer K. Homanen

June 1997 1 Operations Analyst M. Armaly S SI Env. Engineer K. HomanenI Financial Analyst. K Pakkari

August 1997 1 Fin. Analyst K. Paakkari U S

September 1997 1 TTL J. Balkind (Urban Econ.) S SI Operations Analyst M. Armaly

November 1997 1 Transport Specialist S Mitric U SI Financial Analyst K Paakkari

MTR two missions: I TTL J. Balkind (Urban Econ.) U URiga Transport: I Operations Analyst M. ArmalyMarch/ April 1998; 1 Financial Analyst K. PaakkariDaugavpils WaterApril 1998 1 Daugavpils Water Missionl/P and D/O Leader: S. Soderstromratings I Fin. Analuyst K. Paakkaridowngraded to U in Env. Engineer K. JohanssonJune 11 590 Foin I Env. Specialist; K. HomanenRVP and CD visit I Operations Assistant: K. SmitsDaugavpils June1998 reviewmission findings,discuss with theCityOct/Nov 1998 1 Sector Director (R. Halperin) S S

I Urban Sector Mgr. (M.I/P and D/O ratings I Thalwitz)upgraded I TTL J. Balkind (Urban Econ.)

I Social Assessment: K.CartwrightOperations Officer: M. Armaly

June 1999 Riga I TTL J. Balkind (Urban Econ.) S STransport and I Operations Officer M. Armaly;MDF; April 99 Env. specialist 1. KiskisDaudavpils water Water engineer K. Johansson

December 1999 1 TTL J. Balkind (Urban Econ.) S SRiga Transport. I Operations Officer M. ArmalyMDFDecember 1999 1 Env. Specialist: I Kiskis S SDaugavpils Water I Org./Mgt. Specialist M. Lariola

I Fin. Analyst: K. Paakkari

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I Mun. Engineer K. JohanssonI Env. Economist P. Elliste;

I

May-June 2000 1 Env Specialist I. Kiskis S SDaugavpils Water I Fin. Specialist K. Paakkan

I Org./Mgt Specialist (Finland)Riga Transport I Mun. Engineer K. Johansson;

I Riga Transport J. Balkind

Sept. 2000, Riga I TTL J. Balkind (Urban Econ.); S STransport, MDF I Environmental Specialist I.

I KiskisOctober 2000 1 Environmental Engineer

I Environmental Economist P.I Elliste

Financial Specialist K. PaakkariMgt. Specialist M. Lariola

April 2001 1 Env. Specialist 1. Kiskis S SDaugavpils Water, I Mgt. Specialist M. Lariolalast supervision 1 Financial Specialist K.mission on this part I Mun. Engineer K. Johansson;

June 2001 Riga 1 TT'L JBalkind (Urban Econ.)TransportNovember 2001; 1 TTL JBalkind (Urban Econ.); S SJune 2002 lastsupervision mission I DittoRiga Transport

ICRMarch 2002 1 Tr. Econ. W. DenningOct 2002 1 Tr. Economist W. Denning

(b) Staff:

Stage of Project Cycle ActuaVLatest EstimateNo. Staff weeks US$ ('000)

Identification/Preparation n/a 406Appraisal/Negotiation n/aSupervision n/a 469ICR n/a 20.0Total n/a 895

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Annex 5. Ratings for Acihievement of Objecdves/O3utputs of Componenats

(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)Rating

LI Macro policies O H OSUOM O N * NALi Sector Policies OH OSU O M ON O NAO Physical O H OSUOM O N O NAO Financial O H OSU*M O N O NAOi Institutional Development 0 H (O SU 0 M 0 N 0 NAC Environmental O H S SU O M O N O NA

SocialEj Poverty Reduction O H OSUOM O N * NAL Gender OH OSUOM O N * NAO Other (Please specify) OH OSUOM ON O NA

O Private sector development 0 H O SU O M 0 N 0 NAOi Public sector management 0 H S SU O M 0 N 0 NA

i Other (Please specify) O H OSUOM O N O NA

RATINGS BY COM1ONENT(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)

Riga Urban Transport: Part ARating

LlMacro policies O H OSUOM O N O NAI Sector Policies O H OSUOM O N O NA

O Physical @9) H OSUOM O N O NAL Financial O H OSUOM O N O NAL Institutional Development 0 H O SU OM 0 N 0 NALi Environmental O H O SU O M O N O NA

SocialO] Poverty Reduction O H OSUOM ON O NALi Gender OH OSUOM O N * NAO Other (Please specify) O H OSUOM O N O NA

L Private sector development 0 H O SU O M 0 N O NAO Public sector management 0 H O SU $ M 0 N 0 NAO Other (Please specify) O H OSUOM O N * NA

Dauzavpils Water and Waste Water: Part BRating

O Macro policies O H OSUOM O N O NAO Sector Policies O H OSUOM O N O NAOi Physical 0 H OSUOM O N O NALi Financial OH OSUOM O N O NAO Institutional Development () H O SU O M 0 N 0 NAEl Environmental O H 6 SU O M O N O NA

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SocialLi Poverty Reduction O H OSUOM O N O NAO Gender O H OSUOM O N O NA3 Other (Please specify) O H OSUOM O N eb NA

L Private sector development 0 H O SU O M 0 N 9 NALi Public sector management 0 H 0 SU D M 0 N 0 NAL Other (Please specify) O H OSUOM ON O NA

Municipal Development Fund: Part CRating

L Macro policies O H OSUOM O N O NALi Sector Policies O H O SU M O N O NAO Physical * H OSUOM O N O NAO Financial O H OSUOM O N O NALi Institutional Development 0 H O SU O M 0 N 0 NAL Environmental O H *SUOM O N O NA

SocialO Poverty Reduction O H OSUOM O N () NALi Gender O H OSUOM O N Q NAl Other (Please specify) O H OSUOM O N O NA

L Private sector development 0 H O SU O M 0 N 0 NAL Public sector management 0 H * SU O M 0 N 0 NALiOther (Please specify) O H OSUOM O N O NA

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Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bankperformance Rating

O Lending OHSOS OU OHULi Supervision OHS*S OU OHUO Overall OHS*S OU OHUThese ratings are an aggregate of the component ratings and line explanations below. Bank performancewas mnixed. Overall satisfactory.6.2 Borrowerperformance Rating

Li Preparation OHS*S OtU OHUL Government implementation performance O HS * S O U O HUO Implementation agency performance O HS *S O U O HUO Overall OHS*S OU OHUGovernuent performance and agency performance was mixed: Overall satisfactory. See detailed ratingsbelow.

RATINGS BY COMPONENT(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

Rita Urban TransDort: Part A6.1 Bank performance Rating

Li Lending 0 HS * S 0 U 0 HU Project could have beenmore tightly designed: Indicators, financlal covenantsLi Supervision 0 HS 0 S 0 U 0 HU Bank should also haveemphasized cost side. Main emphasis was on fares/revenues

r Overall O HS * s 0 U O HU this rating is weighted bythe fact that the Bank lending preparation and supervision gave a marginally satisfactory outcome.

6.2 Borrower performance Rating

L Preparation 0 HS * S 0 U 0 HU Satisfactory, businessplans of companies preparedLi Government implementation performance 0 HS 0 S 0 U 0 HU Riga Council approvednecessary fare increasesfL Implementation agency performance 0 HS 0 S * U 0 HU Transport operators didnot fully implement business plans

Z Overall 0 HS 0 S * U 0 HU Unsatisfactory, costs notcontrolled, financing unsustainable

Daueavuils Water and Waste Water: Part B6.1 Bank performance Rating

Li Lending OHS OS O U O HU Bankand SIADaugavpils prepared the projectEl Supervision O HS 0 S O U O HU Entity achieved goodinstitutonal progress Municipality would delay tariff increasesO Overall 0 HS 0 S 0 U 0 HU supervision focussed on

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costs side and tariffs, problem In declining consumption

6.2 Borrowerperformance Rating

L] Preparation 0 HS 0 S * U 0 HU SIA Daugavpils Udenshad too large design standardsO Government implementation performance 0 HS 0 S 0 U 0 HU Munidpality woulddelay tariff increases

O Implementation agency performance O HS * S O U O HU Good Institutionalprogress in SIA Daugavpils Udens

O Overall 0 HS 0 S 0 U 0 HU Satisfactory performance

Municipal Development Fund: Part C6.1 Bank performance Rating

El Lending 0 HS 0 S 0 U 0 HU subproject criteria werewell formulatedO Supervision O HS O S O U O HU supervision was goodO Overall O HS * S 0 U O HU BankperformancesatUsfactory

6.2 Borrowerperformance Rating

3 Preparation OHS OS O U O HUOI Government implementation performance 0 HS 0 S 0 U 0 HU MoF handled its part ofsubloan approvalO Implementation agency performance 0 HS 0 S 0 U 0 HU The MDF followed up onsubprojects well? Overall O HS * S 0 U 0 HU Overall saUsfactory

performance

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Annex 7. LAst of Supppourdng iDocuments

BANK DOCUMENTS1. Staff Appraisal Report No. 14950-LV, November 20, 1995.2. Identification Mission Aide-Memoire, November 1993.3. Identification Mission Back-to-Office Report, March 21, 1994.4. Preparation Mission Back-to-Office Report, June 14, 1994.5. Preparation Mission - Enviromnental Aspects Back-to-Office Report, October 15, 1994.6. Preparation Mission Back-to-Office Report, October 31, 1994.7. Pre-appraisal Mission Back-to-Office Report, August 5, 1995.8. Appraisal Mission Back-to-Office Report, August 9, 1995.9. Pre-effectiveness Mission Back-to-Office Report, February 27, 1996.10. Supervision Mission Back-to-Office Report, May 28, 1996.11. Supervision Mission Back-to-Office Report, October 25, 1996.12. Portfolio Status Report (non-mission, update only), January 21, 1997.13. Supervision Mission Back-to-Office Report, June 25, 1997.14. Review Mission - Daugavpils Water Component Back-to-Office Report, September 8, 1997.15. Supervision Mission Back-to-Office Report, October 7, 1997.16. Supervision Mission - Riga Urban Transport Component Back-to-Office Report, November 11, 1997.17. Review Mission - Riga Public Transport Component Back-to-Office, December 8, 1997(Infrastructure Sector Director joined the mission).18. Supervision Mission Back-to-Office Report, April 15, 1998 (served as an MTR although not calledthat; RVP later visited Daugavpils regarding the water/wastewater part).19. Supervision Mission Back-to-Office Report, November 18, 1998 (served as an MTR although notcalled that)20. Supervision Mission Back-to-Office Report, June 18, 1999.21. Supervision Mission Daugavpils Water Component Back-to-Office Report, December 7, 1999.22. Supervision Mission Back-to-Office Report, December 21, 1999.23. Project Status Report, June 28, 2000.24. Supervision Mission Back-to-Office Report, November 2, 2000.25. Supervision Mission Back-to-Office Report, June 27, 200126. Supervision Mission, BTO/PSR, June 30, 200227. ICR Mission Back-to-Office Report

OTHER DOCUMENTS

PolicyStmtofRigaCity.d City of Riga Transport Policy Statement as annexed to the SAR

RiqaTraMcDevConcept 19 99 -2003Riga Traffic Development Concept 1999-2003, March 1999.

ICR WORKING FILES

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Additional_Tables_2002-12-19.i

disbursements_PTU_03.: Summarizes Bank and locally funded disbursements. Supplied by the PTU.

ICR Economic Evaluation files:

ops_data_2002-12-19.) Summary of all operational and financial data. Includes the detailed IRR andNPV calculations.

_

veh_histO3.xls Additional information on the vehicle fleets.

econ_re-evaLSARO3.x Provides an attempt to reconstruct the economic IRR and NPV calculations doneat appraisal.

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Additional Annex 0. Comments from lBorrowerIrImplementing Agency

The following comments have been provided by the Rigs Public Transport Unit (PTU):

Operating costs have been controlled all the time, as monthly reports have always been requested tobe sent by the transport companies to the PTU for operational monitoring. Besides that, operating costscovering a whole year of operation split by types of expenditures (e.g. fuel, electricity, salaries etc.) arebeing compared and monitored among all three municipal operators. The normal procedure of the Riga CityCouncil even includes submission of data on both operating costs as well as qetailed revenue data beforeend of each year for acceptance at various Committees of the Riga City Council (e.g. Traffic and TransportCommittee, Finance Committee).

Some of the main items contributing to ever increasing Operating expenditures have beendepreciation expenditures resulting from purchases of new buses (especially over the past few years), aswell as costs of fuel (see Graphs I and 2 below).

0,315 0.315

X 0,286 o 0 °>°° 0X2 ~~~~~~~0,20.286 0.28 0.28 0.3

-- 0.275 0.280265 025

2001/0,241 0,24 0,237 -3- 2000

0.218 0.22 .22 J901.~~~~~~~~~~~~~~ om om Om * 19

a~~~~ pa a C a A t , a, CxOo

Gesph 1.Changes m libe costs of desel fud

duing a pmiad fiom 1999. to 2001. (mc.L VAT)

80% - 75%

70%m 65%

601% 4 S ,

58% ,uiovatsd~~~~~~~~~~~41 #1

~40%1--0Pmodno30%- 21 % _25% 1_ Oto s

20% 14% 111 9 POP0rv,o.io of

10% %s. b um n_I0% Io.r

1997 1998 199 200 201 2Year

Graph 2Prporbmn of rew or ecently renovawd velucles

The business plans made in 1998, thus elaborating the original business plans, already envisaged aslight increase in the number of staff at the companies, which is partly due to the fact that the actualmileage operated by all companies has been growing (see Graph 3), which requires more drivers and

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conductors. Besides that, the companies have signed contracts with bus suppliers that envisage maintenanceof buses at the companies rather than at the supplier's service stations.

TTP Total Trams Trolleybuses Imanta Talava2001 30 435 800 13 689 400 16 746 400 11 606 496 11 530 4002000 30 302 800 13 646 400 16 656 400 10 803 647 10 876 2001999 30 291200 13 461 900 16 829 300 10 382 912 10 743 2521998 29 902 500 13 241 800 16 669 900 10 294 337 10 060 199

Graph 3.Kilometers run by the transport companies from 1998 - 2001

Air Quality Reports. Due to the fact that the project envisaged mainly achievement of specificfinancial and operational targets of the municipal transport companies, air quality, which undoubtedlycontributes to sustainability of transport in the long run, was not specified as an exact target.Nevertheless, due to the fact, that Latvia is an accession country to the EU, the new buses purchasedunder the World Bank funded contracts are equipped with necessary EURO-2 and EURO-3 standardengines, resulting in lower emissions. All buses purchased in the future will also comply with the latestemission standards, therefore Riga City's commitment to improvement of environmental conditionsshould not be questioned. Besides, the City of Riga has adopted an environmental strategy covering aperiod from 2000 - 2010, which highlights the environmental problems and actions to be taken toachieve reduction in air pollution generated by traffic.

Quarterly Operational Reports. PTU receives operational reports from all three companies on amonthly basis, and occasionally PTU requests operational reports on a day-to-day basis when, forexample, Riga City takes a specific decision on transportation of a certain group of passengers. In suchcases, daily reports are sent to the PTU in order that daily changes in revenues, for example, on aspecific route, or from certain types of ticket sales can be monitored and necessary actions taken andreports made.

Long-term financing. Riga City Council approved a traffic development concept in 1999 covering aperiod from 1999 - 2003, which described the main tasks of the city for improvement of publictransport services and a financial standing of the companies and also a special purpose developmentprogram for the period from 2002 - 2005, which determines the main tasks for the Riga's publictransport. Besides that, a Public Transport development model was worked out in Year 2000 bycompany "Invest-Riga" which even fiurther detailed development targets and tasks for improvement ofpublic transport services. These plans, among other tasks, also foresaw long term financing of transport.

Comments from SIA Daugavpils Udens

Water. Contracts and procurement for water supply subcomponent were carried out according to theWB regulations. At the beginning of the project the WB office in Riga organized several training seminars,which contributed to establishing useful contacts and helped in implementing the project. The procurementprocedures of the WB were described in great detail and very clearly. However, in some cases it is verydifficult to observe the time of the performance of contracts, if all procedures are to be followed. Ziemeliuwellfield can serve as an example: its construction was delayed for 6 months due to the necessity to agreethe changes in the power supply scheme with the WB.

During the implementation of construction contracts, the Daugavpils Udens had enough rights andpossibilities to ensure the most efficient technical solutions within the framework of the contract were

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followed. During preparation the enterprise planned its development based on the forecasts and decisionstaken in 1989-90, since in 1995 there was no clear strategy of communal services development in the cityand in the country in general. This, undoubtedly, determined the company's position regarding the waterdemand forecast and, consequently, the required capacity of water and wastewater plants.

Undoubtedly, a very important part in the institutional development of the company belongs to the 4year cooperation with the water company from Tampere (Finland). In the course of this cooperation, thecompany managed to reorganize its work in many aspects. New accounting and billing programs wereintroduced, new repair and maintenance methods were mastered for the equipment and water supply andsewage networks. The structure of the company's departments and units was changed in order to minimizethe operating costs and to maximize water and wastewater sales. Together with the partners the companydeveloped the criteria for day-to-day and strategic planning. All this enabled the company to adjust itsoperations to market economy conditions.

Wastewater and Sewerage. This component of the project was financed by SIDA (Sweden) andDEPA (Denmark) grants, NEFCO loan and from the local budget. The disbursement of funds was subjectto a number of conditions and limitations, which not always took into account national taxation and localconstruction norms. The Daugavpils Udens didn't have enough opportunities to influence organizationaland technical decision-making during the implementation of the contracts. The procurement procedureswere regulated by the national rules of donor countries and the conditions of grant agreements. During thepreparation of tender documents it turned out that the volume of works considerably exceeded the availablefinancing. As a result, it was necessary to abandon some components, such as sludge utilization, etc. Theproject implementation experience has shown that the most important thing for obtaining good results is theinstitutional development of the company. It is a long process, 3-4 years. That's why it has to precede orpass ahead of the technical project. This would ensure more reliable water demand forecasts and facilitiesdevelopment plan.

PMU Director, S. Selitsky

The Municipal Development Fund commented that the project outcomes were fully satisfactory andthe institutional achievements in helping municipalities to prepare viable subprojects was high.

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