Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 3241 1-Hu

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED GRANT FROM THE

GLOBAL ENVIRONMENT FACILITY TRUST FUND

IN AN AMOUNT OF US$12.5 MILLION

TO THE

REPUBLIC OF HUNGARY

FOR A

NUTRIENT REDUCTION PROJECT

March 28,2006

Infrastructure Department Europe and Central Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

BMSC CAS DDNP EL4 EMP EU FM FMR F M S GEF GoH MWP ICPDR JAP M&E M O B MOEW M O F N NBWWTP P P IU PMRs P M U PSC SA UNDP WD WFD WWTP

(Exchange Rate Effect ive February 15,2006) CurrencyUnit = HUF

HUF = US$O.O0473 US$ = HuF211.22

F I S C A L YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS

Budapest Municipal Sewerage Company Country Assistance Strategy Duna-Drava National Park Environmental Impact Assessment Environmental Management Plan European Union Financial Management Financial Management Report Financial Management System Global Environment Facility Government of Hungary Municipal Wastewater Project (Loan 45 12-HU) International Commission for the Protection o f the Danube River Joint Action Plan Monitoring and Evaluation Municipality of Budapest Ministry of Environment and Water Ministry o f Finance Nitrogen North Budapest Wastewater Treatment Plant Phosphorous Project Implementation Unit Project Management Reports Project Management Unit Project Steering Committee Special Account United Nations Development Programme South-Transdanubian Environment Protection and Water Management Directorate (EU) Water Framework Directive Wastewater Treatment Plant

V ice President: Shigeo Katsu, ECAVP Country Director: Daniela Gressani, ECCU7

Sector Manager: Task Team Leader:

Sumter Lee Travers, ECSIE Xavier Chauvot de Beauchihe, ECSIE

HUNGARY NUTRIENT REDUCTION PROJECT

CONTENTS

A . 1 . 2 . 3 .

B . 1 . 2 . 3 . 4 . 5 .

Page

STRATEGIC CONTEXT AND RATIONALE ............................................................. 1 Country and sector issues .................................................................................................... 1 Rationale for Bank involvement ......................................................................................... 2

Higher level objectives to which the project contributes .................................................... 3

PROJECT DESCRIPTION ............................................................................................. 3 Lending instrument ............................................................................................................. 3

Project components ............................................................................................................. 4

Project development and global environmental objectives and key indicators .................. 3

Lessons learned and reflected in the Project design ........................................................... 6

Alternatives considered and reasons for rejection .............................................................. 7

C . IMPLEMENTATION ...................................................................................................... 8 1 . 2 . 3 . 4 . 5 .

Institutional and implementation arrangements .................................................................. 8

Monitoring and evaluation o f outcomeshesults ................................................................ 10

Sustainability and Replicability ........................................................................................ 10

Critical r i sks and possible controversial aspects ............................................................... 11

Grant conditions and covenants ........................................................................................ 13

D . 1 . 2 . 3 . 4 . 5 . 6 . 7 .

APPRAISAL SUMMARY ............................................................................................. 14 Economic and financial analyses ...................................................................................... 14

Technical ........................................................................................................................... 15

Fiduciary ........................................................................................................................... 16

Social ................................................................................................................................. 17

Environment ...................................................................................................................... 17

Safeguard policies ............................................................................................................. 19

Policy Exceptions and Readiness ...................................................................................... 19

Annex 1: Country and Sector or Program Background ......................................................... 20

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ................. 23

Annex 3: Results Framework and Monitoring ........................................................................ 24

Annex 4: Detailed Project Description ...................................................................................... 28

Annex 5: Project Costs ............................................................................................................... 35

Annex 6: Implementation Arrangements ................................................................................. 52

Annex 7: Financial Management and Disbursement Arrangements ..................................... 55

Annex 8: Procurement Arrangements ...................................................................................... 61

Annex 9: Economic and Financial Analysis ............................................................................. 66

Annex 10: Safeguard Policy Issues ............................................................................................ 71

Annex 11: Project Preparation and Supervision ..................................................................... 73

Annex 12: Documents in the Project F i le ................................................................................. 74

Annex 13: Statement of Loans and Credits .............................................................................. 75

Annex 14: Country at a Glance ................................................................................................. 76

Annex 15: Incremental Cost Analysis ....................................................................................... 78

Annex 16: STAP Roster Review ................................................................................................ 85

Annex 17: Maps .......................................................................................................................... 92

Annex 18: Biological Processes of Nutrient Trapping in Floodplains and Wetlands ........... 95

HUNGARY

NUTRIENT REDUCTION PROJECT

PROJECT APPRAISAL DOCUMENT

EUROPE AND CENTRAL ASIA

ECSIE

Date: March 28, 2006 Country Director: Daniela Gressani Sector ManagerDirector: Sumter Lee Travers Project ID: PO7497 1 Focal Area: International waters Lending Instrument: Specific Investment Loan

Team Leader: Xavier Chauvot D e Beauchene Sectors: Sewerage (5O%);General water, sanitation and flood protection sector (50%) Themes: Biodiversity (P);Pollution management and environmental health (P);Other environment and natural resources management (S) Environmental screening category: Partial Assessment

[ ] Loan [ ] Credit [XI Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others: Total Bank financing (US$m.): ProDosed terms:

Borrower: Republic of Hungary Hungary

Responsible Agency: Ministry o f Environment and Water Management, Department o f Development Policy

Budapest Hungary Tel: +36 1457 3463 Fax: +36 1 201 25 82 sziferenczsofia @ mai l .kvvm.hu Southtransdanubian Environmental and Water Authority, on behalf o f the Duna-Drava National Park

FO U. 44-50, 101 1

Koztarsasag ter 7. Pecs Hungary 7622 Tel: +36 72 506 346 Fax: +36 72 506 350 britta.vizgazd@ddkovizig.hu Municipality o f Budapest Varoshaz utca 9- 1 1 Budapest Hungary 1052 Tel: +36 1 327 1066 Fax: + 3613271811 siklosid@ budapest.hu I

Project implementation period: Start July 6,2006 End: June 30,2011 Expected effectiveness date: July 6, 2006 Expected closing date: December 3 1,201 1

[ ]Yes [XINO

[ ]Yes [XINO [ ]Yes [ IN0 [ ]Yes [ IN0

[XIYes [ ] N o

[XIYes [ ] N o

Does the project depart from the CAS in content or other significant respects? Ref. PAD A.3 Does the project require any exceptions f rom Bank policies? Ref. PAD 0 . 7 Have these been approved by Bank management? I s approval for any policy exception sought f rom the Board? Does the project include any critical r i s k s rated “substantial” or “high”? Ref. PAD C.5 Does the project meet the Regional criteria for readiness for implementation? Ref. PAD 0 . 7 Project development objective Ref. PAD B.2, Technical Annex 3 The key development objectives o f the Project are: (i) to reduce Budapest’s discharge o f nutrients (nitrogen and phosphorus) into the Danube River, and consequently into the Black Sea; (ii) to enhance the nutrient trapping capacity o f Gemenc and Beda-Karapancsa wetlands situated in the lower Hungarian part o f the Danube River; and (iii) to serve as a model for similar nutrient reduction initiatives in Hungary and other Danube basin countries.

Global Environment objective Ref. PAD B.2, Technical Annex 3 Same as the Project Development Objective.

Project description [one-sentence summary of each component] Ref. PAD B.3.a, Technical Annex 4 The Project has three components:

Component 1 - Development o f tertiary treatment (nutrient removal) at the North Budapest

wastewater treatment plant; Component 2 - Wetland restoration in the Gemenc and Beda-Karapancsa areas o f the Duna-

k a v a National Park and establishment o f a comprehensive Monitoring and Evaluation system 'or the evaluation of Project impacts in terms o f reduction o f N and P; Component 3 - Dissemination activities to foster replication in Hungary or in other parts o f the

lanube River basin.

Which safeguard policies are triggered, if any? Ref. PAD 0.6, Technical Annex 10 Znvironmental Assessment (OP/BP/GP 4.01), Natural Habitats (OP/BP 4.04) and Projects on international Waterways (OP/BP/GP 7.50) are the Safeguard Policies triggered by the Project.

Significant, non-standard conditions, if any, for: Ref. PAD C.7 Board presentation: Yone

Loadcredit effectiveness: The GEF Legal documents w i l l become effective once the Bank has received evidence that the Srant Implementation Agreement has been duly executed and Legal Opinions, respectively f rom the Republic o f Hungary attesting the validity and the binding nature o f the GEF Trust Fund Grant Agreement and of the Grant Implementation Agreement; and from the Municipality o f Budapest (MOB) attesting the validity and the binding nature o f the Project Agreement.

Covenants applicable to project implementation: Indicated in section C.5 o f the PAD, they include:

For the GEF Trust Fund Grant Agreement:

(a) The Recipient shall maintain throughout Project implementation the Project Management Unit with adequate financial and human resources to ensure quality and timely coordination.

(b) In order to ensure appropriate inter-agency coordination, provide overall guidance, facilitate integration and address potential conflicts, the Recipient shall maintain throughout Project implementation a Steering Committee chaired by a senior level official o f the Ministry o f Environment and Water (MOEW) and comprising representatives from the Ministry o f Finance (MOF), MOEW, the M O B , the Duna-Drava National Park Directorate(DDNPD) and the South- Transdanubian Environment Protection and Water Management Directorate (WD).

(d) In order to assess and assist the WD authorities in the selection and monitoring of the planned interventions under component 2, the Recipient, through the MOEW, shall ensure that a panel of internationally recognized experts in the area o f wetlands restoration and management shall provide appropriate advice and recommendations, al l in accordance wi th the Operational Manual.

(f> The Recipient shall take al l measures necessary on i t s behalf to carry out, or to enable the WD, as the case may be, to carry out, the measures identified under the Environmental

Management Plans at all times in a timely manner, ensuring that adequate information on the implementation o f said measures i s suitably included in the Project progress reports to be prepared b y the WD.

For the M O B Project Agreement:

(a) The M O B shall maintain the Project Implemention Unit o f the M O B throughout Project implementation wi th financial and human resources adequate to enable it to appropriately carry out i t s responsibilities under component 1 o f the Project.

(b) The Budapest Municipal Sewerage Company (BMSC) shall report to a joint review team formed by representatives o f the MOB and o f the BMSC.

(c) The MOB shall take all measures necessary to carry out the measures identified under the Environmental Management Plan for component 1 o f the Project at all times in a timely manner, ensuring that adequate information on the implementation o f said measures i s suitably included in the Project progress.

A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues

One o f the main reasons for environmental degradation o f the water bodies o f the central European region and the Black Sea i s the high content o f nutrients. The Danube River, one o f the continent’s largest and most important rivers, i s by far the single most important contributor to the nutrient pollution o f the Black Sea. The loads o f nitrogen (N) and phosphorus (P) transported via the Danube River are estimated as o f about 690,000 and 70,000 tons per year’, respectively. As a comparison, these amounts represent about ten times the loads o f N and P discharged to the North Sea from the river Rhine. The eutrophication on the northwestern shelf o f the Black Sea, at the mouth o f the Danube, has had a disastrous impact on water quality, natural habitat, and fish populations on which both biodiversity and human populations depend. Future development o f the river basin w i l l further increase the pressure on the ecosystems.

Since the mid 1980s, the countries in the Region have stepped up cooperation for the protection o f the Danube River and the Black Sea. The Bucharest (1985) and Sofia (1994) Conventions, signed by eleven Danube basin countries and the European Union (EU), led to the creation o f the International Commission for the Protection o f the Danube River (ICPDR) in October 1998. Under the ICPDR’s lead, strategic action plans and monitoring programs have been launched, setting baselines and identifying hot spots and investment priorities. In November 2000, the ICPDR adopted i t s first Joint Action Plan (JAP) for the years 2001-2005, which called for the reduction o f municipal discharges f rom major urban centers. Although, according to studies, pollution from non-point sources represents about 80% o f N and 65% of P, i t i s much more difficult to address them than point-source discharges. One effective method to achieve this consists o f developing wetlands as nutrient traps. This method was identified as a strategic priority to improve the Danube River water quality, and thereby decrease the discharges o f nutrients in the Black Sea. Budapest i s the most important source point o f nutrient discharges identified b y the JAP in Hungary. As such, i t has been included within the top f ive regional priorities o f the JAP.

Hungary joined the EU on M a y 1, 2004 and i s in the process o f adapting i t s regulatory framework to comply with EU requirements, particularly the EU Directives on water. With this goal in mind, the Municipality o f Budapest (MOB) has prepared a long-term comprehensive plan for wastewater collection and treatment in Budapest. This plan represents a substantial step toward Hungary’s compliance with EU Directives. I t entails the development, by the end o f 2010, o f four major projects: the completion o f the wastewater collection system in all areas o f Budapest; the rehabilitation and the development o f nutrient removal facilities at existing wastewater treatment plants (WWTPs); the construction o f the Central WWTP; and the increase of landfi l l capacity for mid-term sludge disposal. The proposed Project complements the actions already undertaken b y the MOB, in particular through the ongoing Wor ld Bank-financed Municipal Wastewater Project (MWP), to further reduce nutrient discharges and achieve additional global benefits (for additional information, see Annex 1).

Within the overall investment program o f the JAP, construction o f wastewater treatment infrastructure i s the largest investment, representing about 90% o f the investment program

Source: Nutrient Removal Extension o f North Budapest Wastewater Treatment Plant - Environmental Impact Assessment (Imsys Ltd.) February 2005, based on MONERIS results.

(investments in wastewater treatment infrastructure in Hungary alone represent 25 % o f the JAP investment program). Although the Danube River i s not declared a sensitive water body, the Hungarian authorities have decided to add tertiary treatment in the North Budapest WWTP (NBWWTP) to fulfill Hungary’s commitments towards the reduction o f nutrient discharges into the Danube and the Black Sea.

In order to reduce costs and to make more affordable the achievement o f the stated objectives, the JAP also puts emphasis on alternative solutions to reduce nutrients. Restoration of wetlands, in particular floodplains connected to rivers, i s one o f the main alternative actions proposed. Given the ample capacity they have to act as nutrient filters, wetlands can make a significant contribution to reducing N and P loads. However, to date the impact of such floodplains and wetlands connected to rivers on nutrient reduction have not been systematically documented (water depth, timing o f flooding, vegetation etc.) and hence the outcomes remain difficult to predict in quantitative terms. The proposed Project aims at developing knowledge and scientific data to better understand such solutions and facilitate their replication.

2. Rationale for Bank involvement

The Bank has played a catalytic role in the ongoing MWP by financing a substantial portion of the investment requirements and helping to mobilize funds f rom other sources to support the Project. The Bank-financed MWP, co-financed b y an EU Phare Grant, i s part o f a Euro 100 mi l l ion investment aimed at reducing the pollution load in the Danube River Basin, strengthening compliance with Hungarian and EU environmental standards, and improving wastewater operations in the water and wastewater utilities. Project benefits extend beyond Hungary to Black Sea countries. The MWP includes the rehabilitation o f the North Budapest and South Pest WWTPs to the secondary level o f treatment, the improvement o f nutrient reduction at the South Pest WWTP, and the construction of a WWTP for secondary treatment in Dunaujvaros. Loan savings and unallocated funds under the MWP w i l l be utilized to complement the GEF Grant for the proposed Project.

The Bank and the GEF helped to establish regional coordination and institutional cooperation through the ICPDR, and were instrumental in the development o f the UNDP/GEF Strategic Partnership for the protection o f the Danube River and the Black Sea. T o support actions under the Partnership, the GEF created an investment fund which wil l finance the proposed Project. As the executing agency for GEF-financed projects, the Bank has gained experience from projects to reduce nutrients in other countries and regions and i s incorporating the lessons learned into the proposed Project. Examples include a wetland restoration project in Bulgaria and a project in the Russian Federation to reduce nutrient discharges into the D o n river and the AzovBlack Seas from the Rostov-on-Don WWTP.

The proposed Project i s consistent wi th the themes o f the last Country Assistance Strategy (CAS) for Hungary discussed by the Bank’s Board o f Directors in 2002, namely: support for Hungary’s EU accession objectives, environmental improvements inter alia to comply wi th EU Directives, sub-national development, poverty reduction and increased social inclusion. The proposed Project i s also consistent wi th the “Framework for World Bank Support to the European Union New Member Countries o f Central and Eastern Europe” (SecM2004-0283, dated M a y 28, 2004). The program set out in the CAS includes the ongoing MWP and the proposed Project, in parallel with analytic and advisory services.

2

3. Higher level objectives to which the project contributes

The Project’s higher-level objectives are to assist national and local authorities in Hungary in the implementation of top priority investments in the wastewater sector and to support the Government’s commitments under the Danube Conventions and other international agreements for the protection of the Danube River and the Black Sea.

B. PROJECT D E S C R I P T I O N 1. Lending instrument

The Project’s cost of US$32 mi l l ion would be partially financed b y a full-sized GEF Grant in the amount o f US$12.5 million. The Grant w i l l be complemented by a reallocation in the amount o f EUR5.9 million2 (US$7.7 mi l l ion equivalent) f rom the Bank’s Loan 4512-HU to the MOB for the MWP, and additional counterpart funding o f about US$10.4 mil l ion from MOB, and US$1.4 mi l l ion f rom the Ministry o f Environment and Water (MOEW).

2. Project development and global environmental objectives and key indicators

The key development and global environmental objectives of the Project are to: (i) reduce Budapest’s discharge of nutrients (nitrogen and phosphorus) into the Danube River, and consequently into the Black Sea; (ii) enhance the nutrient trapping capacity o f Gemenc and Beda-Karapancsa wetlands situated in the lower Hungarian part of the Danube River; and (iii) serve as a model for similar nutrient reduction initiatives in Hungary and other Danube basin countries. These objectives w i l l be achieved through: (i) the development of tertiary treatment (nutrient removal) at the NBWWTP; (ii) the rehabilitation of wetlands in the Gemenc and Beda- Karapancsa areas o f the Duna-Drava National Park (DDNP); and (iii) the establishment o f a comprehensive Monitoring and Evaluation (M&E) system for water quality and environmental health allowing to measure the reduction o f nutrients and contributing to the development o f an impact evaluation methodology. The Project w i l l also finance dissemination activities to foster replication in Hungary and in other parts o f the Danube River basin.

The set of monitoring (physical/technical) and performance (operational and environmental) indicators that w i l l be monitored and reported through Project Management Reports (PMRs) have been agreed during Project preparation. These include:

0

0

0

0

0

Annual reduction o f nutrient discharges f rom the NBWWTP (N and P kg/year) Average operation cost of the nutrient reduction process in the NBWWTP (US$/kg o f nutrient reduced) Number of hectares o f wetlands rehabilitated in the DDNP Annual amount of nutrients retained by the DDNP wetlands (N and P kg/year) Average operation cost of the wetland management procedures in the DDNP, in terms o f i t s nutrient reduction capacity (US$/kg o f nutrient reduced)

* An amendment to the Loan Agreement for the Municipal Wastewater Project (Loan No. 4512-HU) i s being presented to the Board for its approval on a no objection basis, in compliance with OPBP 13.25 on the Use o f Project Cost Savings.

3

Target and baseline figures for these indicators were agreed upon at Negotiations. They might be revised in the early stages of the Project, based on the results o f the baseline study.

3. Project components

The Project uses a multi-focal approach to assist the Government o f Hungary (GoH) in developing advanced wastewater treatment o f domestic discharges and to restore high priority wetlands to work as nutrient traps, while increasing their internationally recognized ecological values. I t w i l l enable comparison o f two different forms o f intervention to reduce discharges o f nutrients from point and non-point sources, and evaluation o f their impacts in terms o f global benefits in relation to their respective investment and operation costs. I t i s thus expected to have an important demonstration role in Hungary and within the region to help develop technically and financially sound solutions, allowing for best use o f scarce resources. Furthermore, the Project i s expected to strengthen the institutions involved, build capacity o f local staff in efficient development and operation o f wetlands for nutrient trapping, and raise awareness o f the ecological benefits o f wetland rehabilitation and their impacts on biodiversity. (See Sections C.2. and Annex 4 for details). The Project has three components:

Component 1 - Development of tertiary treatment at the NBWWTP (Budapest). (GEF amount including contingencies: US$6.96 million, Total cost: US$25.04 million) This component, hereafter referred to as M O B - or Budapest- component, wi l l finance works and equipment to upgrade the NBWWTP to the tertiary level o f treatment for N and P removal. The technology for such treatment i s highly specific and l ikely to be protected by patents. From a procurement standpoint, specifying the technical solutiodprocess would give an unfair advantage to a given supplier. Therefore, the procurement w i l l be based on a set o f precisely defined performance requirements (to be detailed in the technical specifications o f the bidding documents), with evaluation based on technical and financial efficiency in attaining the specified outcomes in regards to N and P reduction.

Component 2 - Wetland Restoration in the Duna-Drava National Park (DDNP component). (GEF amount including contingencies: US$5.20 million, Total cost: US$6.50 million) This component, hereafter referred to as DDNP- or Park- component, w i l l finance the rehabilitation o f about 10,000 hectares o f wetlands to develop their nutrient trapping capacity within two identified areas, Gemenc and Beda-Karapancsa, located within the DDNP, along the course o f the Danube River. The rehabilitation process w i l l be implemented in stages, starting wi th the establishment o f one pi lot in each o f the two areas for a period o f one year. I t w i l l also provide funds to design and install an M&E system for the evaluation of Project impacts in terms o f reduction o f N and P. A comprehensive baseline study w i l l be carried out at the beginning o f the Project to assess the areas’ environmental quality at the f i rs t stage o f the Project, to help determine the precise location o f the two pilots, and to provide recommendations on the design and development o f the M&E system. Building on the results and lessons learned f rom the pilots, the rehabilitation w i l l then be scaled up. Early in the process, an Experts Panel wi l l be convened by the MOEW to assist the South-Transdanubian Environment Protection and Water Management Directorate (WD) and the DDNP Directorate (DDNPD) in the selection and monitoring o f the planned interventions. In parallel, the component w i l l adapt a methodology o f impact evaluation, using local research organizations and universities. I t wi l l also include the development, in a participatory way, o f a DDNP Special Area Management Plan, including measures to best accommodate authorized uses and protection measures in the Park area. Finally,

4

this component wil l include l imited funding for incremental Project management costs for the WD, PIU. Works to be carried out in the wetlands include localized clearing, dredging and construction or installation o f small scale water regulating structures. As the lead-time for the approval o f the required environmental licenses could extend to about eighteen months, execution o f works under this component i s scheduled to star t during the second year o f Project implementation. The M&E system w i l l be developed in the meantime, allowing it to be fully operational prior to the execution of works. (See details in Annex 4)

Parallel Financing through IBRD

Loan No.

7.20 4512-HU

0.00

0.00

Component 3 - Dissemination and Replication. (GEF amount including contingencies: US$0.35 million, Total cost: US$0.43 million) This component w i l l finance consultant services to carry out a comprehensive end-of-project impact evaluation and results analysis study of the two interventions (tertiary treatment and wetlands restoration), including a cost-benefit analysis. The results o f these studies w i l l serve as a basis for the dissemination, replication and knowledge sharing activities. The component w i l l also finance workshops, public communication campaigns and promotion of cost effective solutions for nutrient reduction in other areas o f Hungary and in other riparian countries. The project w i l l link to the GEF Danube and Black Sea Regional projects, Danube Convention- supported dissemination activities and the GEF-funded IW Learn initiative. In this regard, this component w i l l include setting up a Project website consistent with the GEF IW:LEARN guidance, participation of project staff in IW:LEARN activities, participation in at least two GEF International Waters portfolio conferences, and participation in ICPDR and Black Sea coordination meetings. The Project w i l l also provide l imited funds to finance a Project launch workshop; auditing services; and training to strengthen WD for project implementation and to build capacity of DDNPD staff for the efficient development and operation o f wetlands for

GEF Financing

6.50

4.86

0.33

nutrient trapping.

Table 1. Project Costs (mill Component

1: Development of tertiary treatment at the NBWWTP

(Budapest) 2: Wetland Restoration in the Duna-Drava National

Park 3: Dissemination and

Replication

in US$) Indicative

cost

23.40

6.08

0.41

2.09 31.97

% of Total

73%

19%

1%

7% 100 %

Local Financing

9.70

1.22

0.08

0.77 11.77 +%WE--

% GEF Financing

52%

39%

3%

6% 100 %

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Benefits and Target Population.

At the global level, the Project i s expected to generate benefits through the reduction o f N and P discharges into the Danube River and consequently into the Black Sea3. The primary beneficiaries o f the Project are downstream riparian countries and littoral states o f the Black Sea.

The contribution of the Project (reductions o f about 4,000 tons per year for N and 260 tons per year for P) might appear small in comparison to the total N and P f low at the mouth o f the Danube (about 690,000 tons o f N and 70,000 tons of P). However, i t represents a 9% and 4% reduction respectively o f N and P total nutrient discharges from Hungary (see Annex 15). In particular, the M O B component i s expected to reduce 14% o f N and 6% o f P Hungarian discharges from point sources and the DDNP component 6% of N and 2% o f P from diffuse sources. Further, the Project i s not only justified by i t s direct benefits; i t represents also a necessary first step to help generate the commitment for the complementary investments for nutrient reduction needed to achieve the ultimate objective o f controlling eutrophication in the Black Sea.

More importantly, the Project i s expected to have a demonstration effect in Hungary and in the region. I t w i l l result in a replicable model for the treatment o f non-point sources o f nutrient pollution, using wetland and floodplains, and the development o f a methodology o f impact evaluation, which w i l l potentially benefit the entire Danube-Black Sea basin population. The implementation approach proposed, the environmental monitoring information to be introduced, and the results analysis to be performed w i l l also be reviewed and analyzed from a cost-benefit prospective, comparing the wetland rehabilitation approach to the implementation o f tertiary treatment. On that basis, a set of recommendations w i l l be prepared to serve as a "transfer o f experience" to other cities in Hungary and riparian countries, through the ICPDR.

The ecosystems of the DDNP are also expected to benefit directly f rom the Project. These include the Gemenc and Beda-Karapancsa areas, which are two areas o f international importance (Ramsar sites) and nesting places for a number o f migratory birds and other species o f global importance. (See Annex 10 and 18 for details)

At the national level, Hungary w i l l benefit f rom progress towards compliance with EU Directives, in particular in regard to wetland management aspects o f the Water Framework Directive (WFD), and increased capacity o f the existing central, regional and local institutions concerned to protect and manage wetlands, floodplains and aquatic ecosystems.

4. Lessons learned and reflected in the Project design

The main lessons learned from similar Bank-financed operations in the country, in the region, and in other regions suggest that:

Estimation of the nutrient reduction potential of the rehabilitation of Gemenc and Beda-Karapancsa wetlands was carried out on the basis of the data collected, international experience in other regions and extensive literature research, wi th data adapted to the size and general characteristics of the selected restoration sites (e.g., permanent water bodies, water depth, t iming of flooding, vegetation). Expected incremental annual nutrient reduction i s estimated to range between 1,390 and 1,734 tons of N and between 76 and 92 tons of P, Le., between 130 and 165 kilogram per hectare per year o f N and between 7.3 and 8.8 kilogram per hectare per year.

6

0 The roles and responsibilities o f participating agencies need to be clearly defined prior to Negotiations. This issue was addressed through extensive consultations that led to the preparation o f a Grant implementation agreement among the partner institutions, which sets out their respective roles and responsibilities during implementation. A draft o f this agreement, along with an Operational Manual, was submitted to the Bank for review prior to Appraisal. A Grant implementation agreement and an Operational Manual, including financial accounting section, satisfactory to the Bank, were provided prior to Negotiations.

Poor quality at entry may result in unrealistic expectations, delays and unsatisfactory achievement o f the Project objectives. To address this risk, funds were made available b y the GEF for the purpose o f Project preparation. These funds financed detailed consultants’ services for the preparation o f economic and financial analysis, environmental impact assessments, pre-feasibility studies and preliminary design (DDNP component).

The early involvement in Project design o f key stakeholders as wel l as the local communities i s critical to ensure ownership, build trust and ensure lasting commitment and collaboration. Whi le socio-economic and local community development issues need to be carefully considered in the Project design, the rationale, benefits and objectives o f the Project should be disseminated to al l stakeholders early in the preparation process, if not through active participation, through effective public awareness programs. Preparation activities focused on ensuring quality and helped design a Project supported by the main stakeholders and by the population. The Project foresees further public involvement and provides for the development of public awareness, in particular through the dissemination and replication activities.

0

0

5. Alternatives considered and reasons for rejection

The MOB as the sole implementation agency. The selection of M O B as the sole implementation agency was considered due to: (i) the possible substantial reduction o f nutrients; (ii) the fact that Budapest i s considered in the JAF’ as one o f the main hot spots; and (iii) MOB’S good performance in implementing the ongoing MWP and i t s commitment to make available counterpart funding for the proposed Project. This alternative was rejected because the fulfillment o f GoH’s commitments towards the ICPDR and the development o f the EU WFD development agenda fal l under the direct responsibility o f the MOEW, as does the DDNPD. Given their national mandate, the M O E W i s the appropriate agency for the preparation o f the dissemination and replication component.

Addressing only point-source pollution. A possible alternative was to focus exclusively on point-source pollution such as municipal wastewater treatment and industrial discharges. This alternative was rejected because o f the interest shown by the GoH’s interest in documenting the impacts on nutrient reduction o f floodplains and wetlands ecosystems such as the DDNP’s, and in getting the opportunity, while addressing two o f the most important hot spots as identified in the JAP, to compare the efficiency o f nutrient reduction and cost effectiveness o f the two treatment approaches. Whi le nutrient removal technologies are wel l understood and very efficient, they represent an important incremental cost in terms o f investments, operation and maintenance. However, i t i s generally accepted that wetland rehabilitation allowing wetland use as nutrient traps requires significantly lower investments and Operation and Maintenance

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(O&M) costs, while providing a very effective system to reduce nutrients pollution f rom non- point sources and from large quantities o f water.

C. IMPLEMENTATION 1. Institutional and implementation arrangements

Implementation Period: Five years, from FY 2007 to FY 201 1.

Project Management Structure: The M O E W w i l l have overall responsibility for managing Project implementation, including Project oversight and reporting to the Bank, as wel l as for inter-agency coordination between the two executing agencies. For overall Project management, disbursement, supervision and reporting to the Bank and Hungarian authorities, the MOEW has appointed a Project coordinator and established a small Project Management Unit (PMU) to ensure quality and timely coordination. The M O E W has entered into a Grant implementation agreement wi th the MOB, the WD and the DDNPD that defines the main roles and responsibilities o f each partner institution for the implementation o f the Project. Under this agreement, the day-to-day implementation and administration o f components 1 and 2 i s decentralized to separate executing agencies. Component 1 w i l l be implemented by the M O B and Component 2 b y the WD, on behalf of the DDNPD, the final beneficiary o f the investments, through respective PIUS, fully integrated in these two institutions. Implementation o f Component 3 wi l l remain under the direct responsibility o f the MOEW. T o provide for inter-agency coordination, a Project Steering Committee (PSC), composed o f representatives o f the main institutions involved in i t s implementation, has been established.

MOEW, P M U : During Project preparation, the MOEW designated a qualified staff f rom i t s Budget and Finances Department as Project coordinator, who w i l l continue the existing responsibilities during Project implementation. The MOEW has established a PMU to assist the coordinator, staffed wi th six professionals: a coordinator’s assistant, a financial analyst, a procurement specialist and three environmental specialists. The PMU w i l l oversee, coordinate, administer and monitor Project implementation, and w i l l act as the Bank’s counterpart for any matter related to Project implementation. In addition, the PMU w i l l coordinate Project management, monitoring and reporting, and w i l l be directly responsible for implementing the dissemination and replication component.

Project Steering Committee: The PSC w i l l continue operating throughout Project implementation. I t comprises representatives f rom the MOEW, the MOB, the WD and the DDNPD, including PMU director and heads o f the PIU, MOB and PIU, WD. This committee i s to bring the collective expertise of the sectors concerned, at the national, regional and municipal level, and o f the stakeholders, to help ensure that Project implementation achieves i t s objectives. The PSC and w i l l also work as a channel for the dissemination o f experiences and lessons generated by the Project. The PSC i s chaired by a senior level official of the M O E W to ensure appropriate support. For these reasons, the establishment and appropriate staffing o f the PSC was a condition o f Negotiations.

Project Zmplementation Unit-PZU, MOB: Implementation o f the Budapest component w i l l be managed by the PIU, MOB. This unit was established more than ten years ago to implement Projects financed b y F I s . The unit i s composed o f a group o f staff who have substantial experience in the implementation o f Bank-financed projects, through the ongoing MWP (Loan

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4512-HU), which i s at an advanced stage o f implementation. The unit w i l l be responsible for the technical and financial management o f the Project component, and for handling procurement and reporting requirements. The PIU, MOB w i l l be advised in technical matters by the Public Utilities Department of the MOB, which has experienced personnel. There i s a long and well established cooperation between the M O B and the Budapest Municipal Sewerage Company (BMSC), which has been involved in all stages o f Project preparation. During the implementation phase, the supervision o f the works to be performed at the NBWWTP has been awarded to the BMSC, under a contract financed by M O B from i t s own funds. The M O B w i l l create a jo int review team consisting o f representatives o f the M O B (Project Unit and Public Utilities Department), the BMSC, and the Private Operator to monitor the implementation o f the works. The responsibility for investments remains under the responsibility o f the MOB until the facilities are completed and commissioned. Responsibility for their operations and maintenance w i l l then be handed over to the BMSC.

Project Zmplementution Unit-PZU, WD: Implementation o f activities under the DDNP component, including the development o f the M&E system, w i l l be supervised by the PIU, WD, acting as an agent on behalf o f the DDNPD, whose staff has no experience in dealing with Bank- or IFI-financed projects. This unit was established for the component’s preparation, and it i s composed o f a coordinator - a consultant was hired for that purpose - and seasoned professional staff o f the WD. The selection of the WD as an executing agency on behalf o f the DDNP i s based on i t s experience in water project management, including projects financed by I F I s (other than the Wor ld Bank), i t s knowledge o f water management and o f the area and i t s river basin approach. On technical aspects the WD and the DDNPD w i l l continue to work in close cooperation during Project implementation. The DDNPD provides comprehensive knowledge o f the Park areas, ecosystem and biodiversity to the WD, which has expertise o f water management infrastructure and engineering. In order to minimize r isks related to the lack o f experience in dealing wi th Bank-financed projects, a Project launch workshop, including training in Bank’s operational guidelines and Safeguard Policies, w i l l be organized. Additionally, a detailed Project Operational Manual, including the Project’s operational procedures, as wel l as agreed implementation and procurement plans, has been drafted and commented on by the Bank. The PIU, MOB w i l l provide assistance to the PIU, WD, as appropriate.

Operational Flow: Each PIU w i l l be required to fulfill Project requirements in regards to the investment planning, procurement, supervision o f works and purchases, financial management, and for auditing and reporting to the PMU for i t s respective Project component. The above tasks w i l l be performed directly b y the PMU for component 3. Approval for applications for disbursement, withdrawal of Grant funds, and consolidated reporting to the Bank wil l be carried out by the PMU in the MOEW and sent to the MOF or entity delegated by MOF for signature prior to submission to the Bank. M a i n roles and responsibilities in regard to financial management, f low o f funds, disbursement, reporting, and execution and monitoring of the Project’s Environmental Management Plans are to be described in the Grant implementation agreement. Additionally, detailed responsibilities for operational processes, rules and standard forms and documents are to be spelled out in sufficient details in the Operational Manual. Drafts o f these two documents were submitted to the Bank for review prior to Appraisal, and comments were provided. Revised versions of these documents, satisfactory to the Bank, were submitted before Negotiations.

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Legal Arrangements: A GEF Trust Fund Grant Agreement w i l l be signed between the Republic of Hungary and the Bank, acting as an implementing agency for the GEF. This Agreement w i l l include the provisions for the implementation of Components 2 and 3, as both the WD and the DDNPD are under the direct responsibility o f the MOEW. A Project Agreement i s to be signed between the Bank and the M O B for the purposes of Component 1. An amendment to the Loan Agreement for Loan No. 4512-HU to authorize the use o f loan savings and unallocated funds to partially finance Component 1 o f the proposed Project i s being submitted to the Board for i t s approval on a no-objection basis, in compliance with OP/BP 13.25 on the Use o f Project Cost Savings.

2. Monitoring and evaluation of outcomeshesults

Monitoring and evaluation o f the Project outcomes w i l l be carried out separately for each component. Concerning the MOB component, the proposed Project performance indicators w i l l be monitored by the BMSC and reviewed b y the M O B prior to being reported to the PMU. As part o f the regular operations o f the NBWWTP, the BMSC performs continuous measurements of a set o f technical and financial indicators. Technical Project performance indicators are already being closely monitored by the BMSC, in accordance with Hungarian and EU requirements.

For the DDNP component, a comprehensive M&E system w i l l be put in place at the DDNP, under the responsibility o f the WD, in coordination wi th the MOEW, PMU. This system w i l l monitor the Project impacts in the DDNP, in terms o f reduction o f N and P, water quality and environmental health, taking into account the efforts o f the GoH to harmonize existing monitoring systems and to integrate the provisions o f the EU WFD in regard to wetlands. The l i s t o f indicators to be included in the M&E system, including possible indicators species, w i l l be determined in the first stages o f the Project, based on the results o f the baseline study. Also, as indicated above, the M&E system i s to be established prior to the execution o f the works.

A simple management information system for Project M&E w i l l be designed by the MOEW, PMU to ensure the coordination and aggregation o f the data, including reporting formats and the agreed monitoring indicators. Quarterly and consolidated annual reports including the use of Project funds and Project impacts w i l l be prepared by the PMU. Significant supervision by qualified Bank staff i s planned during the start-up phase. A Mid-Term Review w i l l be carried out to assess overall Project progress, introduce required changes, identify lessons learned, and disseminate good practices. This process w i l l be closely coordinated with the review o f similar projects in the Danube and Black Sea Programs, to allow for maximum benefits and knowledge sharing.

3. Sustainability and Replicability

Sustainabilitv. The M O B has demonstrated i t s commitment to the Project objectives through the implementation o f the baseline investments and the approval o f additional direct financial support beyond the GEF contribution. As part o f the MWP, the Bank has financed the construction o f the South Pest WWTP and the rehabilitation o f the biological secondary treatment o f the NBWWTP. These investments, along wi th the installation o f tertiary treatment in the NBWWTP under the proposed Project, and the foreseen construction o f the Central Budapest WWTP are included in the long-term comprehensive plan for wastewater collection

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and treatment in Budapest. Tariff increases w i l l be made as required to cover capital and operational expenses requirements.

In the case o f the DDNP component, the long-term sustainability o f Project benefits i s linked to the adequate management and maintenance o f the restored wetlands in the Gemenc and Beda- Karapancsa areas, both reported as hot spots in the JAP o f the ICPDR. Such management and maintenance w i l l require sufficient institutional and financial resources, which the G o H has committed to provide. A provision i s also made under the Project to support incremental Project management costs o f the WD, PlU on a declining basis while developing financial mechanisms to finance the wetlands basic maintenance costs. The Project makes provisions for strengthening capacity o f local and regional implementing institutions and central administrations to ensure that they acquire the needed managerial and technical s k i l l s and capabilities. Project sustainability w i l l be enhanced by actively involving local institutions during Project implementation and by the preparation o f a Special Area Management Plan, involving stakeholders in the process.

Replicabilitv. As indicated above, the dissemination and replication component o f the Project w i l l provide the means for developing an M&E system to properly assess Project results. Comprehensive impact evaluation studies w i l l be carried out. The results o f these studies w i l l serve as a basis for the dissemination and replication activities. In particular, the component w i l l finance workshops, public communication campaigns and promotion o f cost effective solutions for nutrient reduction in other areas o f Hungary and in other riparian countries.

4. Critical risks and possible controversial aspects

Lack of continuing commitment from the Government. Negligible, because o f the need for compliance wi th EU requirements and the strong support f rom M O B for the Project. The risk o f lack o f continued support for the DDNP component was initially rated as significant on the basis o f previous disagreement between the DDNPD and the MOEW, which significantly delayed confirmation o f counterpart funds and the signing o f the PDF-B grant. However, because of MOEW’s overall responsibility in the preparation and implementation o f the Project, and based on the institutional arrangements made to support the Project, this risk has decreased to negligible. Nevertheless, the Bank team w i l l work closely wi th the MOB and M O E W to maintain current support.

Consumers unwilling/unable to pay required tarifls levels. Negligible, because the increase required in MOB’S wastewater tariffs as a result o f the Project investments i s not substantial, and studies show that the new tariffs should be affordable to most o f the population (less than 4% o f the average household monthly income). As regards l ow income households and households facing temporary difficulties, M O B has certain schemes already in place to provide financial relief.

Institutional capacity to handle preparation and implementation. Negligible for the MOB. The municipality has shown satisfactory capacity during preparation and implementation o f the MWP, financed by Loan 4512-HU, which has a more complex structure and larger requirements than the proposed Project.

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Modest for the DDNPD. Despite being technically strong agencies, the implementing teams o f the WD and the DDNPD do not have experience in dealing with Bank-financed projects. T o decrease this risk, the Project provides for a launch workshop including training in the Bank’s operational guidelines, coaching from M O B to WD and DDNPD, and assistance from specialized consultants for Project preparation, including procurement.

Capital investments at the NBWWTP are higher than estimated. Modest. Since the selection o f the technology as well as the final design are to be carried out as part o f the procurement process, there i s a risk that the bids result in higher than expected prices. However, cost estimates have been carefully and regularly reviewed during Project preparation and have been found in line with market prices. Additionally, the procurement process with a prequalification o f f i r m s and a two-stage-bidding (ICB using the Bank standard bidding documents for Supply and Install) i s expected to create the highest possible competition for such contract, as the design wil l be left to the bidders to decide during the first phase. Thus, prices are expected to be in the l o w range.

Slow decision-making during implementation. Significant. The complex and rather bureaucratic process o f decision-making in Hungary has generated delays during Project preparation. To decrease this risk, a Grant implementation agreement between the M O E W , the MOB, the WD and the DDNPD has been prepared to define the roles and responsibilities o f each partner during implementation. This agreement i s being complemented b y an Operational Manual to describe in sufficient detail the procedures and timeframe for the organization o f procurement, financial management, disbursement, auditing and reporting. Drafts of these documents have been submitted to the Bank and comments have been provided. Final versions o f these documents, satisfactory to the Bank, have been submitted. Additionally, the formal establishment and staffing of the PSC, under the leadership o f the MOEW, w i l l facilitate the exchange of information, experience and lessons learned among the partner institutions. These arrangements have been agreed at Appraisal. The PSC has been established and appropriately staffed before Negotiations. Confirmation o f these arrangements allowed reducing this r i s k to Modest.

Safeguards policies. Modest. Both the MOB and the WD have completed Environmental Impact Assessment (EIA) reports that fulfill Bank requirements for their respective components prior to appraisal (these have been published in Info-Shop). The M O B has already obtained Government’s approval o f i t s EIA and the corresponding Environmental License, which i s required by Hungarian legislation before the works can start. The WD, on behalf o f the DDNPD, i s workmg on the preparation o f the additional assessment for the DDNP component, which i s required to obtain the Environmental License by Hungarian regulations. Such assessment w i l l be completed on the basis o f the detailed design o f the rehabilitation works planned for the wetlands. This assessment has been budgeted and w i l l be implemented as soon as the Grant i s approved. As the process for the approval o f such assessments by the Government has proven to be rather lengthy in Hungary, execution o f works under this component i s scheduled to start during the second year o f Project implementation. A Panel of internationally recognized experts on wetland rehabilitation and river dynamics wi l l also be convened to examine the proposed works. The G o H and the Bank w i l l retain the authority to reject the financing o f any work which the Panel concludes that could have negative impacts. Additionally, these rehabilitation works w i l l be implemented in stages, starting wi th the development o f pilots, to allow for a better quantitative evaluation o f the impacts. Notification to other riparian countries has been made within the scope of the Danube Commission and measures have been developed as part o f the EMP to protect Natural Habitats. (See Section D.6 and Annex 10 for details).

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5. Grant conditions and covenants

Effectiveness conditions:

The GEF Legal documents w i l l become effective once the Bank has received evidence that the Grant Implementation Agreement has been duly executed and Legal Opinions, respectively f rom the Republic o f Hungary attesting the validity and the binding nature of the GEF Trust Fund Grant Agreement and o f the Grant Implementation Agreement; and from the MOB attesting the validity and the binding nature o f the M O B Project Agreement.

For the GEF Trust Fund Grant Agreement:

(a) The Recipient shall maintain throughout Project implementation the Project Management Unit wi th adequate financial and human resources to ensure quality and timely coordination.

(b) In order to ensure appropriate inter-agency coordination, provide overall guidance, facilitate integration and address potential conflicts, the Recipient shall maintain throughout Project implementation a Steering Committee chaired by a senior level official o f the M O E W and comprising representatives from the MOF, MOEW, the MOB, the DDNPD and the WD.

(c) The Recipient, through the MOEW, shall cause the WD: (i) to carry out, supervise and monitor component 2 o f the Project, including the development o f a water quality monitoring system to measure the impact of said component on the reduction o f nutrients in the DDNP; and (ii) upon Project completion, to transfer to the DDNP the ownership and the responsibility for the operation and maintenance o f the facilities constructed, areas rehabilitated and water quality monitoring system developed under component 2 in accordance with a time action plan agreed by the Recipient and the Bank.

(d) In order to assess and assist the WD authorities in the selection and monitoring o f the planned interventions under component 2, the Recipient, through the MOEW, shall ensure that a panel o f internationally recognized experts in the area o f wetlands restoration and management shall provide appropriate advice and recommendations, all in accordance with the Operational Manual.

(e) The Recipient, through the MOEW, shall take all action required to ensure that the Operational Manual i s applied and followed at all times in the implementation, monitoring and evaluation o f components 2 and 3 o f the Project.

(f) The Recipient shall take all measures necessary on i t s behalf to carry out, or to enable the WD, as the case may be, to carry out the measures identified under the Environmental Management Plans at al l times in a timely manner, ensuring that adequate information on the implementation of said measures i s suitably included in the Project progress reports to be prepared by the WD.

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(g) The Recipient, through the M O E W shall, commencing on November 30, 2006 and thereafter, not later than November 30 and M a y 31 in each calendar year and until Project completion, prepare and furnish to the Bank a semi-annual progress report describing the progress achieved in the implementation o f components 2 and 3 o f the Project during the preceding calendar semester and the updated MOEW Monitoring and Evaluation Indicators for the upcoming calendar semester.

(h) The Recipient, through the MOEW, shall maintain policies and procedures adequate to enable it to monitor and evaluate on an ongoing basis the carrying out o f components 2 and 3 o f the Project and the achievement o f the objectives thereof and review with the Bank, by February 28, 2009 a mid-term report on the progress achieved in the carrying out of such components and, thereafter, take all measures required to ensure their efficient completion and the achievement o f the objectives thereof, based on the conclusions and recommendations of the said report and the Bank’s views on the matter.

For the MOB Project Agreement:

(a) The M O B shall maintain the PIU-MOB throughout Project implementation wi th financial and human resources adequate to enable i t to appropriately carry out i t s responsibilities under component l o f the Project.

(b) The B M S C shall report to a joint review team formed b y representatives o f the M O B and o f the BMSC.

(c) The M O B shall take all measures necessary to carry out the measures identified under the Environmental Management Plan for component 1 o f the Project at all times in a timely manner, ensuring that adequate information on the implementation o f said measures i s suitably included in the Project progress.

D. APPRAISAL SUMMARY 1. Economic and financial analyses

As a stand-alone GEF Project, the principal economic evaluation criterion i s the Project’s potential contribution to global benefits (see the economic and incremental cost analysis details in Annexes 9 and 15). For the M O B component, the baseline scenario for the Project includes the rehabilitation o f the NBWWTP and the control o f untreated discharges from the sewerage network, carried out during 2001-2005 under the MWP, but i t does not include any specific nutrient reduction actions, as such development i s not required under the EU Directive for Urban Wastewater Discharges. The GEF Project f i l l s this gap by financing the upgrading o f the NBWWTP to the tertiary level o f treatment, to reduce nutrient discharges. For the DDNP component, the baseline scenario i s business as usual, as no particular development o f nutrient trapping capacity i s required in the DDNP to comply wi th the EU WFD.

Incremental costs: Baseline investment costs are estimated at about US$80 mi l l ion o f which about US$27 mil l ion i s for the NBWWTP. The GEF Project w i l l finance additional investments of about US$32 million, of which GEF w i l l provide US$12.5 million, the ongoing Loan 4512-

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HU EUR5.9 mi l l ion (US$7.7 mi l l ion equivalent), the M O B US$10.4 million, and the M O E W US$1.4 million. 4

Global benefits: The main expected benefits are the reduction in nutrient (N and P) discharges into the Danube and consequently into the Black Sea. Over the 25-year period 2006-2030, the total reduction in nutrient discharges i s estimated at 54,200 tons for the MOB component and 38,350 tons for the DDNP component. In terms of cost effectiveness, the unit cost o f abatement (estimated as the present value o f the relevant annual capital and O & M costs) i s estimated at US$1,060/ton for the M O B component and US$240/ton for the DDNP component. As indicated above, as the impact of wetlands on nutrient reduction has not been systematically documented, the unit cost o f abatement for the DDNP component has been roughly estimated based on the information provided during Project preparation. Details are provided in the Incremental Cost Analysis in Annex 15.

Financial analysis: The M O B and the BMSC, respectively the borrower and final beneficiary under the ongoing Bank Loan (4512-HU), are in compliance with their financial covenants. Financial statements are provided in Annex 5. A financial rate o f return has not been calculated for the Project given the nature of the investments which result in environmental benefits. A financial return on investment i s not the main consideration in undertahng the investment. However, as provided under the contractual agreement between the M O B and the BMSC, the tariff formula provides for BMSC to recover any incremental operating expenses due to the investment. The increment in tariff i s based on such cost-recovery. However, as seen above and in Annex 15, the Project w i l l yield significant economic benefits. For the MOB component, the upgrading to tertiary treatment i s estimated to involve an incremental cash expense (HUF 6.5/m3 for O&M and HUF 1.5/m3 for debt service) o f about HUF 8/m3 o f wastewater invoiced. The required tariff increase i s about 4.5% over the current level o f the average wastewater tariff. The resulting new wastewater tariff i s estimated to remain affordable to most of the population concerned. As regards low income households and households facing temporary difficulties, MOB has certain schemes already in place to provide financial relief. For the DDNP component, the Project i s estimated to result in an increase in O & M expenses by about HtJF 135 mi l l ion per year, which represents about 26% o f the 2005 DDNPD annual budget (HUF 529 million, US$2.7 mi l l ion equivalent). This amount w i l l be provided through budgetary transfers to DDNPD by the MOEW.

2. Technical

M O B component. Although the proposed nutrient removal technology has been widely adopted in many parts o f the world, this w i l l be only the second such use in Hungary. I t has already been implemented at the South Pest WWTP as part o f the ongoing MWP and both WWTPs fal l under the responsibility of the BMSC, which i s managed by a private operator having sufficient knowledge and experience o f O&M o f such facilities. The Bank’s supervision at the design stage, through the procurement process, and during implementation i s critical for the success o f the Project. Verification protocols for the operation o f the new facilities have been discussed and agreed with M O B and B M S C representatives.

The GEF leverage ratio i s 1:7.96 (US$12.5 mil l ion provided by GEF and US$99.5 mil l ion provided as baseline investments and counterpart)

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DDNP component. During Project preparation, a technical assessment at the pre-feasibility level o f restoration o f the two identified sites was carried out. The assessment found that the development o f a number o f small interventions could significantly improve the average water f low and the period o f water retention in the area’s wetlands, ponds and oxbows. Emphasis was placed on ensuring that the restoration o f wetlands maximizes the water f low through the system in order to optimize nutrient trapping and improve ecological conditions and biodiversity. As indicated above, in order to provide additional security and confidence to the authorities, the MOEW w i l l convene a panel of experts, with internationally recognized experience in this type o f intervention, to assist the DDNPD in the implementation o f proposed works and follow up on the impact they have on the Park’s morphology and ecology. Additionally, the works w i l l be implemented in stages, starting with pilot areas. Foreseen interventions include localized dredging, cleaning o f the riverbed and culverts and construction o f small scale facilities to increase water retention (bottom weirs, sluices, pipe-culverts, etc.). Feasibility studies and detailed design w i l l be done in the course o f Project implementation, fol lowing detailed f ield surveys and investigations, for which provisions have been made under the Project.

3. Fiduciary

Procurement. Procurement under the Project wi l l be l imited to a small number of goods, works and consultant services contracts. The major contract, representing 78% o f the Project funds, would be a Supply and Install contract for the constructiodinstallation o f tertiary treatment facilities in the existing NBWWTP, to be procured under International Competitive Bidding (ICB) on a turn key basis. The procurement o f this contract wi l l be carried out by the PIU, MOB, which has gained experience in Bank-financed projects in the successfully implemented MWP, financed b y Loan 4512-Ku. The PIU, WD has no previous experience in implementing Bank- financed procurement. The requirements from this Project component are, however, l imited to only a few contracts of a very simple nature. An Action Plan has been prepared to minimize the r i sks which have been identified, specially related to the lack o f experience o f DDNPD and WD in implementing Bank-financed procurement. The Procurement Plan w i l l be updated at least annually, or as required to reflect the changing Project implementation needs and improvements in institutional capacity. (Detailed information i s included in Annex 8).

Financial Management. A Financial Management (FM) assessment was carried out for the Project. The financial management arrangements o f the project are acceptable to the Wor ld Bank. (See Annex 7 for details).

Strengths & Weaknesses. The strengths that provide a basis o f reliance on the Project FM System (FMS) include the use to a great extent o f the existing financial accounting and budgetary procedures in the implementing entities, and the extensive experience o f MOB in implementing similar Projects co-financed by I F I s (including the Wor ld Bank, EBRD, and EIB). The specific r i sk identified during the assessment relates to the fact that the Project w i l l be implemented by three entities; the MOEW, the MOB and the WD, the latter being located outside Budapest. However, this risk w i l l be mitigated by the coordinating role o f MOEW and the fact that the WD falls under the responsibility o f the MOEW. The MOEW and the WD have assigned staff to carry out the incremental Project FM tasks. (For details, please see Annex 7).

Disbursement: The Department o f Budget o f MOEW w i l l open one Special Account (SA) wi th the Hungarian State Treasury in the currency of the GEF Grant. To facilitate payments through

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each of the implementing entities and to receive the share o f their respective contributions to the financing o f the project, settlement accounts w i l l be opened for each of the three implementing entitiesheneficiaries. The MOB, M O E W and the WD w i l l have to provide the full amount of their respective contributions required to finance Project expenditures before the due date for the payment o f suppliers’ invoice. Accordingly, Grant funds w i l l f low from the Wor ld Bank to the SA and then through settlement accounts to the suppliers. The M O E W w i l l be responsible for having the SA replenished from time to time, on the basis o f withdrawal applications. (For details, please see Annex 7). The associated proceeds under the Loan 4512-HU w i l l remain in the special account already established for that Loan for the purpose o f parallel financing o f the component under the MWP.

4. Social

Considering the nature and the location o f the investments and the current socio-economic situation, the Wor ld Bank concluded that no social impact assessment was needed. Local communities, environmental associations and NGOs have been involved in the preparation of the Project through public meetings and consultations carried out as part o f the EIA preparation process. Conclusions and recommendations were recorded in the EIAs. Special attention wi l l be given during Project implementation to maintaining a high level o f communication and transparency wi th local stakeholders.

5. Environment

Impact Assessment. The major environmental objective o f the Project i s to reduce nutrient discharges into the Danube River and Black Sea and thus to achieve positive environmental benefits, Separate EIAs were prepared for Component 1 and 2. Both EIAs, including the EMPs have been reviewed and found to be satisfactory to the Bank. They were published in the Bank’s Infoshop on June 7, 2005. N o significant negative impact on the environment i s expected as a result of Project implementation. Given the nature o f the investments, the Project has been classified as environmental category “B” (Partial assessment).

For the Budapest component, the MOB completed the EIA for i t s component in compliance with the provisions of OP 4.01. As required, the EIA has been disclosed to the public and a summary of the document has been published on the website o f the MOB, in Hungarian and in English. The EIA clearly indicates that no significant negative impact on the environment i s expected as a result o f the Project’s implementation. Potential impacts on the environment o f the investments at the NBWWTP are exclusively l imited to those that could occur during the construction phase (noise, dust, etc.). Such potential impacts are wel l known and w i l l be adequately controlled. Appropriate measures have been included in the EMP.

For the DDNP component, the WD, on behalf o f the DDNPD, completed the EIA in compliance with OP 4.01 and presented i t in a public forum in March 2005. The final version o f the EIA incorporating all comments received, including f rom the Bank Project Team, was made available for public consultation at the public service offices o f the WD in June 2005. Letters were sent to the main stakeholders, including environmental associations and NGOs, to invite them to consult and comment on the document. The EIA contains a description o f existing environmental conditions in the two areas (Gemenc and Beda-Karapancsa), including climate, hydrology, soil and water quality, groundwater and biodiversity, and i t assesses the impacts on these conditions

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f rom implementation of the Project, during the construction and operation phases. The EIA has assessed potential environmental negative impacts associated with dredging, changes in the local hydrology, disposal of dredge materials, and increased f low o f pollutants into the wetlands. The EIA concludes that no significant negative impact i s expected if the measures included in the EMP are implemented. Moreover, the rehabilitation of the wetlands i s expected to improve the ecological conditions of the ecosystem and increase biodiversity, as the quality o f valuable habitats w i l l be improved. Positive ecological impacts are in particular expected with the quality improvement o f habitats for a number of migratory bird species o f global importance, such as the Ferruginous Duck (Aythya Nyroca), the White-tailed Eagle (Haliaeetus albicilla) and Black Storks. Furthermore, the rehabilitation of the wetlands w i l l help solve the desiccation problem caused by the deepening of the Danube River bed, which has resulted in serious loss o f wet alluvial habitats over the years. As indicated above, the M O E W w i l l convene an Experts Panel to assist the WD and DDNPD authorities in the assessment and monitoring o f the proposed interventions. Additionally, the rehabilitation work in the Park w i l l be implemented in stages, starting with the development of pilots, in parallel with the development o f the M&E system, to allow for a better quantitative evaluation o f the impacts. For more information on the biological processes o f nutrient trapping to take place in the DDNP and on their potential impacts on flora and fauna, see Annex 18. The l i s t of indicators to be measured as part o f the M&E system w i l l be determined in the first stages o f the Project, based on the results o f the baseline study. Also, this study w i l l provide recommendations on the inclusion o f indicators species in the M&E system to measure i t s impacts on the ecology and biodiversity of the DDNP.

As indicated above, Hungarian regulations require that Environmental Licenses need to be obtained on the basis o f the EIA before works can start. This Environmental License has already been obtained by M O B for the works planned under component 1. Therefore, works under this component can start as soon as the Project i s effective. WD i s in the process o f requesting the Environmental License for the works planned under component 2. As part o f this process, the EIA wil l be updated to incorporate eventual additional environmental impact information on the basis of the detailed design o f the rehabilitation activities for the wetlands5. As this process i s rather lengthy in Hungary, execution o f works under this component i s scheduled to start during the second year o f Project implementation.

Environmental Management Plan (EMP). EMPs have been prepared for components 1 and 2. Mitigation measures prepared under each EMP determine and address al l relevant parameters, impacts and mitigation measures, both during the construction and the operation periods, and designate the responsible agency for their enforcement. In particular, for the DDNP component, possible options for the handling and disposal o f the dredged material have been considered, and w i l l be thoroughly examined as part o f the detailed design. These measures include testing materials to be dredged for potential contamination, physical isolation o f the area during dredging, reuse o f dredged material where practicable, i f found to be o f acceptable quality, and disposal o f dredged material to an appropriate site according to i t s quality. Also, measures have been developed as part o f the EMP to protect natural habitats, including concentration o f the dredging and construction work during ecologically less sensitive periods o f the year. Contractors w i l l be responsible to implement these precautions and measures, and their implementation w i l l be supervised by the WD, the DDNPD and the MOEW. These EMPs w i l l

The detailed design work has been budgeted but cannot start before the GoH has assurance o f financial support under the Project.

18

be incorporated in the Project Operational Manual and i t s implementation w i l l be monitored as part o f Bank supervision missions.

6. Safeguard policies

Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP/GP 4.01) [XI [I Natural Habitats (OP/BP 4.04) [XI [ I Pest Management (OP 4.09) [ I [XI Cultural Property (OPN 11.03, being revised as OP 4.11) [XI Involuntary Resettlement (OP/BP 4.12) [ I [XI Indigenous Peoples (OD 4.20, being revised as OP 4.10) [XI Forests (OP/BP 4.36) [ I [XI Safety o f Dams (OP/BP 4.37) [ I [XI Projects in Disputed Areas (OP/BP/GP 7.60) [ I [XI Projects on International Waterways (OP/BP/GP 7.50) [XI 1 1

[ I

[I

Additional information and provisions made under the Project to ensure compliance with applicable safeguards policies are described in Annex 10.

7. Policy Exceptions and Readiness

This project complies with all applicable Bank policies.

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Annex 1: Country and Sector or Program Background HUNGARY: NUTRIENT REDUCTION PROJECT

Hungary’s investment needs in wastewater treatment to comply with EU directives are estimated at EUR4.0 b i l l ion over the next fifteen years. Budapest i s by far the most important point o f wastewater discharges in Hungary, and consequently o f nutrient discharges. In particular, the city generates respectively 45% N and 33% P o f nutrient discharges from point sources in the country. In 1999, the Hungarian Government prepared a long-term sewerage and wastewater treatment plan, which covers the priorities for investment in wastewater treatment until 2015. This plan includes the following investments for reducing nutrient discharges in the Danube: (a) the development o f tertiary treatment for nutrient removal at the South Pest WWTP; (b) the development o f tertiary treatment for nutrient removal at the NBWWTP; (c) the completion o f the sewer network in all areas o f Budapest; (d) the construction o f the Central WWTP, to complete the treatment o f Budapest wastewater; and (e) the increase o f landfi l l capacity for mid- term sludge disposal b y 165,000m3. Investments for the provision o f tertiary treatment facilities for these three plants represent about 30% of the investment allocated to wastewater treatment in the plan, while the development o f wastewater treatment infrastructure in Hungary represents 25% of the overall JAP plan. Although the Danube River i s not declared as a sensitive water body according to the EU Directive, Hungarian authorities decided to reach tertiary treatment to fulfill Hungary’s commitments made towards the reduction o f nutrient discharges to the Danube and the Black Sea. The JAP includes the investment requirements for the reduction o f nutrient discharges in Budapest among the five top priorities in the Plan.

In Hungary, provision o f water and wastewater services falls under the responsibility o f the municipalities. In the past, the Government gave priority to the extension o f drinlung water services. Nowadays, the coverage and quality for such services are good in Hungary, and water tariffs generally reflect the cost o f service. Therefore, the Government recently shifted sector priorities to increase wastewater collection and treatment (to biological secondary level o f treatment). In this regard, the M O B prepared the ongoing MWP, financed by a Bank Loan and an EU Phare grant. This project includes substantial investments in collection system development and improvement o f both the NBWWTP and the South Pest WWTP. The project included also the construction of a WWTP in Dunaujvaros, an important secondary Hungarian city, which i s already completed. The South Pest WWTP discharges constituted the largest source o f pollution of the sensitive Rackeve-Soroksar-Danube Branch, which i s an important recreational area for Budapest and i s classified as a “sensitive water body” as defined in the EU Directive. I t was therefore a priority to develop nutrient reduction facilities at the South Pest WWTP. The development of tertiary treatment at the NBWWTP was a lower priority, as i t discharges directly in the Danube River, which i s not considered a “sensitive water body”.

The Government strategy regarding nutrient reduction i s based on the fol lowing objectives: (a) the establishment o f a framework for sustainable use o f natural resources; (b) implementation of cost-effective actions to meet the EU requirements in regards to the WFD and the Directive on Urban Wastewater Discharges; and (c) contribution to fulfilling Government’s commitments under international agreements, and in particular the Danube Convention established on June 29, 1994, of which Hungary i s a founding member.

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The Project i s fully consistent wi th the GEF Partnership on Nutrient Reduction for the Danube and Black Sea Basins, as it addresses the highest priority transboundary issues identified in the Strategic Actions Plans for the Danube River and the Black Sea. The Project complies with eligibility criteria set for the Partnership, through a multi-focal approach, including investments in two focal points: advanced wastewater treatment for substantial discharges from metropolitan areas, and restoration o f wetlands to recover their function as nutrient traps. The Project w i l l follow-up on the substantial baseline investments financed in the MOB, through the ongoing MWP.

The G o H and the MOB have demonstrated their commitment to reducing nutrient discharges from the NBWWTP and in the Gemenc and Beda-Karapancsa areas o f the DDNP. T o this end, the Government obtained financial support f rom the GEF Strategic Partnership for Nutrient Reduction in the Danube River Basin and the Black Sea. In addition to the GEF Grant, the M O B w i l l provide counterpart financing from i t s own funds and parallel financing f rom funds under the Loan 4512-HU.

As mentioned above, Budapest i s the principal source o f nutrient discharges in the Danube. Nutrients (N and P) are responsible for the stimulation o f aquatic growth and for contributing to eutrophication o f the Black Sea. Estimates show that the city o f Budapest at the NBWWTP Plant discharges about 2,000 t/yr o f Total Kjeldahl Nitrogen and 450 t/yr o f total Phosphorus into the Danube. T o reduce these discharges, the M O B has examined a number o f technologies and has submitted an application for a Preliminary Water License for three pre-selected technologies. License was granted for the three examined technologies, which have been included in the following technical options: (a) using conventional biological nutrient removal, wi th installation of anoxic zones to improve settling o f the sludge; (b) including Membrane Bio-Reactor (MBR) technology in the existing aerated system; (c) constructing new MBR lines; and (d) completing the present activated sludge system by a fix-bed process. As all these technologies are l ikely to be protected by patents, the bid w i l l be organized in two stages, the f i rs t to establish common requirements for the offers, and the second, to compete in prices. The preparation o f the prequalification document i s wel l advanced.

A second Project area, the DDNP’s Gemenc and B6da-Karapancsa region, i s identified by the Environmental Action Plan for Hungary as an environmentally sensitive area, which could be used to develop cost-effective nutrient reduction measures through the restoration o f i t s wetlands, thereby improving the quality o f the Danube River. The DDNP, a protected zone of 50,000 ha, i s one o f the areas with greater potential for this purpose (these wetlands covered 80,000 ha in the past). The Project w i l l support the rehabilitation o f about an additional 10,000 ha o f wetlands and test their nutrient reduction capacity. The wetland restoration wil l take place in the Gemenc and Beda-Karapancsa areas o f the DDNP. The size o f the area i s 27,800 hectares, of which about 19,500 hectares acts as a floodplain and i s thus involved, at least during f lood events, in trapping part o f the nutrients carried b y the Danube. In the past, wetlands were covering an area o f about 80,000 hectares, providing higher capacity for regulating nutrient quantities in the Danube River.

As a result o f numerous actions to regulate the river f low o f the Danube, i t s riverbed has deepened. Consequently, the inundation period in the adjoining floodplain (inundation area), which i s today a protected nature reserve, and the frequency o f floods have decreased. Flood waves with the same water level inundate smaller floodplain areas than a few decades ago. The

21

degree o f riverbed incision i s around 1.5 meters during the course o f 100 years. As a consequence, the area i s becoming drier, wetland habitats keep shrinlung, and the nutrient retention capacity o f the ecosystem i s considerably diminishing.

The hydrological restoration o f the Gemenc area o f the National Park was started in 1998, in order to reconstruct former wetlands. These activities are believed to have caused the reduction o f nutrient levels in the Danube. Stage I of the revitalization of the “VCn-Duna” side branch and the adjoining “NyCki-tb” was completed in 2001. Corresponding costs, reaching HUF 70 million, were financed f r o m the Environmental Fund administered by the Hungarian Government. As part of the restoration a dam was pulled down. As a result, the “VCn-Duna” branch, which was formerly dead, now functions again as a side-branch, improving water circulation and nutrient retention capacity o f the “NyCki-tb”. For Stage 11, which further develops the previous activities, another KUF 35.5 mi l l ion has been granted from the Environmental Fund. The Project has been launched, and init ial steps for Project implementation have been made. The next steps would include interventions in the neighboring f lood areas: the so-called “Lassi” and “Decsi” water systems, which represent an area o f about 1,300 hectares. For these activities, the M O E W has committed HLTF 46 mi l l ion f rom the Environmental Fund. By improving the water circulation and regimes in the area, a considerable proportion o f the lost nutrient retention capacity w i l l be regained. Opening up o f the “Kgdar-sziget” side branch i s also planned through a government- funded Project, but the amount o f necessary investments i s s t i l l to be determined.

Activities under the Project w i l l contribute to increase the scope o f these interventions in the Gemenc and Beda-Karapancsa areas, with a special focus on development o f nutrient trapping capacity and improvement o f the overall ecological conditions and biodiversity in the Park.

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Annex 2: Major Related Projects Financed by the Bank and/or other Agencies HUNGARY: NUTRIENT REDUCTION PROJECT

Sector Issue Latest Supervision

(Bank-financed projects only) Project (PSR) Ratings

Implementation Development Bank-financed Progress (IP) Objective (DO) Municipal Wastewater Hungary - Municipal S H S

Wastewater Project (MWP)

Other development agencies

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

23

Annex 3: Results Framework and Monitor ing

HUNGARY: NUTRIENT REDUCTION PROJECT

Refine JAP and implement the integrated Danube River nvironmental management strategy n the region and the country to levelop synergies and efficient use ,f financial resources.

Results Framework PDO

<ey Project development and global mvironmental objective is: i) to reduce Budapest's discharge o f iutrients (nitrogen and phosphorus) nto the Danube River, and :onsequently into the Black Sea; 'ii) to enhance the nutrient trapping :apacity o f Gemenc and Beda- Karapancsa wetlands situated in the ower Hungarian part o f the Danube River; and ,111) to serve as a model for similar nutrient reduction initiatives in Hungary and other Danube basin Zountries.

Intermediate Outcomes

,...

Reduction o f point-source nutrient discharges from Budapest and Hungary

Reduction o f quantity of nutrients flowing out of Hungary into the Danube River

Replication strategy i s in place

Project Outcome Indicators I Use of Project Outcome Information

lveral l reduction o f the nutrient l o w into the Danube River and the 3lack Sea of about 4000 tons per mum at the end o f the Project.

Intermediate Outcome Indicators

Annual reduction o f nutrient jischarges from the NBWWTP of about 70% o f Nitrogen and about 50% o f Phosphorus by the end o f the Project.

Average operational cost o f the nutrient reduction process in the NBWWTP About 10,000 hectares o f wetlands rehabilitated in the DDNP at the end of the Project.

Annual water flow and quantity o f nutrients (N and P) retained by the DDNP wetlands increased by about 40% each at the end of the Project.

Average operational cost o f the nutrient reduction process in the DDNP wetlands

M&E system fully operational Cost-benefit analysis o f nutrient reduction o f wetland restoration compared to WWTP tertiary treatment carried out

Project experience and impact evaluation studies disseminated in the workshops held

Use of Intermediate Outcome Monitoring

Revise the JAP updating priorities o f the ICPDR for point sources o f nutrient discharges

Development o f good practices for wetland rehabilitation

Development o f similar initiatives in other cities and countries o f the Danube River basin.

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Arrangements for results monitoring

Institutional issues: As indicated above, monitoring and evaluation o f the Project outcomes wil l be carried out separately for each component. Concerning the M O B component, the proposed Project performance indicators w i l l be monitored by the B M S C and reviewed by the M O B prior to being reported to the PMU. As part o f regular operation o f the NBWWTP, the B M S C performs continuous measurements o f a set of technical and financial indicators. Technical Project performance indicators are already being closely monitored by the BMSC, in accordance with Hungarian and EU requirements.

For the Park components, a comprehensive M&E system w i l l be put in place at the DDNP, under the responsibility o f the WD, acting as an implementing agency for the DDNPD, and in coordination with the PMU o f the MOEW. This M&E system w i l l monitor the Project impacts in the DDNP, in terms o f reduction o f N and P, water quality and environmental health, taking into account the efforts o f the G o H to harmonize existing monitoring systems and to integrate the provisions o f the EU WFD in regard to wetlands. The l i s t o f indicators to be included in the M&E system, including possible indicators species, w i l l be determined in the first stages o f the Project, based on the results o f the baseline study. Also, as indicated above, the M&E i s to be established prior to the execution of the works.

A simple management information system for Project M&E w i l l be designed by the MOEW, PMU to ensure the coordination and aggregation o f the data, including reporting formats and the agreed monitoring indicators. Quarterly and consolidated annual reports including the use o f Project funds and Project impacts w i l l be prepared by the PMU. Significant supervision by qualified Bank staff i s planned during the start-up phase. A Mid-Term Review w i l l be carried out to assess overall Project progress, introduce required changes, identify lessons learned, and disseminate good practices. This process w i l l be closely coordinated with the review o f similar projects in the Danube and Black Sea Programs, to allow for maximum benefits and knowledge sharing.

Data collection: This w i l l be carried out by the B M S C and the DDNPD for components 1 and 2 respectively, under the supervision o f the respective PIUs and agencies in charge o f the quality control in Hungary. I t w i l l take into account the Hungarian and EU regulations in place and to be implemented, as well as the efforts to harmonize existing monitoring systems in Hungary.

Capacity: For the M O B component, the municipality has shown satisfactory capacity during preparation and implementation o f the ongoing MWP, financed by Loan 4512-HU, which has a more complex structure and larger requirements than the proposed Project.

Despite being technically strong agencies, the implementing teams o f the WD and the DDNPD do not have experience in dealing wi th Bank-financed projects. T o decrease this risk, the Project provides for a launch workshop, coaching from MOB to WD and DDNPD, and assistance from specialized consultants for Project preparation, including procurement.

Overall, no problems are expected in terms o f capacity to monitor Project results. Additionally, funds w i l l be made available under the Project to finance training and workshops to ensure that any potential problem w i l l be adequately addressed.

25

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Annex 4: Detailed Project Description HUNGARY: NUTRIENT REDUCTION PROJECT

Project Components

1: Development o f tertiary treatment at the NB WW TP (Budapest)

2: Wetland Restoration in the DDNP a) Wetland restoration

Annex 4. Table 1. Estimated Project Costs by Components (million US$)

Local Foreign Total %

9.70 13.70 23.40 73.2%

0.97 3.89 4.86 15.2% b) Technical Assistance and Monitoring system

Total Component 2 0.24 0.97 1.21 3.8% 1.22 4.86 6.08 19.0%

3: Dissemination and Replication

Contingencies Physical

0.08 0.33 0.41 1.3%

0.55 0.94 1.49 4.7% Price

Total Contingencies

Component 1- Development of tertiary treatment at the NBWWTP (Budapest).

0.22 0.38 0.60 1.9% 0.77 1.32 2.09 6.5 %

This component w i l l finance works and equipment to upgrade the NBWWTP to the tertiary level of treatment for the reduction of nitrogen and phosphorous from nutrient discharges into the Danube River. The NBWWTP, which was built in 1973, has been rehabilitated under the ongoing Bank financed MWP. I t i s being operated by a mixed-capital operator company, under a 25-year concession contract, awarded in 1997 to a consortium of the Compagnie Generale des Eaux (now Veolia Water) and Berlinwasser. The Municipality o f Budapest, assisted by consultants, prepared a feasibility study assessing three alternatives for this Project component. This feasibility study has been reviewed and approved by the WD who issued the required Preliminary License.

Grand Total I 11.77

Because most systems for tertiary treatment are l ikely to be protected by patents, and the solutions in each system are difficult to compare in a one-stage conventional bid, the MOB i s workmg on the preparation o f a two-stage process, to permit equalization o f proposals. The solution to be developed i s not specified at this stage and w i l l be provided by the suppliers in the bids. The technical responsiveness o f the solutions to be provided w i l l be checked against i t s compliance with a set of precisely defined performance requirements (to be detailed in the technical specifications o f the bidding documents), based on their technical and financial efficiency and their ability to comply wi th the EU Urban Wastewater Directive in terms of quality of effluents and the Hungarian regulation. After the selection process i s completed, the MOB w i l l seek the final licenses from the WD. The prequalification documents are wel l advanced and prequalification i s expected to be completed prior to effectiveness. After the implementation of the nutrient removal phase the discharges of the NBWWTP in terms o f Total N and Total P in the effluent are expected to be reduced by 68% and 60%, respectively.

20.20 31.97 1 100.0%

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Component 2- Wetland Restoration in the Duna-Drava National Park.

This component w i l l finance the rehabilitation o f about 10,000 hectares o f wetlands to develop their nutrient trapping capacity within two identified areas, Gemenc and Beda-Karapancsa, located within the DDNP, directly along the course o f the Danube River. The DDNP i s located downstream from Budapest, which s t i l l discharges a significant proportion o f i t s wastewater into the Danube River without any treatment. Additionally, the surrounding areas upstream f rom the Park are cultivated areas, and represent a source o f non-point pollution o f nutrients. This component w i l l test the efficiency o f wetlands in trapping nutrients directly f rom the river. I t w i l l establish an M&E system to measure the reduction o f nutrients. This M&E system wil l be developed in compliance with Hungarian regulations in regard to wetland monitoring. I t w i l l also incorporate the quality assessment requirements under the WFD, thus supporting Hungary’s compliance with such requirements. In particular, parameters to be included in the M&E system w i l l be determined on the basis o f the baseline survey to be carried out at the f i rs t stage o f the Project. The rehabilitation process w i l l be implemented in stages, starting with the establishment of one pi lot in each o f the two areas for a period o f one year.

A comprehensive baseline study w i l l be carried out at the beginning o f the Project to assess the areas’ environmental quality at the first stage o f the Project, to help determine the precise location o f the two pilots, and to provide recommendations on the design and development o f the M&E system. Building on the results and lessons learned from the pilots, the rehabilitation wi l l then be scaled up. Early in the process, an Experts Panel w i l l be convened by the MOEW to assist the WD and the DDNPD authorities in the selection and monitoring o f the planned interventions. In parallel, the component w i l l adapt a methodology o f impact evaluation, using local research organizations and universities. I t w i l l also include the development, in a participatory way, o f a DDNP Special Area Management Plan, including measures to best accommodate authorized uses and protection measures in the Park area. Finally, this component w i l l include small provisions for financing incremental Project management costs for the WD, PIU. This provision w i l l cover the cost o f the head o f the WD, PIU, a consultant hired by the WD for the component’s preparation, and who wil l continue the existing responsibilities during Project implementation.

The DDNP area includes floodplains and side branches covering about 20,000 hectares. The Project includes their hydrological restoration as wetlands or floodplain (inundation) area. Necessary investments w i l l include some engineering works and earthworks for smaller dikes, weirs and sluices, wetland monitoring and sampling equipment, and some localized dredging and clearing. Additionally, laboratory instruments and operation control systems (computer hardware and software) w i l l be needed to establish the monitoring system. As a result, the drying o f the wetland habitat i s expected to stop and i t s degradation to reverse. Through the general improvement o f the natural ecosystems with adequate vegetation, the nutrient reduction capacity of the wetland w i l l increase. I t i s estimated that the Gemenc and Beda-Karapancsa regions w i l l have the ability to annually retain between 1390 and 1,730 tons o f N and between 76 and 92 tons of P. For a detailed description o f the qualitative biological processes o f nutrient trapping to take place in the DDNP and on their potential impacts on flora and fauna, see Annex 18.

A pre-feasibility study has been carried out in the fol lowing hydrological units o f the Park, to elaborate feasible and cost effective interventions to increase nutrient trapping capacity, while

29

taking into account environmental and biodiversity protection. The study recommended implementing the interventions described below as part o f the DDNP component o f the Project. Final design for these interventions w i l l be prepared during Project implementation. Detailed maps of these areas, identifying the different zones, are available in Annex 17.

“Verhnka” water system, “Rez6ti-Duna”. Area: 1,100 hectares.

Description: The Verhnka island was created at the end o f the 19* century, by artificially cutting across an over-developed bend, what i s today the “RezCti-Duna” side branch. The water surface area of the 15 kilometres long side branch i s 206 hectares. I t s upper and lower mouths connecting it to the main bed are 3 kilometres apart. As a result o f regulation, the branch i s increasingly silted up, especially at i t s upper section and i t s confluence, with the water f low being totally blocked at low water levels, and being less capable o f supplying water to the wetland habitats of the island.

Recommended intervention: Construction of a s i l t gathering device at the upper mouth. Building a levee or a weir to hold back the water and dredging o f the bed at the lower mouth.

“Buvat” water system. Area: 614 hectares.

Description: There are several silted-up dead branches crossing the area. Their desired level o f water intake should be ensured from the neighbouring dead branches (“RezCti-Duna” and “GrCbeci-Duna”).

Recommended intervention: Improve the linkage between the Keszeges-t6, the Lidia-tavak and Lidia-lapok to the RezCti-Duna, in order to allow more frequent floods. Improve the water transport at Zitony-tava and repair the collapsed culvert at Vajas-fok to stop the leakage b y the old abandoned rai l road.

“B6da-Karapancsa’’ water system. Area: 2,500 hectares.

Description: The major elements o f this area adjacent to the Croatian border are the “Btdai- Duna” and the “Belso BCda”, comprising a 20 kilometre long system o f side-branches. The areas belonging to the two side-branches are separated by a flood-prevention dike. The “Belso-BCda” i s situated on the flood-protected side. A small sluice separates Kiilso-BCda (outer BCda) dead branch from the Danube; with the help o f which, the water can be sustained at a constant level averaging 3.2 meters.

Recommended intervention: Build a sluice (4.0m x 4.5m) to separate the Kiilso-BCda (outer BCda) f rom the Danube and dredge the pre-channel inner river stretch to transform this dead branch into a floodplain lake with a surface o f 75 hectares and a depth up to 5.0 meters; In the Belso BCda (inner BCda) dead branch, remove the dividing barrier and increase the allowed water level;

30

By making a large passage at the upper stretch o f the channel linlung Mocskos-Duna dead branch, increase the water level wi th a small escape sluice and dredge the river stretch.

Water system at the Sib-mente canal. Area: 755 hectares.

Description: The area along the Si6-mente canal connecting Lake Balaton with the Danube i s interwoven by various types o f wetland habitats originating from the Danube’s earlier riverbed movements and from the cross-cutting o f bends. In order to be able to maintain the high variety o f wetland plant species capable of retaining nutrients, i t i s necessary to implement bed corrections, and construct regulatory works and water-retaining barriers.

Recommended Interventions: Improve the water intake conditions (frequency, accretion volume, level of retention) achieved through cleaning the connections to the river-bed and the internal connections, (profile extension, thalweg correction), through the implementation of controllable water- retention facilities (maneuverable locks, pipe culverts) in the mouth profiles Sib mente ZZ.: Cleaning of the channel No. 1259; Construction of regulating sluice and o f a pipe culvert at water body No. 1259 and at the mouth o f Szi l igy fok Sib mente ZZZ.: Bed cleaning at water body and channels No. 1254. Construction o f a water f low regulating weir. Construction o f a pipe culvert at section 0+105 o f the water body No. 1254 Sib mente VI.: Bed cleaning at water bodies and channels No. 1263 and No. 1265; Construction o f water f low regulating weirs and construction o f a pipe culvert at section 000-010 o f the water body No. 1265 Sib mente VZZ.: Bed cleaning at water body and channels No. 1268; Construction of a water f low regulating weirs and o f a pipe culvert at the mouth of Holt-Si6 and Si6 Sib mente VZIZ.: Bed cleaning at the mouth; Construction o f water f low regulating weirs and o f a pipe culvert at the mouth o f Holt-Si6 11 and Si6.

“Gemenc” water system. Area: 926 hectares.

Description: The most valuable central element o f this water system i s the 30 hectares surface- area Forg6 Lake. The lake i s connected wi th the “GrCbeci-Duna” side branch through a 2 lulometres long canal.

Recommended Interventions: Improve the water intake conditions (frequency, accretion volume, level o f retention) through cleaning the connections to the river-bed and the internal connections, (profile extension, thalweg correction) In the Forg6 Lake (No. 1002), implementation o f a double water induction ,direction and restoration of the inter-basin diversion under the line road from the direction o f north Cleaning o f channel No. 1008. Construction o f a water f low regulating device at the north side o f Forg6-t6, construction o f a pipe-culvert wi th double gate.

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“BBtai-Duna” water svstem. Area: 1,430 hectares.

Description: The system i s named after the 6 lulometres long dead branch o f 96 hectares surface area. The island between the branch and the Danube River bed i s an area o f high ecological diversity, partially covered by forest, which i s frequently flooded.

Recommended Interventions: 0 Biitai-Holt-Duna: construct a water f low control facility (decelerator) in parallel wi th the

village and a weir or sluice at the lower railway bridge pillars section 0 The optional severance o f the Jaj-tanyai-tb from B i t a water system. Contemplate the

repair o f an existing channel leading to the Siirosok (and the Danube).

“Fekete-erdei” water system, “GrCbeci-Duna”. Area: 500 hectares.

Description: The area i s an island bordered by the main bed and the side branch “GrCbeci-Duna”. I t was-created in the 19” century, by cutting across a bend. The side-branch has 66 hectares surface area. I t s length i s 4 kdometres, and it i s connected to the main bed only by i t s confluent end. I t has become strongly silted up, with a developed eutrophication process.

Recommended interventions: 0

0

T o block the upper inlet o f GrCbec in order to slow down the rate o f sedimentation and dredge stretches filled with sediment In order to facilitate the improvement o f water intake into lakes and swamps, namely Sulymos-tb, Akbs-hbkony, Doglott GrCbec, Kesel$s-(Ashs)-Duna and Tehenes-lap, i t i s essential to secure more frequent flooding o f those sites through the water inf low and outflow o f the channels.

“Keriilo-Duna” water system. Area: 640 hectares.

Description: The determining element o f water regime in the area i s the artificially created bed with the name ,,Keriilo-Duna”. I t i s 8 kilometres long. During flood events, i t can represent a wetland o f 9 hectares.

Recommended Interventions: 0

0

0

0

0

Slight dredging o f the river-bed in order to increase the volume o f the water body Improvement o f the water supply o f the wet habitat defended by the summer dike Restoration o f 2 dike drains at the same location Repair o f two pipe weirs at 000-450 Construction o f a damming weir.

“BBli” water svstem. Area: 500 hectares.

Description: The central part of the area i s occupied by a strongly eutrophic, filled-up inner lake. The surface area of the lake i s approximately 15 hectares. I t s water supply i s regulated b y the canal connecting i t to the “VCn-Duna” (Old-Danube), the neighbouring hydrological unit, which has already been revitalised.

32

Recommended Interventions: 0

0

0

Rebuild the culvert in the dirt road above ground level at BBli-fok (lake) Dredge the entire stretch o f BBli-fok and the bottom o f BBli-t6 to ensure a more frequent and prevalent flooding o f the lake Construct a water regulating weir or sluice at the inlet to BBli-t6.

Remark: Csorosz i s currently getting i t s water from NyCki-to, but i t i s possible to develop feeding from Simon-Duna, which w i l l result in a more frequent, lower water supply. One o f the branches o f Zsold-kasztil6 i s fed from the NyClu-t6. More frequent flooding can be ensured by moderate dredging.

“M6ricz-Duna” water system. Area: 360 hectares.

Description: The M6ricz-Duna branch and the associated water system cover an area o f 48 hectares, which i s periodically flooded and have been considerably silted up, especially at the confluent section.

Recommended Interventions: 0 Construction o f a weir at O+OOO

“Nagy-Pandur” water system. Area: 1,200 hectares.

Description: The Nagy-Pandur Island i s a temporarily flooded area with forest cover, belonging to the town o f Baja and the village Szeremle. The area i s bordered b y the main Danube and the 10 lulometres long “Szeremlei-Duna” side branch o f 84 hectares open surface area. On the island there are 25 hectares o f permanently flooded area and inner lakes, with water supplied at times of f lood coming partly f rom the Danube and partly f rom the “Szeremlei-Duna” branch. The latter i s strongly silted up, and the relative elevation o f i t s bottom level i s relatively increasing as the main Danube bed deepens.

Recommended intervention: Rebuilding o f the confluence at the lower part o f Szeremlei-Sugovica and dredging, preferably, along the highly sedimented stretches. Alternatively, the entire dead branch may be subject to dredging. Improvement o f the water supply into the water bodies at Pandtir-sziget through enhancement o f the channels’ water influx.

Component 3: Dissemination and Replication

This component w i l l finance consultant services to carry out a comprehensive end-of-project impact evaluation and results analysis study o f the two interventions (tertiary treatment and wetlands restoration), including a cost-benefit analysis. The results o f these studies w i l l serve as a basis for the dissemination, replication and knowledge sharing activities. The component w i l l finance workshops, public communication campaigns and promotion o f cost effective solutions for nutrient reduction in other areas o f Hungary and in other riparian countries. The project w i l l also link to the GEF Danube and Black Sea Regional projects, Danube Convention-supported dissemination activities and the GEF-funded I W Learn initiative. In this regard, this component

33

w i l l include setting up a Project website consistent wi th the GEF 1W:LEARN guidance, participation o f project staff in IW:LEARN activities, participation in at least two GEF International Waters portfolio conferences, and participation in ICPDR and Black Sea coordination meetings. The Project w i l l also provide limited funds to finance a Project launch workshop; auditing services; and training to strengthen WD for project implementation and to build capacity o f DDNPD staff for the efficient development and operation o f wetlands for nutrient trapping.

34

Annex 5: Project Costs

HUNGARY: NUTRIENT REDUCTION PROJECT

CONTENTS

Table 1: Project Cost and Financing

Table 2: Financial Results and Projections - Municipality of Budapest

Table 3: Financial Results and Projections - BMSC

Table 4: NBWWTP - Project Stand-Alone Income Statement Projections

Table 5: NBWWTP Financial Operations - Impact of GEF Project

Table 6: Ma in Assumptions in Financial Projections

Institutional Analysis - Municipality of Budapest

Institutional Analysis - BMSC

Institutional Analysis - DDNPD and WA

35

Annex 5, Table 1: Project Cost and Financing

Foreign U S $million Local

U S $million

Project Cost By Total Component and/or U S Activi ty $million

Government Municipality GEF Associated (MOEW) of Budapest IBRD loan

23.40 0 9.70 6.50 7.20

1: Development of tertiary treatment at the NBWWTP (Budapest) 2: Wetland Restoration in the Duna-Drava National Park 3: Dissemination and Replication Total Baseline cost Physical Contingencies

6.08 1.22 0 4.86 0

0.41 0.07 0.01 0.33 0

29.88 1.29 9.71 11.69 7.20

1.49 0.06 0.49 0.58 0.36

Price (

0.03 0.19 0.23 0.14

Interest during construction

Front-end Fee

1.38 Total Financing 31.97 Required 10.39 12.50 7.70

'Identifiable taxes and duties are US$6.4 million, and the total Project cost, net of taxes, i s US$25.6 million. Therefore, the share of Project cost net of taxes i s 80%.

36

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z

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m m

Annex 5, Table 3: BMSC - Summarized Historical Financial Statements (HUF billion)

NCOME STATEMENTS 3perating revenues Iirect cost of sales ndirect cost of sales selling and marketing administration other overhead

3ther revenues 3ther expenditures

Dperating profit -inancia1 revenues Financial expenses Financial profiVloss Profit loss from ordinary activities Extraordinary revenues Extraordinary expenditures Extraordinary profiVloss Profit before tax Corporate tax

Total operating expenses -.

Profit after tax BALANCE SHEETS Intangible assets Tangible assets Long-term financial assets

Total long-term assets Inventories Receivables Securities Liquid assets

Total current assets Prepayments

Total assets Issued capital Capital reserve Retained earnings ProfiVloss of the year

Provisions Long-term liabilities Current liabilities

Total liabilities Accrued expenses and deferred income

Total shareholders' equity

Total equity and liabilities FINANCIAL RATIOS Operating margidoperating revenues (Yo) Profit before tadoperating revenues (Yo) Current ratio Debt equity ratio

I999 2000 2001 2002 2003 2004

14.4 17.0 18.5 7.3 8.0 8.7

0.1 0.1 0.1 0.7 0.7 0.9 0.7 0.6 0.7 4.4 5.5 7.5 5.0 7.7 8.3

13.8 17.1 18.7 5.0 5.4 7.3 1.0 0.9 1.1

0.1 1.0 0.8 1.1 6.0 6.2 8.4 0.1 0.1 0.1 1.6 1.2 2.7

-1.5 -1.1 -2.6 4.5 5.1 5.8 1.0 1.3 1.5

20.2 9.8

0.1 0.9 0.8 6.1 7.4

19.0 7.3 0.8 0.1 0.7 8.0 0.2 2.2

-2.0 6.0 1.5

20.2 25.7 11.2 11.8

0.1 0.1 1.1 1.1 0.8 0.8 9.7 8.8 9.7 13.6

22.9 18.5 7.0 7.2 0.7 0.9 0.2 0.2 0.5 0.7 7.5 7.9 0.3 0.3 3.3 3.1

-3.0 -2.8 4.5 5.0 1.2 1.4

3.5 3.8 4.3 4.5 3.3 3.6

0.1 0.1 0.1 0.1 0.1 0.1 82.8 84.1 85.9 88.6 90.5 92.2 0.1 0.1 0.1 0.1 0.1 0.1

83.0 84.3 86.1 88.8 90.7 92.4 0.2 0.1 0.2 0.2 0.2 0.2 3.4 3.1 3.2 3.5 3.1 3.8 5.8 6.8 7.0 6.5 4.9 6.3 0.8 0.5 0.5 0.7 1.6 1.5

10.2 10.5 10.9 10.9 9.8 11.8 0.4 0.3 1.2 1.6 2.0 2.8

93.6 95.1 98.2 101.3 102.5 107.0 70.0 70.0 70.0 70.0 70.0 70.0 13.6 13.6 13.6 13.6 13.6 13.6 2.6 3.9 5.1 6.6 8.3 8.8 1.3 1.2 1.5 1.7 0.5 0.6

87.5 88.7 90.2 91.9 92.4 93.0 0.9 1.7 1.7 2.4 1.2 2.7 0.7 0.2 0.4 0.2 1.4 1.2 1.5 1.1 1.5 1.8 2.1 1.4 1.9 1.1 1.5 2.1 3.0 3.3 4.4 6.0 7.5 9.3

93.6 95.1 98.2 101.3 102.5 106.9

35 32 39 36 35 28 31 30 31 30 22 19 7.3 8.8 7.3 9.9 6.5 6.5

0.01 0.00 0.00 0.00 0.00 0.00

39

Annex 5, Table 4: NBWWTP - Project Stand-Alone Income Statement Projections (000 US$)

A. PROJECT STAND-ALONE REVENUES Sewerage revenues Other revenues

Total revenues EXPENSES Salaries Electricity Chemicals Sludge disposal (incl. transportation) Maintenance Other operating expense Environmental levy Water pollution charge Rental fee Provisions for bad debt

Depreciation

Interest expense

Corporate tax

Total 0 & M expense

Operating margin

Net income before tax

Net income after tax

2007 2008 2009 2010 2011 201 2

5277 0

5277

238 1021 1214 221 160 50

-376 0

2492 106

51 26 0

151 0

151 24

127

5306 0

5306

252 1052 1251 227 165 52

-41 8 0

2465 106

51 52 0

154 0

154 25

129

5298 0

5298

268 1083 1288 234 170 54

-498 0

2437 106

51 42 0

156 0

156 25

131

5363 0

5363

283 1111 1321 240 174 55

-498 0

241 0 107

5203 0

160 0

160 26

134

5441 0

5441

299 1142 1359 247 178 56

-498 0

2382 109

5274 0

167 0

167 27

140

5522 0

5522

31 5 1174 1398 254 183 58

-498 0

2355 110

5349 0

173 0

173 28

145

Note: Lease alternative - rental fee to be paid by the operator is included

40

Annex 5, Table 5 - NBWWTP Financial Operations - Impact of GEF Project (US$ 000)

NBWWTP operations (without project)

Revenues

0 & M cash expenses

Corporate tax

Net cash income

Project operations

Revenues

0 & M cash expenses

NBWWTP operator (with project)

Revenues

0 & M cash expenses

Corporate tax

Net cash income

2007 2008 2009 2010 2011 2012 2013 2014 Annually

48675 50142 51653 52951 54476 56045 57760 59322 60722

33999 34844 36697 37504 38438 39401 40393 42173 43034

2059 1669 3352 3575 3740 3902 4065 4029 41 69

12617 13629 11604 11872 12298 12742 13302 13120 1351 9

5277 5306 5298 5363 5441 5522 5606 5624 5650

5020 5045 5036 5095 5165 5238 5315 5329 5350

53952 55448 56951 58314 59917 61567 63366 64946 66372

39019 39889 41733 42599 43603 44639 45708 47502 48384

2083 1694 3377 3601 3767 3930 4094 4140 4200

12850 13865 11841 12114 12547 12998 13564 13304 13788

41

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iu

Institutional Analysis - Municipality of Budapest

Legal Framework: Hungary's system of government comprises the State, 19 county governments plus Budapest, and 3,148 independent local units organized as villages or towns. Budapest i s further structured into 23 independent districts, each district having i t s own mayor, city council and staff. O f the independent local units, 42 (including the Budapest districts) have a population o f 50,000 or more.

Key pieces o f legislation govern Hungarian local government spending and revenue powers: the 1990 Law on Local Governments (Act No. LXV); the Law on Local Taxes (Act C of 1990), last modified at the end o f 1995; and the 1996 Act on Municipal Debt Adjustment (Law XXV o f 1996), providing procedures for formal debt work out and bankruptcy reorganization for municipalities.

Organization and Administration: The 1990 Law on Local Government contains a chapter on Budapest's governmental structure, recognizing i t s "special role and position" vis-8-vis central government and other local governments. According to the law, Budapest has a municipal government where each o f the city's 23 districts has one seat on a General Assembly (city council), and the remaining 65 council seats are elected at large. The Budapest municipal government i s headed b y a L o r d Mayor, elected directly every four years, wi th the next election in 2006. Deputy Mayors are appointed b y the Lo rd Mayor subject to General Assembly approval.

The Local Government law directs the Municipality to perform functions affecting the whole of the city, including maintaining major roads and providing public transportation, police protection, water and wastewater treatment, wastewater collection, wastewater disposal and drainage. District government i s responsible for primary and secondary education and social programs including day/elder care, and birth and death registry.

Revenues: Budapest has two general revenue sources: funds from the central State budget and "own source'' local revenues. Revenues received from the State fa l l into three major categories: intergovernmental transfers, shared taxes and fees, and social security support.

Zntergovemmental Transfers. The four categories o f budget transfer f rom State to local government are: normative grants, targeted matching grants, addressed grants and other relatively minor transfers.

Normative (unconditional) Grant. The normative grant i s an unconditional transfer composed o f two elements: (i) a HUF 2 mi l l ion lump sum, provided to al l local governments and (ii) an amount based on "norms" and need indices. The norms are a function o f standard per capita services, a small matching grant (each HUF o f tourism tax i s supplemented b y two from the State) and 18 expenditure related weights designed to estimate the demand and cost for municipal services. From the grant, cost recovery for services i s just below 60% for most operations o f the Municipality.

43

Targeted (matching) Grants. Matching grants are provided for specific capital construction projects determined b y annual state priorities. The central funds are matched by a local contribution, wi th the state generally providing 40% o f project costs. Most wastewater projects (except for Budapest and the largest cities) are funded b y matching grants.

Addressed Grants. Certain infrastructure projects for Hungary's larger cities, including the ongoing Municipal Wastewater Project for Budapest, are funded by addressed grants (special appropriations). Each year legislation i s passed earmarking the funds to specific projects.

Shared Tuxes and Fees. Local governments receive a share o f personal income taxes collected by the state. The local share ranges from 25 to 36%, according to a formula incorporating per capita income and population. Budapest's share o f personal income taxes i s divided between the Municipality and the districts in a 60:40 ratio.

Other Centrally Earmarked Transfers. There are two other state transfers to the Budapest budget: (i) a social security contribution of pass-through funds to cover the cost o f health institutions and (ii) special "ad hoc" grants.

Revenues under Municipality control can be divided into two major categories: (i) those f rom current operations and (ii) from portfolio income and the sale o f municipal assets.

Current Revenues. Municipal revenue from current operations consists primarily o f local taxes, together wi th relatively minor fees, fines and other income. The Law on Local Taxes grants local government authority to levy five types o f "own-source" taxes, up to maximum rates defined by the law. In Budapest, the Municipality levies two o f these taxes, and the balance are reserved for the district governments. The taxes are:

Local Industrial Tux (general business turnover tux). This i s a tax levied by the Municipality on all businesses operating within i t s l i m i t s . The tax i s 2% o f gross sales revenue net o f VAT, cost of goods sold and the value o f subcontractor services. Revenue from the general business tax i s shared with district government. Budapest's rate i s the maximum allowed under the law.

Tourism Tux. The maximum rate i s 4%, or 300 HUF per person per night. In i t s current version, the tax applies to every night's stay at commercial lodgings; previously, the first night was exempted, resulting in large losses due to short average stays by business people. The tax i s collected and administered by the Municipality and shared with the local districts. The Municipality retains 60%, which i s allocated equally to a tourism infrastructure fund and a general fund.

Property Tuxes. T w o types o f property taxes may be levied b y district governments: on unimproved private and public land, and on improvements (private buildings, both commercial and residential). The maximum rate on unimproved property i s 200 HUF per square meter, or 3% o f "corrected value" (defined as 50% of observed market value). The percentage calculation i s rarely used because o f low turnover and unreliable price data. The maximum rate on commercial and residential buildings i s 900 HUF per square meter, or 3% o f corrected value.

44

Communal Tuxes. Communal taxes are charged at a flat rate per employee or per unit of housing. The maximum rate i s 12,000 HUF per housing unit or 2,000 HUF per employee. This tax i s available only to district governments.

Portfolio Income and Sale of Assets. Municipality o f Budapest generates revenue from sales o f equity stakes in enterprises, securities transactions, sales o f land and other assets, privatization o f housing, interest income, rental income, and profits from entrepreneurial activities. The Municipality has significant holdings o f shares in recently privatized utilities (Budapest Gas Works, Budapest Electrical Works, the national grid), as wel l as compensation coupons and securities, and plans to sel l several unimproved lots and other real estate.

Borrowing capacity: A limit on municipal borrowing i s included in the legislation governing Hungary’s budget. Municipal debt service i s limited to 70% o f “corrected’ own revenues, defined as local taxes, administrative fees, interest income, environmental fees and other specific revenue o f local governments less debt service. This definition excludes “current” revenue o f municipal institutions having discretion over their own income, and “capital” revenue other than dividends and interest. Budapest’s debt backed by sovereign guarantee i s not included in the debt service limitation, but even without this exclusion, Budapest i s wel l within the prescribed l im i t s . Projections prepared b y Budapest with the help o f international consultants indicate that Budapest w i l l continue to remain within the limits specified at present.

45

Institutional Analysis - Budapest Metropolitan Sewerage Company (BMSC)

The Operating and Technical Support Agency - Budapest Metropolitan Sewerage Company (BMSC)

Sewer construction was begun in the inner city o f Budapest at the end o f 18th century. Wastewater collection nationwide, including Budapest, was a central government responsibility until 1946, when an independent company under the control o f the local council was established. Since 1950, the company has been known as Budapest Fovarosi Csatomdzdsi Mzuvekor, translation o f Budapest Metropolitan Sewerage Company (BMSC). In 1993 i t was transformed into a public l imi ted liability company. Water supply i s the responsibility o f a separate company, the Budapest Metropolitan Water Supply Company.

Ownership and Governance: BMSC i s an Operating Company (OC). I t s assets comprise buildings, real-estate and operating equipment only. Prior to 1997, BMSC was 100% owned by the Municipality. In 1996, i t was registered and the newly registered company concluded a public utility service agreement with the Municipality. The agreement specifies service requirements and a formula for the annual adjustment o f tariffs. In 1997, the Municipality sold a 25% share o f the BMSC through an international competition to a private investor, a joint venture o f Generale des Eaux and Berlinwasser. The shares owned by the investor are preferred shares which entitle the investor to a dividend equal to 18% of the par value of their shares. The dividend i s calculated from the after tax profit. Any profits remaining after payment o f the private investor's preferred shares dividend then go to the Municipality. The shareholder's agreement gives the investor the right to manage the B M S C for a period o f 25 years. The investor's management rights include a majority position on the Board o f Directors and the right to appoint the General Manager. Tariff-setting i s discussed below in the last paragraph in this section.

Organization and Management: The Company i s organized into two management centers-- technical and financial--with clear lines o f hierarchical authority. Each center i s headed by a deputy general manager. There are roughly six management levels, each employee reports to no more than one manager, and responsibility i s delegated (within expenditure thresholds) so that senior management involvement i s not required in lower level decisions.

The technical center i s divided into three sections: network, operations and investments. The network section i s responsible for the sewer system, pump stations and associated equipment, including repair, maintenance and reconstruction of sewers, surface drainage, river bank outlets and hydraulic structures. The network section also operates sludge disposal facilities on Csepel Island and in Csomad, and maintains the technical designs inventory. The operations group i s responsible for wastewater treatment, including laboratory analysis o f samples, control of industrial discharges and scheduled maintenance programs for wastewater treatment plants. The investments department plans the company's capital improvements and manages their implementation.

46

Institutional Assessment: With the introduction o f the private-sector led management starting 1997, B M S C has become a strong institution that has been successful in delivering dependable sewerage and drainage services to the Municipality.

Management. The current management o f the company has consistently sought to bring BMSC management systems and practices closer to Western European accepted norms and standards through upgrading the company's operational, financial and commercial management functions; improvements in equipment, facilities and personnel sk i l ls ; enhancement o f operational efficiency through improved maintenance and replacement programs; financial planning and control through improved information systems to provide a better basis for internal decision- making; and improved commercial practices, including customer relations.

Operations. BMSC's operational staff i s competent. Company management follows a policy o f setting specific and achievable targets and standards. Areas addressed include customer service obligations, system reliability, including improved inspection and monitoring programs; timely preventive and routine maintenance; and reductions in obstructions and breaks in pipe networks.

Employment and Staffing. The company employs about 1,180 persons, down from 1,7 17 in 1997 when the new management took over. This represents an employee per thousands connections ratio o f 1.8 which the management intends over time to bring closer to ratios in similar sized utilities in Western European countries. B M S C encourages the education and training of i ts employees through company sponsored university education. Skilled worker and driver training are provided, as are short courses for software/hardware applications.

Commercial Activities. For most customers, wastewater charges are a function o f water purchased. A computerized bill i s prepared b y the water company on behalf o f BMSC. The bills either are sent by the water company with automatic debiting o f the customer's bank account, or are transmitted to a private collection company (Dijbeszedo Rt), which prints the bills, and collects and remits the fees. Dijbeszedo Rt also has contracts for the billing and collection o f other city services (water, gas, solid waste, district heating and insurance premiums). With automatic billing, information on a customer's account i s available at any time. The collection agency reports remittances and non-collected debts monthly. In both cases, sales revenue i s recorded monthly and bank transactions entered daily. Wastewater customers wi th their own water supply are bi l led by BMSC on the basis o f self-declarations. B M S C has a two year collection contract wi th the Dijbeszedo Rt. The contract stipulates a minimum 95.2% collection effectiveness ratio. Dijbeszedo Rt transfers the total fee collected less any retention allowed under the contract to the BMSC. BMSC keeps the operations part and transfers the investment and rent parts to the Municipality.

Financial Management. The company has an experienced financial management team aware o f the value o f timely and accurate information for decision-making. Concurrently wi th improvements in the management information system, steps have been taken to improve the content and quality of internal reporting and analysis.

Accounting and Internal Control. Company accounts are kept in formats required under current regulations. Prior to 1997, in common with most Hungarian utilities, the focus in accounting

47

was more on the production o f financial statements and reports for regulatory, tax and control purposes rather than as an aid to management decision-making. This has progressively changed under the new management. The focus i s continually improving linkages between the different financial, accounting and commercial subsystems to enable management to take an integrated and fully informed view.

Wastewater Turifls. The company utilizes one tariff structure for all customers (domestic, industrial, commercial) and does not take into account differential costs o f service. The tariffs are adjusted each year with the new tariff going into effect on January lSt. There are three parts to the tariff: (i) the depreciation of the sewerage system; (ii) an investment fee for the construction o f new facilities and the repayment o f debt service on loans taken out by the Municipality for new investments, e.g., the ongoing Bank Loan 4512-HU; and (iii) the operating fee. Starting 2003, an environmental levy has been added as a surcharge to the tariff. The investment fee i s decided b y the Municipality and i s used only for replacement o f or improvements to the system. The operating fee i s proposed by the BMSC based on the formula in the utility services agreement and i s subject to negotiation of the assumptions. The formula contains no allowance for a management fee or a f ixed profit. The profit, i f any, results f rom the savings realized by the investor over the year in operation o f the system. BMSC has consistently realized a net profit after tax for each year since 1999.

48

Institutional Analysis - Duna Drava National Park Directorate, and

South-Transdanubian Environment Protection and Water Management Directorate

The Hungarian park system covers an estimated 485,000 hectares, o f which about 58,400 hectares are wetlands. The Ministry o f Environment and Water (MOEW) i s the designated central government agency in charge o f the national parks. Administration o f the parks i s carried out through 10 Directorates within the MOEW. Financing for the operations and maintenance o f the parks i s provided through the central budgetary allocations for the Directorates. In some cases, the Directorates are able to supplement these budgetary allocations wi th revenues derived through other activities related to forestry, plant growing and horticulture, animal and fish farming, game management, and tourism.

Duna Drava National Park Directorate (DDNPD)

The DDNP covers an area o f about 50,000 hectares o f which about 19,500 hectares are temporary (floodplain) or permanent wetlands. This includes the Gemenc and Beda-Karapancsa wetlands situated in the lower Hungarian part o f the Danube river. Administration o f the DDNP i s carried out by the DDNPD, established in December 1995. Current responsibilities o f the DDNPD include, but are not limited to, the following:

0 Maintenance o f the Park, including wetlands; 0 Operation and maintenance o f facilities for nature protection and tourism; 0 Monitoring, information gathering and control, activities related to Park protection and

maintenance; 0 Protection o f flora and fauna; 0 Forestry activities; 0 Cooperation and coordination with municipalities and other local/regional bodies in tasks

related to environmental protection, regional development planning; and 0 Contribute to research involving nature protection, education, and information

dissemination.

The annual budget o f the DDNPD i s funded mainly through allocations f rom the central government’s budget. I t s other sources o f revenue are not very significant. For 2005, the DDNPD budget i s HUF 529 mil l ion (USD 2.7 million).

The DDNPD has a total o f 78 staff, 60 o f whom have various degrees in biology, ecology, forestry, etc. The staff has, on average, about 6 to 8 years o f experience. T o date, the DDNPD has not been involved in large internationally financed projects, but it has some experience in smaller projects o f up to HUF 80 mi l l ion (USD 400,000). In particular, the DDNPD does not have, in-house, the type o f water management expertise that w i l l be required for the proposed project. Consequently, the Government has decided to assign implementation management responsibility for the implementation o f the Park component (Component 2) o f the Project to the South-Transdanubian Environment Protection and Water Management Directorate as described below.

49

South-Transdanubian Environment Protection and Water Management Directorate (WD)

The WD was established by Government decree in 1953. I t i s defined as a regional state organization and i s an independent legal entity. In 2004, guided in part by the need to bring existing institutions more in line with the requirements o f EU membership, the Government initiated a restructuring o f the WD. Under this, new functions have been added, e.g. environment protection activities, while some other functions, e.g. licensing activities, have been transferred to a newly created Water Licensing Authority. At present, the WD’s main responsibilities are to:

0 Maintain, protect and regulate natural state waters in i t s jurisdiction; 0 Fulfill tasks related to flood protection, environment protection, and water quality

management; 0 Fulfill tasks connected to hydrogeology; 0 Collect primary data for carrying out i t s tasks and responsibilities for the State

Environment Protection Information System; 0 Operate laboratories for the fulfil lment o f the maintenance requirements o f state water

utilities, state waters and water utilities; and 0 Cooperate with the water supervisory body in regards to supervision o f water

management.

The M O E W approves the annual work plan and budget o f the WD. The W D ’ s activities are funded through three types o f schemes: (i) core activities f rom the state budget; (ii) supplementary activities from operational and institutional incomes; and (iii) entrepreneurial activities (limited to 30% o f total revenues) which are to be self-financing. For 2005, the central budgetary allocation, through the M O E W budget, i s HUF 807 mi l l ion (about U S D 4 million) which includes about HUF 700 mi l l ion for administration, HlTF 63 mi l l ion for maintenance and HUF 44 mi l l ion for investments. The WD supplements this through some revenues generated from i t s entrepreneurial activities.

The WD i s headed by a Director appointed by the M O E W . The restructuring has resulted in a separation o f the licensing activities and related staff to the Water Licensing Authority, created for that purpose, and in a new organizational structure for the W D ’ s remaining and added functions. The WD has four expert consultingladvisory departments (water reserve and monitoring; environment and water utilities; water damage prevention; and watercourse management) and six administrative and support departments or units (finance; project management; information technology; internal audit; information and service; and Director’s support). As a result o f the restructuring, while new specialists were added, e.g. in environment protection, there was a significant reduction in the total number o f employees, part o f which transferred to the Water Licensing Authority. The WD currently employs a total o f 185 staff, 65 of whom hold university degrees. More than half the staff has at least 10 years or more o f experience with the WD. Over the years, the WD has acquired substantial experience in project implementation for water management projects funded either through central budgetary resources or international financing (e.g. EU Phare) where the WD functioned as implementing agency andor constructor. As implementing agency, the W D ’ s experience includes projects dealing with flood plain and reservoirs management (over 100 ha), river regulation works, f lood protection planning and management, water base protection schemes, surface and underground

50

water quality analysis, improvement and monitoring. The projects have ranged in size from HUF 150 mi l l ion (USD 770,000) to HUF 1,000 mil l ion (USD 5 million). In addition to the proposed Project, the WD i s also involved in the preparation o f other activities, including Interreg programmes o f various sizes. In particular, the WD i s acting as lead expert advisors for the development o f compliance wit the requirements under the EU Water Framework Directive.

As regards implementation o f the DDNP component o f the GEF project, under the Grant implementation agreement between the MOEW, MOB, DDNPD and WD, the responsibility for implementation o f the DDNP component has been assigned to the WD, acting as an implementing agency on behalf o f the DDNPD. For this purpose, a Project Implementation Unit (PIU) has been set up within the WD. The PIU was involved in the preparation o f the component. I t consists o f a coordinator (an experienced and qualified consultant was appointed for this purpose) and f ive staff drawn from the existing staff o f the WD that cover the engineering; procurement; financial management; monitoring and water management; and environmental protection aspects o f implementation. The PIU w i l l also be responsible for implementation of the Monitoring & Evaluation (M&E) system to be installed under the project. A detailed Operational manual has been prepared to assist the PIU in project implementation. Training, including familiarization wi th Bank procurement rules, and financial management and reporting requirements, w i l l also be provided through a Project Launch Workshop that i s planned to take place in the f i rst months following Grant effectiveness.

T o enable proper coverage of the incremental operational and monitoring expenses o f project implementation, funds have been provided under the Project to supplement those available for this purpose under the WD budget.

51

Annex 6: Implementation Arrangements

HUNGARY: NUTRIENT REDUCTION PROJECT

Zmplementation Period: The Project would be implemented over a period o f five calendar years, f rom 2006-201 1, covering the Fiscal Years 2006 to 201 1.

Project Management Structure: The M O E W w i l l have overall responsibility for managing Project implementation, including Project oversight and reporting to the Bank, as wel l as for inter-agency coordination between the two executing agencies. For overall Project management, disbursement, supervision and reporting to the Bank and Hungarian authorities, the M O E W has appointed a Project coordinator and established a small PMU to ensure quality and timely coordination. The MOEW has entered into a Grant implementation agreement with the MOB, the WD and the DDNPD that defines the main roles and responsibilities o f each partner institution for the implementation o f the Project. Under this agreement, the day-to-day implementation and administration o f components 1 and 2 i s decentralized to separate executing agencies. Component 1 w i l l be implemented by the MOB and Component 2 b y the WD, on behalf of the DDNPD, the final beneficiary o f the investments. Implementation o f Component 3 w i l l remain under the direct responsibility of the MOEW. T o provide for inter-agency coordination, the Project’s institutional arrangements include the establishment o f a Project Steering Committee (PSC) composed of representatives o f the main institutions involved in i t s implementation.

MOEW, PMU: During Project preparation, the M O E W designated a qualified staff f rom i t s Budget and Finances Department as Project coordinator, who w i l l continue the existing responsibilities during Project implementation. The MOEW has established a PMU to assist the coordinator, staffed wi th six professionals: a coordinator’s assistant, a financial analyst, a procurement specialist and three environmental specialists. The PMU w i l l oversee, coordinate, administer and monitor Project implementation, and wil l act as the Bank’s counterpart for any matter related to Project implementation. In addition, the PMU wi l l coordinate Project management, monitoring and reporting, and w i l l be directly responsible for implementing the dissemination and replication component.

Project Steering Committee (PSC): The PSC w i l l continue operating throughout Project implementation. I t comprises representatives f rom the MOEW, the MOB, the WD and the DDNPD, including the PMU director and heads o f the PIU, MOB and PIU, WD. The PSC plays an important role in the Project. I t i s to bring the collective expertise o f the sectors concerned, at the national, regional and municipal level, and o f the stakeholders, to help ensure that the Project achieves i t s objectives. The PSC, which was established prior to Negotiations, w i l l also work as a channel for the dissemination o f experiences and lessons generated by the Project.

Project Implementation Unit-PIU, MOB: Implementation activities for the Budapest component w i l l be managed by the PIU, MOB. This unit was established more than ten years ago to implement Projects financed by I F I s . The unit i s composed o f a group o f staff who have substantial experience in the implementation o f Bank-financed projects, through the ongoing MWP (Loan 4512-HU), which i s at an advanced stage of implementation. The unit w i l l be responsible for the technical and financial management o f the Project component, and for

52

handling procurement and reporting requirements. The PIU, M O B w i l l be advised on technical matters by the Public Utilities Department o f the MOB, which has experienced personnel. There i s a long and wel l established cooperation between the M O B and the Budapest Municipal Sewerage Company (BMSC), which has been involved in all stages o f Project preparation. During the implementation phase, the supervision o f the works to be performed at the NBWWTP has been awarded to the BMSC, under a contract financed by M O B from i t s own funds. The M O B w i l l create a joint review team consisting o f representatives o f the M O B (Project Unit and Public Utilities Department), the BMSC, and the Private Operator to monitor the implementation o f the works. The responsibility for investments remains under the responsibility o f the M O B until the facilities are completed and commissioned. Responsibility for their operations and maintenance w i l l then be handed over to the BMSC.

Project Zmplementation Unit-PZU, WD: Implementation o f activities under the DDNP component, including the development o f the M&E system, w i l l be supervised by the PIU, WD, acting as an agent on behalf o f the DDNPD, whose staff has no experience in dealing wi th Bank- or IFI-financed projects. This unit was established for the component’s preparation, and it consists o f a coordinator - a consultant was hired for that purpose - and seasoned professional staff o f the WD. The selection of the WD as an executing agency on behalf o f the DDNPD i s based on i t s experience in water project management, including projects financed by IFIS (other than the Wor ld Bank), i t s knowledge o f water management and o f the area and i t s river basin approach. On technical aspects the WD and the DDNPD wi l l continue to work in close cooperation during Project implementation. The DDNPD provides comprehensive knowledge of the Park areas, ecosystem and biodiversity to the WD, which has expertise o f water management infrastructure and engineering. In order to minimize r isks related to the lack o f experience in dealing wi th Bank-financed projects, a Project launch workshop, including training in Bank’s operational rules and Safeguard Policies, w i l l be organized. Additionally, a detailed Project Operational Manual, including the Project’s operational procedures, as wel l as agreed implementation and procurement plans, has been drafted and commented on by the Bank. The PIU, M O B w i l l provide assistance to the PIU, WD, as appropriate. Preparation o f basic engineering designs and works supervision w i l l be carried out by consultants. As the lead-time requirements for the approval of the required environmental licenses for the DDNP component could extend to about eighteen months, execution o f works under this component i s scheduled to start late during Project implementation.

Operational Flow: Each PIU w i l l be required to fulfill Project requirements in regards to the investment planning, procurement, supervision o f works and purchases, financial management, and for auditing and reporting to the PMU for i t s respective Project component. Approval for applications for disbursement, withdrawal of Grant funds, and consolidated reporting to the Bank w i l l be carried out b y the PMU in the MOEW and sent to the M O F or entity delegated by MOF for signature prior to submission to the Bank. The main roles and responsibilities in regard to financial management, f low of funds, disbursement, reporting, and execution and monitoring of the Project’s Environmental Management Plans are described in the Grant implementation agreement. Additionally, detailed responsibilities for operational processes, rules and standard forms and documents are spelled out in sufficient details in the Operational Manual. Versions of these documents, satisfactory to the Bank, were submitted b y Negotiations.

53

Legal Arrangements: A GEF Trust Fund Grant Agreement w i l l be signed between the Republic o f Hungary and the Bank, acting as an implementing agency for the GEF. This Agreement wi l l include the provisions for the implementation o f Components 2 and 3, as both the WD and the DDNPD are under the direct responsibility o f the MOEW. A Project Agreement i s to be signed between the Bank and the M O B for the purposes o f Component 1. An amendment to the Loan Agreement for Loan No. 4512-HU to authorize the use o f loan savings and unallocated funds to partially finance Component 1 o f the proposed Project i s being submitted to the Board for i t s approval on a no-objection basis, in compliance with O P B P 13.25 on the Use o f Project Cost Savings.

54

Annex 7: Financial Management and Disbursement Arrangements

HUNGARY: NUTRIENT REDUCTION PROJECT

1. Summary of the Financial Management Assessment

The Financial Management (FM) assessment was performed in April 25-27, 2005, prior to Project Appraisal. The FM arrangements of the Project meet the World Bank's fiduciary FM requirements.

Strengths & Weaknesses. The strengths that provide a basis o f reliance on the Project F M S include the use to a great extent o f the existing financial accounting budgetary procedures in the implementing entities, and the extensive experience o f MOB in implementing similar Projects co-financed by I F I s (including the World Bank, EBRD, and EIB). The specific risk identified during the assessment relates to the fact that the Project w i l l be implemented b y three entities MOEW, MOB and WD, the latter being located outside Budapest. However, this risk w i l l be mitigated by the coordinating role o f M O E W and the fact that the WD falls under the responsibility o f the MOEW. The M O E W and the WD assigned staff to carry out the incremental Project FM tasks.

Implementing Entities

The MOEW has overall responsibility for program implementation. M O E W and Ministry o f Finance (MOF) w i l l work closely together to ensure that the Program i s adequately funded throughout i t s l i fe with transparency and clear accountability, and that the necessary arrangements are put in place to ensure satisfactory coordination, implementation, monitoring and auditing for the Project. The Project w i l l be managed and coordinated by designated staff worlung in existing organizational units o f MOEW. MOEW itse l f w i l l be responsible for direct implementation o f the Dissemination and Replication component.

The MOB i s the implementing entity for the Budapest component. Within the organization o f the Municipality, the PIU, M O B i s responsible for the day-to-day coordination and administration of all investment projects implemented by the Municipality wi th international assistance (grants and Loan proceeds from IBRD, EBRD, EIB, EU). The PIU MOB i s working in collaboration with the Public Utilities Department, which takes care of the financial and technical aspects o f the Project, in addition to other investment projects in the sector. However, PlU, M O B w i l l be responsible for al l financial aspects o f the Budapest component. Thus, all financial management, disbursement and procurement management under the grant activities w i l l be implemented by the PIU, MOB, in accordance wi th Bank guidelines.

Regulations concerning the operation, organizational structure, duties and powers o f the MOB are described in Act No. LXV o f 1990 on Local Governments (hereinafter referred to as the Act on Local Governments) and in General Assembly Decree No. 7/1992 (111. 26.) concerning the Rules o f Procedure o f the MOB, enacted on the basis o f the authorization granted under the aforementioned law (hereinafter referred to as the Rules o f Procedure).

55

Budapest has a two-tier local government system: it consists o f the Municipal Government and the District Governments. The special weight and national role of the capital ci ty and i t s two-tier government system requires regulations differing from the overall one. The Municipality and the District Governments are not subordinated to one another. Concerning their basic rights as defined in the Constitution and in law they are equal, but they differ in their specific duties and powers. Due to the vast population and area of the capital, it i s reasonable that most basic and administrative services are provided for the citizens at the district level.

However, the Act on Local Governments provides, as a fundamental principle, that the M O B shall perform the duties and exercise the rights o f a local government which concern the whole of the capital or more than one district, or if they relate to the special role o f the capital in the country. In order to avoid possible disputes relating to jurisdiction and problems o f operation that may arise thereof, the Act on Local Governments stipulates that any act specifying duties and powers for local governments shall also define, in respect o f the capital, whether i t i s the obligation o f the City or o f the District government, to fulfill certain duties. In accordance wi th the Act on Local Governments, i t i s possible for the Ci ty and the Districts to agree on taking over duties from one another and assuming the other’s powers.

T o be able to fulfill the above duties, the MOB has been provided wi th own assets; i t i s subsidized from the central budget and it i s entitled to collect revenues o f i t s own, o f which the most important i s the right to impose local taxes.

The Act on Local Governments offers the opportunity to establish associations to facilitate more efficient management of municipal tasks. The City, the Districts, as wel l as the local governments outside the capital may participate in such associations. Agglomeration associations may be set up with the local governments outside Budapest, in particular to harmonize public transportation, water management, the containment o f catastrophes, public and communal investment projects, as well as the organization o f services in the vicinity o f Budapest providing education, health and social care.

The PZU, WD wi l l implement the DDNP component on behalf o f the DDNPD. The proposed interventions consist mostly o f dredging and construction o f f low regulating devices in the Gemenc and Beda-Karapancsa areas o f the DDNP. The PlU WD i s operating as a regional governmental organization, a separate legal entity, under the supervision o f the MOEW. WD i s responsible for flood protection, environment and water quality-protection activities. The policy, organizational structure and financing o f the activities are regulated in the organizational and operational regulations.

FZow of Funds: The Department o f Budget o f MOEW wil l open one Special Account (SA) with the Hungarian State Treasury in the currency o f the GEF Grant. T o facilitate payments through each o f the implementing entities and to receive the share o f their respective contributions to the financing o f the project, settlement accounts w i l l be opened for each o f the three implementing entitiesheneficiaries. The MOB, MOEW and the WD w i l l have to provide the full amount o f their respective contributions required to finance Project expenditures before the due date for the payment o f suppliers’ invoice. Accordingly, Grant funds w i l l f low from the Wor ld Bank to the SA and then through settlement accounts to the suppliers. The MOEW wi l l be responsible for having the SA replenished from time to time, on the basis o f withdrawal applications. The

56

associated proceeds under the Loan 4512-HU w i l l remain in the special account already established for that Loan for the purpose o f parallel financing o f the component under the MWP. (Detailed chart presenting the f low o f funds and documents i s presented in an Appendix to this Annex).

Audit Report Due Date Project Financial Statements prepared for Within six months o f the end o f each fiscal fi ear and also at the closing o f the roject

Staffing. The Project w i l l rely on the existing staff in MOEW, MOB (including PIU), and WD. MOEW’s staff w i l l be responsible for collection and consolidation o f reports from other implementing entities. The financial staff o f the implementing entities has proven experience in the accounting and reporting of budgetary expenditures. Additionally, M O B staff including the PIU, have proven experience in implementation o f projects co-financed by I F I s . The WD assigned staff to be responsible for contract monitoring and Project reporting for the purpose o f the DDNP component.

Accounting Policies and Procedures. The accounting books and records o f the implementing entities are maintained on modified cash basis (i.e. liabilities are recorded at the date o f invoice acceptance). Each implementing entity w i l l record transactions in their accounting books and records in accordance with normal accounting procedures according to Hungarian regulations applicable for budgetary units.

The MOEW documented the Project’s FM arrangements in the Operational Manual for the Project. This document describes Project-specific procedures, roles and responsibilities o f the various FM staff in al l implementing entities, eligibility o f expenditures, f low of funds, applicable budgetary procedures for withdrawal applications, sample formats o f the financing agreements between MOEW, MOB, WD and DDNPD, F M R s reporting requirements wi th the deadline for their preparation, and the Project’s auditing arrangements.

Internal Audit departments of the MOEW, MOB and WD w i l l be responsible to perform the internal audit function according to the annual plan as approved by the management o f the entities. Additional assurance could be gained if internal auditors include the Project in their audit plans. However audit plans are established individually in each implementing entity and therefore the World Bank i s not able to rely solely on such audits for i t s fiduciary purposes.

External Audit. MOEW w i l l organize the annual audits o f the financial statements for the entire Project. The audit o f the Project financial statements w i l l be performed annually by an auditor in accordance with terms o f reference acceptable to the Bank. The audit shall be carried out in accordance with International Standards on Auditing and the Project financial statements together with the auditor’s report w i l l be submitted to the Bank within six months o f the end o f the each fiscal year. The terms o f reference acceptable to the Bank were attached to the minutes o f negotiation. The short l i s t o f auditors w i l l be submitted to the Bank prior to the end o f each fiscal year, and only those accepted b y the Bank shall be included in the short l is t . The cost o f the audit w i l l be financed from the GEF Grant.

57

Reporting and Monitoring. M O E W w i l l be responsible for submission of consolidated F M R s on quarterly basis within 45 days o f month-end incorporating the information submitted b y implementing entities as well as annual Project Financial Statements subject to external audit. PIU, M O B w i l l assist M O E W in compiling the inputs from implementing entities into a consolidated report. However, M O E W w i l l be ultimately responsible for verification o f the consistency o f the information in the F M R s , reconciliation o f the SA statements, reconciliation of the disbursements/expenditures as recorded by the Bank, and the final acceptance of F M R s . The first F M R s wi l l be submitted to the Bank not later than 45 days after the end o f the f i rs t calendar quarter after the Effectiveness date. The F M R s w i l l be used for Project monitoring and supervision. Agreed formats of the FMRs were attached to the agreed minutes o f technical discussions, and were confirmed at Negotiation.

Information Systems. Each o f the implementing entities (MOEW, MOB, WD) uses various computerized financial accounting systems. All the Project transactions wil l be entered on separate analytical codes within these systems maintained by each implementing entity, to track the use o f the Project funds. Additionally all the transactions o f the SA and the three settlement accounts w i l l be done within the State Treasury System. The entire Project wi l l have a separate appropriation under the budget chapter. However the systems are not able to generate FMRs or disbursement reports automatically. The F M R s w i l l be complied manually using the Excel spreadsheets. Due to the relatively low volume o f transactions, such an approach i s acceptable.

Disbursement Arrangements

Disbursement of Funds from the World Bank. There would be one SA for the Project opened by M O E W and three settlement accounts opened for each o f the three Beneficiaries. All accounts w i l l be opened in the Hungarian State Treasury. Grant funds w i l l f low from the Wor ld Bank to the S A and then through settlement accounts to the suppliers in line with existing State Treasury procedures.

The Project w i l l use traditional disbursement methods. Statement o f Expenditures w i l l be used for expenditures incurred on all contracts which do not require The World Bank’s prior review. For al l other contracts, disbursement w i l l be made on the basis o f Summary Sheet wi th full documentation. Tahng into account the fact that the Project w i l l finance investment contracts o f high value, and no direct payments w i l l be used, i t i s justified to allow the limit o f the S A up to 10% o f the total Grant amount. Thereafter, MOB and WD w i l l rely on the MOEW for the transfer o f funds from the SA to the settlement account (both kept in the Hungarian State Treasury), on the basis o f suppliers’ invoices with confirmed delivery. In parallel M O B and WD w i l l transfer their own contributions to the settlement account and notify the M O E W that the own contributions were transferred in full. After the grant funds are made available in the settlement account, beneficiaries w i l l submit the payment order (with required supporting documents) to the State Treasury in order to make the payments to the suppliers. Grant funds w i l l not be kept in the settlement account on an ongoing basis but i t w i l l be funded in sufficient time to allow for prompt payment to suppliers. All original source documentation supporting Statements o f Expenditures and Summary Sheets shall be kept by implementing entities, and made available for review by auditors and the Bank staff until one year f rom the receipt o f the final Project audit report.

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Disbursement Categories

Goods, Works and Consultants’ Services under Component 1: Development of tertiary treatment at the NBWWTP (Budapest)

Services under Component 2: Wetland Restoration in the Duna- Drava National Park Goods and Consultants’ Services and Training under Component 3: Dissemination and Replication Unallocated

Goods, Works and Consultants’

Indicative Cost GEF Financing Financing percentage in million U S D in million U S D from GEF Grant

23.40 6.50 up to 80%

6.08 4.86 80%

0.41 0.33 80%

2.09 0.8 1

Supervision Plan. During Project implementation, the Bank wil l review the Project’s FM arrangements in two main ways: (i) review the Project’s quarterly FM reports and the annual audit report; (ii) during the Bank’s missions, review the Project’s f inancial management and disbursement arrangements to ensure compliance with the Bank’s requirements. As required, a Bank-accredited Financial Management Specialist wi l l assist in the supervision process.

Total Project Cost

59

31.97 12.50 39 %

Appendix to the Annex 7 -Nutrient Reduction Project Seauence and Flow of Documents and Funds

deposits) for advance, deposits, recovery

World Bank - - - - - - - - - - _ - - _ _ _ _ Finance b

Special Acc. in the State Treasury in USD

l e - y c - c -

I e -

iv. Quartyb? consolidatcd

4 c -

I - a. Withdrawal Applikation for grant

further replenishme+ of Special Account, recovery process.

disbursement - for ikt ial advance, proje,ci fcports- FM l i s .-- 4- P'aynient order to transfer the funds l iomSA to

I settlement accounts. c - c -

I

I

.- I . .-

r . .- c -

c - .- L"""":-= 1 1 I 1 1 1 I

I 1 1 1 I 1 I 1 I 1 I 1 I 1 I 1

1 1

1 1

1 1 iii. Monthly rcport on I 8 utilization of funds

I SOE or SS. And I quarterly FMRs 1. i\pplication for j I

funds for project I I

expenditures with I supporting I 1 2. Payments order to transfer documentation j j own contribution to scttlciiient 3. Transfer of own

I 1

- contribution

5. Transfer of funds to settlement accounts

MOB, MOEW,

accniintq

b __------------------____________________-_- I 1

I 1 I 1

~

r 1

MOB,MOEW, WD in the State

Treasury

I 1 I 1

1 1

rendcrcd l l i. Signing oj'thc I contrac'ts

Contractors' bank Accounts

b Flow o f funds -b Flow of documents _ _ _ _ _ _ - _ _ _ 60

Annex 8: Procurement Arrangements HUNGARY: NUTRIENT REDUCTION PROJECT

A. General Procurement for the proposed Project would be carried out in accordance wi th the Wor ld Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated M a y 2004; and “Guidelines: Selection and Employment o f Consultants b y Wor ld Bank Borrowers” dated M a y 2004, and the provisions stipulated in the GEF Trust Fund Grant and Project Agreement. For bidding and contracting o f consulting f i rms, the Project executing agencies would use standard Bank documents; for National Competitive Bidding (Works), for Shopping, E C A regional sample documents; and for individual consultants, national standard documents satisfactory to the Bank.

The general description o f items under different expenditure categories i s provided below. For each bidding package to be financed b y the Grant, the procurement method, the need for prequalification, estimated cost, prior-review requirement and time-frame have been agreed between the Recipient and the Bank Project team, and are detailed in the Procurement Plan. The Procurement Plan w i l l be updated at least annually or as required to reflect the changing Project implementation needs and improvements in procurement capacity.

Procurement of Goods and Works: Goods and Works represent most o f the total Project cost. They are packaged as follows: (a) the constructiodinstallation o f tertiary treatment facilities in the existing NBWWTP. The turn-key contract for this plant w i l l be procured under International Competitive Bidding method (ICB), using the Bank standard bidding document for Supply and Install (Two Stages). There w i l l be pre-qualification o f f i rms. The estimated cost i s US$ 23.4 million; (b) the rehabilitation o f wetlands to develop trapping capacity for nutrients in the DDNP, through earth moving and installation o f water f low controllers. These works include several c iv i l works contracts estimated to cost less than US$2,000,OOO equivalent per contract, to be awarded under National Competitive Bidding (NCB) procedure taking into account broad compatibility wi th Bank’s guidelines as included in the Legal Agreement using Hungarian N C B documents translated into English language for a prior check o f broad consistency. The aggregate cost o f these contracts i s estimated at US$3.125 million. (However, subject to the estimated cost being updated higher than the N C B threshold, one additional similar works contract may have to be awarded under I C B procedure for US$1.25 million). Six very small minor works contracts (estimated aggregate: US$490,000) estimated to cost less than US$lOO,OOO equivalent per contract would be awarded on the basis o f three or more written quotations (Shopping for works). The BMSC has been awarded a contract for the supervision o f the constructiodinstallation o f tertiary treatment facilities in the existing NBWWTP. Therefore, to avoid conflict o f interest, neither the Private Operator managing the B M S C nor i t s affiliates w i l l be allowed to participate in the bidding for the construction o f tertiary treatment facilities. Additionally, fol lowing the Bank’s advice, the M O B w i l l create a committee consisting o f representatives o f the MOB (Project Unit and Public Utilities Department), the BMSC, and the Private Operator to monitor the implementation o f the works.

Selection of Consultants: Consulting services represent about 5 % o f the total Project cost and include several assignments to be contracted wi th individual consultants for support o f Project implementation management training and workshops. T w o contracts estimated to cost US$

61

270,000 would be awarded using Quality and Cost Based (QCBS) Selection method for design, preparation o f specifications and bidding documents, and supervision. The same method wil l be used to award the development o f DDNP Special Area Management Plan (US$ 250,000). One contract might be awarded using Least Cost (LCS) Selection method. Other Consultant contracts with f i r m s would be awarded using the selection method based on the Qualifications o f Consultants (CQS) for the preparation and implementation o f replication and dissemination (three contracts), and for three other contracts l isted below under Section E.2 o f this Annex.

~

Description Objective Time-frame Procurement Identify eventdwork f low Appraisal

B) Assessment of the Agency’s Capacity to Implement Procurement.

PladPackaging Draft Operational Manual Project Launch Seminar Procurement Ex-Post Reviews

Project implementation management would be under the responsibility o f the MOEW. A Project Steering Committee with representatives o f the MOEW, the MOB, the WD and the DDNPD has been set up for advisory and coordination purposes. The M O E W has appointed a Project coordinator, to lead a Project Management Unit involving six other people f rom different departments o f the MOEW. Implementation activities for the Budapest component w i l l be supervised and controlled by the M O B through a Project Implementation Unit - PIU, MOB. The implementation activities for the DDNP Project component w i l l be under supervision and control of the WD through a Project Implementation Unit - PIU, WD. The implementation o f the dissemination and replication component w i l l be with the PMU, MOEW.

Define operational rules Negotiations Traiddisseminate rules Prior to disbursement Supervision T w o in the Project

Implementation period, to be scheduled.

An assessment o f the capacity of both PIUs, as well as o f the PMU, to implement the Project’s procurement was carried out on February 4, 2005. The risk assessment o f the system’s capacities to implement procurement has been rated as average. The PIU, MOB has gained experience in dealing with Bank-financed projects through the implementation o f the ongoing MWP financed by Loan 4512-HU, which has been successful. The PIU, WD has no previous experience in implementing Bank-financed procurement. The procurement requirements f rom this Project component, however, are l imited to a few contracts of a simple nature. The implementation of the following Action Plan w i l l help minimize the r i sks which have been identified, especially those related to the lack of experience by DDNPDND in implementing Bank-financed procurement.

Administrative Support to the PMU at M O E W

Assure satisfactory Appraisal supervisiodcontrol.

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C) Procurement Plan.

Total

Both executing agencies have prepared Preliminary Project implementation schedules and procurement plans covering the foreseen implementation period (2005- 10). These procurement plans have been updated and annexed to the Operational Manual.

26.38 3.34 2.25 3 1.97 (8.03) (2.68) (1.80) (12.50)

D) Frequency o f Procurement Supervision.

The participation o f a procurement specialist at least once a year in Bank supervision missions i s recommended.

E) Details of Procurement Arrangements Involving International Competition.

1. Goods, Works and Non Consulting Services.

(a) L i s t of contract packages to be procured following I C B and direct contracting: 0 Contract: Constructiodinstallation o f tertiary treatment facilities in the existing North

Budapest Wastewater Treatment Plant. Estimated Cost: U S $ 23.4 million. Procurement Method: ICB; two stages. Prequalification: yes Domestic Preference: N o Review by Bank: Prior Expected Bid Opening Date: M a y 2006 Comments: technical and bid preparation i s advanced.

(b) Direct Contracting: not planned.

Table A: Project Costs by Procurement Arrangements Million US$ (1)

related to (i) managing the Project.

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2. Consulting Services

QCBS QBS SFB

(a) L i s t of consulting assignments with short-list of international f i rms :

LCS CQ Other N.B.F. Total cost

- Two contracts estimated to cost respectively U S $ 150,000 and US$ 120,000 wi l l be awarded using Quality and Cost Based (QCBS) Selection method for design, and preparation of specifications and bidding documents on one hand, and subsequent construction supervision of the works in the DDNP on the other hand. (First expected submission of proposals: March 2006) Three contracts for (i) Design and Development of a Monitoring System (US$ 80,000) (ii) Baseline study and licensing support (US$ 120,000), and (iii) Development of impact evaluation technology (US$ 80,000) wil l be awarded using Selection method based on Consultants’ Qualifications (CQS). (First expected submission of proposals: January 2006) Six Consultant contracts with f i r m s wi l l be awarded using the selection method based on Consultants’ Qualifications (CQS) for (i) the preparation and implementation of replication and dissemination, (ii) training and Project launch workshop, and (iii) impact evaluation and cost-benefit analysis (estimate: U S $ 325,000 for the six). (First expected submission of proposals: January 2006)

-

-

0.70 (0.56)

0.70

Table A l : Consultant Selection Arrangements (optional) Mil l ion US$

- - 0.81 - 1 .so - - (0.65) - (1.20) - - 0.16 - 0.16 - (0.13) (0.13)

0.8 1 0.16 - 1.67 - -

Expenditure Category

A. Firms

B. Individuals

Total

64

Appendix 1 to the Procurement Plan: Prior Review Thresholds

Thresholds for prior review are specified hereafter as Appendix 1 to the in i t ia l Procurement Plan for the starting year o f implementation, and may be revised after one year. The updates issued by the Bank are to be construed as Appendix 1 to the current Procurement Plan replacing previous Appendix 1.

Thresholds for prior review are set as follows for the first year:

A). Goods and Works. The following contracts are subject to the Bank’s prior review as set forth in paragraphs 2 and 3 o f Appendix 1 to the Guidelines: 1. all I C B contracts; 2. 3. under Shopping as well as under Minor Works (S or MW).

all contracts estimated to cost the equivalent o f US$200,000 or more; and the f i rst two contracts procured under N C B (regardless o f contract value), and first two

B). Consulting Services. With respect to consulting services, prior Bank review w i l l be required for al l terms o f reference for consultants. Contracts for services estimated to cost the equivalent of US$ 100,000 or more for f i r m s and US$ 50,000 or more for individuals, and the f i r s t two contracts under CQS, FBS and LCS are subject to Bank’s prior review as set forth in paragraphs 2 and 3 o f Appendix 1 to the Guidelines (CQS Method may be used for contracts estimated to cost less than US$200,000 equivalent).

C). All other contracts are subject to post review, in a ratio o f one contract in five.

Table 8: Thresholds for Procurement Methods and Prior Review’

Contract Value Threshold (Method)

Expenditure Category (US$) 1. Works Over 2,000,000

less than 2,000,000 less than 100,000

2. Goods Over 300,000 Up to 300,000

Less than 100,000 Over 200,000

L e s s than 200,000 Less than 200,000 Less than 100,000

3. Services (local and foreign firms)

Procurement Method

ICB NCB

s (Mw) ICB NCB

S QCBS

CQ LCS I C

Contracts Subject to Prior Review

(US$) All

2 first contracts 2 f i r s t contracts

All 2 first contracts 2 f i r s t contracts

All

above 100,000 above100,OOO above 50,000

65

Annex 9: Economic and Financial Analysis H U N G A R Y : NUTRIENT REDUCTION PROJECT

1. Economic

The key development objectives o f the Project are: (i) to reduce Budapest's discharge o f nutrients (nitrogen and phosphorous) into the Danube River, and consequently into the Black Sea; (ii) to enhance the nutrient trapping capacity o f Gemenc and Beda-Karapancsa wetlands situated in the lower Hungarian part o f the Danube River; and (iii) to serve as a model for similar nutrient reduction initiatives in Hungary and other Danube basin countries. These objectives w i l l be achieved through: (i) the development o f tertiary treatment (nutrient removal) at the NBWWTP; (ii) the rehabilitation o f wetlands in the Gemenc and Beda-Karapancsa areas o f the DDNP; and (iii) the establishment o f a comprehensive M&E system for water quality and environmental health to measure the reduction o f nutrients. The Project w i l l also finance dissemination activities to foster replication in Hungary or in other parts o f the Danube River basin.

The economic analysis in this annex should be read in conjunction with the detailed Incremental Cost Analysis o f the Project which i s presented in Annex 15.

Broad sectoral goals and baseline: See Annex 15.

Incremental cost and financing: See Annex 15.

Global benefits: See Annex 15.

Cost-Effectiveness: See Annex 15.

Economic benefits: Incremental benefits are valued at U S $ 5 per kg o f nutrient reduction.6 Incremental capital and O&M costs are net o f taxes. The projection period i s 25 years (2006- 2030). On this basis, the economic rate o f return (ERR) i s estimated at 22% for the Budapest component and 72% for the DDNP component. The high rate o f return for the DDNP component, however, has to be viewed with caution given the relative lack o f quantitative evaluations o f impacts for wetlands. Details are in the attached Table 1.

Current estimates of the value of nutrient reduction range from US$2/kg to about US$9/kg for N and up to US$22/kg for P. Therefore, the estimate o f US$5/kg appears rather conservative. This figure o f 5 U S $ per k g has been adopted on the basis of available references, such as: 47 SEWkg ($5.58/kg) and 112 SEWkg ($13.30/kg) for the marginal cost o f the reduction of nitrogen and phosphorous to coastal waters, as proposed by K. Elofsson (Cost efficient reductions o f stochastic nutrient loads to the Baltic Sea, Paper presented at the 7th Ulvoe conference 19-21 June 2000), $2/kg proposed by G. Constantinides (Cost-Benefit Analysis Case Studies in Eastern Africa for the GPA Strategic Action Plan on Sewage. UNEP, 2000); 62 SEWkg ($7.36/kg) proposed for the marginal benefit of N- reduction proposed by I.M. Gren and H. Folmer (Cooperation vs. Non-Cooperation in Cleaning o f an International Water Body with Stochastic Environmental Damage: The Case o f the Baltic Sea. Swedish University o f Agricultural Sciences, Uppsala, September, 2001), and 11.50 E W k g as the critical emission "tax" level for the removal of P from detergents, as proposed by I. Ijjasz (Reducing Phosphorus in the Danube Basin Workshop, Hungary, 1995). In more recent studies, the US EPA established a benchmark for the cost-effectiveness o f nutrient removal o f $4 per pound o f nitrogen ($8.8/kg) and $10 per pound ($22/kg) o f phosphorus (Federal Register / Vol. 68, No. 29 / Wednesday, February 12,2003 / Rules and Regulations).

66

Budapest component Incremental capital cost Incremental O&M expenses Incremental economic benefits Net economic benefit

Economic rate of return (ERR)

DDNP component Incremental capital cost Incremental O&M expenses Incremental economic benefits

Net economic benefit

Economic rate of return (ERR)

Note: Base economic

Annex 9, Table 1 - Economic benefits estimation (US$ 000)

2006 2007 2008 2009 2010 2011 2012 2013 2014 Annually 201 5- 2030

-1872 -7488 -6926 -2434

-5020 -5045 -5036 -5095 -5165 -5238 -5315 -5329 -5350

12320 12320 12320 12320 12320 12320 12320

-1872 -12508 11971 4850 7225 7155 7082 7005 6991 6970

22% ~~~ ~ ~~

-1 00 -729 -1798 -1652 -581

-700 -700 -700 -700 -700 -700 -700 -700 -700

9130 9130 9130 9130 9130 91 3C

-100 -1429 -2498 -2352 7849 8430 8430 8430 8430 843C

72%

lue of nutrient reduction assumed to be USD 5/kg of reduction. NBWWTP component: Total project cost (including taxes and duties) = USD 23.4 million; taxes and duties = 20%; cost excluding taxes and duties = USD 18.72 million DDNP component: Total project cost (including taxes and duties) = USD 6.08 million; taxes and duties = 20%; cost excluding taxes and duties = USD 4.86 million

Sensitivity Analysis: Estimates o f the economic value o f nutrient reduction range between US$ 2/kg to US$ 9/kg for nitrogen (N) and up to US$ 22//kg for phosphorus (P) in different studies. Sensitivity analysis indicates that, at the lower end value o f US$ 2/kg, the ERR for the NBWWTP becomes negative while that for the DDNP component drops to 33%. At the upper end values o f US$ 9/kg for N and US$ 22/kg for P, the ERRS for the two components are estimated at 51 % and 111% respectively. For the NBWWTP component, the break-even point (NPV=O) i s reached at an economic value of nutrient reduction o f about US$3.5/kg. For the DDNP component, given the relative uncertainty about the amount o f reductions to be achieved, sensitivity analysis indicates that the ERR would remain above 40 % even if the amount of reduction (in tons) i s lower than expected by up to 50%. Furthermore, the ERR would remain about 20% even if both the amount o f reduction (in tons) i s lower than expected by up to 50%, and the economic value per unit o f reduction drops to US$2.5/kg. See Table 2 for details.

67

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Financial (see Annex 5)

Financial rate of return (FRR): An FRR has not been calculated for the Project given the nature o f the investments which result in environmental benefits and externalities. A financial return on investment i s not the main consideration in undertalung the investment. However, as provided under the contractual agreement between the M O B and the BMSC, the tariff formula provides for B M S C to recover any incremental operating expenses due to the investment. The increment in tariff i s based on such cost-recovery.

Financial assessment of the participating entities: The M O B i s a borrower under the ongoing Bank Loan 4512-HU for the MWP and had earlier been a borrower under Loan 3093 for the Urban Transport Project. Budapest has generally followed a prudent fiscal and financial policy, and has been successful in raising funds in European bond markets. I t has also followed an active pol icy o f divestiture o f assets through privatization with the revenues f rom these sales being directed largely to developmental, including infrastructure, investments. Budapest, wi th the help o f international consultants, has prepared forward-looking financial plans, updated each year, including detailed financial projections (a summary i s provided in Annex 5). The projections indicate that Budapest would continue to be able to meet i t s debt service obligations in a satisfactory manner. The BMSC i s the beneficiary under Loan 4512-HU. Until November 1997, B M S C was a joint stock company owned by Budapest. In November 1997, Budapest entered into an agreement with a consortium o f two foreign utility operators General des Eaux (of France) and Berlinwasser (of Germany) under which Budapest transferred 25% o f the share ownership and the management o f the company to the consortium. The Bank has been in touch wi th the company through Project supervision under Loan 45 12-HU. Operations of the company have been satisfactory and the company has realized a prof i t each year since 1999 (a summary o f the financial statements i s provided in Annex 5). The DDNPD falls within the jurisdiction o f the MOEW. Revenues o f the DDNPD are derived primarily through budgetary transfers f rom the MOEW.

Incremental 0 & M expenses and tariffs: For the NBWWTP, the annual incremental 0 & M expenses on account o f the addition o f tertiary treatment have been estimated at about US$ 5 mi l l ion equivalent (HUF 975 million). For B M S C as a whole, wi th a total invoiced volume o f about 154 mi l l ion m3 per year, this implies a per m3 incremental 0 & M expense o f about HUF 6.5/m3. Annual debt service on the loan amount o f US$ 7.2 mi l l ion (HUF 1440 mil l ion) i s estimated to amount to about HUF 1.5/m3. The total incremental expense for the NBWWTP i s therefore estimated at about €€UF 8/m3 which represents an increase o f about 4.5% over the existing level o f average wastewater tariff (about HUF 173/m3) and o f about 2.3% over the existing level o f the average water and wastewater tariff. The resulting new tariff i s projected to remain affordable for the population (less than 4% o f the average households’ monthly income). For the DDNPD, the incremental expenses associated with the Project are estimated at HUF135 mi l l ion per year which represents 26% o f the 2005 DDNPD annual budget (HUF 529 million, US$2.7 mi l l ion equivalent). This amount w i l l be provided through budgetary transfers to DDNPD b y the MOEW.

70

Annex 10: Safeguard Policy Issues

HUNGARY: NUTRIENT REDUCTION PROJECT

Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP/GP 4.0 1) [XI [I Natural Habitats (OP/BP 4.04) [XI [XI Pest Management (OP 4.09) [ I [XI Cultural Property (OPN 11.03, being revised as OP 4.11) [XI Involuntary Resettlement (OP/BP 4.12) [ I [XI Indigenous Peoples (OD 4.20, being revised as OP 4.10) [XI Forests (OP/BP 4.36) [ I [XI Safety o f Dams (OP/BP 4.37) [I [XI Projects in Disputed Areas (OP/BP/GP 7.60) [ I [XI Projects on International Waterways (OP/BP/GP 7.50) [XI [I

[I

[I

Environmental Assessment (OP/BP 4.01). N o significant indirect or long term negative impact on the environment i s expected as part of the Project, which, given the nature o f the investments, has been classified as environmental category "B".

The M O B completed the environmental assessment report for i t s component for which i t received Government's approval. The WD, on behalf o f the DDNPD, completed an EIA for the DDNP component. As the process for i t s approval i s rather lengthy in Hungary, the Project provides for a late start o f implementation for the DDNP component, to take place after the Government's approval for this EIA i s obtained, in compliance with Hungarian regulation.

The EIAs and other studies carried out during preparation clearly indicate that n o significant negative impact on the environment i s expected as a result o f the Project's implementation. For the Budapest component, potential impacts are exclusively l imited to those that could occur during the construction phase (noise, etc.) which w i l l be adequately controlled (the EMP includes measures to this end). For the DDNP component, the EIA has identified potential environmental negative impacts associated with dredging, changes in the local hydrology, disposal o f dredge materials, and increased f low o f pollutants into the wetlands. The EIA concludes that no significant negative impacts are expected i f the precautions foreseen under the EMF are followed. Moreover, the rehabilitation o f the wetlands i s expected to improve the ecological conditions o f the ecosystem and increase biodiversity, as new valuable habitats w i l l be created. Positive ecological impacts are in particular expected wi th the creation o f additional habitats and nesting places for a number o f migratory bird species o f global importance, such as the Ferruginous Duck (Aythya Nyroca), the White-tailed Eagle (Haliaeetus albicilla) and Black Storks. As indicated above, the Ministry o f Environment w i l l convene an Experts Panel to assist the WD and DDNPD authorities in the assessment and monitoring o f the proposed interventions. Qualitative aspects o f the biological processes to occur in the DDNP in regards to nutrient trapping and their possible consequences on the ecology and biodiversity are detailed in Annex 18.

Environmental Management Plans have been prepared for each o f the aforementioned components, and mitigation measures have been proposed. The Mit igation Plan prepared under

71

each EMF identifies and addresses all relevant parameters, impacts and mitigation measures, both during the construction and operation periods, and identifies the agency with designated responsibility for i t s implementation and for i t s enforcement. In particular, for the DDNP component, possible options for the handling and disposal o f the dredged material have been considered and wil l be thoroughly examined as part o f the detailed design. These measures include testing materials to be dredged for potential contamination, physically isolate areas during dredging, reuse dredged material where practicable if found to be o f acceptable quality, dispose o f dredged material to an appropriate site according to i t s quality, and concentrate the dredging and construction work during ecologically less sensitive periods o f the year. Contractors w i l l be responsible for implementing these precautions and measures, and their implementation wil l be supervised by the WD, the DDNPD and the MOEW. The distribution o f responsibilities for the implementation and monitoring o f these EMFs w i l l be incorporated in the Grant implementation agreement between the MOEW, the MOB, the WD and the DDNPD. Additionally, these EMPs w i l l be incorporated in the Project Operational Manual and i t s implementation wil l be monitored as part o f Bank supervision missions.

Natural Habitats (OP/BP 4.04) On the basis o f the conclusions o f the EIAs, the Project i s not expected to have any significant conversion (loss) or degradation o f natural habitats, particularly in the DDNP. The DDNP i s currently flooded periodically (several times a year) by the Danube River. The Project w i l l increase water retention and expand the areas o f permanent wetlands. Specific provisions have been included in the EMP to ensure that these works are carried out talung into consideration the functioning o f these habitats so as to avoid disturbing migratory species or reduce biodiversity. Populations o f selected endangered species w i l l be monitored during and beyond the Project l i fe as part o f the Park monitoring system to be established. Consistent wi th the Safeguards meeting and comments received, the Project Team took al l necessary measures to comply wi th the OP/BP, in particular in the EMPs.

Cultural Property (OPN 11.03) and Involuntary Resettlement (OP/BP 4.12) The investments financed by the Project w i l l not affect any known archeological or historical site, nor wi l l i t affect indigenous people or require resettlement or purchase o f land.

Safety of Dams (OP/BP 4.37) N o dams higher than 15 meters are located within the Project area and no upstream dam infrastructure failure could impact the planned investments.

Pro-iects on International Waterways (OP/BP/GP 7.50). The Project i s expected to have a positive impact on the water quality o f the Danube, which i s an international waterway. In addition, riparian countries which are signatory members o f the Danube convention have been informed o f and have.discussed the Project within the scope o f the Danube Commission, which has included i t in the priority l i s t o f the Joint Action Program. Therefore notification to the riparian countries as part o f OP7.50 has been waived for this Project via Memo from the E C A RVP dated March 18, 2005.

No other Safeguard Policy i s triggered.

72

Annex 11: Project Preparation and Supervision HUNGARY: NUTRIENT REDUCTION PROJECT

Planned Actual P C N review 10/08/2004 12/08/2004 Ini t ia l PID to PIC 11/24/2004 Ini t ia l ISDS to PIC 11/24/2004 Appraisal 06/07/2005 10/12/2005 Negotiations 11/21/2005 02/17/2006 BoardRVP approval 1/21/2006 Planned date o f effectiveness 2/ 15/2006 Planned date o f mid-term review 12/15/2007 Planned end o f implementation 12/3 1/2009 Planned closing date 12/3 1/20 1 1

Key institutions responsible for preparation o f the Project: As indicated above, the M O E W has been given overall responsibility for the preparation and the implementation o f the Project. I t w i l l be directly responsible for the coordination and the implementation o f the dissemination and replication component. The M O B and the WD, on behalf o f the DDNPD, are responsible for the preparation o f components 1 and 2, respectively.

Bank staff and consultants who worked on the Project included:

Name Tit le Unit Xavier Chauvot de Beauchkne Water & Sanitation Specialist, TTL ECSIE Manuel Marifio Lead Water & Sanitation Specialist, co-TTL ECSIE Emil io Rodriguez Consultant LCOPR David Sislen Senior Infrastructure Economist LCSFU Iwona Warzecha Senior Financial Management Specialist ECSPS Andreas Rohde Senior Sanitary Engineer ECSIE Salim Benouniche Senior Procurement Specialist ECSPS Suman Mehra Country Program Coordinator ECCU7 Christine Castillo Operations Analyst ECCU7 Claudia Pardifias Ocafia Senior Counsel LEGEC Andrina Ambrose-Gardiner Finance Officer L O A G l Maria Teresa Lim Program Assistant ECSIE

Bank funds expended to date on Project preparation: 1. Bank resources: 2. Trust funds: 3. Total:

Estimated Approval and Supervision costs: 1. Remaining costs to approval: 2. Estimated annual supervision cost:

73

Annex 12: Documents in the Project File

HUNGARY: NUTRIENT REDUCTION PROJECT

Extension o f the North Budapest Wastewater Treatment Plant: I1 Stage, Nutrient Removal. Estimation of Investment and Operation Costs for Technological Alternatives (Hydrochem Kft. Vitulu Innosystem Kft.) M a i 2003

Nutrient Removal Extension o f North Budapest Wastewater Treatment Plant - Financial and Economical Analysis (Oko Inc.) February 2005

Nutrient Removal Extension o f North Budapest Wastewater Treatment Plant - Environmental Impact Assessment (Imsys Ltd.) February 2005

Reduction o f Nutrient Discharges Project - DDNP Component - Environmental Assessment and Public Consultation (VITUKI Kht/ VTK Innosystem Ltd.) March 2005

Reduction o f Nutrient Discharges Project - (DDNP) Pre-Feasibility Study, Financial and Economic Analysis (DHV Hungary Ltd.) March 2005

74

Annex 13: Statement of Loans and Credits HUNGARY: NUTRIENT REDUCTION PROJECT

Difference between expected and actual

disbursements Onginal Amount in US$ Milhons

Project ID FY Purpose IBRD IDA SF GEF Cancel Undnb Ong Frm Rev’d

PO08497 2000 MUN WASTEWATER 3160 000 000 000 000 811 8 73 8 03

Total 31 60 000 000 000 000 &# 8-74 $&

HUNGARY STATEMENT OF IFC’s

Held and Disbursed Portfolio In Millions of U S Dollars

FY Approval Company

Committed Disbursed

IFC IFC Loan Equity Quasi Partic. Loan Equity Quasi Partic

1990 FHF 0 00 0 11 0 00 0 00 0 00 0 11 0 00 0 00 2001 HEECPZ 12 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00

Total portfoho 12 00 0 11 0 00 0 00 0 00 @>a$ 0 00 0 00

75

Xf H 0'3

206 447 IC07 1 0 9 1 250 226 247 228 422 4 4 4 657 e 7 7 n . 1 228 21 8 213 232 192 159 153

4 1 I" 4 4 4 9 4 3 i o 133 IC14 106

.OB 4 a 4 8

161 5 9 5 1 423 272 316

198 24 1 31.7 509 6 4 4

-28 3 1 379 - in8 -i 8 5.0 4 9 5 4

6 7 5 4 5 8 0 0 4 2 29 4 2

202 6 8 3.6 5.0 26.7 4.6 2.5

56 97 97 55 07 %3

103 101 99

'19,932 GB.210 71,158 19.953 69,303 73,044

-22 -3,084 .1,w

-1,691 .6.072 -6,775 200 315 104

6,528 10.730 13,404 -5,016 -1.889 -4.947

15 .W 18.W3 5 0 1 125.7 2026 199.1

1991

I

Current a~c#unt baiancc! to GDP (*..}

I\

77

Annex 15: Incremental Cost Analysis

HUNGARY: NUTRIENT REDUCTION PROJECT

Broad Sectoral Development Goals and the Baseline

Background: Hungary joined the EU in M a y 2004 and i s in the process o f adapting i t s regulatory framework to meet the requirements under EU Directives, including those in regards to water quality and environment. Along with other countries that joined the EU in 2004, Hungary has been given a period o f ten years to achieve full compliance wi th the EU Directives. The Government’s priorities in regards to the sector are therefore governed by the need to meet the EU requirements within the specified time frame. Hungary i s also a signatory to the ICPDR created in October 1998. As such, i t i s committed to international cooperation for the protection of the Danube River and the Black Sea.

Status of the sector: Water supply in Hungary generally functions well. Water service levels are high, ownership and management in the sector have been decentralized to the local governments, and most tariffs reflect the cost o f service. The Government’s principal objectives in the sector are to: (i) close the gap between water supply coverage, and wastewater collection and treatment; (ii) keep water and wastewater services affordable; and (iii) increasingly reach full compliance with the relevant EU Directives. For Hungary, investment in additional wastewater facilities, particularly treatment facilities, i s by far the largest aspect of compliance with the EU Directives. The Government, in dialogue wi th the EU and other institutions including the Wor ld Bank, has guided resources towards investments that are local and /or national priorities (including improvement o f water quality in the Danube basin) and which also help Hungary move towards compliance with EU requirements.

Budapest i s by far the most important source point of nutrient discharges in Hungary. As such, i t has been included within the top priorities in the f i rs t JAP o f the ICPDR. Development o f the wastewater treatment infrastructure in Hungary represents about 25% o f the overall investment program under the JAP. Alternative solutions to achieve nutrient reduction, including wetlands, and in particular, floodplain solutions, are also considered. The DDNP, a protected area o f 27,800 ha includes about 19,500 ha o f wetlands. In the past, these wetlands covered about 80,000 ha but the area has been drastically whittled down b y conversion o f land to agricultural use. The DDNP, particularly i t s Gemenc and Beda-Karapancsa sections, lies close to the southern body o f the country where the Danube exits Hungary. Because o f i t s characteristics and location, i t i s the area with the largest nutrient reduction potential in Hungary, and capable o f eliminating large amounts o f nutrients f rom agricultural and other diffuse uses.

Baseline: In recent years, the Government has initiated a number o f wastewater treatment related investments. In the case o f Budapest, this includes expansion and upgrading o f two WWTPs for North Budapest and South Pest respectively (these investments were financed in part by the Bank through Loan 4512-HU). The South Pest WWTP was expanded f rom a capacity o f 72,000 m3/day to 120,000 m3/day, and upgraded to provide nitrogen and phosphorus removal, and biogas recovery. The NBWWTP was expanded to a capacity o f 200,000 m3/day and includes secondary treatment; however, nutrient removal facilities were left for

78

implementation in the future (when i t was planned to add more high-rate primary sedimentation tanks, fixed-bed filters, and chemical dosing for phosphorus removal). The estimated total cost o f the investment was about US$ 80 mi l l ion o f which US$ 31 mi l l ion was for the South Pest WWTP, US$27 mi l l ion for the NBWWTP, and US$22 mil l ion for complementary investments. This i s taken as the Baseline for the proposed Project.

Indicator South Pest WWTP NBWWTP Wastewater discharged BOD discharged Nitrogen discharged Phosphorus discharged

90,000 m3lday 152,000 m3lday 1,350 kglday 20,600 kglday 900 kglday 9,230 kglday 90 kglday 775 kglday

Incremental Cost: Although the Government i s keenly aware o f i t s commitment to cooperate in improving the environmental situation and transboundary impacts o f pollution in the Danube River, and consequently, the Black Sea, i t i s prevented from pursuing these goals as rapidly as it would l ike by the lack o f sufficient funds. Under the current EU directives, tertiary treatment i s not a requirement for discharges into the Danube River. Therefore, as regards the important nutrient reduction investments (extension to tertiary treatment for the NBWWTP and wetlands restoration in the DDNP), unless complementary financing i s available f rom external sources, the Government’s financial constraints would prevent i t from undertaking the investments until such time as i t has funds available for the purpose. This would indefinitely delay the nutrient reduction activities and result in continued pollution o f the Danube and the Black Sea. The entire cost o f the Project (estimated at US$ 32 million) i s therefore taken as additional to the Baseline. For details, please see Table 6 and 8 below.

Global Environmental Objective and the GEF Alternative

The global objective i s to reduce the discharge o f nutrients into the Danube River and thereby to reduce nutrient loads into the Black Sea.

Under the Baseline discussed above, the Government i s unlikely to be able to allocate sufficient financial resources to address the growing pollution effects f rom nutrient discharges into the Danube River which w i l l also result in negative transboundary and global environmental consequences including:

0

0 endangered coastal ecosystems 0

0 development o f algae populations 0

endangered marine ecosystems and habitats

r isks and adverse impacts o f biodiversity

declining marshlands o f global importance

GEF alternative: To minimize the nutrient discharges and consequent eutrophication o f the wetlands and marine areas, the GEF alternative proposed includes investments that wi l l significantly reduce nutrient loads o f the wastewater discharged into the Danube River and into the Black Sea. Availability o f a significant GEF Grant contribution wil l enable the Government

79

to complete the financing required to launch the early implementation of the environmental protection interventions. The local contribution to the Project i s expected to be about US$11.8 mi l l ion o f which about US$10.4 mil l ion would be from the Municipality o f Budapest and US$1.4 mi l l ion f rom the Government. An amount of US$7.7 mi l l ion equivalent (Euro5.9 million) w i l l be made available f rom the reallocation o f loan savings and uncommitted funds under the Bank’s Loan 4512-HU (for the MWP). The balance o f US$12.5 mi l l ion i s to be provided through the GEF Grant. The investments proposed under the GEF alternative are the following:

NBWWTP

Components Current After Project N (Vyr) 3,370 1,075 (68%) p (Vyr) 280 110(60%)

0

0

0

Upgrading o f the NBWWTP to the tertiary level o f treatment for nutrient reduction (N and P); Rehabilitation o f wetlands and the development o f nutrient trapping capacity in the Gemenc and Beda-Karapancsa regions o f the DDNP; and Establishment o f monitoring systems to measure nutrient reduction, improvement o f water quality, and impacts on ecology and biodiversity.

Hungary point sources emissions Budapest

Current After Project Current After Project 7,150 4850 (32%) 15,900 13,600 (14%) 985 820 (17%) 3,000 2800 (6%)

GEF financing i s expected to be used in conjunction wi th associated complementary financing for each o f the components (see Table 5).

Components

N (Vyr) p (Vyr)

The Project investments are expected to result in the fol lowing reductions in nutrient emissions:

Estimated reductions in DDNP Current After Project Current After Project

3,770 5,500 (46%) 29,300 27,300 (6%) 190 280 (49%) 4,000 3,900 (2%)

Total non point sources emissions in Hungary

Annex 15, Table 3: Estimated nutrient reduction in the DDNP component (in tondannum).

As a result o f the Project, total point and non-point source nutrient discharges from Hungary are expected to be reduced by about 9% for N and 4% for P, as indicated in Table 4 below.

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Annex15, Table 4: Project impact on Hungary nutrient discharges (in tondannum) compared to

Component

Additionality: The measures under the proposed interventions are additional to the Baseline. These actions wil l complement existing and planned activities. Specifically, the additional activities are designed to improve international waters quality and reduction o f pollution f rom municipal sources, wildlife management o f the wetlands, restore precious habitats, and secure long-term biodiversity protection o f both marine and marshland areas. Incorporation of the proposed alternative w i l l ensure the conservation o f globally unique biodiversity by integrating biodiversity protection with the improvement o f quality o f life.

Total GEF Government Municipality Parallel financing cost (budget) of Budapest through IBRD and Loan No. 4512-HU

financing

Expected outputs and global benefits: These are the following:

Development o f tertiary treatment at the NBWWTP (Budapest)

0

0

0

0

significant reduction in nutrient discharges in the Danube River basin and the Black Sea; improving the quality o f the Danube River providing benefits to downstream areas; restoration o f high priority wetlands with benefits for biodiversity o f the ecosystems; and demonstration effects for other potential investors in Hungary as wel l as other countries in the region.

25.04 6.96 0 10.38 7.70

Cost and Financing Plan

6.50

0.43

Wetland Restoration in the Duna-Drava National Park Dissemination and Replication

The total cost o f the GEF alternative i s estimated at U S $ 32 mil l ion and i s expected to be financed as follows:

5.20 1.30 0 0

0.35 0.07 0.01 0

I Total 1 31.97 I 12.50 I 1.37 I 10.39 I 7.70 Above amounts include contingencies.

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Benefits-Global Environmental Effects

Annex 15, Table 6: Matr ix of global environmental benefits and incremental costs (GEF

cost

Development of tertiary treatment at the NBWWTP (Budapest)

Wetland Restoration in the Danube- Drava National Park

Dissemination and replication component

comDon Baseline

tmplementation o f wastewater treatment activities up to levels required to comply wi th EU directives (secondary treatment) and investment in wetlands restoration only as and when funding becomes available

US$80 million of which US$ 27 million for the NBWWTP

N o further extension o f treatment f rom the current level (secondary treatment)

No action leading to further degradation o f the wetlands

No action

Alternative

Extension o f NBWWTP to tertiary treatment and wetlands restoration in the Gemenc and Beda- Karapancsa areas o f the DDNP together with associated Project monitoring activities

US$25.0 million for the NBWWTP and US$6.5 million for the DDNP

Extension to tertiary treatment

Wetlands restoration and development o f nutrient trapping capacity

Establish proper monitoring system, and arrangements for dissemination and facilitating replication

Incremental global environmental benefit

Reduce nutrient loads .nto the Danube and the Black Sea; protect and restore endangered marine ecosystems and habitats; increase o f biodiversity

US$108 million for the NBWWTP and US$79 million for the DDNP

Reduce nutrient discharges into the Danube and thereby reduce nutrient loads for the Black Sea

Reduce nutrient discharges into the Danube and thereby reduce nutrient loads for the Black Sea; improve protection o f ecology and biodiversity

Contribute to efficient and effective use o f allocated resources under the Project; demonstration effect for future projects

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Cost Effectiveness

Annex 15, Table 7: Nutrient (N and P) reduction and cost-effectiveness

Projected quantity reduced

(tondyear)

2,464

I Financial costlunit reduction nutrient reduction

(US$/7zg) (US$/ton) (000 US$) (million HUF)

Total annualized cost of

1.06 1,059 2,296 448

~

Development of tertiary treatment at the NBWWTP (Budapest)

Wetland Restoration in the DDNP

I Total Note: Over the period 2006-2030,

1,826

4,290

0.24 24 1 370 72

0.62 621 2,666 520

92,554 tons at a total cost (in PV terms) of US$ 66.7 million.

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Annex 15, Table 8: Incremental cost-benefit for the period 2006-2030

Incremental effects (2006-2030)

Vitrogen reduction (tons)

Phosphorus reduction [tons)

Total (tons)

Incremental economic benefits (PV at US$5/kg o f nutrient reduction over 25 years) (US$ million)

Incremental abatement costs (PV of annual capital and operating costs over 25 years) (US$ million) Cost per unit of nutrient reduction (US$/kg)

Total annualized cost (capital + operating cost) per inhabitant (US$ per capita)

GEF investment cost per inhabitant (US$ per capita)

Total

87.014

5,540

92,554

187

66.7

0.62

0.27

3.15

Budapest comDonent

50.600

3,608

54,208

108

56.0

1.06

0.23

2.50

DDNP component

36.414

1,932

38,346

79

10.7

0.24

0.04

0.65

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Annex 16: STAP Roster Review HUNGARY: NUTRIENT REDUCTION PROJECT

Context information: In accordance with GEF guidelines, a Scientific and Technical Advisory Panel (STAP) review of the Project has been performed by Dr. Cristobal Fel ix Diaz Morejon, member o f the STAP roster o f the GEF. The below STAP report has been received June 7,2005. I t confirmed the scientific soundness and technical quality o f the Project and provided comments, which have been incorporated in the present PAD and associated Project documents, in compliance with Bank procedures. The comments and answers to the question raised b y the STAP reviewer are also available at the end o f the present Annex.

Original title: HUNGARY NUTRIENT REDUCTION (GEF) Project - Review 1 Expert Reviewer STAP/GEF: Dr. Crist6bal F6lix Diaz Morej6n Date: June 1,2005

1. Introduction

The Project i s o f utmost importance for the European environment, taking into account i t s benefits for sanitation improvement in Budapest, reducing the nutrients (mainly N and P) to the Danube River and Black Sea. The sanitation sector has been less benefited than that o f drinlung water in most countries in the world, and Hungary i s not an exception. Hence the importance to develop this kind o f projects, wi th replicability possibilities in other riparian countries, i f results are as foreseen.

Key Issues

2. Scientific and technical soundness of the project

The project has an acceptable scientific and technical baclung, although tending more to technical soundness. I t i s perhaps advisable to propitiate the inclusion in i t o f the scientific community and universities, thus giving a strong scientific support to the necessary research in the design, implementation and follow-up stages, specially monitoring and evaluation activities.

However the following comments are valid: . The improvement o f treatment in wastewater treatment plants on the North (including the addition o f tertiary treatment), the South, and in the future the construction o f other one in the central part o f Budapest, wi l l undoubtedly improve the city sanitation and the reduction o f nutrients r ich in N and P effluence in the Danube River and, subsequently, in the Black Sea. Three technologies are mentioned for the license process for the tertiary treatment in the Northern Plant (NBWWTP), but without an in-depth analysis o f the technical considerations o f convenience according to the wastewater quantity and characteristics. Thus i t i s very dif f icult to make a potential analysis o f technological alternatives. With their own use characteristics, the 3 technologies mentioned have demonstrated good results in different parts o f the world, but at different scales (quantity

85

rn

3.

and quality o f wastewater to be treated). The activate sludge system by a fix-bed process, although i t i s the many countries.

I t i s not very clear whether the municipal wastewaters to be treated in the treatment plants are only domestic or also include industrial wastewaters, an aspect that has to be explicitly reflected and explained in the text. In the latter case, the existence or not o f heavy metals content should be takes into account, because they are very difficult to eliminate by conventional treatment methods. In the case o f domestic wastewaters, the special treatment o f foams from detergents and soaps for various home uses should also be accounted for, since they contain chemicals that are very difficult to eliminate in the treatment.

The results and recommendations established in the Environmental Impact Assessment (EIA) are very important. The EIA was adopted by the government for Budapest Component conducted by M O B y WD. I t i s unfortunate that the main findings and recommendations were not included in the Draft. I suggest their inclusion. For the National Park Component the representative WD on behalf o f DDNPD i s worlung in the preparation o f the required evaluation. This w i l l require a stringent work because o f the implications wetland restorations (1 1) may have over the environment in terms o f affectation and biodiversity variation, the potential creation in the future o f anaerobic conditions as a result o f systematic accumulations o f considerable volumes o f nutrients r ich in N and P, that wi th time may lead to swampy conditions through eutrophication processes and GHG emissions. Apart f rom the potential impact on the Danube itself and riparian countries, i f changes and negative impacts due to variations in the conditions init ial ly expected b y the Project, there should be special attention on the Beda-Karapancsa area given i t s proximity to Croatia. Attention should be also given to cases o f “Fekete-erdei”, “GrCbeci-Duna” wetland with advanced eutrophications processes, and “Bali” whose central part i s occupied by a strongly eutrophic, filled-up inner lake.

The Project Operational Manual should be acquired without delay for i t s various components and a strict follow-up o f i t future implementation.

Monitoring and Evaluation should have first priority, because there are negative cases o f projects, since they are later steps in the Project, there was less or no money for them and they were partially or totally ignored, wi th natural disasters that could have been avoided with systematic monitoring and evaluation. In the case o f the wetland restoration monitoring system in Duna-Drava National Park (Annex 4. Table 1. Estimated Project Costs by Components, page 13), taking into account the necessary volume o f research and the follow-up required for a comprehensive evaluation, including biodiversity, water quality, bottom sediment studies and other. I suggest a percentage increase for monitoring and evaluation (0.7 %), since 250 M euros i s actually very little.

Identification of the global environmental benefits and/or drawbacks of the project.

The global environmental benefits for Europe, Hungary - specially Budapest - and the riparian countries in this part o f Danube are clearly reflected, as wel l as for the Black Sea, because o f the reduction o f nutrients r ich in N and P entering into the river, wi th the

86

treatment plant improvement located in the North and South o f Budapest and the water systems.

4. Project’s context within GEF goals, operational strategies, program priorities, GEF Council guidance and the provisions of the relevant conventions.

The Project context perfectly classifies within the GEF objectives and i t s operational strategies, program priorities, and guidelines o f the GEF Council. I t clearly articulates with the European Union Water Directives, and specially those having to do with the Danube River and the Black Sea, as wel l as with the European Union Directive for the discharge o f urban wastewaters, and the provisions o f the Bucharest Convention (1985) and the Sofia Convention (1998), the strategic plans o f the International Commission for the Protection o f the Danube River, and the UNDP/GEF Partnership on Nutrient Reduction for the Danube and Black Sea basins.

In the Annex 10: Safeguard Policy Issues (page 20) i t may perhaps be necessary to deepen on Natural Habitats (OP/BP 4.04), since the creation o f water systems w i l l change the natural habitats. This i s also valid for Involuntary Resettlement (OP/BP 4.12), since there i s no explanation or what w i l l be done with landowners working in agriculture, because i t i s not explained.

Foreseen supervisions b y qualified personnel o f the Wor ld Bank (as GEF implementing agency) and GEF teams i s essential, not only during the start-up phase but during the implementation, especially the f ield visits where each components o f Project w i l l be analyzed.

5. Regional context

In general, the analysis o f regional context i s adequate, approaching essential elements and actors. However i t w i l l be good to add that, at national and local levels, additional benefits w i l l be obtained with an improved water quality in the Danube River and the Black Sea together wi th a better quality o f l i fe in the population.

6. Replicability of the project

The Project w i l l be perfectly replicable in other areas o f Hungary, riparian countries, and other parts of the world, i f the init ial foreseen results are obtained.

7. Sustainability of the project

The Project intends to achieve sustainability wi th an element o f great importance in every country - the reduction of pollution. In this case, the reduction o f nutrients r ich in N and P arriving to the Danube River and later to the Black Sea, with the improvement o f existing wastewater treatment plants, and an ambitious rehabilitation plan o f a former wetland through 11 water systems restoring the National Park former conditions.

However, results useful, the following comments on the Project as a whole are relevant:

0 I t i s important to really take into account, not only the technical, operative and maintaining costs, but too the social costs when service tariffs are established, in correspondence with the characteristics o f the population o f North and South wastewater treatment plants.

87

I t i s necessary to comply wi th what i s established in the Consumers unwillinghnable to pay required tariffs levels in Point 5 Critical risks and possible controversial aspects of C. Implementation (page 16), that mechanisms “are already in place r . . .1 for any cross - subsidies that would be required to provide services to the poor”, i f we hope the Project reaches the intended economic, social and environmental repercussions.

The relationship between sustainability and water management i s often viewed in terms o f the exploitation of natural systems for water treatment. Ponds, reed beds, and wetlands have consequently been granted extensive coverage as potentially sustainable solutions to water management problems. However, i t i s important to recognize that engineered water treatment technologies are not, in themselves, a threat to sustainable water management. Where there i s room for improvement i s in the wise design and implementation o f technology. For this reason we must research to study, and deepen into the variant o f establishing 11 water systems the lower part o f the Danube River in Hungary, since their long-term effects maybe negative. I t would be trying to reconstruct something destroyed by men themselves and it while never be as originally conceived by Nature. That i s why I believe a pi lot water system should be built in each zone: ” BCda - Karapancsa ’’ y ” Gemenc ”, where the impact on the environment and the consequences o f accumulating o f nutrients r ich in N and P may be studied in depth. That i s why in Point 2 I suggested the intervention o f the scientific community and the universities, creating multidisciplinary research groups.

0

0 I t w i l l be useful in the future, together with the construction the Central new wastewater treatment plant, and even in the already constructed ones, to work in the capacity o f the types o f technologies to recycle grey and black waters at the neighborhood, street or even household level thus offering new opportunities for the design o f comprehensive water supply and sewerage network that w i l l allow smaller physic and treatment dimensions in wastewater treatment plants (in a household level, for example, sand filters and physical filtedmembrane systems for recycling bathhhower water and even the wastewater f rom kitchens). This consideration has large economic, social and environmental advantages.

0 Project sustainability should be viewed comprehensively wi th an integral management for the entire region. Thus it would be important to include:

variant analysis for possible reuse of treated wastewaters( for example in agriculture for irrigation, in municipalities for irrigation o f gardens, parks, and other uses) wi th important savings of water in the sources; the use of possible sludge arising in wastewater treatment plants (for example, in agriculture as fertilizer, if it does not contain heavy metals or other hazardous substances; or in the production o f energy); the gradual reduction in the application o f inorganic fertilizers r ich in N and P, that constitutes non-point sources o f pollution to the Danube River; wi th the consequent savings, ut i l iz ing organic fertilizers as compost, biofertilizers and others.

These possible applications may be considered in the financial analysis, because they w i l l result in incomes f rom the Project

Other aspects about sustainability were raised in Point 2.

-

-

-

0

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Secondary issues

8. Linkages to other focal areas

This Project has links with the focal areas o f Biodiversity, Land Degradation, and even with Climate Changes, i f we take into account the emissions in wastewater treatment plants and if the possible adverse effects described above in water systems occur (Point 2).

9. Linkages with other programs and action plans at regional or sub-regional levels

They are wel l described in the Draft Project.

10. Other beneficial or possible environmental damaging effects

All important issues were described in Points 2 and 7.

In the Annex 3: Results Framework and Monitoring (pages 9 -12), in the part on Monitoring (Table: Arrangements for results monitoring, page 11), I suggest to include in the Intermediate Outcome Indicators: Quantity of treated wastewaters reused; Variation in the number of existing species in water systems; Average of N and P contained in each water system /ha.

11. Capacity building aspects

These aspects are described in generic form without a very clear and defined plan, o f what i s intended. I ins is t in the need of worlung together with the scientific community and universities.

12. Innovativeness of the project

Some aspects may be reflected in Point 5 Lesson learned and reflected in the Project design (pages 10 y 11) and in Point 6 Alternatives considered and reasons for rejection (pages 11 y 12) in B Project description.

However the main innovation i s the application in a complex Hungarian region, within the l i m i t s o f the capital and a National Park, an improvement o f wastewater treatment systems, and the application o f wetlands. These are wel l known technologies used in other parts o f the world.

Dr. Cristdbal Felix Diaz Morejdn STAP/GEF Expert

89

Response by the Project Team to comments and answers to the question raised by the STAP reviewer

This i s to acknowledge that I received your excellent and very wel l written STAP review report on the design o f the aforementioned Project. W e have incorporated your comments in the document and discussed them wi th our Hungarian counterpart during our mission there. I just have the following comments on some o f the points you raised.

Point 2 :

I ful ly agree with you on the fact that university and the research community should be involved in a study to help in the wetland rehabilitation in the Gemenc and Beda- Karapancsa areas o f the Park. Provisions have been made under the Project to finance the development o f an impact evaluation methodology, in addition to the contracts for final designs, baseline study. This study should serve as a basis for the design and development o f the Monitoring and Evaluation system. This study i s foreseen to be implemented by searchers or university involved in such activities or similar activities in Hungary .

The technology to be developed i s not decided yet, and since the treatment technologies referred to in the feasibility studies are only indicative at this stage, they have not been described in details in the document. Since these technologies are l ikely to be protected by patents, and in order to guarantee competition, the turn key contract wi l l be procured based on technical specifications that w i l l allow the widest range o f technical solutions to be applied, while takmg into account the operation and maintenance (O&M) costs. O f course, thorough technical review w i l l be performed in the process, in particular at the end o f the prequalification stage, to make sure that the technical specifications allow reaching the appropriate level o f treatment, that these technologies demonstrated good results while minimizing the O&M costs.

The impact evaluation you are referring to and the potential implications in terms o f creation o f anaerobic conditions which might lead to eutrophication and GHG emissions w i l l be studied as part o f the aforementioned study. Mitigations measure for potential negative impacts w i l l be added to the Environmental Management Plan o f the Park component.

As indicated above, Monitoring and Evaluation w i l l be given the right level o f attention. A baseline study w i l l be prepared, an impact evaluation methodology wi l l be developed and a M&E system w i l l be implemented, taking into account your comments. Altogether, about 250,000 Euro equivalent (USD320,OOO) wil l be allocated to these aspects, which represents more than 6% o f the component amount. This percentage looks rather on the high side, compared to other projects in the Bank. Additionally, preparation o f the development o f the M&E system w i l l take place at the early stages o f the Project and not at the end, giving the priority to the M&E o f the activities to be implemented in the Park.

90

Point 4:

Regarding your mention on the Annex 10, we w i l l deepen on the Natural Habitat in the Environmental Management Plan, based on the results on the baseline, final design and the impact evaluation methodology results. As indicated in the Environmental Impact Assessments, the Project i s expected to improve the habitats o f a number o f species, including some protected species and migratory birds. Additionally, the dredged material, which good quality has just been confirmed, w i l l be used as game island to prevent animals from drowning during the flood events. Concerning the Involuntary Resettlement Safeguard Policy, the national park i s property o f the state and no agriculture i s taking place within the park boundaries. This i s the reason why there i s no mention o f any agricultural activity within the Park.

In addition to regular supervision missions, and in order to provide additional security and confidence to the authorities, the M O E W w i l l convene a short team o f experts, wi th internationally recognized experience in the type o f interventions to be developed, to review the proposed works and follow up the impact they have on the park’s morphology and ecology.

Point 7:

I fully agree with your comment on the possible development o f technologies to recycle grey and black waters at the street or household level, however, this i s outside the scope o f this Project.

Point 10:

In regard to the indicators, we agreed during the last mission with the indicators proposed by the authorities to focus on a l imited number o f monitoring indicators that can be easily measured.

Point 11

Detail plan of activities and associated terms of reference for the capacity Building aspects w i l l be prepared before Project Effectiveness, based on the identified needs at that time.

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Annex 17: Maps

HUNGARY: NUTRIENT REDUCTION PROJECT

Map 1 : Gemenc area of the Duna Drava National Park7

Map 2: Beda Karapancsa area of the Duna Drava National Park

These two maps are the property of the WA. Written authorization to use and publish these maps has been received and filed. They have been cleared by the Cartography Department of the World Bank.

92

M a p 1: Gemenc area of the Duna Drava National Park

2. "Buvat" water system 4. Water system at the S i k n a l 5. "Gemenc" water system

7. "Feketeerdei" water system, "G&be&Duna" 8. "KerCil6-Duna" water system 9. "BAli" water system

1 1. "Nagy-PandW water system

93

M a p 2: Beda Karapancsa area of the Duna .- Drava National Park

94

Annex 18: Biological Processes of Nutrient Trapping in Floodplains and Wetlands

HUNGARY: NUTRIENT REDUCTION PROJECT

Introduction:

Wetlands perform many important biochemical functions in watersheds in relation to nutrients (Nitrogen and Phosphorus). Among these are sediment trapping; nutrient removal, storage and release; and transformation of inorganic nutrients to organic forms. Floodplains and temporary wetlands, l ike Gemenc and Beda-Karapancsa areas o f the Duna-Drava National Park, can also be high efficiency purifiers, during both flood and dry periods. Studies have shown that, under optimal conditions, floodplains and temporary wetlands can make a significant contribution to reducing N and P loads entering the wetlands carried in surface water. Permanent wetlands and wetlands used as nutrient filters at the discharges of wastewater treatment plants indicate retention rates of up to 90% o f nitrates and up to 50% of phosphorous which transit through them. However, to date, the impacts of natural floodplains and temporary wetlands on nutrient reduction have not been systematically documented. Hence, the outcomes remain difficult to predict in quantitative terms. The purpose o f t h i s annex i s to describe in simple and qualitative terms the complexity o f the processes expected to take place in the Project areas in relation to nutrient reduction. In particular, i t w i l l focus on the biological processes and their impacts on biodiversity. However, as indicated in the Project description, the proposed Project intends to develop knowledge and scientific data to better understand such solutions and facilitate their replication.

Processes affecting nutrient reduction in floodplains and wetlands

Nutrients entering a wetland carried in surface water may be in dissolved or particulate (suspended sediment) form, and may exist as organic and inorganic compounds. Organic N or P compounds are in either dissolved or particulate form. Inorganic compounds occur primarily in solution, as nitrate (NO3- ) or ammonium (N&+) for N, and as orthophosphate (H2P0 i and €PO:-) or phosphate-containing minerals suspended in the water column for P. Once in the wetland, nutrients are exposed to complex combinations o f physical (water flow, depth, sedimentation, filtration, absorption), chemical (denitrification) and biological (nutrient reduction through aquatic micro and macrophytes and the roots of terrestrial vegetation) processes involving a large number o f dynamic parameters. These processes result in retention, cycling and release of nutrients, as indicated in Figures 1,2, and 3. Major processes affecting retention, cycling and release of nutrients in wetlands are described in Table 1 below.

~~

Figure 1: Simplified diagram of the Phosphorus cycle in wetlands (Source: Phosphorus cycling in wetlands, a fact sheet o f the Soil and Water Science Department, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida. Published: July 1999.)

95

Inputs Light 1 I

Process Diffusion (Physical

Effect on Nitrogen compound Driven b y the concentration gradient, dissolved forms o f N and P can be transferred from surface water to soil solution (porewater) and vice versa, diffusing from a region o f high

I Effect on Phosphorus compound

process) Plant uptake

I concentration to regions o f lower concentration. 1 Inorganic forms are taken up by plants either rooted in the soil or floating in the water,

(Biological process) Litterfall (Physical process) Sedimentation (Physical process)

including algae.

Dead plant tissue (e.g., leaves and stems) falls from the l ive plants and collects at the soil surface to form a litter layer, also known as detritus.

Particulate matter (inorganic and/or organic sediment) entrained in the water column settles out, due to the reduced water velocity, shallow water depth and filtering action o f emergent vegetation, and collects on the soil surface.

96

(Biochemical process)

I

volatilization (Chemical process)

(Biochemical process)

Denitr$catio I- (Biochemical

Adsorption (Physicochem

3rganic matter, including plant detritus, organic sediments and peat, i s broken down by a variety o f microorganisms that utilize organic carbon as a source o f energy. Organic :ompounds, such as proteins and amino acids, are broken down to smaller organic molecules, both particulate and dissolved, and ultimately to ammonium (NH43 for N and xthophosphate for P, which may be utilized either as a nutrient by the microorganisms or jiffuse back into the soil or water. Under high-pH conditions in the wetland floodwater, concentration o f the un-ionized form o f ammonia (NH3) becomes appreciable compared to N H 4 + , and may be released to the atmosphere as ammonia gas. This process i s not usually a major factor for N cycling in most wetlands, but can lead to substantial N losses for poorly buffered waters with high photosynthetic activity (due to the associated

1

daily increase in pH). Microbial conversion (by Nitrosomonas and Nitrobacter spp.) o f reduced inorganic N (NH43 to the oxidized nitrate form. This process occurs in aerobic, or oxygenated, regions o f the wetland, usually confined to the surface water and the top few millimeters o f the underlying soil. Microbial conversion (e.g., by Pseudomonas spp.) o f nitrate to nitrogen (N2) gas and, to a lesser extent, nitrous oxide (N20), which are lost to the atmosphere. The release o f nitrous oxide i s o f particular concern, because o f ozone-layer impacts. Denitrification occurs only in the anaerobic, or oxygen-depleted, regions o f the wetland that typically exist below the soil surface. Retention o f N in the soil by adsorption occurs through the process o f cation exchange, whereby the ammonium ion (NH4+) i s weakly bound to soil particles by electrostatic attraction. Most soil profiles are negatively charged, so the corresponding retention o f nitrate (N03.) i s rare.

This general term i s applied to the processes o f adsorption o f the orthophosphate ion by clays and iron or aluminum oxides (chemisorption) in the soil, and precipitation o f PO4 with either iron and aluminum oxides or dissolved calcium, to form solid compounds (Fe- and Al-phosphates or Ca-phosphates) in the soil or water column. These phosphate minerals are potentially very stable in the soil, affording long-term storage o f

Partially decomposed plant detritus and other organic matter i s gradually buried and I phosphorus.

incorporated into the soil profile. The buried material representing the portion o f organic matter that i s more resistant to decomposition. I t becomes highly decomposed and compressed, forming peat (Le., peat accretion). This process takes decades to take place.

Burial and peat accretion (Physical process)

results in gaseous losses o f N from the ecosystem. Highly favorable environmental conditions for denitrification are commonly found in wetland soils. The existence o f an aerobic- anaerobic interface near the wetland soil surface greatly facilitates the coupling o f nitrification and denitrification, which allows removal o f inorganic N as both nitrate and ammonium. Comparatively, the capacity o f wetlands for P removal i s limited, as there i s no loss mechanism for P in wetlands that i s analogous to denitrification. Therefore, P tends to accumulate in wetlands at a higher rate than does N. However, precipitation o f phosphate minerals can provide a significant

97

sink for P in wetlands with large stores or inputs of iron and aluminum (low-pH wetlands) or calcium (high-pH wetlands).

The vast majority of nutrients in wetlands are in organic form, contained either in the vegetation (live plants), plant detritus, macrofauna, microorganisms, soil (soil organic matter or peat) or water (dissolved organic compounds or suspended sediments). Although wetlands may remove and store substantial quantities of nutrients, they also can potentially release a significant quantity to downstream ecosystems. In particular, wetlands' functions may change seasonally. During the growing season o f the vegetation, late spring, summer and early fall, emergent and submerged aquatic plants take up large quantities o f nutrients from water and sediment. Algae and floating plants absorb nutrients from surface water. These plants essentially convert the wetland into a "nutrient sink," by taking nutrients from the water and sediment and retaining them as plant material. B y taking up and holding nutrients during the summer, wetlands decrease the possibility o f contamination downstream (Figure 4).

. P I , - ' a 8 , I . . , q-- I , . , _ ' ' . - . , a .

, '

Figure 4. Nutrient Sink

However, this process reverses when these plants die. Then, decomposition and litterfall take place, generating a large portion of nutrients to return to the water and sediment. During this period (in late fal l and early spring), wetlands serve as a nutrient source when water flows from the wetlands to ecosystems downstream (Figure 5).

. . . . , . . . . _ . ..:

Figure 5. Nutrient Source

In most cases nutrients are recycled within the wetland. Emergent and submerged plants bring nutrients from the sediment into the water column, acting as "nutrients pumps." Algae and floating plants serve as "nutrient dumps" by taking nutrients from the water and depositing them back in the sediment when they die and settle on the bottom. The cycle breaks when nutrients are removed

98

from the wetland system, occurring when nutrient-rich water flows out o f the wetland. The release of nitrogen gas to the atmosphere by denitrification, ammonia volatilization or possibly nitrification of ammonia also causes nutrients to be lost.

M a j o r factors influencing the efficiency of nutrient retention capacity of floodplains

Efficient management o f the above processes i s critical to ensure proper nutrient retention, enhance biological processes transforming nutrients into biomass, and avoid potential negative impacts such as release of nutrients or maintaining optimal conditions for flora and fauna. The efficiency o f such biological processes linked to nutrient retention in floodplain ecosystems i s determined by two main multi-factor parameters:

(i) (ii) The water f low in the ecosystems i s o f utmost importance, more specifically the volume o f water current and i t s speed. On the one hand, the water inflow provides the necessary reduction-oxidation (redox) potential for the photosynthesis; on the other hand, the river provides nutrients to the vegetation biosynthesis. Since the concentration of nutrients in the Danube river waters remains quite stable al l year around, the nutrient retaining capacity i s in proportion to the volume o f water delivering redox potential directly, and the amount of suspended solids in the river waters indirectly, provided that the water velocity i s sufficiently low to allow the suspended solids to settle.

The volume o f water entering the ecosystem; and The active vegetation biomass within the ecosystem.

The other critical parameter regulating the retention capacity i s the volume o f vegetation biomasses characterizing the floodplain, as it i s in proportion to the level of nutrient intake. The nutrient retaining capacity o f the ecosystems w i l l be optimal when the inundated areas o f the floodplain are covered with vegetation and when the flooding episodes are taking place during the seasonal growing period of the vegetation cycle, when nutrient consumption i s at i t s peak. However, the water depths should be shallow enough to permit the vegetation to continue i t s biosynthesis, even during long submersions.

On the one hand, through the restoration of the oxbows in the Gemenc and Beda-Karapancsa areas of the Park, more water w i l l enter the floodplain during flood events. On the other hand, the development of small water regulation works intends to slow down the flow o f water exiting the floodplain. As a result, temporary wetlands w i l l be created from time to time, creating suitable conditions for the retention o f nutrient loads o f the Danube River and subsequently the Black Sea. In the process, both the ecology o f the riverside habitats and the quality o f the water leaving the floodplain are expected to improve. To reach such results, i t i s critical to integrate the specificity of the vegetation throughout the Project area, to take into account their relative capacity to trap nutrients and their potential limitations.

Specificity of the Gemenc- and BCda-Karapancsa floodplains

Over the last 125 years, records have shown a decrease o f the water level o f the Danube River by 1.6 to 1.8 meter. The cause o f t h i s decrease i s the numerous hydraulic works to regulate the flow of the Danube River. As a result, the number and frequency o f flood events in the Gemenc- and BCda- Karapancsa floodplains have considerably decreased, leading to a general drying o f the areas. Additionally, the flood events are shorter in time and the flood waves o f the Danube River are likely to occur at any period o f time during the year. However, the probability i s higher during the 6 month period between February and July than in the period between August and January.

The floodplains o f Gemenc- and BCda-Karapancsa are habitats o f a large variety o f flora and fauna, which has adapted to regular floods and related sedimentation followed by dry periods. In addition, the hydrology and ecology of the Park has been modified by various human interventions. A

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significant portion o f the forests occupying the floodplain o f the Park are composed o f non- indigenous tree species (e.& about 50% in BCda-Karapancsa in 2002) such as acacias and poplars. All woodlands are managed in the area. Nowadays, the natural vegetation o f the Gemenc floodplain i s represented by riverine willow scrubs, riverine willow-poplar woodlands, riverine oak-elm-ash woodlands to a lesser extent, and wetland euhydrophyte, reed, typha and sedge communities. The nature conservation value o f the flora i s high: 30 rare, protected species have been described from the region so far, a number of which are growing in the woodlands (see Appendix I to this Annex). Higher frequency of flooding events are expected to be beneficial for forestry (natural and cultivated), as increased land desiccation represents a threat to some species.

In terms of fauna, the number of specialized and rare species of birds, bats, fishes, amphibians and other aquatic species i s much larger than that o f common species in the Gemenc and Beda- Karapancsa areas. Altogether 198 bird species were detected in the Gemenc and BCda- Karapancsa areas of the Park. That represents 52 % o f the total number o f 377 species described in Hungary until now. The number o f species nestling i s 124 in this area, including the Ferruginous Duck (Aythya Nyrocu), the White-tailed Eagle (Haliaeetus albicilla) and Black Storks, representing 62 % of the number o f total nestling species in Hungary. About 40 % o f the strictly protected species are found in the Lower Danube stretch, according to ornithological observations (DEME, 2003). In addition, the Park harbours two species of rare fishes (Perca jluviatilis and Gymnocephalus cemuus), three “International Red Data Book” amphibians, and a strictly protected otter (Lutru lutra), which population i s considered stable.

The Environmental Impact Assessment of the Park component, carried out during Project preparation, concludes that no significant negative impacts are expected if the measures included in the Environmental Management Plan are implemented. Moreover, the rehabilitation o f the wetlands i s expected to improve the ecological conditions o f the ecosystem and to increase biodiversity, as new valuable habitats w i l l be created. Positive ecological impacts are in particular expected with the creation o f additional habitats for a number o f migratory bird species o f global importance. Furthermore, the rehabilitation of the wetlands w i l l help solve the desiccation problem caused by the deepening o f the Danube River bed, which has resulted in serious loss o f wet alluvial habitats over the years. Nevertheless, given the outstanding importance o f the Park in terms of biodiversity and nature conservation, proper attention should be paid to monitor the possible impacts of the Project on the ecology and biodiversity o f the area. In this regard, as part of the baseline study, selected indicators species w i l l be identified. They are to be included in the Monitoring and Evaluation system o f the Project, which i s to be implemented early in the process and prior to the investments. Monitoring o f such indicator species i s to be introduced in the l i s t of performance indicators o f the Project, to ensure that their populations remain stable and serve as an early warning system for any threats to that stability.

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Appendix 1 to Annex 17: list of endangered species identified in the Park

1.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

B).

A). LIST OF PROTECTED PLANT SPECIES DESCRIBED IN THE GEMENC AREA (SZARVAS, 2003)

Listera ovata Carex strigosa .Orchis purpurea Crataegus x degenii Scilla vindobonensis Cephalantera damasonium Nymphaea alba Crategus nigra Carpensium abrotanoides Dactylorhiza incarnata Cephalanthera longifolia Acorus calamus Platanthera bi fo l ia Gentiana pneumonanthe Ophioglossum vulgata

16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

Equisetum hyemale Vitis sylvestris Marsilea quadrifolia Senecio palodosus Leucojum aestivum Salvinia natans Clematis integrifolia Trapa natans Epipactis helleborine I r i s sibirica Dryopteris carthusiana Dryopteris dilatata Nymhoides peltata Orchis militaris Platanthera clorantha

List of fish species found in main riverbed (l), connected backwaters (2), and disconnected standing waters (3) in the Gemenc area. Black boxes common, grey boxes rare, x historical data (GUTI, 2001). Where n o indication i s given, the presence of the fish species i s suspected but was not be documented as part of this study.

Fish species Eudontomyzon mariae Acipenser ruthenus Acipenser giildenstaedti Acipenser nudiventris Acipenser stellatus Huso huso Hucho hucho Oncorhycus mykiss Umbra krameri Esox lucius Rutilus rutilus Rutilus pigus Virgo Ctenopharyngodon idella Scardinius erythrophthalmus Leuciscus leuciscus Leuciscus cephalus Leuciscus idus Aspius aspius Alburnus alburnus

1 2 31

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?ish species {licca bjoerkna Lbramis brama Lbramis ballerus ibramis sapa limba vimba 'elecus cultratus rinca tinea 7hodrostoma nasus 3arbus barbus 3arbus meridionalis ?obi0 gobio 7obio albipinnatus Dseudorasbora parva Phodeus sericeus amarus 7arassius carassius Tarassius auratus Syprinus carpio Fiypophtalmichthys mol itrin 4ristichthys nobilis 'Misgumus fossilis Cobitis taenia Silurus glanis 4meirus nebulosus 4meiurus melas 4nguilla anguilla Lata lota Lepomis gibbosus Micropterus salmoides Perca fluviatil i s Gymnocephalus cemuus Gymnocephalus baloni Gymnocephalus schraetzer Stizostedion lucioperca Stizostedion volgense Zingel zingel Proterorhinus marmoratus Neogobius fluviatilis Neogobius kessleri Neogobius syrman

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