Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 33724-UA

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$140 MILLION

TO

UKRAINE

FOR AN

URBAN INFRASTRUCTURE PROJECT

JULY 6,2007

Sustainable Development Department Ukraine, Belarus and Moldova Country Unit Europe and Central Asia Region

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

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CURRENCY EQUIVALENTS (Exchange Rate Effective July 6,2007)

Currency Unit = Ukraine (UAH) UAH 1 = US$O.20 lEuro = US$1.32

CAS CFAA CPAR CPMU DPL DZhKG EA ECA EFP EIRR EMF ENPV ESW GDP GPN IBRD IDA MHCS MDGs MOF MoU NGO O & M OP OSCE PAS PFS PVP RFP ROSC RPMU SA SBD SIL SOCIS SOE SPN TDR TOR UNDP USAID VSL

FISCAL YEAR January 1 - December31

ABBREVIATIONS AND ACRONYMS

Country Assistance Strategy Country Financial Accountability Assessment Country Procurement Review Central Project Management Unit Development Policy Loan Derzhzhitlocommungosp Environmental Assessment Europe and Central Asia Environmental Framework Policy Economic Rate of Return Environmental Management Plan Economic Net Present Value Economic and Sector Work Gross Domestic Product General Procurement Notice International Bank for Reconstruction and Development International Development Bank The Ministry of Housing and Communal Services Millennium Development Goals Ministry of Finance Memorandum o f Understanding Non-Governmental Organization Operations and Maintenance Operational Policy Organization of Security and Cooperation in Europe Procurement Accredited Staff Project Financial Statement People’s Voice Project Request for Proposals Report on Observance of Standards and Codes Regional Project Management Unit Special Account Standard Bidding Documents Specific Investment Loan Center for Social and Political Investigation Statement of Expenditure Specific Procurement Notice Transboundary Dnister River Project Terms of Reference United Nations Development Program United States Agency for International Development Variable Spread Loan

Vice President: Shigeo Katsu Country Director: Paul G. Bermingham

Sector Director: Peter D. Thomson Sector Manager: Sumter Lee Travers

Task Team Leader: Seema Manghee

11

UKRAINE URBAN INFRASTRUCTURE PROJECT

CONTENTS

A . 1 . 2 . B . 1 . 2 . 3 . 4 . 5 . C . 1 . 2 . 3 . 4 . 5 . 6 . D . 1 . 2 . 3 . 5 . 6 . 7 .

Page STRATEGIC CONTEXT AND RATIONALE ............................................................. 1 Country and sector issues ................................................................................................. 1 Higher level objectives to which the project contributes .............................................. 4 PROJECT DESCRIPTION ............................................................................................. 4 Lending instrument .......................................................................................................... 4 Program objective and Phases ......................................................................................... 5 Project components ........................................................................................................... 5 Lessons learned and reflected in the project design ...................................................... 6 Alternatives considered and reasons for rejection ......................................................... 7 IMPLEMENTATION ...................................................................................................... 8 Partnership arrangements (if applicable) ....................................................................... 8 Institutional and implementation arrangements ........................................................... 8 Monitoring and evaluation of outcomes/results ............................................................. 9 Sustainability and Replicability ....................................................................................... 9 Critical r isks and possible controversial aspects .......................................................... 10 Loadcredit conditions and covenants ........................................................................... 10 APPRAISAL SUMMARY ............................................................................................. 11 Economic analysis and financial analysis ..................................................................... 11 Technical .......................................................................................................................... 15

Environment .................................................................................................................... 19 Safeguard policies ........................................................................................................... 20 Policy Exceptions and Readiness ................................................................................... 20

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

Annex 1: Country and Sector o r Program Background ......................................................... 22 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ................. 28 Annex 3: Results Framework and Monitoring ........................................................................ 31 Annex 4: Detailed Project Description ...................................................................................... 37

Annex 6: Implementation Arrangements ................................................................................. 42 Annex 7: Financial Management and Disbursement Arrangements ..................................... 43 Annex 8: Procurement Arrangements ...................................................................................... 58 Annex 9: Economic and Financial Analysis ............................................................................. 66 Annex 10: Safeguard Policy Issues ............................................................................................ 66 Annex 11: Project Preparation and Supervision ..................................................................... 74 Annex 12: Documents in the Project Fi le ................................................................................. 75 Annex 13: Statement of Loans and Credits .............................................................................. 77 Annex 14: Country at a Glance ................................................................................................. 79 Annex 15: Social Assessment ..................................................................................................... 81 Annex 16: Maps ........................................................................................................................... 85

Annex 5: Project Costs ............................................................................................................... 41

IBRD Map 34813

... 111

UKRAINE

FY 4nnual Cumulative

URBAN INFRASTRUCTURE PROJECT

PROJECT APPRAISAL DOCUMENT

EUROPE AND CENTRAL A S I A

ECSSD

2008 2009 2010 201 1 2012 14.00 25.20 58.80 28.00 14.00 14.00 39.20 98.00 126.00 140.00

Date: July 6, 2007 Country Director: Paul G. Bermingham Sector Director: Peter D. Thomson Sector Manager: Sumter Lee Travers

Project ID: PO95337

Lending Instrument: Specific Investment Loan

[XI Loan [ ]Credit [ 3 Grant [ ]Guarantee [ ]Other:

Team Leader: Seema Manghee Sectors: Solid waste management (1 0%); Water supply (60%); Sewerage (30%) Themes: Other urban development (P); Access to urban services and housing (S ) Environmental screening category: Partial Assessment

For Loans/Credits/Others: Total Bank financing (US$m.): 140.00 Proposed terms: Variable Spread Loan with a 5 year grace period and 20 years final maturity.

Financing Plan (US$m) Source Local Foreign Total

Borrower 0.00 0.00 0.00 International Bank for Reconstruction and 51.83 88.17 140.00 Development Total: 51.83 88.17 140.00

Borrower: Government o f Ukraine Responsible Agency: Minister o f Housing and Communal Services

Expected closing date: December 3 1 , 2012 Does the project depart f rom the CAS in content or other significant respects? Re$ PAD A.3 Does the project require any exceptions from Bank policies?

[ No

Expected closing date: December 3 1 , 2012 Does the project depart f rom the CAS in content or other significant respects? Re$ PAD A.3 Does the project require any exceptions from Bank policies?

[ No

Re$ PAD D. 7 [XIYes [ ] N o Have these been approved by Bank management? ; ]Yes X N o Does the project include any critical r isks rated “substantial” or “high”? Re$ PAD C.5 Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D. 7 Project development objective Re$ PAD B.2, Technical Annex 3 The Project’s objective is to assist participating utilities in moving towards higher quality and reliability o f services and reducing the costs o f service through a series o f institutional improvements and selective investments in rehabilitation and replacement o f deteriorated water supply, wastewater and solid waste systems.

[XIYes [ ] N o

[ ]Yes [XINO

[XIYes [ ] N o

Project description Re$ PAD B.3.a, Technical Annex 4

A. Institutional Capacity ($1.15 million): This component would help utilities to adopt commercially oriented business-type practices and become financially viable through the preparation o f annual Business Plans.

B. Rehabilitation Investments ($61 -53 million): This component would address the most urgent investment needs o f the water, wastewater and solid waste sectors.

C. Energy Efficiency ($76.47 million): This component would address the most urgent needs related to energy efficiency.

D. Project Management ($2.0 million): This component would finance implementation o f the project.

Which safeguard policies are triggered, if any? Re$ PAD 0.6, Technical Annex 10 OP 4.01 and OP 7.50.

Significant, non-standard conditions, if any, for: Re$ PAD C.7 Board presentation: N o t applicable.

Loan effectiveness:

a) The Loan Agreement and two Project Agreements are signed by the Government o f Ukraine.

b) Two Subsidiary Loan Agreements are signed between the Ministry o f Finance (on behalf of the Borrower) and a participatory utility or municipality.

Covenants applicable to project implementation: Financial covenants,

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A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues

1. After a decade o f economic contraction, Ukraine’s economy has enjoyed six years o f growth during which Gross Domestic Product (GDP) expanded by more than 50% and poverty f e l l sharply. Growth resulted from a combination o f a highly favorable external environment, a revival o f the traditional industrial base and improved macroeconomic policies and management. Economic performance has remained strong and the country has the potential to transform and deliver fast, sustainable and equitable growth and to meet the national ambitions for integration into the global economy.

2. The high growth rates will require high quality municipal services throughout the country. In particular, the needs in the water supply, sanitation and solid waste sectors are large with high funding needs for rehabilitation. The Ukraine National Water Sector Strategy and Action Plan carried out under the direction o f the Ministry o f Housing and Communal Services (MHCS) estimates the investments required simply to reinstate the operational safety o f the systems at 4 to 6 bi l l ion euros. The investment required to achieve international service standards over a 20-year period has been estimated at 22 to 26 bi l l ion euros.

3. About 65% o f Ukraine’s total population has access to public water supplies and about 53% are connected to piped wastewater collection. The national averages mask wide divergences. In cities and towns, close to 90% are connected to water supply and 85% to public sewerage. In semi-urban areas, service levels drop o f f rapidly to 70% for water supply and 50% for public sewerage, and in rural areas to 23% for water supply and 3% for public sewerage. The high urban connection rates are deceptive, however, because most o f those connections provide neither safe nor reliable service. In many systems, water service i s intermittent, a fact associated with bacteriologically unsafe drinking water and that causes real hardship for consumers.

4. Water supply in many large cities i s rationed: nine hours a day in Lviv (population 700,000); nine hours in Mykolayiv (population 500,000); and six hours in Uzhgorod (pop. 120,000). A growing number o f small cities have only a few hours of water supply each day.

5. At the same time, industrial consumption has dropped sharply which deprives service providers o f sales at high tariff levels and makes financial sustainability more difficult to reach. Deprived o f a reliable cash flow, service providers cannot maintain their infrastructure that ages rapidly and breaks down. Steadily worsening service makes any tariff increase an uphill battle.

6. The needs for rehabilitation are exacerbated by the overall than necessary energy requirements for pumping water and wastewater that are up to 50% higher due to pump inefficiencies. Various technical assessments concur that the potential energy savings by replacement o f the energy intensive pumps are in the range o f 1.0 billion to 1.75 bi l l ion kWh per year. I t is estimated that the energy intensity o f use in Ukraine i s perhaps the

highest in the region, for example, 22 times more than Germany o n a GDP basis, and 3.6 times higher than Germany on a purchasing power parity basis. This high energy intensity makes Ukraine especially vulnerable to both o i l and gas price increases.

7. The sewerage sector suffers from equally deep problems. The lack o f financial revenue makes preventive maintenance impossible and does not allow the timely payment o f operating costs o f which energy costs are the major portion. Energy costs constitute a high share o f operating costs because much o f the electromechanical equipment i s inefficient and ill-suited for current conditions. Meanwhile, electricity tar i f fs have risen sharply in real terms. Due to the lack o f funding, the infrastructure for collecting and treating wastewater i s either out o f commission or poorly operated. Pollution o f both national and international waterways has risen as a result. The situation i s particularly serious for the Black Sea into which 80% o f Ukraine’s water-borne waste i s ultimately discharged. Consequences o f the sector’s chronic crisis extend well beyond the sector. Other utility companies, particularly energy, are forced to accumulate large arrears from the water supply and wastewater service providers because they find it politically difficult to cut o f f essential inputs to water supply and wastewater.

8. Solid waste also requires immediate attention. Poor service quality makes the population reluctant to pay user fees. Consumers, non-governmental organizations (NGOs), mayors, local government officials and environmental specialists rank solid waste as an urgent priority because much waste now goes uncollected or i s disposed o f inadequately causing environmental damage. Mayors in Odesa and Kharkiv have specifically requested long-term financial assistance to start addressing solid waste problems.

9. Environmental issues o f local as well as o f transboundary impact are important to both the central and local governments. Due to the prevailing financial constraints, the f i rst priority i s to select investments that immediately benefit the local population: correcting situations where delivered water is unreliable and unsafe and removing industrial and sanitary wastes f rom populated areas. While local service providers undertake the rehabilitation they can afford, the scope and pace o f more significant investments depend largely on external financing.

10. Improving service quality offers the possibility of making ut i l i t ies financially sustainable. Poor service quality translates into consumer reluctance to pay user fees that could cover operations, maintenance and possibly investment which in turn aggravates the utilities’ financial situation. Given the high capital intensity o f the water supply and sanitation sector, the fiscal effect could be considerable.

11. The fiscal effect stems from the fact there are only two sources o f funding to pay for operating and capital expenditure in the sector: (i) from user fees, and (ii) from tax revenue. In order to maximize user fees as a source o f revenue, there must be willingness and obligation to make service quality meet standards (that should ideally be regulated) and to accept the necessity and obligation that consumers will eventually pay the full cost o f services. Tariffs that reflect costs are a necessary but not sufficient condition to

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redress the financial situation. In addition, utilities must have the means to meter consumption, charging commensurately and disposing o f the organizational and legal means to collect effectively. In order to make user fees affordable, it becomes important that service provision i s efficient so that costs are minimized. This is a lengthy process that must include creating the institutions and policies that favor efficiency. In the short run, however, it i s possible to invest in greater efficiency, for instance in less energy- consuming pumps.

12. Given the current financial situation o f the sector and the absence o f a domestic market prepared to offer long term loans, the Government has asked the Bank to provide long-term finance to enable service providers to start rehabilitating deteriorated systems. Improving the sector will take time and requires a phased approach comprising four types o f activity:

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0

0

0

Rehabilitation o f the existing assets; Selective additions o f capacity when economically justified; Tariff pol icy reforms in l ine with the improvement in service quality; and Regulation o f both the quality and costs o f services.

13. The present project will concentrate on the rehabilitation o f assets that represents the highest priority. Cognizant o f the fact that many systems are rapidly deteriorating and risk breakdowns, the Government has asked the Bank to provide long-term finance to enable service providers to start rehabilitating deteriorated systems. Electromechanical equipment could be replaced by modern energy-efficient equipment with short payback periods. The additions o f capacity must be highly selective since demand is likely to drop in the long run in response to a planned effort to meter al l consumption and gradually increasing tari f f levels. Experience from other transition economies, such as the Baltic countries, shows that consumption levels can drop by 50% or more as a result o f demand management programs. Tarif f policy reforms will be easier once service has improved. At the present time collections cover only 88% o f operating costs. Unless corrected, the operating deficits will worsen the quality and safety o f supplies further because preventive maintenance has been starved for lack o f an operating surplus. Finally, the regulation o f the quality and costs o f services will be expanded and improved.

Project Objective

14. The Project’s objective i s to assist participating utilities in moving towards higher quality and reliability o f services and increase energy efficiency through a series o f institutional improvements and selective investments in rehabilitation and replacement o f deteriorated water supply, wastewater and solid waste systems.

Rationale for Bank involvement

The Government and the Country Assistance Strategy (CAS) stress action to improve municipal services and in+astructure. Government officials have

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repeatedly asked the Bank to assist in addressing municipal infrastructure problems. Similarly, the CAS states the need to address municipal infrastructure and address poor water quality and inadequate sanitation and recommends inclusion o f water quality projects in the portfolio.

Government request for external support for sector development. Given national budgetary constraints, external funding is crucial for improvement for service delivery o f municipal services. The Government has requested financing from the Bank and also, believes that the availability o f Bank financing will secure other donor financing in municipal services.

The Bank has experience in Ukraine. The Bank has the experience and knowledge to serve as a key partner with the Government. Given the complexity o f Ukraine, in-country knowledge i s vital for involvement in successful sector policy dialogue as wel l as preparation and implementation o f projects that can lead to results on the ground.

2. Higher level objectives to which the project contributes

15. The CAS (Report No. 26448) states that quality (safety) and quantity (accedavailability) o f drinking water, deterioration o f municipal infrastructure and lack o f sanitation facilities are burning issues in many regions o f the country, especially in rural areas. Under Goal 7, “Ensure Environmental Sustainability” o f the MDGs, Target 10 seeks to halve by 2015 the proportion o f people without sustainable access to safe drinking water. The project assists in meeting the basic needs for safe water targets under the MDGs to which Ukraine has subscribed.

16. In addition, the CAS states that the institutional capacity to ensure proper integration o f environmental infrastructure sustainability into mainstream decision- making needs substantial strengthening, Through the drafting o f annual Business Plans, the project will assist the municipalities and utilities who are responsible for the delivery o f public services - water supply and sanitation, solid waste and disposal - to move toward financial viability and sustainable operations.

B. PROJECT DESCRIPTION

1. Lending instrument

17. Bank support to the proposed water supply, sanitation and solid waste sector would start with a Specific Investment Loan (SIL). The Ministry o f Finance will be the Borrower under this Project. The Government, through i t s Ministry o f Finance, would on-lend the Loan to the utilities. The Ministry o f Housing and Communal Services, in full coordination with the utilities, would be responsible for a l l procurement, financial management and disbursement aspects.

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18. The Borrower has selected a Variable Spread Loan (VSL), to borrow an amount equal to one hundred and forty mi l l ion Dollars ($ 140,000,000) with the standard IBRD terms o f 5 year grace period and 20 years final maturity. The Borrower will pay a front- end fee in an amount equal to one percent (1%) o f the amount o f the Loan, subject to any waiver o f a portion o f such fee as may be determined by the Bank. The Borrower shall pay to the Bank a commitment charge at the rate o f three-fourths o f one percent (3/4 o f 1%) per annum on the principal amount o f the Loan not withdrawn. The Borrower shall pay interest on the principal amount o f the Loan withdrawn and outstanding at a rate for each Interest Period equal to L IBOR Base Rate plus L IBOR Total Spread.

2. Program objective and Phases

19. The Government and the Bank agreed that there should be a long-term view o f the sector based on a programmatic approach with flexible lending tools. During this f i rst phase, the lending tool would be a SIL. The S I L would provide immediate support by focusing on priority investments in those regions where preparation i s wel l advanced. At a later stage, the option would remain open to move toward a development policy loan or adaptable programmatic loan, if those tools were requested by the Government.

20. The use o f a sector-wide programmatic approach would set the groundwork for municipal services expanding beyond water supply, sanitation and solid waste sub sectors to have access to external financing, improve performance and deliver quality service. The ultimate long-run objective for the program is to ensure that the majority, if not al l the utilities, provide sustainable, quality supply.

3. Project components

A. Institutional Strengthening ($1.15 million)

2 1. This component would help ut i l i t ies to adopt commercially oriented business-type practices and work towards financial viability through the preparation o f annual Business Plans. During Project preparation, the uti l i t ies drafted Business Plans for 2006. The Business Plans show yearly targets such as increasing the number o f people to be served; improving water quality; improving the collection-to-billing ratio; reducing energy per m3 and o f the staff per 100 connections; increasing tariffs and cost-recovery levels to break-even; improved collection o f solid waste; safe disposal; and clean-up o f wild dump sites. In so doing they provide a baseline against which project performance can be reliably measured. During Project implementation, the Business Plan would produce updated financial statements (income statement, balance sheet and cash f l ow statement) that would help utilities to manage their financial resources better.

22. At the central level, the Ministry o f Housing and Communal Services and the uti l i t ies would be further strengthened to ensure accountability and efficiency for the sector. They would be provided technical capacity building on implementation and supervision. The component would also ensure that proper procurement and financial management training, applicable to Ukraine, i s provided and that feasibility study requirements are met.

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B. Rehabilitation Investments ($61 -53 million)

23. This component would target the following areas: Chernihiv, Donetsk, Ivan0 Frankivsk and Odesa. The areas were selected based on a competitive selection criteria which fulfil led the following criteria: gradually cover operating and maintenance costs through the l i fe o f the Project; ability to demonstrate that the proposed investments would constitute the least-cost approach and reduce operating costs; the service provider possessed the necessary institutional capacity to operate and maintain the proposed investment and ability to work in a coordinated manner between local and central government officials.

24. This component would address rehabilitation o f investments in the water, wastewater and solid waste sectors. The investments would be implemented in two phases. The first phase would target priority first year investments. The second phase would address investments that improve operational efficiency and sustainability and most importantly, replace high energy consuming pumps and related infrastructure with efficient and energy saving pumps and related infrastructure to reduce operating costs.

C. Energy Efficiency ($76.47 million)

25. The component would address the most urgent needs related to energy efficiency for al l municipal utilities and be open to al l the regions in the country that fulfill the following requirements: (i) complete the Business Plan in a satisfactory manner according to the Ministry o f Housing and Communal Services, (ii) provide economic and technical analysis confirming the potential energy savings o f a minimum o f 15% through the proposed investments, and (iii) be allowed to borrow from the World Bank as confirmed by the Ministry o f Finance.

D. Project Management ($2.0 million)

26. This component would finance implementation o f the project; incremental operating costs related to al l eligible expenses; audits; guidance and training for ut i l i t ies and local governments on project implementation; and a stakeholder education campaign on linkages between improved service and willingness to pay.

4. Lessons learned and reflected in the project design

27. Lending to municipal authorities and utilities is risky. The risks o f lending to utilities would be mitigated by ensuring that al l central Ministries, specifically the Ministry o f Finance, Ministry o f Economy and Ministry o f Housing and Communal Services have reached agreement with the local governments through a Memorandum o f Understanding (MoU) on how to address the long-term financial viability o f the sector through a broad framework agreement. All parties saw the M o U as a positive way further to strengthen relationships between the different levels o f government. It was agreed during negotiations that the M o U should be part o f the Business Plan as this

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arrangement was seen as the most practical and this way, the MoU would also be updated each year as part o f the Business Plan.

28. The need for results on the ground. All levels o f government have repeatedly stated that they have received sufficient technical assistance from multiple donors over the past decade. The Government asked the Bank to focus more on results on the ground than on technical assistance. The preparation o f utility Business Plans, however would ensure that the utilities are undertaking the institutional work and preparing for implementation to provide the needed results-oriented focus and a framework for monitoring and evaluation.

29. Timely preparation and implementation of projects in Ukraine has been difficult. In the past, projects were prepared with a single municipality or utility. By working with only one municipality, political problems can slow down or even cancel a project. To mitigate that risk, the Project includes a number o f uti l i t ies chosen via a demand-driven and competitive process in addition to the util i t ies to be selected under the energy efficiency component.

5. Alternatives considered and reasons for rejection

30. Civil servant salaries vs. donor funded (higher) salaries for Project Management Unit. Staff salaries in donor-funded projects tend to be four to five times higher than public sector staff salaries. This has invariably created multiple problems within Government ministries, ut i l i t ies and other institutions. Given the need to build capacity within the institutions in the country and to rectify the artificial wage structure that has been created in Government institutions by donor-funded projects, the project will pay salaries to the project management unit comparable to those paid to utility employees.

3 1. Competitive vs. non-competitive selection process. The proposed design has been based on a demand-driven and competitive selection process. The selection criteria for inclusion o f the regions were: ability to gradually cover operating and maintenance costs through the l i fe o f the Project; ability to demonstrate that the proposed investments would constitute the least-cost approach to meet the given objectives; the service provider possessed the necessary institutional capacity to operate and maintain the proposed investment and ability to work in a coordinated manner between local and central government officials.

32. Many systems in Ukraine require both improvement and expansion. However, due to the numerous facilities that need immediate rehabilitation, the priority will be to work on those systems that can reach operational capacity through rehabilitation rather than focusing on new construction. By experience, rehabilitation offers higher economic returns than new construction and the risks for misguided investments are lower. In a situation where per capita consumption levels are likely to fa l l with demand management programs, the priority is not to add capacity but to retain what already exists.

Rehabilitation vs. new construction.

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33. Inclusion vs. Exclusion of the Energy EfJiciency Component: Due to the high interest o f numerous uti l i t ies to be included in the project, i t was agreed that the Energy Efficiency component should be added to the project and opened to al l municipal uti l i t ies in the country that fulfill the requirements (Annex 4 describes the requirements under Project Description).

C. IMPLEMENTATION

1. Partnership arrangements (if applicable).

34. The Government o f Ukraine requested that the World Bank avoid duplicating any work that had already been completed by other donors and instead to build on the data gathered, strategies proposed and feasibility studies completed.

35. The World Bank i s closely coordinating with the Government o f Sweden on obtaining grant financing to further improve institutional strengthening within the municipal sector and assist with tender documentation and sector specialists during project implementation.

36. The project is working in collaboration with the People’s Voice Project (PVP) that uses an innovative and comprehensive approach to provide short-term technical support and longer-term institutional building assistance to develop Ukraine’s c iv i l society and enhance the accountability o f municipalities to their citizens.

37. The f i rs t phase o f the PVP helped establish N G O coalitions in four pilot cities including Chernihiv and Ivano-Frankivsk. Given that a number o f regions have Business Plans, feasibility studies and Urban Management Programs, the project used the Business Plans for Chernihiv and Ivano-Frankivsk as part o f i t s preparation work. These Business Plans will be further developed during implementation as part o f the institutional component.

2. Institutional and implementation arrangements

38. The key stakeholders at the central level are the Ministry o f Housing and Communal Services, Ministry o f Finance and Ministry o f Economy. The Project would be implemented during FY 2008-2013 under the overall responsibility o f the Ministry of Housing and Communal Services with close cooperation with the Ministry o f Finance and Ministry o f Economy.

39. Within the Ministry o f Housing and Communal Services, a Central Project Management Unit (CPMU) has been established to manage procurement and financial management aspects. The C P M U would be staffed by qualified personnel. It would consist o f a C P M U Head, procurement manager, two procurement officers, a financial manager and an assistant. If necessary, it would also include a specialist consultant on procurement as wel l as water supply and sanitation. The procurement manager would have adequate experience in Bank-financed procurement or would be trained sufficiently

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prior to the Project launch workshop. The C P M U would report to the Minister, Ministry o f Housing and Communal Services.

40. There are Regional Project Management Units (RPMUs) established in each of the uti l i t ies. These would be referred to as RPMU-Chernihiv, RPMU-Donetsk, RPMU- Ivan0 Frankivsk and RPMU-Odesa. RPMUs would consist o f a procurement officer and financial officer. Even though the C P M U would have overall responsibility for implementation and policy dialogue, RPMUs would handle al l day-to-day project matters. RPMUs would conduct al l procurement in coordination with the CPMU. The contracts, however, could only be signed by either the Utility Director or regional RPMU member.

Procurement

41. Overall responsibility for procurement management and filing o f paperwork will be with the CPMU. The C P M U will be composed o f qualified procurement staff, with support from consultants familiar with World Bank projects. C P M U in full coordination with RPMUs will handle the procurement o f goods and consulting servicedtraining for this project under the Loan.

42. However, actual procurement will be carried out at regional level. This will be the responsibility o f the RPMU procurement staff supported by specialist consultants. Consultants will be hired to assist with the preparation o f documentation for the design and supervision contracts, carried out under consultancy procedures. Evaluation will be the responsibility o f the tender committees at RPMUs.

3. Monitoring and evaluation of outcomes/results

43. The monitoring and evaluation o f outcomes and results during implementation would fol low standard Bank practice. The C P M U would collect and present data and reports from RPMUs for bi annual review to show the following targets: improving water quality; improving the collection-to-billing ratio; reducing energy per m3 and o f the staff per 100 connections; increasing tariffs and cost-recovery levels to break-even; improved collection o f solid waste; safe disposal; and clean-up o f wild dump sites. In so doing they will provide a baseline against which project performance can be reliably measured. This would be followed up in conjunction with quarterly supervision missions o f the Bank (Annex 3) during the f i rs t two years o f project implementation and subsequently, semi- annual supervision missions.

4. Sustainability and Replicability

44. The sustainability o f the Project would largely depend on: (i) achieving financial viability by gradually decreasing inefficiencies and increasing revenues to cover adequate operating and maintenance expenditures and debt service; and (ii) adequate prioritization o f infrastructure development by focusing on rehabilitation and reduction o f high energy use through technical efficiencies.

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5. Cri t ical r i s k s and possible controversial aspects

Risk

Reaching financial viability will be difficult for the utilities, particularly those to be included in the energy efficiency component.

Working with municipalities i s high risk.

Projects in Ukraine tend to disburse slowly.

The rehabilitation would be too expensive to operate and uti l i t ies would not be able to afford it.

Mitigation Strategy

In working with the central and local level o f Governments, it has been emphasized that the need to reach or gradually attain financial viability i s the main objective o f the Project. The main criterion for selection was regions that are committed to financial viability. In addition, the Business Plans that are due on October 31 o f each year are focused on the utilities’ strategy to reach financial viability.

Each Mayor and Municipal Board was asked to submit a written letter o f interest on their commitment to work with the World Bank. The Bank only started working in those municipalities that sent written requests for Bank assistance. This resulted in a long l i s t of municipalities that sought to be included in the project. Due to the limitation o f funds, municipalities that qualify under the selection criteria but can’t be added to the current project have been placed on a short l ist. Any municipalities that are unable to perform will be replaced by others on the waiting l i s t .

To ensure that disbursement does not lag, a first year investment plan has been prepared. During the first year o f implementation, remaining designs and tender documentation will take place for second-fifth year investments.

The most cost-effective options have been selected for rehabilitation. The majority o f sector professionals are in full agreement to move away from capacity expansion investments to those that specifically focus on reduction o f energy costs as well as adequate maintenance and improvements in efficiency.

6. L o a d c r e d i t conditions and covenants

Conditions for L o a n Effectiveness

(a) The Loan Agreement and two Project Agreements have been signed by the Government o f Ukraine.

(b) Two Subsidiary Loan Agreements are signed between the Ministry o f Finance (on behalf o f the Borrower) and participating utilities or municipalities.

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Financial Covenants

Participating utilities will cover al l operating and maintenance costs, by December 3 1 , 20 1 1.

Each utility should provide financial forecasts through a Business Plan, satisfactory to IBRD, by October 3 1 , 2008 and o n October 3 1 o f each following year o f Project implementation to ensure that projected operating revenues are sufficient to meet operating and maintenance costs for the next fiscal year. If these requirements are not met, the utilities must take al l necessary measures, including efficiency improvements and adjustments o f the structure or level of i t s rates.

Participating utilities will not incur any debt unless a reasonable forecast o f the utilities’ revenues and expenditures shows that the estimated net revenue o f the utilities for each fiscal year during the term o f the debt to be incurred shall be at least 1.3 times the estimated debt service requirements o f the utilities in such and future years o n al l debt o f the utility, including the debt to be incurred.

Entity financial statements o f each utility will be audited on an annual basis under the terms acceptable to the Bank

Project financial statements will be audited on an annual basis under the terms acceptable to the Bank

Environmental Covenant

(a) An Environmental Management Plan (EMP), satisfactory to the Bank, prepared and adopted by the Recipient, describing the environmental mitigation, monitoring and institutional measures under the Project for a l l sub-projects that will be identified during project implementation.

D. APPRAISAL SUMMARY

1. Economic analysis and financial analysis

45. analyzed.

To assess the economic benefits o f the project fol lowing two scenarios were

Without proiect scenario

46. Under this scenario, Bank does not support the investments nor are alternative external financing sources available. The municipalities will continue to operate in the same manner as they have done in the past. This scenario will result in continued deterioration o f the existing infrastructure (pumps, pipes, and c iv i l works), with occasional repair and rehabilitation investments from own source revenues. In this

11

scenario, the assumptions are as follows, which apply to al l municipalities and al l sub- projects but with varying percentage changes per year.

47. In this scenario, the cumulative effect o f foregone maintenance and rehabilitation increases costs and, with a falling service quality, decreases willingness-to-pay and forces consumers to invest in coping mechanisms to offset service gaps. After the rehabilitation, service quality will return to present levels. The following factors will also contribute to an increase in operations and maintenance costs.

48. Increase in electricity. Without the major rehabilitation undertaken in the project, the deteriorating equipment i s increasing energy inefficient. As the equipment begins to break down, utilities would undertake replacement o f selected equipment through their own resources. However, the without project pace o f replacement will be much slower than with project.

49. Chemical and other material. Without major rehabilitation, as proposed under the project, a modest annual increase i s projected in response to increased demands with deteriorating equipment quality.

50. Maintenance and repair. Every utility will face a trade-off between increasing maintenance and repair, and rehabilitation, or suffering from falling equipment performance. The without project scenario assumes that the most critical maintenance and rehabilitation does take place with existing resources, but unmet demands continue to grow.

5 1. will continue to grow.

Other operating expense. Without major rehabilitation, expenses in this category

With proiect scenario

52. details o f these projections are given in the financial analysis section.

These projections are taken directly from the financial analysis; therefore, the

53. To convert the financial expenses into economic expenses, the expenses for taxes, fee, and depreciation are deducted because these categories do not provide any economic benefits. Inflation and tariff increase assumptions have been taken out as well. The economic benefits o f the project have been assessed in the following categories.

Savings in operating, costs and increasing willingness-to-pay

54. At the time o f this project, the reliability o f water supply i s poor and in some o f the areas, the quality o f water in the target areas i s poor. Operating costs are increasing and willingness-to-pay decreasing. Therefore, the thrust o f the proposed project is to reduce the operating cost and increase the willingness-to-pay by increasing the reliability o f supply through infrastructure rehabilitation. The economic analysis i s primarily based on these two elements.

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Revenue generation from increased water charges

55. The increased water supply and sewage charges due to higher willingness to pay with improved service will bring additional revenue to the uti l i t ies as rehabilitation proceeds and service quality improves, but stabilizes after investment benefits are fully realized, after approximately five years.

Social benefits from increased quality o f water supply

56. With the project, there will be an increase in the quality o f water supply, which is only partially captured in willingness-to-pay. Positive impacts not reflected in that likely include those on environment, health, and on overall productivity o f the target population. N o attempt has been made to estimate the magnitude o f those other impacts. The benefits from investments in management training, seen in the form o f more efficient system and customer management, are captured on the cost side o f the business.

57. This economic benefit cash f low stream i s used to determine the economic net present value (ENPV) and economic rate o f return (EIRR) from the project investments, as given in the following summary table.

US$ mil US$ mil

Project ENPV EIRR Financial Economic cost cost

Chernihiv Water and Wastewater $14.83 $14.43 $6.85 21% Odesa Vodokanal $28.39 $27.50 $11.46 18% Ivano-Frankivsk $15.00 $14.40 $0.19 10% Donetsk oblast water $25.86 $25.46 $27.91 3 5%

Financial analysis

58. A summary o f the financial accounts for the water supply utilities o f Chernihiv, Ivano- Frankivsk and Donetskobl for the five years 2002-2006 and the projections for seven years 2007-2013 are in Annex 9. In reviewing the accounts, it should be noted that some o f the utilities have a problem in collecting accounts and as a consequence delay their payments to suppliers. In addition, failure to increase tariffs to compensate for the effects o f inflation during the past five years has resulted in weaker financial performances by two o f the ut i l i t ies. Some improvements have been evident recently in the overall water supply sector, and it i s expected that with the improvement in services resulting from the investments combined with the installation o f metering and focus on financial viability, gradual improvement can be expected.

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Chernihiv Water and Wastewater Company

59. Chernihiv Vodokanal covers an operating area population o f about 300,000 where 100% of the urban population i s connected to the water supply system and 84% to the sewerage system. In 2004, the household water tariff was increased by about 47%to UAH 0.50/m3 and the industrial tariff by about 25% to UAH 1.32/m3. The domestic sewerage surcharge was UAH 0.32/m3. In 2006, the tar i f fs were again increased by about 6%. During the five years 2002-2006, the utility incurred losses each year with operating ratios ranging from 117 in 2002 and 108 in 2004. The ratio was 11 1 in 2006. The utility i s projected to achieve an operating ratio o f 100 in 2009 and 89 by 2013. The debt service coverage in 20 13 , the f i rst year o f repayments o f the project loan i s 1.1 To achieve this objective, will require a 3% per annum real tariff increase in tar i f fs during the seven year period.

Ivano-Frankivsk Water and Wastewater Company

60. This utility serves an area with a population o f over 235,000 inhabitants, 80 % of whom are connected to both the water supply system and sewerage system. About 58% o f the domestic customers are metered, representing about 55% o f total water sales. The tariff for metered households in 2004 was UAH 0.47/m3. The industry and business tariff was UAH 1.53/m3. The domestic sewerage surcharge was UAH 0.38/m3. The utility had an operating ratio o f 119 in 2003 but this was reduced to 101 in 2004 and 98 in 2005 and 2006. The key to the ut i l i t ies satisfactory performance was appropriate adjustments to tariffs to compensate for inflation in recent years. The utility i s projected to maintain operating ratios in the nineties during the project period. This would require that they continue to increase tariffs in l ine with inflation. Debt service coverage i s projected at 1.7 times in 2013, the f i rs t year o f full debt service on the project loan.

Donetsk Oblast Water and Wastewater

61. Donetsk Oblast Water and Wastewater covers an area with a population o f 1.1 million. The household water tariff i s UAH 1.85/m3. The industry and business tariff i s UAH 1.55/m3. Donetsk Vodokanal had an operating ratio o f 125 in 2002 which f e l l to 119 in 2003 and 2004 and 107 in 2005. However, the ratio increased again in 2006 to 1 13. The utility i s projected to break-even in to gradually improve i t s financial during the project period and to reach break-even in 2011. To achieve this object, the utility wi l l need to increase i ts tar i f fs in real terms by about 3% per annum. The debt service coverage i s projected at 1.3 in 20 13.

Odesa Municipality

62. Annex 9 provides a summary o f the accounts for the municipality o f Odesa for the years 2002-2005. The municipality prepares i ts accounts in accordance with cash accounting principles, so no charges for depreciation o f fixed assets are included. The municipality had a solid financial performance during the past four years with an operating surplus ranging from 8% o f revenue in 2003 to 1% in 2005. About 80% (UAH

14

602 million) o f the municipality's revenue in 2005 was derived from income and profit tax and municipal services. The balance o f 20% was provided by State budget transfers. Salaries and benefits accounted for about 40% o f expenditure and subsidies and transfers accounted for a further 30%. The projected debt service o n the proposed Bank Loans would represent less than a hal f o f one percentage o f current revenue and as a result, would not be significant burden. The municipality also has a capital investment account which totaled UAH 150 mi l l ion in 2005. The program is financed by the sale o f property which financed 92% o f investment in 2005. The municipality's own major repairs and investment program utilized 77% o f the funds.

Odesa Water and Wastewater Company"

63. The utility serves an area with a population o f about one mi l l ion inhabitants, 100% o f whom are served by water supply and 80% are connected to the sewerage system. About 50% o f the customers are metered, which represents about 75% o f water sales. Metered households are charged UAH 0.56/m3 while non-metered households are charged UAH 3.75 per month. Industry and business are charged UAH 1.97/m3. Domestic sewerage i s surcharged UAH 0.41/m3. The utility incurred an operating loss in 2002 with an operating ratio o f 1.06. Tariffs were increased by about 50% in 2003. The utility had a satisfactory return in 2003 and 2004 with an operating ratio o f 0.88 and 0.89, respectively. The utility was profitable in both 2005 and 2006 and this level o f performance is projected to continue during the project period.

* The Odesa Water & Sewerage utility i s a subsidiary company o f the Odesa municipality who will also be the borrower for the Odesa sub project.

2. Technical

Description o f Proposed Investments

64. The proposed investments aim to reach higher quality and reliability o f services and increase energy efficiency through a series o f investments in rehabilitation and replacement o f deteriorated water supply, wastewater and solid waste systems. The rehabilitation Investments under Component B would address investment needs o f the water, wastewater and solid waste sectors. The investments would be implemented in two phases. The f i rs t phase would target the most urgent priority investments that can be carried out in the first year. The second phase would address investments that improve efficiency and sustainability and most importantly, replace high energy consuming pumps and related infrastructure to reduce operating costs. The first phase (year) investment for each city has been identified and the detailed design o f the second phase (mid-term) investments (years 2 to 5) would be prepared during the f i rst year o f implementation. The energy efficiency investments in Component C would address the most urgent needs related to energy efficiency for al l municipal ut i l i t ies in cities throughout the country meeting the selection criteria on a f irst come, f i rs t serve basis.

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Project Cost and Bank Finance for the Rehabilitation of Investments and Energy Efficiency Components

Component

Sub Borrower

Odesa Vodokanal Odesa Solid

A B I I C I I D E Project

Mgt Audit Unallocated Total Rehabilitation Investment Energy Efiiency Institutional Capaeiry

VXE Consultant GOO& works "tm Consultant GOO& works s:m Op$20ns Sum

0.50 1 .oo 5.50 21.00 27.50 0.00 0.39 28.39

0.15 0.84 0.00 5.90 6.74 0.00 0.25 7.14

~ 14.83 Waste Chemihiv Vodokanal Donetsk Regional Water & Wastewater Ivano Frankivsk Water & Wastewater Open Component

Eficienc y) ( E n e r a

3. Fiduciary

0.15 1 .oo 3.80 9.63 14.43

0.00 0.11 2.42 1.39 3.92

0.35 1.40 .86 6.31 7.17

2.95

Procurement

65. An assessment o f the capacity o f the CPMU to implement procurement actions for the project has been carried out. The assessment reviewed the organizational structure for implementing the project and the interaction between the project's staff responsible for procurement and the Ministry's relevant central unit for administration and finance. The key issues and risks concerning procurement for implementation o f the project have been identified and include the ability o f the C P M U to adequately coordinate and assist the RPMUs with procurement. The corrective measures which have been agreed include the hiring o f additional procurement specialists at the RPMUs to assist with the preparation o f packages and overall implementation o f procurement. In addition, an Action Plan to strengthen the conduct o f procurement and the capacity at the CPMU and the RPMUs has been recommended.

Fin an cia1 management

66. An assessment to determine whether the financial management arrangements within the C P M U for the Project are acceptable was undertaken in November 2005- March 2006 and updated in July 2007. The assessment concluded that the Project currently satisfies Bank's minimum financial requirements.

67. The overall project risk i s considered high and the overall residual risk i s acceptable. The current financial management arrangements meet the minimum Bank's requirements but will need to be further strengthened during implementation, This will involve the staffing o f C P M U with a suitable accountant and RPMUs with an appointed

16

financial officer for each utility. This will further improve financial management aspects o f the Bank-financed operations for both C P M U and RPMU staff in the absence o f an automated accounting system at CPMU. The FM risks related to the Project will be continually evaluated during project implementation.

68. fbrther strengthen the financial management arrangements for the Project.

Annex 7 describes the actions to be implemented during implementation to

4. Social

69. A comprehensive social assessment was undertaken to collect quantitative and qualitative data about the needs and priorities related to environmental protection and urban infrastructure as perceived by the residents o f (i) three communities/municipalities in the Odesa Oblast (including Odesa, Illichevsk, and Teplodar), (ii) Kharkiv and (iii) Donetsk. The major focus was on water supply, waste and storm water treatment and discharge, solid waste and sanitation. This work covered the communities and regions identified for investment during Project preparation.

70. The comprehensive social assessment was structured to include: (i) a public opinion survey providing a representative sample o f citizens in each o f the three areas mentioned above; (ii) focus group discussions with (a) a representative mix o f users in each community and (b) a representative mix o f local NGOs; and (iii) in-depth interviews with key informants or representatives o f the municipal authorities and other services. Paired focus groups separated users and NGOs.

71. Assessment validation was obtained through comparison with (i) six independently conducted “Satisfaction Surveys” for the delivery o f municipal services, (ii) a general analysis o f household willingness to pay more for better services, and (iii) a gender analysis o f user satisfaction, al l o f which were prepared under the People’s Voice Project. Cluster analyses o f the findings o f these documents were also available and reviewed. Public forums were also held in conjunction with the preparation o f the Environmental Assessments and Environmental Framework Policy discussed in the next section. These confirmed the conclusions o f the comprehensive assessment.

72. The overwhelming majority of respondents in these studies and assessments were highly concerned about the quality of the environment. This concern cuts across age, gender and status o f employment. They felt water supply was their first concern, but sanitation issues were key to not only safe water for the wider community but also to regional and international environmental issues. The use o f recreational facilities on beaches, river banks and even in some cases lakes was curtailed as a result o f sewage polluting these areas.

73. Health concerns were widespread. Many respondents bought bottled water or treated tap water before consumption. Of the total respondents in the comprehensive social assessment, 20% reported serious health problems for family members that were related to water supply and sanitation, and depending o n the city other percentages

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reported general health issues. Popular perceptions o f these relationships were in some cases medically inaccurate, indicating the need for better education and customer service programs. The highest incidence o f such health problems was registered among respondents from Odesa and Teplodar.

74. The study also addressed the issue o f confidence in local institutions and social capital. For example, residents o f Teplodar and Illichevsk were satisfied with activities o f their local authorities. Although NGOs responded more often as neutral, the attitudes o f ordinary residents tended to fal l between neutral to negative. In Odesa, respondents were more positive recognizing constraints that hampered the intentions o f public officials. In al l three cities, the merits o f user groups and NGOs as advocates had appeal. The role o f the media was seen as more important in Odesa and not very important in the other two communities.

75. The results o f the comprehensive assessments indicated that although there might be variations that were community specific, the commonality o f social concerns and issues in Ukraine overrode any such variations. In general most users in Ukraine were dissatisfied with the water services they received and noted problems with wastewater drainage. Health concerns were widespread.

76. The expert interviews in Odesa Oblast gave particular focus to pollution o f the Black Sea. The major factors cited by such specialists for pollution o f the waters o f the Black Sea were (i) inadequate wastewater treatment and disinfection, (ii) uncontrolled construction works without any urban development master plan, and (iii) the overall poor technical quality o f the city water supply and sanitation network. Improved regional collaboration was also cited as a need. Experts in other oblasts reflected similar concerns.

77. The expert interviews varied f rom the findings o f the focus groups somewhat in terms o f the perspective o f issues, causes, and solutions. To a degree this reflected a different set o f technical skills and, for some experts, a correspondingly reduced knowledge o f practical social impacts. It also reflected the evolutionary state o f social capital and the disconnect between service provider and the users o f services.

78. Solid waste sites in Ukraine vary considerably from managed sites to wild sites randomly selected for convenience by users. Although pickers may glean wild sites, the sanctioned managed sites identified for inclusion under the project were closed to such picking, eliminating the potential o f negative impact to pickers f rom the project.

79. In general an appreciation o f client or user orientation by the providers o f municipal services i s s t i l l evolving. All ut i l i t ies participating in the project will be expected to develop “Customer Service Programs.” In part this will be a local contribution o f the utilities to the project, but specialized consultation, training, and workshops will be supported under the project. The benefit o f collaboration with the People’s Voice Project has been confirmed. This would provide a model for the preparation by participating ut i l i t ies o f such “Customer Service Programs” as part o f their

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overall business and strategic planning. These programs would also include periodic monitoring o f user satisfaction by means o f community scorecards whereby users periodically rank services by standardized criteria. This builds o n the init ial examples o f the focus groups used in the social assessment but offers an institutionalized and sustainable mechanism for user input. Unfolding social issues and concerns would also be addressed on a recurrent basis by such programs. Flexible solutions would be advocated on a community specific basis.

5. Environment

80. The water supply, wastewater treatment and solid waste investments that have been selected for inclusion in the project address major rehabilitation requirements. N o significant impact is expected, and the project has been classed as Category B. To minimize and contain impact, however, Environmental Assessments (EAs) with site specific Environmental Management Plans (EMPs) have been commissioned to examine al l the sites initially selected under component B and will be a prerequisite to disbursement for any other sites. Public consultations and disclosure o f a l l environmental documents has been provided. The analysis in the EAs includes the current baseline situation, describes what rehabilitation activities are proposed, and identifies any significant impact arising f rom the proposed rehabilitation investments. The respective EMPs include: (i) a mitigation plan, and (ii) a monitoring plan that identifies the monitoring roles and responsibilities for adherence to the mitigation plan. A workshop to review the EMPs and ensure effective monitoring o f the mitigation plan will be held in conjunction with the launch workshop.

81. An Environmental Framework Policy (EFP) has also been prepared for the Project. Any sub-projects subsequently identified for funding, including the use o f any unallocated funds or under the efficiency improvement component (Component C), would require screening and an environmental assessment similar to the process used for the works initially identified (A shortened EFP has been prepared for investments under Component C). This requirement i s specified in the EFP. The screening would be reviewed by the Project Team in collaboration with the Ministry o f Environment and the Ministry o f Housing and Communal Services.

82. The EFP discusses the approach to be taken in the case o f chance finds. It also discusses parallels and any variations between the policies o f the Wor ld Bank and the Government o f Ukraine, offering suggested resolutions for any conflicts identified. The EFP i s an especially important document in ensuring client compliance to environmental protection. The EFP will be attached as an annex to the Operational Manual for the Project.

83. The investments would cover only rehabilitation, not extension o f services. All work would be executed within existing facilities on publicly held land. All the contracts for the performance o f works will specify requirements for keeping work sites pollution- free, reducing dust and noise during construction, maintaining access to utility services and forms o f employment, and returning sites to their original conditions.

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84. The Project would affect neither natural habitats nor forests. N o safeguards policies related to indigenous people or disputed areas have been triggered. No dams are in the Project scope, and pest management i s not an issue. The long-term impacts o f the investments are clearly positive both in terms o f local and global benefits. Although there would be no significant negative environmental effects, the EMPs do include mitigation and monitoring plans.

85. Consultation with local residents has been undertaken in conjunction with both an initial review o f the Terms o f Reference (TOR) for the EA and at the time when findings have been reviewed and disclosed to the public. Participation at these sessions has been actively pursued by both individual residents and NGOs, with a high level o f support for the positive environmental impact foreseen. Social capital for environmental advocacy has reached an init ial stable level. This enthusiasm will be folded into the follow-up monitoring mechanisms proposed for the Project. Environmental issues would be included in focus group session on user satisfaction. The responsibility for conducting these focus groups would eventually be supported by the ut i l i t ies as part o f their evolving “Consumer Relations Program.”

6. Safeguard policies

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPBP/GP 4.0 1) [XI [ I Natural Habitats (OPBP 4.04) [ I [XI Pest Management (OP 4.09) [ I [XI Cultural Property (OPN 1 1.03, being revised as OP 4.1 1) [ I [XI Involuntary Resettlement (OPBP 4.12) [ I [XI Indigenous Peoples (OD 4.20, being revised as OP 4.10) [I [XI Forests (OPBP 4.36) [I [XI Safety o f Dams (OPBP 4.37) [ I [XI Projects in Disputed Areas (OPBP/GP 7.60); [ I [XI Projects on International Waterways (OPBP/GP 7.50) [XI [ I

7. Policy Exceptions and Readiness

International Waterways Exception to Notification O P B P 7.50

86. I t has been assessed that the Project falls within the exceptions to the notification requirement under paragraph 7 (a) o f the Policy. According to paragraph 7 o f OP 7.50, there are exceptions to the Bank’s requirement that the other riparian states be notified o f the Project. According to paragraph 7(a) o f OP 7.50, the exception applies for any ongoing schemes, projects involving additions or alterations that require rehabilitation, construction or other changes that in the judgment o f the Bank: (i) would not adversely change the quality or quantity o f water flows to the other riparian; and (ii) would not be adversely affected by the possible water use o f other riparians. This exception applies

* By supporting the proposedproject, the Bank does not intend to prejudice the final determination of the parties‘ claims on the disputed areas.

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only to minor additions or alterations to the ongoing scheme; it does not cover works and activities that would exceed the original scheme, change i t s nature or so alter or expand i t s scope and extent as to make it appear as a new or different scheme.

87. In case o f doubt regarding the extent to which a project meets the criteria o f this exception, the Executive Directors representing the riparians concerned are informed and given two months to reply. Even if projects meet the criteria o f this exception, the Bank tries to secure compliance with the requirements o f any agreement or arrangement between the riparians.

88. The Project team has assessed the Project components in the context o f and in relation to OP 7.50. The OP 7.50 applies to the Project most specifically in terms o f the wastewater systems included in the Project that discharge directly into the Black Sea or Dnister River, which itself discharges into the Black Sea constituting international waterways as defined by paragraph l(a) o f OP 7.50. Since the projects would have a significant positive impact o n reducing sewage discharges, the clearance for exception to notification has been obtained by the Legal Department, and an exemption has been granted by the E C A Regional Vice President by memo dated October 12,2005.

89. implementation.

This project complies with al l applicable Bank policies and i s ready for project

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Annex 1: Country and Sector o r Program Background UKRAINE: URBAN INFRASTRUCTURE PROJECT

Ukraine i s situated in the southwest o f the plain o f Eastern Europe, bordering the Azov Sea and the Black Sea to the south. I t s total area i s about 604,000km2. It i s bounded to the north by Russia and Belarus, to the east by Russia and to the west by Poland, Slovakia, Hungary, Romania and Moldova. O f a total population o f 48,800,000 (2003 estimate), 58% live in urban areas.

There are 1,600 urban municipalities in 27 regions, including 24 oblasts, one autonomous republic and the two cities o f Kiev and Sevastopol, both being administrative and territorial units with the status o f a region. The country i s densely populated with most o f the population living in towns o f 50,000 to 100,000 people. Five cities have populations above 1 million and another five have more than 500,000.

Sector Organization

The national government i s responsible for developing state policy in the housing and communal services sector, which includes water supply and wastewater. I t has the authority o f the regulatory body, responsible for drafting national legislation related to the regulation o f natural monopolies - water, wastewater and heat supply utilities. Previously, these powers were delegated to the national committee for housing and communal services Derzhzhitlocommungosp (DZhKG and also, referred to as State Committee) which developed and implemented government policy in the municipal sector. In October 2005, DZhKG or State Committee has been merged within the Ministry o f Construction, Architecture and Housing and Communal Services. As o f March 2007, the Ministry o f Construction, Architecture and Housing and Communal Services went through a further reorganization and divided i tse l f into the Ministry of Housing and Communal Services and Ministry o f Regional Development and Building.

The Ministry o f Housing and Communal Services develops the principal regulatory documents for the sector including tariff setting, licensing and operations supervision. It also collects water sector performance data, jointly (with municipalities) negotiates international loans and monitors state and international investment programs for the sector. The Ministry o f Housing and Communal Services has no representative offices in the regions except in the capital city, Kiev. Housing and communal services departments at each local state administration are, however, subordinate to the Ministry.

Municipal water services are provided by water and sanitation utilities. There are more than 6,000 water supply and sanitation utilities, o f which 1,857 provide services to the urban population and industries. The Ministry o f Housing and Communal Services monitors about 250 large municipal water ut i l i t ies on a regular basis.

The new law on Housing and Communal Services (No.1875, 24 June 2004), mandates Oblast administrations to cooperate with the local Rada on housing and communal services issues and to control tar i f fs for such services. A local elected body (rada - in

municipalities, villages and residential settlements) i s in charge o f the actual provision o f housing and municipal services, including water supply and wastewater collection and treatment. These bodies are also the owners o f municipal infrastructure in most cases (83% o f the utilities). The rayon and oblast councils are local elected bodies that represent joint interests o f the territorial communities o f the villages, residential settlements and cities.

Private Collective State Owned by Communities Owned by Foreign Companies Total number o f entities providing water services

Ukraine has private utilities, communal utilities (owned by the municipality), state uti l i t ies (for large water and sanitation companies that provide services for several regions andor municipalities) and utilities created on mixed types o f ownership. Private companies lease several utilities. Some concessions with small private entrepreneurs for water, heat and housing are operating in rural areas in Crimea. Several ut i l i t ies have the status o f joint stock companies (in Kiev and two cities in Chernihivska oblast, and nine limited liability companies). Foreign operators manage several small industrial water uti l i t ies. In 2003, private companies managed 36 o f the relatively large uti l i t ies. In smaller settlements, typically with a population below 20,000, an integrated communal services company provides al l communal services (water, wastewater, solid waste, electricity, district heating and others). In several large cities (Kharkiv, Nikolayev and several others), water and sanitation services are provided by separate companies and in a number o f cases water services for one town can be provided by several entities.

509 503 3,353 2,893 63 5 561

2,008 2,43 8 4 6

6509 6401

I Ownership I 2002 I 2003 I

Source: State Committee of Statistics.

Sewage Treatment Facilities

During Soviet times, Ukraine was - despite the high operating costs - a recognized leader in the research, design and construction o f advanced wastewater infrastructure. Wastewater treatment plants are in operation in Odesa, Kiev, Kharkiv and many large cities. At the same time, communal services are among the polluters o f surface waters, discharging more than 3.5 mi l l ion m3/year, o f which 0.3 mi l l ion m3/year are discharged untreated (without pretreatment), 1 .O mil l ion m3/year i s insufficiently treated (mechanical treatment) and the rest undergoes mechanical and biological treatment. Methane collection from the sludge digestion process was in operation in Kharkiv and Sevastopol in the late 1980s, but i s not in operation now.

Wastewater treatment does not everywhere meet quality standards, and untreated wastewater i s being discharged into the Black Sea basin, which i s already suffering from excessive eutrophication. The situation i s worsening as water and wastewater tariffs do

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not cover operating costs; and in many places, wastewater treatment suffers from a financing gap in cash-strapped water utilities, which are increasingly releasing wastewater without treatment.

I tem 1999 2000 2001 2002

Tariffs

2003 2004

The national government sets general requirements on costs that can be recovered through water and wastewater tariffs. These requirements are spelled out in the procedures and instructions o f the central executive bodies, such as the Ministry o f Housing and Communal Services, Ministry o f Economy and European Integration, Anti- Monopoly Committee and Ministry o f Finance. Local governments must follow these regulations. The executive body o f the local autonomous government regulates tariffs according to the law On Housing and Communal Services (2004). Several ut i l i t ies that serve more than one community are negotiating tariff-setting rules, as regional administrations were setting tariffs for them before 2004.

Water Supply Service

Wastewater Services

Water and wastewater tar i f fs are charged separately. Water supply normally includes water pumping, treatment and distribution to customers. Wastewater service includes wastewater collection, treatment and disposal. Each utility has its own procedure for charging customers for services. One utility may show separate line items for water and wastewater services on the customer’s bill, while some may show it as one amount. Water or wastewater tar i f fs are charged only for those users who receive the service.

85.6% 97.8% 92.1% 87.5% 86.3% 92.3%

94.4% 105.2% 95.8% 92.2% 94.2% 94.9%

Water and wastewater tariffs are set according to the cost-plus scheme, although a price- cap mechanism i s allowed by tariff regulations. Cross-subsidy is allowed for the tariffs of different types o f consumers.

Tariff levels

Water (domestic) tar i f fs vary from US$0.12 to US$0.25 per m3. Water (industrial) tar i f fs vary from US$0.37 to US$1.84 per m3.

Wastewater (domestic) tariffs vary from US$0.06 to US$0.37 per m3. Wastewater (industrial) tariffs vary from US$0.37 to US$2.46 per m3 (depending on the level o f pollution that requires pretreatment).

Tariff operational cost recovery

Source: State Committee of Housing and Communal Services of Ukraine.

Tariffs are subject to 20% VAT.

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Indicators

The following data apply to water supply and wastewater collection and treatment:

Water Drinking water production:

Drinking water billed:

Number o f municipal WwTPs:

Drinking water coverage:

Per capita consumption:

Distribution network:

Metering level:

Unaccounted-for water:

Water losses in urban areas:

Wastewater

Sewer network:

Sewerage connection:

Wastewater reuse:

Water Resources

4,420 million m3/yr, o f which 3,454 mill ion m3/yr i s consumed (3,000 mill ion m3/yr municipal water).

2,800 mill ion m3/yr (2,000 mill ion m3/yr - domestic supply; Kiev - 500 mill ion m3/yr).

1,700 (few in operation).

74.6% (country average); 100% in municipalities (urban piped connections - 98%; rural piped connections - 17.4%).

195 lpcd (country average); 430 lpcd (Kiev average).

>50,OOOkm (3,708km in Kiev); the average age o f the network i s 30 to 40 years.

30% (20% in Kiev).

30%. 70 m3 per km o f the network per day.

>30,OOOkm (2,160km in Kiev).

60% (country average); 90% - centralized connection in urban areas, 98% in Kiev.

Only at local level.

The Ministry of Environmental Protection i s responsible for managing water resource protection, developing new regulations, issuing permits for special water use, coordinating and conducting monitoring activities and enforcing the various water regulations. I t s regional offices conduct these services at the local level. It i s responsible for protecting and monitoring groundwater sources and issuing permits for water abstraction from such sources. The Ministry i s responsible for maintaining state water cadastre, as well as for issuing permits for conducting hydrometeorological activities. The Ministry o f Health Protection i s responsible for monitoring drinking water and recreational sites. I t s State Sanitary inspectorate monitors water quality and issues permits for water system operations.

The Committee for Hydrometeorology i s responsible for the network monitoring water quality (subordinate to the Ministry o f Environmental Protection).

0

25

Overall renewable resources amount to 140 mi l l ion m3 or 2,800 mi l l ion m3 per capita per year, out o f which about 38% originates within the territory and the rest comes from transboundary rivers (Danube - 80%). Resources are unevenly distributed; some areas, especially in the eastern part o f the country (Donetsk and Luhansk oblasts) are experiencing significant water shortages.

The main rivers are the Dnipro (Dnepr), Dnister, Siversky Donets and Pivdennii Bugh, which are part o f the Black Sea basin. Dnipro i s the major river, which is fed by several tributaries and irrigates almost hal f o f the country with an average annual f low o f 53.5km3. Six Dnipro large reservoirs provide water for the industrial centers o f Donbass, irrigation in Crimea and the Black Sea coast and for hydropower. About 60% o f the country’s population depends o n this river for drinking water supply. Another major river i s the Dnister, which flows from the Carpathian Mountains for more than 300km through neighboring Moldova, and then enters Ukraine near the city o f Odesa, which i s supplied with water f rom this source.

In 1999, al l river basins were classified as polluted or very polluted, with the exception o f several very small rivers in the Crimea. Smaller tributaries are more polluted than main rivers. The largest polluters are agriculture, mining and municipal sources. Industries release substantial volumes o f wastewater, although their volume has declined over the past 15 years.

Lack o f sewerage and wastewater treatment facilities also contributes to the poor quality o f water in Ukraine. Only 60% o f the total population is connected to municipal wastewater plants, and the majority o f the rural population discharges their waste without any treatment. Although there are 1,700 wastewater treatment plants found particularly in heavily populated cities, few are working properly as a result o f lack o f maintenance and rehabilitation.

Groundwater resources are available throughout the country. The southern and eastern parts o f the country have less groundwater reserves than other areas. Total resources available amount to 20 to 22 mi l l ion m3/year, o f which about 17 mi l l ion m3 f low into surface water bodies. About 25% o f drinking water comes from groundwater sources. Groundwater i s commonly polluted with nitrates as a result o f agricultural activities and low enforcement o f sanitary zones for groundwater intakes.

Institutional and Legal Arrangements

The basic pieces o f legislation for water resources are the L a w on Environmental Protection (1991) and the Water Code (1996). The latter provides the basic framework for water legislation. It specifies that groundwater and surface water belong to the people and can be allocated for their use, and i t s conceptual basis i s an ecological approach to water quality management.

26

The Water Code regulates the management, conservation and use o f the resource. According to the Code, abstraction and discharge f i o m and to surface water and groundwater require a permit (short-term up to 3 years and long-term from 3 to 25 years). The permit determines the volume o f raw water that can be abstracted, as well as the amount o f pollutants than can be discharged into surface waters. It also defines the rate o f the water abstraction fee (differentiated according to the source - groundwater, surface or basin) and pollution charge (calculated on the basis o f pollution limits) that the water user must pay. When the water user operates above the limits set in the license, it pays five times the fee. Local authorities issue the permit for waters o f local significance (originating within the region’s borders), while the Ministry o f Environment Protection and Nuclear Safety issues permits for waters o f national or state significance, and if the utility operates in more than one oblast.

Current water resource fee rates are established by the Basic Rates for Economic Use o f Freshwater Resources, published by the Ministry o f Environment Protection. In 1997, the surface water tax ranged between US$0.006 to US$0.012/m3 for surface water and between US$0.020 and US$0.059/m3 for groundwater. The highest rates are established for industrial water users. These fees are passed on to water tar i f fs for individual consumers, but domestic consumption i s often exempt from such fees.

27

4 Z

d Z

0 M

Annex 3: Results Framework and Monitoring UKRAINE: URBAN INFRASTRUCTURE PROJECT

Results Framework

participating utilities in moving towards higher quality and reliability o f services and reducing the costs o f service through a series o f institutional improvements and selective investments in rehabilitation and replacement o f deteriorated water supply, wastewater and solid waste systems.

Component A: Institutional Capacity

Component B: Rehabilitation Investments

Component C: Energy Efficiency

Component D: Project Management - Ministry o f Housing and Communal Services

0 Improved quality o f municipal services with framework o f financial viability and sustainability

0 Enhanced financial viability, management, and improved institutional capacity

Component A : Drafted Business Plans for uti l i t ies Enhanced institutional capacity within Ministry o f Housing and Communal Services

0 Improved municipal services

Component B: These results wi l l be Sub-project specific and wi l l include:

0 Servicecost 0 Energy efficiency 0 Rehabilitation o f solid waste

0 Collection as percentage o f landfills

billings

Component C: These results wi l l be Sub-project specific and wi l l include:

0 Energy use per m3 o f water supplied Reduction in operating costs

Component D: 0 Ministry o f Housing and

Communal Services capacity strengthened Project implemented in a

Use of Outcome Information 0 Development o f Annual

0 Annual project reviews during Business Plans

supervision

f Resu

Component A : 0 Promoting viability o f uti l i t ies 0 Improved and strengthened

Ministry o f Housing and Communal Services

0 Improved coordination between central and local government institutions

Component B: Monitoring and Comparison with baseline data

Component C: Monitoring and Comparison with baseline data

Component D: 0 A strengthened Ministry o f

Housing and Communal Services wi l l assist to serve as the policy institution responsible for the water

31

satisfactory manner in compliance with al l procurement and financial management requirements.

0 Prepared design packages 0 Timely tendering o f packages

supply and sanitation sector; as wel l as to serve as the central body to coordinate, facilitate and direct sector policy in cooperation with local utilities and municipal authorities.

0 Services for design 0 On-site supervision

A. Institutional capacity building

B. Rehabilitation Investments

C. Energy Efficiency

D. Project Management

Development o f viable time-bound business plans including: 0 Financial statements (income and balance

sheets, and sources and applications o f funds)

0 Establishment o f training program: quality o f training and numbers trained

General: meeting time bound investment targets; ensuring sustainability o f operations Water Supply: quality o f service; efficiency and productivity o f service operations Wastewater: wastewater treatment effectiveness and efficiency; compliance with standards Solid Wastes: quality o f waste collection and disposal services; efficiency and productivity o f service

Reduced energy cost per unit o f output

Overall performance o f CPMU, meeting annual investment targets; producing timely audits; performance o f training activity and stakeholder education campaign.

Adjustment o f business- improvement strategies to improve institutional effectiveness

providers

training program

Replication to other service

0 Adjustment and strengthening

0 Fine-tuning technologies and operating procedures

0 Adjusting investment and operational targets to match enhanced implementation capacities

0 Evaluation and modification o f energy reduction strategies

0 Replication o f successful modalities

0 Raising awareness o f management and staff to cost- savings potential o f energy- saving operations and behavior

Creating incentives for sound management

32

3

E

m m

s n 9

a o 3

d M

u . . .

IA m

.. - 0

Annex 4: Detai led Project Description UKRAINE: URBAN INFRASTRUCTURE PROJECT

A. Institutional Capacity

This component would help uti l i t ies to adopt commercially oriented business-type practices and become financially viable through the preparation o f annual Business Plans. During Project preparation, the utilities drafted their Business Plan for 2006. The Business Plan would show yearly targets such as increasing the number o f people to be served, ; improving water quality; improving the collection-to-billing ratio; reducing energy per m3 and o f the staff per 100 connections; increasing tar i f fs and cost-recovery levels to break-even; improved collection o f solid waste; safe disposal; and clean-up o f wild dump sites. In so doing they will provide a baseline against which project performance can be reliably measured. During Project implementation, the Business Plan would produce updated financial statements (income statement, balance sheet and cash f low statement) that would help utilities to manage their financial resources better.

At the central level, the Ministry o f Housing and Communal Services and the utilities would be further strengthened to ensure accountability and efficiency for the sector. They would be provided technical capacity building on implementation and supervision. The component would also ensure that proper procurement and financial management training, applicable to Ukraine, i s provided and that feasibility study requirements are met.

B. Rehabilitation Investments

This component would target the following areas: Chernihiv, Donetsk, Ivano-Frankivsk and Odesa. The areas were selected based on a competitive selection criteria which fulfilled the following criteria: gradually cover operating and maintenance costs through the l i f e of the Project; ability to demonstrate that the proposed investments would constitute the least-cost approach and reduce operating costs; the service provider possessed the necessary institutional capacity to operate and maintain the proposed investment and ability to work in a coordinated manner between local and central government officials.

This component would address rehabilitation o f investments in the water, wastewater and solid waste sectors. The investments would be implemented in two phases. The f i rs t phase would target priority investments for the first year investments. The second phase would address investments that involve efficiency and sustainability and most importantly, replace high energy- consuming pumps and related infrastructure with efficient and energy saving equipment to reduce operating costs (see Project Costs Table attached).

The detailed description o f Component B is as follows:

(1) Odesa Vodokanal will rehabilitate: (i) No. 7 distribution steel pipes; (ii) Rehabilitation o f Main Collectors and Pumping Stations - 2.1 km o f interceptor was constructed. The project will finance the remaining design and construction work; (iii) sludge dewatering facility - the project will finance the pi lot sludge treatment facility.

37

Odesa Solid Waste Company will rehabilitate: (i) existing site within the city (31 ha.); (ii) closure o f site o n present landfill (60 ha.); (iii) the landfill (36 ha.) site by providing drilling and drainage works.

Chernihiv Vodokanal will rehabilitate: (i) extraction wel l pumps and pump stations by replacing current overcapacity, inefficient pumps with more efficient pumps; (ii) 2.3 km of water mains; (iii) WWTP by upgrading pumps, instrumentation and controls: (iv) 13.1 km o f Wastewater Collection Pipes.

Donetsk Oblast Water and Wastewater Company will: (i) install water meters in order to reduce excessive consumption; (ii) replace old, worn out pumps and motors in order to reduce energy cost; and (iii) install pressure reduction valves in the water networks in order to reduce water losses.

Ivan0 Frankivsk Vodokanal will implement: (i) Water distribution system f low and pressure improvements; (ii) Alternative disinfection measures other than Chlorination; (iii) a mini-hydro power plant construction to generate electricity for use in the Water Treatment Plant; (iv) Rehabilitation o f Sewer Collectors

Energy Efficiency

The component would address the most urgent needs related to energy efficiency for al l municipal utilities and be open to al l the regions in the country that fulfill the following requirements: (i) complete the Business Plan in a satisfactory manner according to the Ministry o f Housing and Communal Services, (ii) provide economic and technical analysis confirming the potential energy savings o f a minimum o f 15% through the proposed investments, and (iii) be allowed to borrow from the World Bank as confirmed by the Ministry o f Finance.

D. Project Management

This component would finance implementation o f the project; incremental operating costs related to al l eligible expenses, audits; guidance and training for utilities and local governments on project implementation and a stakeholder education campaign o n linkages between improved service and willingness to pay.

38

39

40

Annex 5: Project Costs UKRAINE: URBAN INFRASTRUCTURE PROJECT

Project Cost by Component Local Foreign Total

US$ mi l l ion US$ mi l l ion US$ mil l ion

A. Institutional Capacity 0.35 0.80 1.15 B. Rehabilitation Investment 26.36 40.63 66.99 C. Energy Efficiency 24.32 45.54 69.86 D. Project Management 0.8 1.2 2.00

Total Baseline Cost 51.83 88.17 140.00 Physical Contingencies (included) Price Contingencies (included)

Total Project Costs' 51.83 88.17 140.00 Interest during construction (included)

Front-end Fee* Total Financing Required a S 3 88.17 140.00

* Front end fee is waived until further notice. The Government will receive a Variable Spread Loan with 20 years o f total maturity including a grace period o f 5 years. The Loan will be amortized in Annuity repayments.

41

Annex 6: Implementation Arrangements UKRAINE: URBAN INFRASTRUCTURE PROJECT

The central government i s responsible for the development o f state policy in the housing and communal services sector, which includes water supply and wastewater. I t has the authority o f the regulatory body, responsible for drafting national legislation related to the regulation o f natural monopolies - water, wastewater and heat supply utilities. These powers are delegated to the Ministry o f Housing and Communal Services, which develops and implements government policy for the municipal sector. The Ministry o f Housing and Communal Services develops the principal regulatory documents for the sector including tariff setting, licensing and operations supervision. It also collects water sector performance data, joint ly (with municipalities) negotiates international loans and monitors state and international investment programs for the sector. The Ministry o f Housing and Communal Services has no representative offices in the regions except in the capital city, Kiev. However, housing and communal services departments at each local state administration are subordinate to the Ministry Housing and Communal Services.

In addition to the Ministry o f Housing and Communal Services, the key stakeholders at the central level are the Ministry o f Finance and Ministry o f Economy. The Project would be implemented during 2008-2012 under the overall responsibility o f the Ministry o f Housing and Communal Services with close cooperation with the Ministry o f Finance and Ministry of Economy.

A CPMU has been established to manage procurement and financial management aspects. CPMU would be staffed by qualified personnel. It would consist o f a C P M U Head, procurement manager, two procurement officers, a financial manager and an assistant. If necessary, it would also include a specialist consultant on procurement as wel l as water supply and sanitation. The procurement manager would have adequate experience in Bank-financed procurement or would be trained sufficiently prior to the Project launch workshop.

RPMUs established in each o f the uti l i t ies. These would be referred to as RPMU-Chernihiv, RPMU-Donetsk, RPMU-Ivano-Frankivsk and RPMU-Odesa. The RPMUs would consist of a procurement officer and financial officer. Even though C P M U would have overall responsibility for implementation, and policy dialogue, RPMUs would handle al l day-to-day project matters. RPMUs would conduct al l procurement in coordination with the CPMU. The contracts could be signed by either the utility Director or the regional RPMUs member because the Borrower should ultimately be the only one signing the contracts.

42

Annex 7: Financial Management and Disbursement Arrangements

UKRAINE: URBAN INFRASTRUCTURE PROJECT

1. Introduction

Country Financial Management Issues Previous Bank diagnostic and other Economic and Sector Work (ESW) concluded that significant improvement i s required in the management o f public expenditures, especially strengthening o f internal and external audits in the public sector. The C F A A also identified a lack o f adequate accountability arrangements for state owned enterprises. The 2002 Report on Observance o f Standards and Codes (ROSC) on Accounting and Auditing identified weak regulatory arrangements for the audit profession, differences between National Accounting Standards and IFRS, and weak capacity in the country to implement IFRS financial statements and ISA audits.

PEFA assessment report o f 2006 indicates that the annual process o f identifying priorities to be protected during budget execution is working and that payments in arrears are low, and have been declining, indicating no major issues. The Treasury system provides generally reliable, complete information on most resources received by service delivery uni ts. Reporting quality appears generally high, but the Accounting Chamber did note some problems with appropriate recording o f spending. The Accounting Chamber i s firmly established and well funded, although the nature o f the audit i s more compliance oriented, with limited performance audits.

Project Implementation

The implementing agency for the Project at the central level i s the C P M U within the Ministry o f Housing and Communal Services. The Ministry will hold the overall responsibility for implementing the Project in close cooperation with Ministry o f Finance and Ministry o f Economy. C P M U would report to the Minister o f Housing and Communal Services.

CPMU i s being established to handle reporting and coordinate procurement and financial management aspects. After project effectiveness, the C P M U will include the head, procurement manager, procurement officer, a financial manager, accountant, and an assistant. If necessary, it would also include a technical specialist.

RPMUs are established in each o f the util i t ies: Chernihiwodokanal Utility, Ivano- Frankivskvodoecotechprom Utility, Donetskoblvodokanal State Oblast Utility, and Utility Agency for Development Programs o f Odesa. The regional RPMUs include a procurement officer and a financial officer.

The RPMUs will handle day-to-day Project matters and conduct procurement and financial management actions in coordination with CPMU, which will collect, check and submit the procurement documents to the Bank for clearance. The CPMU would ensure compliance to the Bank’s regulations o f al l procurement documents and submit to the Bank for clearance.

43

2. Summary of Financial Management Assessment

Executive Summary An assessment to determine whether the financial management arrangements within the CPMU for the Project are acceptable was undertaken in November 2005-March 2006 and updated in July 2007. The assessment concluded that the Project currently satisfies Bank’s minimum financial requirements. The details o f assessment are provided in relevant sections below. An action plan to further strengthen the financial management arrangements for the project was agreed, and i s summarized below.

Action Plan

The following actions will be implemented during the project implementation, and will further enhance and strengthen the financial management arrangements for the Project. -

No. 1. -

2.

- 3.

4.

5.

6.

- 7.

- 8.

Action CPMU i s to appoint a qualified accountant, based on TORS agreed with the Bank.

Financial specialist o f the CPMU will be provided with additional training on FM and disbursement procedures through participation in Bank courses, project launch workshop and o f the Bank and on-the-job training continuously during project implementation by December 3 1,2007. The financial specialist o f CPMU will be subject to a trial period o f six months after the project effectiveness. Contract with the CPMU financial specialist i s to be signed by August 3 1,2007.

Each utility shall appoint a financial officer as part o f regional P M U group. CPMU will need to install and modify the 1-C accounting system in order to perform accounting for all project expenditures in the necessary detail during project implementation, by April 30,2008. The project budget for FY 2008 needs to be included in the State Budget.

The draft Financial Management Manual needs to be revised by the financial manager o f CPMU to reflect any changes between the Board date and beginning o f project implementation. This i s to be completed during project implementation within three months o f project effectiveness.

By Whom Ministry o f Housing and Communal Services Bank

Bank

Ministry o f Housing and Communal Services Ut i l i t ies

CPMU

Ministry o f Housing & Communal Services CPMU

Due date December 3 1 , 2007

December 3 1,2007

Within six months after project e ffeciiviness August 3 1 , 2007

December 3 1 , 2007

By April 30,2008

By August 15,2007

Within three months from project effectiveness

44

Financial Risk Analysis

(1) The existing procurement capacity o f CPMU will be strengthened by hiring procurement consultant and by implementing an agreed procurement action plan. CPMU i s in process o f implementing an integrated accounting and reporting software; CPMU has established a system o f internal controls in i t s draft financial management manual (2) Any changes in staffing will need to be agreed with the Bank. (1) Dedicated CPMU and R P M U s are established (2) Additional training on project financial management and disbursement to financial staff; frequent project FM supervisions; supervisions will include visits to RPMUs; funds will not be disbursed to utilities accounts, but will be

The overall project risk i s considered high and the overall residual risk i s acceptable. The current financial management arrangements meet the minimum Bank’s requirements but will need to be further strengthened during Project implementation. This will involve the staffing o f CPMU with an accountant and the regional PMU with a financial officer for each utility. This wi l l further improve aspects o f financial management o f the Bank-financed operations for both CPMU and regional PMU staff in the absence o f an automated accounting system at CPMU.

S

S

Appropriate remedial measures to further strengthen the financial management arrangements for the Project will be undertaken during project implementation as indicated in the Action Plan. The financial management risks related to the Project will be continually evaluated during the project implementation.

The summary o f risks i s as following:

1 INHERENTRISKS

Country level. Certain weaknesses o f PFM institutions, including procurement, internal audit and internal controls (related to both capacity o f Ministry o f Housing and Communal Services and the utilities) Entity level. (1) First time experience with IBRD o f CPMU within Ministry, as well as in RPMUs, (2) changes in staffing o f CPMU and R P M U S

Project level. (1) Complexity o f the project; (2) f i rst time experience o f CPMU and R P M U s financial staff with IBRD .

FM Risk

H

H

- H

-

Risk Mitigating Measures Residual

Risk

Mitigation o f risk by way o f creating the CPMU and R P M U s in the utilities, and their appropriate staffing. The CPMU has been established for the need for project and financial management and coordination due to the multi municipal design o f the project.

S

Conditions of Board or Effective-

ness

No

No

No

45

Overall Inherent Risk

CONTROL R I S K S

M

S

M

Internal Controls and accounting- CPMU wil l need to have established and operating internal procedures for controls over project operations

N o

N o

N o

Funds flow - (1) risk of delays in disbursements as the financial staffyet needs to become familiar with disbursement procedures of CPMU; (2) first time experience of the CPMU and RRPMUs with IBRD lending

Accounting system- the automated accounting system 1 -C available at CPMU is not yet available to meet the accounting and reporting needs of CPMU Financial Reporting - CPMU staff will be providing in training of generating FMRs. The accounting system is not fully automated.

Auditing - Utilities are not undergoing financial audit based on the current requirements of Ukrainian legislation

Staffing - Staff of CPMU will be working with financial management aspects of the Bank for the first time; CPMU

FM Risk

S

- S

- H

S

- S

- S

-

Risk Mitigating Measures

disbursed from SAs to contractors/suppliers directlv.

A draft Financial Management manual, which summarizes the accounting and reporting procedures, f low o f funds, and procedures for internal control. The Financial Management will be updated as necessary during project implementation

(1) Financial staff o f CPMU will receive additional training and advice (2) all payments will be reviewed by CPMU and authorized by Ministry o f Housing and Communal Services and MOF; al l payments w i l l be done centrally from special accounts/transit accounts to contractors, or by means o f direct payments. Before IT accounting system i s installed, modified and becomes functional, CPMU has established a simple accounting module in Excel, which will be protected by passwords and regular backups.

The accounting and reporting system i s yet to be installed and modified to meet the project needs, including reporting. The indicative format o f FMRs was agreed at Negotiations.

External audit o f project financial statements and o f project financial statements will be performed on an annual basis, and will include audit o f transactions at R P M U s . Additionally, audit o f financial statements o f utilities will be performed annually based on TORS agreed with the Bank. Additional training on project financial management and disbursement will be provided to CPMU (and R P M U s ) financial staff during project implementation; CPMU

Conditions Residual of Board or

Risk Effective-

I

46

accountant is yet to be hired, contract withjnancial manager is to be concluded

Residual Risk

Budgeting - (1) the project finds may not be timely and f i l ly included in the State budget, which have negative impact on project disbursements; (2) the budget may be changed during project implementation Procurement - need for additional procurement capacity at both RPMUs and CPMUto become familiar with Procurement rules and procedures OVERALL CONTROL RISK

Conditions of Board or Effective-

OVERALL FMRISK

Risk Mitigation Measures

FM Risk

S

- H

H

H - -

Risk Mitigating Measures

financial specialist wil l be subject to a trial period o f six months after the project effectiveness. The accountant shall be hired based on TORS agreed with the Bank and wil l have sufficient qualifications (1) the project budget wil l be agreed with the Bank and authorized by MOF. (2) Any subsequent changes to the project budget shall follow the same authorizations procedures.

Additional procurement specialists at the R P M U s will be hired as needed. The Action Plan to strengthen procurement capacity at PCU and the R P M U s has been agreed upon.

I

The following measures are incorporated in the internal control framework:

Control over procurement - Each o f the RPMUs will have a procurement specialist. The contracts will be executed at the RPMUs level but the Request for Proposal preparation and bid evaluation will be supervised by the procurement officer at the level o f CPMU. Each o f the RPMUs will have a financial officer who would verify invoices before submitting them to CPMU for payment.

Technical supervision - Quality o f construction will be checked (1) by technical staff o f the ut i l i t ies before payments are made by the CPMU. (2) by the Bank’s technical engineer and technical consultant during frequent supervision missions o f the Bank (3) by the Ministry o f Housing and Communal Services designated technical specialist who will be appointed for technical oversight o f the project contracts

Direct payments to contractors - RPMUs will not make payment to contractors - instead they will submit full documentation to the CPMU for independent verification by CPMU and subsequent authorization by Ministry o f Housing and Communal Services and MOF. Payments to the contractors will then be made from Special accounts/transit accounts.

-

-

47

- Control over special accounts and transit accounts - al l special accounts and transit accounts will be opened in an acceptable Ukrainian commercial bank. All payments from these accounts will be subject to multiple verification and authorization controls.

Monitoring of RPMUs - RPMUs will be monitored by CPMU, which will provide ongoing support and supervision over the activities o f RPMUs. This will include check o f payment documentation for compliance with the loan agreement and financial management rules.

Regular supervision of the Bank - the Bank FM supervision will be carried out at least three times per year during initial stages o f project implementation, and will include review o f al l aspects o f financial management at CPMU and selectively at one or several WMUs. Each supervision will include a walk through test, which will cover review o f al l financial documents for selected transactions, including procurement and payment cycles.

Building of capacity at CPMU and RPMUs - trainings will be provided to CPMU and RPMUs financial management staff on Bank disbursement and financial management procedures. This will be done through participation o f the CPMU and RPMUs staff in the Bank courses, during project launch workshop, and through on-the-job trainings during project implementation. The financial manager of CPMU will be subject to a trial period o f six months after effectiveness.

Regular financial audits - the project financial statements will include transactions at RPMUs, and will be audited by acceptable auditors based on TORS agreed with the Bank. The ut i l i t ies financial statements will be audited annually by local auditors.

-

-

-

-

Supervision Plan

The project will be part o f the risk based supervision model, which is based on the substantial project risk assessment. The minimum number o f FM supervisions i s to be at least three times per annum during the first year o f project implementation, which with evidence o f good performance could be decreased to two times per year during the following years of implementation.

During project implementation, the Bank will supervise the project’s financial management arrangements as following: (i) review the project’s quarterly financial management reports and the project’s and entities’ annual audited financial statements and auditor’s management letters; (ii) during the Bank’s supervision missions, review the project’s financial management and disbursement arrangements and control environment to ensure continuing compliance with the Bank’s minimum requirements; (iii) one or several o f the utilities will be visited during each supervision; and (iv) the Bank shall conduct joint fiduciary supervisions.

Conditions

None

48

3. Details o f Financial Management Arrangements

Funds flow

The MOF, as the borrower, will manage al l loan funds. There would five Special Accounts o f the borrower (MOF) in an acceptable commercial bank for each o f participating ut i l i t ies and one for the Ministry o f Housing and Communal Services and open component, and al l payments would be made directly f rom those accounts to contractors, suppliers, and consultants.

Respective transit accounts will be opened in the same bank in Ukrainian hryvnia in order to make payments in local currency. The Foreign exchange risk will be managed by CPMU as following: (1) funds will be transferred from Special Accounts to transit accounts only as necessary to make payments, (2) l o w balance in the transit accounts will be maintained at al l times. N o use o f Treasury for making local currency payments i s envisaged.

Payment authorizations will ensure proper segregation o f duties. All payment orders will require verifications by the head o f C P M U and the financial manager o f C P M U before signatures by the Ministry o f Housing and Communal Services and MOF. Invoices will be processed by the CPMU after appropriate checks and review by the RPMUs.

There will be no counterpart financing requirements under the project.

The risk associated with funds f low i s substantial before mitigation measures, and i s assessed as moderate after risk mitigation measures.

Staffing

CPMU i s being established by the Ministry o f Housing and Communal Services. The CPMU will be headed by the C P M U head, and will include financial specialist and accountant.

The financial specialist has been selected. The project financial specialist has a financial/economic background and will be trained on o f the Bank’s financial management procedures.

A qualified accountant will be contracted after loan effectiveness. The accountant will have a university degree and experience in accounting and bookkeeping. Before the accountant i s appointed during the initial stages o f project implementation, the functions o f accountant would be performed by the project financial specialist.

There i s a risk o f C P M U financial staff not performing adequate monitoring and coordinating. Therefore, the following risk mitigation measures will be put in place: (1) CPMU financial specialist will attend FM and disbursement trainings provided by the Bank and also on-the-job training and advice by Bank FMS as necessary; (2) intensive financial management supervision will be undertaken during the initial years o f implementation; and (3) the financial specialist o f CPMU will be subject to a trial period, and his performance will be monitored by the Bank.

49

RPMUs wi l l have a financial officer to perform project financial management work - check and verify invoices, submit full documentation to the CPMU for payment, prepare and submit monthly and other periodic reports to the regulatory and controlling authorities, and to CPMU as may be necessary. The financial officer will be an existing staff o f each o f utility, and the above work wi l l be performed as part o f h isher regular job duties. The P M U financial officers shall consult with the CPMU financial specialist, seek advice from the Bank FMS, and also attend relevant training provided by the Bank as may be found necessary during project implementation.

The risk associated with staffing i s substantial before mitigation measures, and i s assessed as moderate after risk mitigation measures.

Required actions: - -

Contract with the CPMU financial specialist i s to be signed by August 3 1 , 2007.

CPMU i s to appoint a qualified accountant, based on TORS agreed with the Bank by December 3 1 , 2007.

Financial specialist o f the CPMU will be provided with additional training on F M and disbursement procedures through participation in Bank courses, project launch workshop and o f the Bank and on-the-job training.

The financial specialist o f CPMU wi l l be subject to a trial period o f six months from the date o f project effectiveness. Each utility shall appoint a financial officer as part o f PMU group after project effectiveness if not already done so, but no later than by December 3 1 , 2007.

-

-

-

Budgeting

The Project budget will be included as one l ine in the State budget, as a special fund. Only one budget program will be created for this project, and Ministry o f Housing and Communal Services will be the budget holder. Annual project consolidated budget will be prepared by Ministry o f Housing and Communal Services with the assistance o f the CPMU based on information received from the util i t ies, and submitted to MOF for verification and approval and to the Bank. As o f date o f this report, the annual budget for the project for FY 2008 has not yet been submitted. It i s envisaged that the budgets would be submitted to MOF in August 2007. Any subsequent changes to the project budget shall follow the same authorizations procedures.

CPMU wi l l prepare annual budgets based on information provided by uti l i t ies on sub projects approved and expected to be approved. CPMU wi l l coordinate closely with the regional RPMUs in the preparation o f the project financial budgets.

The risk associated with budgeting i s substantial before mitigation measures, and i s assessed as moderate after risk mitigation measures.

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Required actions:

The project budget for FY 2008 needs to be included in the State Budget by August 15,2007.

Accounting Policies and Procedures

CPMU will maintain separate financial records for the project and will ensure that the appropriate accounting i s done. The accounting for the project i s cash basis with additional information provided for commitments on signed contracts.

The C P M U accounting policies and procedures are established and prescribed in the draft Financial Manual for the Project. The accounting policies and procedures envisage internal controls including segregation o f duties, regular reconciliation, regular reporting. The accounting policies and procedures are adequate to account for a l l Project-related transactions performed by al l regional RPMUs. The C P M U will not retain originals o f a l l documentation, but rather keep copies o f a l l accounting documents. The C P M U will maintain accounting of al l transactions under the Project, and the C P M U will account separately for transactions o f each of uti l i t ies. Based on accounting at the CPMU, all financial and monitoring reports will be prepared and submitted to the Bank.

The regional RPMUs will fo l low local accounting policies and procedures. For the purposes o f this assessment, the existing financial management arrangements at RPMUs have not been assessed.

The CPMU will maintain a financial management system acceptable to the Bank, and regional RPMUs will review and authorize invoices before submission to C P M U for payment. The Project Financial Manual describes internal controls including segregation o f duties, regular reconciliation, and reporting. Risk o f non-compliance with stated policies and procedures is moderate as C P M U i s new and has no previous experience in implementing Bank-financed projects.

The risk associated with accounting policies and procedures i s substantial before mitigation measures, and i s assessed as moderate after risk mitigation measures.

Reporting

Reporting for the components under this project will fol low the standard Bank requirements for FMR preparation. The FMR forms will be based on the format agreed upon at negotiations. The CPMU will prepare quarterly FMRs for al l components and submit them to the Bank within 45 days after end o f each financial quarter, starting from the quarter in which the f i rs t project disbursements occur.

The FMRs will include the following areas: (a) Financial Reports, (b) Project Progress Reports; and (c) Procurement Management Reports. The Financial Reports include the forms on (i) sources and uses o f funds - consolidated, (ii) uses o f funds by components - consolidated, and (iii) special accounts statement - separately for each special account and consolidated.

5 1

The risk associated with reporting i s substantial before mitigation measures, and i s assessed as moderate after risk mitigation measures.

Information system (accounting software)

The financial manager and accountant o f CPMU will maintain at a central level al l accounting for transactions o f each o f the RPMUs and for al l project components. Backups o f accounting information will be performed regularly by CPMU staff (at least on a monthly basis). Reporting will not be fully automated at initial stages o f project implementation, and FMRs will be prepared in spreadsheets based on accounting information.

At the initial stages o f project implementation, C P M U will use a simple accounting module in Excel, properly protected by passwords and regular backups, which has been installed at the CPMU. The module includes register o f contracts and invoices, and register o f payments, register o f fixed assets, register o f loan and special accounts, as wel l as budget information on a consolidated and monthly basis. This module will be used until the 1-C accounting system i s installed, modified and becomes fully operational, At that point, project balances will be transferred to the 1-C accounting system.

CPMU will install an off-the-shelf standard automated accounting and reporting system “1 -Cy’. The 1-C accounting system would need to be modified to allow accounting for al l project expenditures in the necessary detail. The TORS for an IT Company have been prepared during project preparation. Modification to the accounting and reporting system will be done during project implementation.

The risk associated with information systems i s high before mitigation measures, and i s assessed as substantial after risk mitigation measures.

Point for action plan

CPMU will need to install and modify the 1-C accounting system in order to perform accounting for al l project expenditures in the necessary detail during project implementation, by April 30, 2008.

Internal controls

The application for disbursements will be prepared by the CPMU based on the invoices provided by the regional RPMUs. These applications will then be reviewed by Ministry o f Housing and Communal Services and authorized by MOF.

Contracts will be concluded by RPMUs, and the procurement process wil l be managed directly by a procurement specialist o f each o f the RPMUs and assistance and advice will be provided by the procurement specialist o f the C P M U as necessary.

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The invoices issued by contractors will be sent to the RPMUs. The RPMUs will verify all data in the invoices, including amount and currency o f invoice, name o f contractor, and check the invoice to the bi l ls o f quantity and to the terms o f the contract. A technical employee at a utility will check that the quality o f goods or services supplied by contractor/supplier i s acceptable and make a certification. If technical expertise i s not available at the utilities, then the necessary certification will be done by external technical specialists. The invoices will be transmitted to the CPMU.

At CPMU, the invoice will be checked to the contract. A technical specialist o f the Ministry o f Housing and Communal Services will be appointed for overlooking the technical aspects o f the project implementation. After the necessary verifications o f CPMU, payment will be authorized by the Ministry o f Housing and Communal Services and M O F prior to processing. All payments will be done directly to a supplier/contractor/consultant from special accounts or transit accounts (without transfer o f funds to accounts o f utilities). A copy o f the paid invoice will be sent to the RPMUs for their records.

The financial management arrangements, including accounting procedures, f low o f funds, and system o f internal controls are described in the draft Financial Management Manual. The Financial Management Manual, including f low o f funds charts, drafted during project preparation, has been updated prior to Board approval, and will be updated as necessary during project implementation by the CPMU. The first revision, if necessary, will be done within three months from Project effectiveness.

The risk associated with internal controls i s substantial before mitigation measures, and i s assessed as moderate after risk mitigation measures.

Required actions

The draft Financial Management Manual will be revised by the financial specialist o f the CPMU to reflect any changes between the Board date and beginning o f project implementation. This i s to be completed during project implementation within three months o f project effectiveness.

Impact of procurement arrangements

Overall responsibility for procurement management and coordination will be with the CPMU which will include experienced Procurement staff. However, actual procurement will be carried out at regional level, specifically by P M U procurement staff supported by specialist consultants. Consultants will be hired to assist with the preparation o f documentation for the design and supervision contracts, carried out under consultancy procedures. Evaluation will be the responsibility o f the tender committees at RPMUs.

The overall procurement r isk and capacity assessment indicates that the project has been rated high risk, as RPMUs and C P M U are working with the World Bank for the first time. Initial review o f project design suggests that project will have numerous contracts.

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The key procurement risks include the ability o f the C P M U to adequately coordinate and assist the RPMUs with procurement. The corrective measures, which have been agreed, include the hiring o f additional procurement specialists at the RPMUs to assist with the preparation o f packages and overall implementation o f procurement. In addition the Action Plan to strengthen the conduct o f procurement and the capacity at the Implementing Agency and the RPMUs has been recommended and included in Annex 8.

The following controls over procurement will be executed during the project implementation: (1) each o f the RPMUs will have a procurement specialist. The contracts will be executed at the P M U level but the Request for Proposal preparation and bid evaluation wil l be supervised by the procurement officer at the level o f CPMU. (2) Each o f the RPMUs will have a financial officer to verify invoices before submitting them to CPMU for payment.

The risk associated with procurement is high before mitigation measures, and i s assessed as substantial after risk mitigation measures.

Internal audit

The CPMU has no internal audit function, and none is required given the separation o f functions between contract award and contract payments. C P M U i s part o f the Ministry o f Housing and Communal Services and will be subject to audit procedures o f the Ministry. However, internal audit o f transactions o f Ministry o f Housing and Communal Services is transaction-based, rather than control-based and the capacity o f the KRU to undertake proper internal audits is still being developed; therefore, no reliance will be placed on this internal audit for the purpose of the Project. However, the inspection reports o f internal audit will be reviewed during Project supervision.

External audit

An audit o f the CPMU’s Project financial statements will be performed annually by private auditors on TOR acceptable to the Bank, and will be financed from the proceeds o f the loan. These TORS will require auditors assess FM arrangements at RPMUs, and check project related transactions and balances at the R P M U s . Audit reports will include opinions on the project financial statements (including statements o f expenditures), the Special Accounts and the CPMU’s internal control arrangements and cover al l financial sources. The audit TORS will be based on a format which has been designed during project preparation, and agreed during the Project Negotiations.

The annual audited financial statements will be provided to the Bank within six months after the end o f each fiscal year. The contract for the audit awarded during the f i rs t year o f project implementation and thereafter extended on an annual basis, subject to satisfactory performance o f the auditor. Auditor’s management letter will be required based on the audits.

Each o f the ut i l i t ies will undergo an audit o f entity financial statements. These audits will be carried out by locally qualified statutory auditors, appointed by the management o f uti l i t ies. The

54

statutory auditors will carry out audits o f entity financial statements prepared under requirements o f local accounting standards and following local auditing regulations.

Audit Report Entity financial statements o f Ut i l i t ies

Project Financial Statements (PFS), including SOEs and SpeciaVdesignated account. The PFSs include sources and uses o f funds by category, by components and by financing source; SOE statements, Statement o f designated account, notes to financial statements, and reconciliation statement.

Due Date Within six months o f the end o f each fiscal year Within six months o f the end o f each fiscal year and also at the closing o f the project

The risk associated with audits i s substantial before mitigation measures, and i s assessed as moderate after risk mitigation measures.

Financial management in Utilities

All ut i l i t ies have accounting systems and billing systems, which meet the basic needs o f utilities. The utilities are required to prepare annual financial statements and have these financial statements checked periodically by various regulatory and controlling authorities.

Risk and mitigation measures are included above in the relevant sections. FM supervisions o f the project will include periodic site visits to utilities as needed.

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4. Disbursement Arrangements

Withdrawal o f the Proceeds of the loan

Category

(1)For Parts A.l A.3, B, C and D.2 o f the Project

Goods, Works, Consultant Services, and incremental operating costs

(a) Utility Agency for Development Programs o f Odesa

(b) Chernihiwodokanal Utility

(c) Ivano-Frankivskvodoecotechprom Util i ty

(d) Donetskoblvodokanal State Oblast Utility

(2)Part C o f the Project

Goods, Works, Consultant Services and incremental operating costs

(3) Part A.2 and D. 1 o f the Project

Amount o f the Loan Allocated (Expressed in

Dollars)

% o f Expenditures to be financed

100%

35,530,000

14,830,000

7,170,000

4,000,000

100%

76,470,000

2,000,000 100%

Consultant Services and incremental operating costs for the Ministry o f Housing and Communal Services

(4) Front-end fee 0

TOTAL 140.000.000

Disbursement procedures

Bank finds would be disbursed under the Bank’s transactional procedures including (1) direct payments (2) SOEs.

(1) Direct payments: Disbursements for expenditures above the SOE thresholds would be made on the basis of the presentation o f full documentation relating to those expenditures. The

56

SOE thresholds are (a) goods costing less than $100,000 equivalent per contract; (b) works costing less than $100,000 equivalent per contract; (c) services o f individual consultants costing less than $100,000 equivalent per contract; (d) services o f consulting f i r m s under contracts costing less than $100,000 equivalent per contract; and (e) incremental operating costs al l under such terms and conditions as the Bank shall specify by notice to the Borrower.

(2) Disbursements below these thresholds, and al l contracts for training and study tours, would be made according to certified Statement o f Expenditure (SOEs). Supporting documentation for SOEs including completion reports and certificates would be retained by the MOF, C P M U and regional RPMUs and made available to the Bank during Project supervision. This documentation would be retained for at least one year after receipt by the World Bank o f the audit report for the year in which the last disbursement was made.

Special Accounts

For the purposes o f the Project, five Special Accounts (SA) will be opened and managed in one o f the Ukrainian commercial banks acceptable to the Bank including appropriate protection against set-off, seizure and attachment. The following Special Accounts shall be opened: (a) Special Account A in respect o f the Utility Agency for Development Programs o f Odesa; (b) Special Account B in respect o f Chernihiwodokanal Utility; (c) Special Account C in respect o f Ivano-Frankivskvodoecotechprom Utility; (d) Special Account D in respect of Donetskoblvodokanal State Oblast Utility; and (e) Special Account E under Part C o f the Project, implemented by the Ministry o f Housing and Communal Services for the ut i l i t ies and municipalities to be selected.

Additionally, respective transit accounts will be opened in the same bank for payments in local currency. The payments orders are to be verified by the C P M U head and C P M U financial specialist. The f i rs t signatures on payment orders would be o f Minister or Deputy Minister of Housing and Communal Services and o f MOF.

Replenishment for the SA would fol low IBRD procedures. The C P M U would submit replenishment applications, authorized by MOF, at monthly intervals, (or when 20 percent o f the initial deposit has been utilized, whichever occurs earlier). The replenishment applications would be supported by the necessary documentation, the SA bank statement and a reconciliation o f this bank statement. The minimum application amount for applying for direct payment and for special commitments would be 20 percent o f the authorized allocation to the Special Accounts for each o f the participating ut i l i t ies and the Ministry o f Housing and Communal Services.

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Annex 8: Procurement Arrangements UKRAINE: URBAN INFRASTRUCTURE PROJECT

A. General

Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Loans" dated May, 2004; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for pre- qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

A General Procurement Notice (GPN) was published in the August 2007 issue o f the Development Business and in dgMarkets announcing goods and consulting services to be procured and inviting interested eligible suppliers and consultants to express interest and to request any complementary information from the Borrower. Specific Procurement Notices (SPN) will be published in the on-line edition o f the Development Business for al l I C B contracts, and in the printed edition at the option o f the Borrower. For goods to be procured through ICB, individual bidding opportunities would also be advertised in a major local newspaper on the same (or within 5) day(s) o f the on-line publication. The local advertisements will be in the English language and, at the option o f the Borrower, will also be in the local language. For consultants' contracts above US$200,000, SPNRequest for Expression o f Interest will be advertised in on-line edition o f the Development Business and in at least one major national newspaper o f wide circulation (in the national and English languages). C iv i l servants can be hired as individual consultants or as members o f a team with financing under the Loan provided they are on leave o f absence without pay and they have not been working for any of the Beneficiary Agencies immediately prior to taking leave o f absence.

Procurement o f Works: Works procured under this Project estimated at about US$ 50.96 mil l ion equivalent would include installation o f steel water pipes, modernization and rehabilitation o f sewage collection systems, rehabilitation o f landfill sites, rehabilitation o f water intakes, and installation o f water lines. The procurement o f Works will be done using the Bank's Standard Bidding Documents (SBD) for al l I C B and National SBD agreed with or satisfactory to the Bank. For any refurbishments and preparation works which relatively small (less than $100,000 equivalent per site) a shopping procedure (see below) may be used for minor works procurement.

Procurement o f Goods: Goods procured under this project estimated at about U S $ 76.36 mil l ion would include inter a l ia steel water pipes, sludge dewatering equipment, sewer pipe rehabilitation equipment, pumps for wells, laboratory equipment and waste collection containers. In so far as possible procurement will be done using the Bank's SBD for al l I C B and National

58

SBD agreed with or satisfactory to the Bank. envisaged.

The following procurement procedures are

(i)

(ii)

(iii)

(iv)

International Competitive Bidding (ICB). Goods estimated to cost more than $500,000 equivalent per contract and Works estimated to cost more than $5,000,000 equivalent per contract will be procured using I C B procedures in accordance with the Bank’s Procurement Guidelines.

Shopping (SH) procedure will be used for readily available off-the-shelf goods, including office and computer equipment for the Beneficiary Agencies and for minor computer equipment for the RPMUs. All items would have standard specifications, estimated to cost less US$lOO,OOO equivalent per contract. This procedure will be based on obtaining and comparing price offers from at least three suppliers from at least two different countries in accordance with paragraph 3.5 o f Procurement Guidelines. It i s recommended that the World Bank shopping site should be used to draw up shortlists for simple computer equipment. In the case o f Minor Works Shopping procedures will be used for contracts estimated to cost less than US$lOO,OOO equivalent.

National Competitive Bidding (IVCB). Goods estimated to cost less than $500,000 equivalent per contract and Works estimated to cost less that $5,000,000 will be procured according to N C B procedures in accordance with paragraphs 3.3 and 3.4 o f the Bank’s Procurement Guidelines and using agreed documents based o n the Bank’s sample N C B documents for E C A Region for Works and Goods

Direct Contracting. Where certain goods are available only from a particular supplier or in cases where compatibility with existing equipment so requires, goods may be procured under Direct Contracting (Single Source) have obtained prior approval from the Bank (in accordance with paragraph 3.6 o f the Procurement Guidelines).

Procurement o f non-consulting services: At this stage it i s not foreseen to procure any non- consulting services

Selection o f Consultants: Contracts for Consulting Services will be packaged to combine related sk i l ls and services in order to make them attractive for competition and reduce the number o f contracts to be administered taking into consideration the size o f the RPMUs and CPMU. To the extent practicable, training activities would be incorporated with consulting services contracts. Consultant services consist o f short-and long-term assignments to be contracted to f i r m s and/or individuals (national and/or foreign or jointly) depending on the nature and duration o f the assignments. Selection procedures will be managed through competition among qualified short listed consultants. The short lists for consultant services contracts with f i r m s shall comprise six f i r m s with a wide geographical spread, and with no more than two firms from any one eligible country. The procurement o f consultant services contracts financed under the Loan will be in accordance with the provisions o f the Consultant Guidelines. For consulting assignments exceeding US$200,000 equivalent per contract, expressions o f interest will be obtained by advertisement in the Development Business (on-line), supplemented with notices issued in the national press.

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Consultancy services will be required for the following major tasks: Feasibility Studies, Detailed Designs, and Procurement Services and Supervision Consultant services.

Short l i s ts o f consultants for services estimated to cost less than US$lOO,OOO equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

The following procurement procedures will be used for selection o f consultant services:

Quality and Cost Based Selection (QCBS) procedures, as described in Section 11, paragraph. 2.1 to 2.31 o f the Consultant Guidelines will be used if necessary for assignment under al l Components o f the Project;

Least Cost Selection (LCS) procedure would be used for selection o f an auditor to carry out audit o f the Financial Statements o f the Project;

Selection Based on Consultants’ Qualifications (CQ) will be used for contracting f i r m s for certain assignments under al l three components o f the project for which the value of the assignments i s estimated to cost less than US$200,000 equivalent per contract and where it i s considered that a small team o f specialists would be more beneficial than a single individual;

Individual Consultants (IC). Where specialized activities require specific ski l ls for a limited period o f time at scattered intervals and it would not be practical to package assignments for consulting firms the services o f individuals may be envisaged. In particular it i s expected to hire international consultants for procurement and supervision services for each RPMU or to improve the specialized technical capacities within RPMUs. Selection o f individual consultants will be carried out in accordance with Section V o f the Consultant Guidelines. Individuals will be selected on the basis o f their qualifications for the assignment by comparing the CVs obtained in response to an advertisement in the national press or Development Business;

Sole Source (SS). The method will be used for certain individuals with the prior approval o f the Association in accordance with paragraph. 3.9 to 3.13 o f the Consultants Guidelines.

Training Activities: Training is an integral element o f the project’s capacity building objective. The Loan will finance training programs, including training workshops, study tours and local training. Expenditures related to such training activities include: (a) for local training and workshops - per diems o f participants to cover transportation, lodging and subsistence; minor organizational expenses (stationery, handouts, training materials, coffee breaks); (b) for international study tours - international travel and visa costs, per diems (lodging and subsistence) and course-related expenses (fixed tuition or participation fee). Design o f the training courses and study tours will be done by the specialists contracted as short term consultants under relevant QCBS, CQ andor I C procedures depending on the value o f the assignment as described above in this Annex.

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Operating Costs: Incremental operating costs incurred by the RPMUs for communications and office supplies would be financed under the Loan for the duration o f the project. In addition, recurrent costs related to operating and maintenance o f equipment provided under the project for the WMUs and generated by the project including the day-to-day operational costs for office equipment and maintenance, consumables, will be financed by the Borrower and Sub-borrowers.

Others: No Special Arrangements

The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, are presented in the Project Operational Manual.

B. Assessment of the agency’s capacity to implement procurement

Country Issues

A Country Procurement Assessment Review (CPAR) for the Ukraine was finalized in 2001 and indicates a “high” risk based on the assessment o f the country’s national procurement system. This CPAR has recently been updated (June 2006), unfortunately this assessment has revealed a significant deterioration in the public procurement framework (both the legislative and institutional). The changes made to the PPL in 2004 and 2005 make the current L a w largely at variance with international standards and as such, together with the current institutional framework make it unacceptable for use in the context o f “certification for use o f country systems” under World Bank financed projects. This i s due to shortcoming concerning the following fundamental issues:

a) lack o f clarity in respect o f the current institutional structure o f procurement; b) lack o f standard bidding documents and standard contract forms; c) lack o f recognition o f consultancy services in the PPL; d) lack o f clear written procedures for tendering, evaluation and contracting; e) overuse o f restrictions, exemptions and exceptions from PPL thus restricting competition; f ) unrestricted use o f a merit points system leading to ineffective, un-transparent and costly

procurement; g) apparent coercive practices forcing procuring entities to make expenditures which are not

in the public interest.

There i s also a concern regarding the ability o f the local marketplace to provide a robust competitive bidding environment at the current N C B thresholds, if during implementation it i s shown that only one or two Bidders are in a position to participate in the Bidding process, the Borrower may ultimately face higher costs from lack o f competition. Therefore the Bank will need to address the issue o f marketplace capacity as evidenced in the results o f Bidding in the f i rst year o f the project. Evidence o f a l imited market may indicate a need to scale back and lower thresholds, thus allowing greater opportunity for international competition where local markets are sparse.

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Procurement Arrangements

An assessment o f the capacity o f the Implementing Agency to implement procurement actions for the project has been carried out by Procurement Accredited Specialist (PAS) assigned to the project during appraisal in October 2005 and updated in March 2007. The assessment reviewed the organizational structure for implementing the project and the interaction between the project’s staff responsible for procurement and the Ministry’s relevant central unit for administration and finance.

The key issues and r isks concerning procurement for implementation o f the project have been identified and include the ability o f the Implementing Agency to adequately coordinate and assist the RPMUs with procurement. The corrective measures which have been agreed include the hiring o f additional procurement specialists at the RPMUs to assist with the preparation o f packages and overall implementation o f procurement. In addition, the following Action Plan to strengthen the conduct o f procurement and the capacity at the Implementing Agency and the RPMUs i s recommended:

procurement staff (at C P M T and RPMUs) would be given the opportunity to attend intensive procurement training in either English or Russian language; consulting services for assistance in preparation o f design and supervision tender documentation would be provided; the project will be subject to intense supervision by the Bank with close monitoring o f activities in each RPMU; Initiating a Project Launch Workshop before effectiveness, as part o f the project implementationhapacity building initiatives, especially in procurement. This would be supplemented by further training for procurement staff and members o f Evaluation Committees; conduct o f annual jo int reviews o f the Procurement Plan and review o f contracts that would be subject to prior review; prior review thresholds would apply to activities o f each RPMU and not whole project.

The overall project risk for procurement i s High, since RPMUs are not familiar with Bank’s procurement procedures. However, this rating can be revised in the future as Ukraine continues to make improvements in i t s public procurement processes and as RPMUs gets more familiar with Bank’s procurement processes.

C. Procurement Plan

The Procurement Plan contains al l the relevant procurement information, including prior review thresholds for Bank financed contracts. For procurement under the Loan, the Borrower will use the Bank’s latest Standard Bidding Documents (SBD), Standard Form o f Consulting Contracts and Request for Proposals (RFP), and Standard Bid Evaluation Report Forms. For N C B procedures the Bank’s sample N C B documents for E C A Region for Works and Goods will be used updated to the May, 2004 Guidelines. The Standard Bidding Documents for procurement o f Information Systems would be used for procurements o f al l IT equipment estimated to cost

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over US$lOO,OOO per contract. These will comprise Supply and Installation o f Information Systems - Single Stage Bidding or Supply and Installation o f Information Systems - Two Stage Bidding (both version March 2003 or more recent). Also, the sample procurement documents and forms developed in E C A Region for small value procurement would be adapted to suit the Project needs for procurement as outlined in the POM.

The Borrower developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team in March 2006 and i s available at the offices o f the R P M U s . It will also be available in the project’s database and in the Bank’s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

D. Frequency of procurement supervision

In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment o f the Implementing Agency has recommended two supervision missions per year to visit the field to carry out post review o f procurement actions. It i s envisaged that 2 out o f every 5 procurement contracts will be reviewed ex-post.

E. Details o f the procurement arrangements involving international competition

1. Goods, Works, and Non Consulting Services

(a)

(b)

L i s t o f contract packages to be procured following ICB, N C B and direct contracting: See Procurement Plan attached. I C B contracts estimated to cost above $500,000 equivalent per contract (for Goods) and above $5,000,000 equivalent per contract (for Works), N C B Goods contracts estimated to cost above $300,000 equivalent per contract and al l direct contracting will be subject to prior review by the Bank. The f i rs t ICB, N C B and Shopping contract for Goods carried out by each RPMU will also be subject to prior review, The f i rs t N C B and the f i rs t Minor Works contract carried out by each RPMU shall also be subject to Prior Review

2. Consulting Services

List o f consulting assignments with short-list o f international firms: See Procurement Plan (below). Consultancy services estimated to cost above $200,000 equivalent per contract for f i r m s and $100,000 equivalent per contract for individuals and single source selection of consultants will be subject to prior review by the Bank. The f i rst CQ contract and first two I C contract carried out by each RPMU irrespective o f price will also be subject to Prior Review. Short lists composed entirely o f national consultants: Short lists o f consultants for services estimated to cost less than $100,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

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PROCUREMENT PLAN

Procurement Threshold Method

I. GENERAL

Prior Comments ReviewTheshold

1. Agreed Date o f the procurement Plan Original: March 2007 Revision 1 : April 2007

4. 5. 6. 7.

2. Date o f General Procurement Notice: August 2007

review Direct Contracting* - All subject to Prior Review ICB (Works) > $5,000,000 All subject to Prior review NCB (Works) < $3,000,000 >$3,000,000 First 2 NCB and al l subject to prior review Minor Works < $100,000 < $100,000 First 2 Works contract subject to prior review

11. GOODS AND WORKs AND NON CONSULTING SERVICES.

1. Prior Review Threshold: Procurement Decisions subject to Prior Review by Bank as stated in Appendix 1 to the Guidelines for Procurement:

2. Pre-qualification. Bidders shall be pre-qualified in accordance with the provisions o f paragraphs 2.9 and 2.10 o f the Guidelines (no pre-qualification i s envisaged).

3. Any Other Special Procurement Arrangements: None

4. Procurement Items with Methods and Time Schedule: See below

111. SELECTION OF CONSULTANTS

1. Prior Review Threshold: Selection Decisions subject to Prior Review by Bank as stated in Appendix 1 to the Guidelines Selection and Employment o f Consultants:

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* All Contracts subject to justification

Prior Review thresholds are applicable to each RPMU

2. Short list comprising entirely o f national consultants: Short list o f consultants for services, estimated to cost less than $100,000 equivalent per contract, may comprise entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

3. Any Other Special Selection Arrangements: None

4. Consultancy Assignments with Selection Methods and Time Schedule: See below

IV. OTHER

1. Ex-Post Review: All other contracts below Bank’s prior review threshold are subject to Bank’s selective ex-post review. Periodic ex-post review by Bank staff will be undertaken during regular supervision missions. Procurement documents, such as bidding documents, bids, bid evaluation reports and correspondence related to bids and contracts will be kept readily available for Bank’s ex-post review during supervision missions or at any other points in time. Bank missions will review at least 2 out o f every 5 contracts which are subject to ex-post review.

2. Record Keeping: The P M T and RPMUs will maintain complete procurement f i les which will be reviewed by Bank supervision missions. All procurement related documentation that requires Bank prior review will be cleared by Procurement Accredited Staff (PAS) and relevant technical staff. N o packages above mandatory review thresholds by RPA are anticipated. Procurement information will be recorded by the RPMUs and submitted to Bank as part o f the quarterly (FMRs) and annual progress reports. A simple management information system with a procurement module would be established to assist the RPMUs and P M T procurement specialists to monitor al l procurement information.

65

Wastewater services Water abd Sewerage Revenue Other revenues

Total revenues

Production Expenses

Chemicals and othar materials Maintenance and repair Taxes and fees Other operating expenses

Total operating expenses Operating profitlloss Interest on long-term loans

Net profitlloss before tax

Net pmfltlloss afler tax

2002 2003 2004 ZOOS 2006 AEVIIP

ASSETS Current assets Cash Accounts receivable Less: provisions for doubtful receivables Net accounts receivable Inventory

Total current assets Fixed assets Gross fixed assets Less' accumulated depreciation Net fixed assets Work in Progress

Total assets

LIABILITIES AND EQUITY Current liabilities Accounts payable Short-term loans Other current IiabiIities

Medium and long term liabilities Equity Founders' capital Other additional capital Retained profitlioss

Total equity Total liabilities and equity

Total current liabilities

Current ratio Long-term debtlequlty ratlo (I)

2007 2008 2009 2010 2011 2012 2013 prolsniotar

Total internal resources Less debt service

interest on loans repayment of long-term loan

Total debt service lncreaseidecrease in working capital

Net internal cash generation Capital Investments Total investments

Funds from external sources Long-term loans Adddions to capital Total funds from external

29,594 913

30,507

30,507

16,440

6,787

7,924 2.846

33,997 -3,490

0

Annex 9: Economic and Financial Analysis UKRAINE: URBAN INFRASTRUCTURE PROJECT

CHERNlHlV VODOKANAL FINANCIAL STATEMENTS (UAH '000)

34,714 1,035

35,749

35,749

18,452

7,468

8,631 4.145

38,697 -2,948

0

10,137 6,490

420 17,047

17,047

6,501 2,457

473 1,055

875 4.168 2.324

19,874 -2,827

111 -2,938

0 -2,938

103 117

75 17,269

0 17,269 1,106

18,450

106,009 63,716 42,293 2,353

63,096

3,617 340

2,112 6,069

0

45.256 5,156 6,615

57,027 63,096

3.0

-2,938 2.324

0 -614

111

0 111

-725 153 153 878

0 0

0 0

566 5.617

0 5,617 1,073 7,256

134,209 73,263 60,946 13,389 81,591

1,530 1,675

638

364 6,435

0 6,435 1,165 7,964

150,728 77,408 73,320 2,670

84,154

1.662 2,000

693

12,359 15,349 15.715 7.921 11,871 12.154

3,843 0

45,256 40,660 -8,188 77.748 81,591

183 228 737 20,463 27.448 26,606

4,354 0

45,256 45.660

-11.136 79,800 84,154

20,463 27,448 28,606

1.9

-3,490 2,846 -140 5 0 4

0

0 0

8.943 9,821 10,116 2.898 3,621 4,946

462 551 566 1,311 2.144 2,209 1,209 1,347 1.386

1.8 0.0

-2.948 4.145

0 1,197

0

0 0

8,640 10,002 10,302 2,266 2,243 2,297

25.729 29.729 31.826

5765 4.488

0 3,666

5.266 -2,281 -3,220 159 207 41

6.000 5,202

0 5,000

4.425 -2,488 -3.261 0 0 0

-5,425 -2,488 -3.261 115 100 103 126 108 111

167 523 1,308 17,392 11.903 9.611

2,434 0 0 14,958 11.903 9,611 4.182 1.067 1,187

19,327 13,513 12,186

107.021 108.326 117,474 65,982 68.224 70,572 41,039 40,102 46,902 2,444 9,565 7,067

62.810 63,180 66,155

7.019 4,059 3,409 1,439 200 973 2.198 1,406 1,768

10,656 5,665 6,170 0 0 0

45,256 45,256 45,256 5,710 13,556 19,287 1,186 -1.297 -4,558

52,154 57,515 59,985 62,810 63,180 66,155

1.7 2.0 2.0

4,425 -2,488 -3,220 2,266 2.243 2,297

0 0 0 -3,159 -245 -923

159 207 41

0 1.239 0 159 1,446 41

-3,822 -1,159 -2,697 504 -532 1,733 290 7.640 6.589 290 7,640 6,599

-214 8,172 4.866

0 0 0 552 7,542 5,731

552 7.542 5,731 766 -630 865

523

-3,490 -2,948

-3.630 -2.948 1401

-1,781 399 1,277 798 5,765 I 6,000

39,331 1,173

40,504

40,504

20,707

8.137

9,214 4,292

42,349 -1.84s

187 3.031

3,032 94

105

543 7,291

0 7,291 1,239 9,073

155.066 61,700 74,368

5,030 88,471

1,766 1,500

737 4,003 6,700

45,256 45,680

-13,166 77.768 88,471

2.3 7.9

-1,845 4.292

0 2.447

187

0 187

1,281 979

7,500 7,500 6,521

6,700 0

6,700 179 364

44,562 1,315

45,677

45,877

22,741

6,676

9,724 4,812

45.952 -76 654

-929

-929 90

1 DO

1,719 6,258

0 8.258 1,296

11,274

174.978 86.512 88,466 3,620

103,360

1,850

772 2,622

23,900

45,256 45,660

-14,097 76,839

103,360

4.3 23.7

-76 4.812

0 4,736

854

0 854

2,407 1.476

17,500 17,500 16,024

17.200 0

17,200 1,176

543 ~. *A7 1 7 1 4

49.089 1,442

50,532

50,532

24,196

9,051

10,354 5,527

49,130 1,402 2,000 -599

-599 86 97

5,256 9,096

0 9,096 1,343

15,695

200.998 92,039

108,959 2,100

126,753

1,915

799 2,713

47,800

45,256 45.680

-14,696 76,240

126,753

5.8 38.5

1,402 5,527

0 6,929

2,000

0 2,000

792 4,137

24,500 24,500 20,363

23,900 0

23,900 3,537 1,719 5.256

52,555 1,546

54,101

54,101

24,894

9,219

10,875 6,166

51,156 2,945 3,189 -244

-244 83 95

6,272 9,738

0 9,736 1.377

17,386

224,298 98.207

126,091 1,800

145,277

1,963

818 2.781

66,500

45,256 45,680

-14,941 75,995

145,277

6.3 46.7

2.945 6.168

0 9,113

3,189

0 3,189

608 5.316

23,000 23,000 17.684

16,700 0

18,700 1,016

,~ ~ -. 6,646 2,839

2.5 1.1 75 187 523 1,368 - .I , , . , -

I 5 . 5 4.2 0.6 43.3 6.2 2.7 3.1 2.7

5.256 6,272

55.734 60,232 1.635 1,715

57,369 61,947

57,369 61,947

26,061 27,075

9,555 9,829

11,273 11,595 6,501 6,693

53,390 55,192 3,979 6,755 3,945 3,970

34 2,785

34 2.785 82 78 93 69

8,646 2,839 10.326 11.151

0 0 10,326 11.151 1,404 1,432

20,376 15,421

236,398 243,396 104,708 111,402 131,690 131,996

1,700 1,700 153,766 149,117

2,002 2.042

835 652 2,837 2.894

74,900 67,410

45,256 45,256 45,680 45,680

-14,907 -12,122 76,029 78,814

153,766 149,117

7.2 5.3 49.6 46.1

3,979 6,755 6,501 6.693

0 0 10,480 13,449

3.945 3,970

0 7,490 3,945 11,460

12,000 7,000 6,026 5,807

8,400 0 0 0

8,400 0 2,374 5.807 6272 8646

66

REVENUE Water Sales Other Revenue

Total Revenue EXPENSES Personnel Expenses Production Expenses Depreciation

Total Operating Expenses Operatlng ProfltAosr Interest on Long-Term Loans Net ProfltAoss Retalned ProflWLoss

Working Ratio Operatlng Ratlo

ASSETS

Curnnt Assets Cash Net Accounts Receivable Inventory Other current Assets

Total Current Assets

WORK IN PROGRESS

Fixed Assets Gross Fixed Assets

Accumulated Depreciation Total Fixed Assets

TOTAL ASSETS

LIABILITIES

Current Llabllltler Account Payable Short-term Loans Other Current Liabilities

Tots1 Curnnt LIEbllltlES

~ong- tam Llrbilltles

ClPltal

Long-ten Loans

Founders Capital

Retained ProfiVLosS Total Capltal

Rerewes

TObl Llabllltler

Current Ratio Long-term Debt Equity Ratlo

2002

62,847 13,222 96,069

24,634 87,771

8,157 120,562 -24,493

-24,493 -24,493

1.17 1.25

DONETSKOEL INCOME STATEMENTS FOR THE YEAR ENDING ZOOS 2004 2006 2006 2007 2008 ZOOS 2010 2011

ACTUAL PROJECTIONS UAH '000

97,794 115,918 141,083 169,617 209,647 237,530 256,888 264,440 322,270 9,793 14,353 13,197 15,532 17,762 20,156 22,587 25,022 27,344

107,587 130,271 154,280 185,149 227,428 257,685 279,476 309,461 349,614

31,371 41,948 41,058 55,070 63,047 70,392 77,701 85.214 92,193 87,219 103,677 114,122 144,109 164,982 164,205 203,331 222,991 241,254

6,974 9,493 10,241 10,765 12,967 13,067 13,219 13,415 13,704 127,564 155,118 165,421 209,944 241,016 267,685 294,251 321,620 347,151 -19,977 -24,847 -11,141 -24,795 -13,587 -9,999 -14,776 -12,159 2,463

0 0 0 0 0 51 231 541 882 -19,977 -24,847 -11,141 -24,795 -13,587 -10,050 -15,007 -12,700 1,601 -19,977 -24,847 -11,141 -24,795 -13,587 -10,050 -15,007 -12,700 1,601

1.10 1.12 1.01 1.08 1.00 0.99 1.01 1.00 0.95 1.19 1.19 1.07 1.13 1.06 1.04 1.05 1.04 0.99

2012

348,535 29,883

378,418

99,744 261,013

13.962 374,716

2,512 1,065 1,447 1,447

0.95 0.99

DONETSKOEL BALANCE SHEETS AS OF DECEMBER 31 2002 2003 2004 2006 2006 2007 2008 ZOOS 2010 2011 2012

ACTUAL PROJECTIONS UAH '000

4,417 6,616 11,255 380 2,600 2,452 4,942 10,102 1,116 10,633 19,397 85,328 96,247 97,661 96,879 119,327 111,190 77,306 81.048 77,365 69,923 75,664 10,454 9,642 12,909 12,775 10,572 11,481 12,205 12.784 13,232 13,562 13,834

837 294 3,026 16,324 15,181 15,026 3,026 3,026 3,026 3,026 3,026 101,035 112,799 125,071 128,358 147,660 140,149 97,478 106,960 94,739 97,144 111,940

1,951 2,261 3,466 2,786 2.480 1,500 1,200 1,570 2,100 2,275 1,900

396,319 421,288 451,941 461,233 472,240 475,900 480,700 467.830 496,330 507,695 513,870 236,731 254,767 271,373 288,607 299,106 312,093 325.180 336,399 351,814 365,519 379,480 159,588 166,521 180.568 174,626 173,134 163,807 155,520 149,431 146,516 142,177 134,390

262,575 281,601 309.105 305,770 323,294 305,457 254,196 257,961 243,354 241,596 248,230

58,873 64,883 109,766 27,503 59,301 54,670 36,841 52,965 44.598 36,168 39,152

12,123 13,388 15,903 48,026 39,726 40,903 15,903 15,903 15,903 15,903 15,903 71,838 99,358 126,671 77,344 102,023 97,773 54,744 68,668 60,501 52,091 55,055

842 1,087 1,000 1,615 2,996 2,000 2,000

103 72 45 0 0 0 1,820 6,466 12,926 17,976 20,200

185.856 196,652 220,540 215,853 233,493 233,493 233,493 233,493 233,493 233,493 233,493 2,429 3,148 4,326 2,347 -17,629 -42,477 12,573 -12,222 -25,809 -35,859 -50,866 -63,566 -61,965 -60.518

190,634 182,171 182,369 228,426 221,271 207,664 197,634 182,627 169,927 171,528 172,975

262,575 281,601 309,105 305,770 323,294 305,457 254,198 257,961 243,354 241,596 248.230

1.4 1.1 1.0 1.7 1.4 1.4 1.8 1.6 1.6 1.9 2.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1

2013

376,941 32,657

409,597

107,913 262,390

14,131 404,435

5,163 1,069 4,094 4,094

0.95 0.99

2013

21,249 81,91Q 14,110 3,026

120,304

1,250

519,920 393,612 126,308

247,663

36,711

15,903 52,614

16,180

233,493

-56,424 177,069

247,863

2.3 0.1

67

OPERATING PROFIT/LOSS ADD DEPRECIATION LESS TAXES PAID

TOTAL INTERNAL SOURCES LESS DEBT SERVICE ON LONG-TERM LOANS

INTEREST REPAYMENT

TOTAL DEBT SERV CE IhCREASVDECREASE h VVORK hG EX CASrl NET INTERNAL CASH GENERATION

CAPITAL hVESTMENTS

Capnal Investments TOTAL

FUNDS REQUIRED EXTERNAL SOURCES

LONG-TERM LOANS CAPITAL ISSUED TOTAL EXTERNAL SOURCES

CASH SURPLUSDEFICIT FOR THE YEAR CASH AT BEGINNING OF YEAR CASH AT END OF YEAR

DEBT SERVICE COVERAGE

DONETSKOBL CASH FLOW STATEMENT FOR THE YEAR ENDING 2002 ZOO3 2004 2005 2006 ZOO? 2008

ACTUAL UAH '000

-24,493 -19,977 -24.847 -11,141 -24,795 -13,587 -9,999 8,157 8,974 9,493 10,241 10,765 12,987 13.087

0 0 0 0 0 0 0 -16,338 -11,003 -15.354 -900 -14,030 -801 3,088

0 51

0 0 0 0 0 0 51 -17,956 -19,680 83,489 -7,577 -3,133 -2,132

6,953 4,326 -64.389 -6,453 2,532 5,169

0 0 0 0

3,514 3.917 2,741 2,013 1,444 3,514 3,917 2,741 2,013 1,444

0 -3,036 -1,585 66,402 7,897

1,181 13,904

0 0 0 0 15.085 0 3,036 1.585 -68,402 7.188

4,417 6,616 11,255 -55,147 2,600 11,255

2,680 4,500 2,680 4,500

148 -669

1,820

0 1,820 -148 2,489

2,800 2,452 2,452 4,942

100.8

2009 2010 2011 PROJECTIONS

-14.776 -12.159 2.463 13,219 13,415 13,704

0 0 0 -1,556 1,257 18,167

231 541 862

231 541 862 -9,802 5,132 1,298 8,015 -4,416 14,007

7,500 11,030 9,540 7,500 11,030 9,540

-515 15,446 -4,467

4,646 6,460 5,050

4,646 6,460 5,050 5,161 -8,986 9,517 4,942 10,102 1.118

10,102 1,116 10,633

33.7 -9.2 15.2

2012

2,512 13,962

0 16,473

1.065

1.065 3,068

12.340

5,800 5,800

-6,540

2,224

2,224 8.764

10,633 19,397

10.6

2013

5.163 14,131

0 19,294

1,069 2020 3,089 8,954 7,252

5,400 5,400

-1,852

0

0 1,852

19,397 21,249

1.3

68

REVENUE Water Sales Wastewater Services Water and Sewerage Revenue Other Revenue

Total Revenue EXPENSES Production Expenses Electricity Personnel Expenses Chemicals and Other Materials TaxesandFees Maintenance and Repair Other Operating Expenses Depreciation

Total Operating Expenses Operating ProfiffLou Interest on Long-Term Loans Net ProflVLoss Profit Tax Retained ProfiWLoss

Wohing Ratio Operating Ratio

ASSETS

Cumnt Assets Cash Accounts Receivable

Net Accounts Receivable Inventory Other current Assets

Less Provisions for Bad Debts

Total Cumnt Assets

WORK IN PROGRESS

Flxed Assets Gross Fixed Assets

Accumulated Depreciation Total Fixed Assets

TOTAL ASSETS

LIABILITIES

Cumnt Llabllities Account Payable Short-term Loans Other Current Liabilities

Total Current Llabillties

Long-term Liabilities Long-term Loans

Capital Founders Capital Reserves Retained ProfiVLosr

Total Capital

Total Liabilities

Currant Ratio Long-term Debt Equity Ratio

NANO-FRANKIVSK INCOME STATEMENTS FOR THE YEAR ENDING 2002 2003 2004 2006 2008 2007 2008 2009 2010 2011 2012 2013

ACTUAL PROJECTIONS UAH 'OW

8,103 8,365 10.853 6,442 7.187 9,324

23,052 26,118 28,247 30,549 33.038 35,731 36,803 39,802 6,860 7,404 4,621 5,269 6,032 8,838 7,662 8.488 9,276 10,034 10,788

21,402 22,956 24,798 26,321 32,150 35,064 38,211 41,527 45,007 46.806 50,590

2002

120 18.350 2,120

16,230 1,595 1,333

19,278

9,744

97,500 40,955 56,545

85.567

12.278 62

2,677 15,017

400

57,991 15,865 -3,706 70,150

85,567

4,178 5,163 6,335 2.504 3,865

3,415 25,460 -4,058

0 4,056

1 4.059

3,409 4,840 5,093 2.885 3,485

3,387 23,099

-143 0

-143 0

-143

3,207 6,653 4,791 2,714 3,052

3,864 24,281

417 13

404 63

341

7,579

8,261

9,603 2,342

27,785 536

0 536 440 96

8,677

9,182

10,460 3,415

31,734 416

0 416 104 312

9.688

9,953

11,112 3,510

34,263 82 1 89

732 183 549

10,694

10,667

11,670 3,654

36,685 1,526

417 1,109

277 831

11,728

11,357

12,177 3,909

39,171 2,355

968 1,387

347 1,040

12.688

11,930

12,663 4,352

41,633 3,375 1545 1,830

458 1,373

13.546

12.365

12,995 4,746

43,652 3,155 1,952 1,202

301 902

1.03 0.88 0.82 0.90 0.88 0.88 0.86 0.85 0.83 0.83 1.19 1.01 0.98 0.98 0.99 0.98 0.96 0.94 0.93 0.93

IVANO-FRANKIVSK BALANCE SHEETS AS OF DECEMBER 31 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

ACTUAL PROJECTIONS UAH '000

696 452 1,066 541 445 1,682 2,812 1,494 1,321 4,387 11,569 12,830 10,352 10,767 9,200 9,400 9,700 10,300 11,200 10,000 2,089 5,382 4,500 5,515 4,600 3,500 1,500 0 0 0 9,480 7,448 5,852 5,253 4,600 5,900 8,200 10,300 11,200 10,000 2,406 1,165 1,479 1,078 1,171 1,244 1,304 1,349 1.383 1,411 2,276 3,355 1,607 1,714 1,861 1,979 2,073 2,145 2,199 2,243

14,858 12,420 10,004 8,586 8,077 10,805 14.388 15,289 16,103 18,040

8,323 7,916 3,536 3,167 3,700 3,450 4.030 3,400 3,570 3,000

103,171 107,390 94.853 124,173 127,640 132,890 142,140 158.240 172,570 182,040 4,308 47,662 43,526 52,171 49,976 53.488 57,141 61,049 65,401 70,147 58,863 59.728 51,327 72,002 77.684 79,404 84,999 97,191 107,169 111,893

82.044 80.064 64,867 83,755 89.441 93,659 103.387 115,879 128.842 132,933

2,066 718 357 2,770 4,701 5,084 5,499 5,947 6,432 6,625 0 0 0 0 0 0 0 0 0 0

11,591 9,639 7,141 3,457 3,754 3,640 4,022 4,226 4,332 4,418 13,657 10,357 7,498 6,227 8,456 8,924 9,521 10,173 10,763 11,043

0 0 3,200 11,500 22,300 31,300 38,210

57,991 57,991 57,849 57,849 88,145 88,145 88,145 88,145 88,145 88,145 18,160 19,623 7,086 27,150 -7,764 -7,907 -7,586 -7,471 -7,159 -6,610 -5,779 -4,738 -3,368 -2,464 68,387 69,707 57,369 77,528 80,966 81,535 82,368 83,407 84,779 85,681

82,044 80.064 64,867 83,755 89,442 93,659 103,387 115,879 126,642 132,934

1.1 1.2 1.3 1.4 1.0 1.2 1.5 1.5 1.5 1.6 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.2 0.3 0.3

14,462

12,817

13,335 5.006

45,620 4,970 2,100 2,870

718 2,153

0.80 0.90

201 3

1,032 9,800

0 9,800 1.598 2,276

14,706

2,000

190,540 75,153

115.387

132,093

7,164 0

4,507 11,671

32,569

86,145

-312 87,833

132,093

1.3 0.3

69

IVANO-FRANKIVSK CASH FLOW STATEMENT FOR THE YEAR ENDING

OPERATING PROFlT/LOSS ADD DEPRECIATION LESS TAXES PAID

TOTAL INTERNAL SOURCES LESS DEBT SERVICE ON LONG.TERM LOANS

INTEREST REPAYMENT

TOTAL DEBT SERVICE INCREASE/DECREASE IN WORKING CAP. U: CASH NET INTERNAL CASH GENERATION

CAPITAL INVESTMENTS OTHER

TOTAL

FUNDS REQUIRED EXTERNAL SOURCES

LONG-TERM LOANS GRANTS TOTAL EXTERNAL SOURCES

CASH SURPLUSIDEFICIT FOR THE YEAR CASH AT BEGINNING OF YEAR CASH AT END OF YEAR

DEBT SERVICE COVERAGE

2003 2004 2005 ACTUAL

.4.058 3.415

1 -644

0

400 4.636 2,592

2.014 2,014

-578

0 578

696

7.5

-143 3.387

0 3,244

0

0 1,106 2,138

744 744

-1,394

0 1,394

452

417 3,864

83 4,218

13

13 -171

4,378

3,782 3,762

-614

0 814 452

1.068

337.6

2006 2007 2008

UAH '000 536 418 821

2,342 3,415 3,510 440 104 183

2.438 3,727 4,148

0 0 89

0 0 89 378 -2.841 1,022

2,061 6.368 3,037

5,049 4,OW 5,000 5,049 4,OW 5,000

2,989 .2,388 1.963

3200

0 0 3200 2,969 2.368 1,237 1,066 -1,923 445

.1,923 445 1,682

35.0

2009 2010 2011 PROJECTIONS

1,526 2,355 3,375 3,654 3,909 4.352

277 347 458 4.903 5,917 7,269

417 968 1545

417 968 1,545 1.858 1.568 397 2.830 3,383 5,327

9,800 15,500 14,500 9,800 15,500 14,500

7,170 12,117 9,173

8300 10800 9000

8300 10800 9000 1.130 . I317 -173 1.882 2,612 1,494 2.812 1.494 1,321

7.3 4.5 4.4

2012

3,155 4,746

301 7,800

1,952

1,952 -1,408 7,055

8,900 8,900

1.845

4910

4910 3,065 1,321 4,387

4.6

2013

4,970 5,006

718 9,259

2,100 3621 5,721 -808

4,145

7,500 7,500

3,355

0

0 -3.355 4.387 1.032

1.7

70

ODESSA MU N IC1 PALlTY FINANCIAL STAT EM ENTS

2002 2003 2004 2005 ACTUAL

OPERATING STATEMENTS (UAH '000)

Revenue Tax Revenue

Income and profit Tax Land Charges Common Tax Other Tax Revenue

Non Tax Revenue State budget Transfers Other Subventions

Total Revenue

Expenditure Salaries and Benefits Materials Services Subsidies and transfers Other Expenditures

Total Expenditure Debt Service Current SurpluslDeficit

250,752 46,457 23,828 48,254 47,851

100,763 7,424

525,329

148,200 47,200 28,100

287,600 3,415

514,515 0

10,814

300,116 48,813 30,227 52,871 57,950 91,359 4,843

586,179

255,744 56,767 34,770 59,553 89,986

147,837 4,019

648,676

172,500 223,300 52,400 76,000 31,700 35,900

277,200 290,300 3,305 8,037

537,105 633,537 0 0

49,074 15,139

324,677 61,525 44,902 72,217 98,219

139,932 5,539

747,011

330,500 101,400 53,000

238,900 7,200

731,000 6,200 9,811

CAPITAL INVESTMENT ACCOUNT Purchase of Equipment 5,500 18,600 13,800 14,500 Capital Construction 7200 12,900 36,300 10,700 Major Repairs 32,900 50,200 60,400 90,500 Capital Transfers to Enterprises 2,651 100 21,400 32,400 Other Expend it ure 251 588 2,300

Total Investments 48,251 82,051 132,488 150,400

Receipts Sale of Property 50,252 61,891 11 1,828 145,376 Other Income 59 33 61 2840 Operating Surplus/Deficit 10,814 49,074 15,139 9,811

Total 61 ,I 25 11 0,998 127,028 158,027

Surplus/Deficit 12,874 28,947 -5,460 -7,627

71

Annex 10: Safeguard Policy Issues UKRAINE: URBAN INFRASTRUCTURE PROJECT

Environmental Assessment:

Environmental Assessments (EAs) were commissioned for al l investments under the project. Included in the EAs are Environmental Management Plans (EMPs) covering the details o f the specific mitigation and monitoring measures o f the sub-projects. Mitigation would include social as well as physical impacts on the environment. The EAs have been reviewed and approved by a specialist identified by the World Bank E C A Regional Environmental Unit. Any works identified during project supervision for inclusion under the project would be reviewed and determination made by the project team in collaboration with the M o E o f the need for the conduct o f an EA for the respective works; the completion and clearance o f such EAs would be required before the disbursement o f any funds for such sub-components.

An Environmental Framework Policy (EFP), serving as “Environmental Guidelines” for chance finds and the possible investments mentioned above that may be identified after the project starts, has also been prepared and reviewed by the above referenced specialist. The EFP will be attached as an annex to the Operational Manual. It provides (i) an overview o f Bank policies compared to country regulationsAegislation and procedures for environmental screening, impact assessment and monitoring, (ii) indicates the manner in which these would be resolved, and (iii) details institutional responsibilities and procedures. It provides the model for any subsequent EAs to be undertaken during the project.

Pest Management:

Not Applicable.

Involuntarv Resettlement:

The specific project sites and investments determined during preparation did not require involuntary resettlement or land acquisition. Although it is expected that al l works to be identified in the future would be the same, the EFP specifies the requirements that would apply (for example, the EFP describes standard Ukraine procedures and policies and the steps that must be taken to ensure compliance with the Operational Policy o f the Bank (particularly compensation at full replacement value, compensation for impact on income, and the right of appeal).

Indigenous PeoDle:

Not Applicable.

Forests:

Not Applicable.

72

Safety of Dams:

Not Applicable.

Cultural ProDertv:

The project would not involve any physical activities at or near known sites o f cultural/historical/religious etc. significance. During routine activities, however, artifacts that are significant from a cultural heritage viewpoint may be found, To address this possibility, chance find procedures would be specified in the EFP and in the respective EMPs for each site (see "Environmental Assessment" above).

Proiects in Disputed Areas:

Not Applicable.

Proiects on International Watenvavs:

OP 7.50 applies to any water project that involves "the use or potential pollution o f international waterways. It specifically exempts fi-om the notification requirement "minor additions or alterations" to existing schemes that "will not adversely change the quality or quantity o f water flows to the other riparians." Since by design the project seeks to improve the water quality o f rivers in the region, it meets this definition. Reduced downstream f l ow o f pollutants into the Black Sea would have positive regional/global implications.

O n this basis, an exception to the notification o f riparians has been prepared and the clearance has been obtained by the Legal Department and an exception has been granted from the Office of the E C A Regional Vice President by memo dated October 12,2005.

73

Annex 11: Project Preparation and Supervision

UKRAINE: URBAN INFRASTRUCTURE PROJECT

Planned Actual PCN review 041 1212005 04/12/2005 Initial PID to PIC 06/27/2005 06/2 712 00 5 Initial ISDS to PIC 07/08/2005 07/08/2005 Appraisal 11/01/2005 11/01/2005 Negotiations 02/22/2007 07/05/2007 BoardRVP approval 0 812 812 0 07 08/28/2007 Planned date o f effectiveness 06/30/2007 NA Planned date o f mid-term review 03/15/2010 NA Planned closing date 12/31/2012 NA

Key institutions responsible for preparation of the project:

Ministry o f Housing and Communal Services, Ministry o f Finance, Ministry o f Economy, and Municipal Governments and Uti l i t ies o f the respective regions included in the project

Bank staff and consultants who worked on the project included: Peer Reviewers: Alex Bakalian, Andrew Macoun and Peter Ellis.

Name Title Unit Seema Manghee Task Team Leader ECSSD Takao Ikegami Dmytro Kryshchenko Pekka Kalevi Salminen Bernard Baratz Philip Moeller Shinya Nishimura Arben Bakllamaja Anna L Wielogorska Daria Goldstein Marjorie Mpundu Brenda Morata Hannah Koilpil lai Irina Babich Delphine Hamilton Oksana Kovalenko

Sr. Sanitary Engineer Financial Analyst Senior Energy Specialist Environmental Specialist Social Specialist Investment Officer Operations Specialist Senior Procurement Specialist Senior Counsel Lawyer Paralegal Senior Finance Officer Financial Management Specialist Senior Program Assistant Program Assistant

ECSSD ECSSD ECSSD

ECSSD CESSE ECSSD ECSPS LEGEM LEGEM LEGEM L O A G l ECSPS ECSSD ECCUA

QAG

Marie-France Sacks Program Assistant LEGEM

Bank funds expended as o f May 13,2007 on project preparation: 1. Bank resources: 440,019.76 2. Total: US$ 440,019.76

Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$ 10,000 2. Estimated annual supervision cost: US$ 120,000

74

Annex 12: Documents in the Project F i le

UKRAINE: URBAN INFRASTRUCTURE PROJECT

Aquarian Engineering Services. Pre-Technical Review Report. Ukraine Proposed Urban Infrastructure Proiects, World Bank Contract No. 7134265, June 21, 2005 [See also technical updates in files].

A r e Households Willing to Pay More for Better Services? PADCO, Live, August 2002.

Association o f Ukrainian Cities and Communities. Safeguarding our Members Interests. Kiev, Ukraine, n.d.

COWI. Ukraine National Water Sector Strategy and Action Plan: National Water Sector Profile, Interim Report June 2002.

MAMA-86. The Citv Clean of Wastes. Project The Children’s Voices for Municipal Waste Problems in the Country. Kharkiv, Ukraine, 2003.

MAMA-86. Drinking Water in Ukraine: Communication and Empowerment for Local and International Action, 3rd edition. Kiev, Ukraine, 2002.

MAMA-86. Incinerators A r e Dangerous for Mankind, Project the Children’s Voices for Municipal Waste Problems in the Country. Kharkiv 2003.

MAMA-86. Provision o f Social Assessment Service, Urban Environmental Infrastructure Needs and Priorities, Final Report UI, Kiev, Ukraine, September 25, 2005.

Municipal Service Delivery Satisfaction Survey: Summary Report, City o f Chernihiv, Conducted by Kiev International Institute o f Sociology, People’s Voice Project, World Bank/PADCO/ICPS, (CIDA), Kiev, Ukraine, 2004.

M W H Associates. Ukraine Proposed Urban Infrastructure Proiect, Initial water, Sanitation. and Solid Waste Investigations, Ivano-Frankivsk water and Wastewater Systems. Current Conditions Report, Chicago, Illinois, August 26,2005.

M W H Associates. Ukraine Proposed Urban Infrastructure Proiect. Initial water, Sanitation, and Solid Waste Investigations. Odesa water and Wastewater System. Current Conditions Report, Chicago, Illinois, September 2,2005.

People’s Voice: Ouarterly report #6. April-June 2005. PADCO, The World Bank, and ICPS, funded by CIDA, Kiev, Ukraine, April 2005.

75

Roberts, Andrea and Olena Houmenyuk. Gender Analysis o f the Results o f a Municipal Service Delivery Satisfaction Survey, Analytical Paper #2, The People’s Voice Project (CIDA), Kiev, Ukraine, 2005.

Zakhozha, Victoria, et al. Service Delivery Satisfaction Survey: Cities o f Alchevsk, Kolomvia, Komsomolsk, Lutsk, Makiyivka and Chernihiv. Analytical Paper # 1. People’s Voice Project (CIDA), Kiev, Ukraine.

76

Annex 13: Statement of Loans and Credits UKRAINE: URBAN INFRASTRUCTURE PROJECT

Original Amount in US$ Millions

Difference between expected and actual

disbursements

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

PO95203 2007 PO76553 2006 PO75231 2006 PO77738 2005

PO83702 2005 PO76338 2004 PO69857 2003 PO57815 2003 PO35777 2003 PO69858 2002 PO35786 2001 PO44832 1998

EXPORT DEVT 2 154.50 0.00 0.00 0.00 0.00 154.50 0.00 0.00 ACC TO FIN SERVS (APL 1) 150.00 0.00 0.00 0.00 0.00 150.00 0.00 0.00

QUAL EDUC EQUAL ACCESS (APL 86.59 0.00 0.00 0.00 0.00 85.48 18.89 0.00

HYDROPOWER REHAB 106.00 0.00 0.00 0.00 0.00 105.25 2.11 0.00 DEVSTAT 32.00 0.00 0.00 0.00 0.00 27.78 22.16 0.68

TB/AIDS CNTRL 60.00 0.00 0.00 0.00 0.00 53.10 45.60 26.22

ST TAX SERV MOD PROG (APL # 1) 40.00 0.00 0.00 0.00 0.00 38.31 21.31 10.60

RURAL LAND TITLING & CADASTRE 195.13 0.00 0.00 0.00 74.00 111.50 29.87 -0.10

SIF 50.21 0.00 0.00 0.00 0.00 29.40 24.68 17.42

SOC ASST SYS MOD 99.40 0.00 0.00 0.00 0.00 95.76 9.03 9.03

LVIV W A T E W 24.25 0.00 0.00 0.00 0.00 7.72 7.71 -1.55

KIEV DISTRICT HEAT 200.00 0.00 0.00 0.00 40.00 12.88 52.88 -0.65

Total: 1.198.08 0.00 0.00 0.00 114.00 871.68 234.24 61.65

STATEMENT OF IFC’s Held and Disbursed Portfolio

In Millions o f U S Dollars

Committed

IFC

FY Annroval Comuanv Loan Equity Quasi

2004 2005 2005 2006 2005 2006 2006 2006 2006 2005 2006 2003 2006 2006

2004 2005

First Lease A E S RivneEnergo AESKyivoblenergo Asnova AvalBank Biocon Group CJSC Rise CJSC Sofia Kiev Delta-Wilmar CIS EVU I1 Galnaftogas HVB Bank Ukraine Industrial Un ... Kviza MHP S.A. Mironovsky Mironovsky

1.14 14.89 29.50 0.00 11.25 3.50 10.00 14.50 17.50 0.00 21.00 2.04 100.00 45.00 0.00 17.50 60.00

0.00 0.00 0.00 0.00

0.00 0.00 0.00 8.00 0.00 70.00 0.00 0.00 0.00 0.00 0.00 2.00 0.00 0.00 7.50 0.00 0.00 4.00 0.00 0.00 0.00 0.00 0.00 0.00

20.00 0.00 0.00 10.00 0.00 0.00

Disbursed

IFC

Partic. Loan Equity Quasi Partic.

0.00 0.00 0.00 0.00 0.00 0.00 0.00

13.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

1.14 3.89 8.50 0.00

11.25 0.00

10.00 6.80 0.00 0.00 9.00 2.04 0.00 0.00 0.00

17.50 60.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.22 0.00 0.00 0.00 0.00

20.00 0.00 0.00

0.00 0.00 0.00 0.00

70.00 0.00 0.00 2.00 0.00

0.00 4.00 0.00 0.00

0.00 0.00

10.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 7.60 0.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00 0.00

77

2004 Nova Liniya

2006 Nova Liniya

2000 Procredit UKR 2004 Procredit UKR 2004 RZB Ukraine 2004 Sandora

2006 Zeus

Total Dortfolio:

0.00 0.00 4.65 0.00 0.00 0.00 4.65 0.00 10.00 0.00 0.00 0.00 2.20 0.00 0.00 0.00 1.50 0.00 0.00 0.00 1.50 0.00 0.00 0.00 6.38 0.00 0.00 0.00 6.38 0.00 0.00 0.00 28.57 0.00 0.00 0.00 28.57 0.00 0.00 0.00 19.00 0.00 0.00 0.00 19.00 0.00 0.00 0.00 9.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

422.27 27.50 98.65 13.00 187.77 20.22 90.65 7.60

Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic.

2006 IMB 0.01 0.00 0.00 0.00 2006 ISD 0.00 0.00 0.00 0.25 2005 A E S RivneEnergo 0.00 0.00 0.00 0.00 2006 Velyka Kyshenya 0.00 0.00 0.00 0.06 2005 AESKvivOblenemo 0.00 0.00 0.00 0.00

Total pending commitment: 0.01 0.00 0.00 0.3 1

78

Annex 14: Country at a Glance UKRAINE: URBAN INFRASTRUCTURE PROJECT

.. 55.1 55.2 00 01 02 03 04 05

.. 21.3 8.1 Household final consumption expenditure General gov't final consumption expenditure Imports of goods and services .. 50.2 53.7 49.1 - -GCF -GDP

POVERTY and S O C I A L Ukralne

2005 Population, mid-year (millions) 47.1 GNI per capita (Atlas method, US$) 1520 GNI (Atlas method, US$ billions) 71.6

Average annual growth, 1999-05

Population (%) -0.9 Labor force (%) -0.3

M o s t recent es t imate ( l a t e s t year aval lable, 1999-05)

Po vert y (%of po pulatio n below natio nal po verty line) 20 Urban population (%of totalpopulation) 66 Life expectancyat birth (Pam) 68 Infant mortality(per (000live births) 14 Child malnutrition (%ofchildren under5) 1 Access to an improvedwater source (%ofpopulation) 96 Literacy(%ofpopulatlonage 69 99 Gross primaryenrollment (%of schookagepopulation) 95

Male 95 Female 95

KEY ECONOMIC R A T I O S and LONG-TERM TRENDS

1985 1995

G D P (US$ billions) .. 48.2 Gross capital formation/GDP .. 26.7 Exports of goods and services1GDP .. 47.1 Gross domestic savings/GDP .. 23.6 Gross national savingslGDP .. 23.3

Current account baiancelGDP .. -2.4 interest payments/GDP .. 0.9 Total debtlGDP .. l7.5 Total debt servicelexports .. 6.4 Present value of debt1GDP Present value o f debtlexports

1985-95 1995.05 2004 (average annualgmwth) GDP -9.3 3.6 P . l GDP per capita -9.4 4.7 0 .0 Exports of goods and services -B.4 6.7 U.8

Europe 6 Lower- Cent ra l middle-

A s i a Income

473 4.10 1,945

0.0 0.6

64 69 26 5

92 97 u 4 a5 102

2004

e4 .9 8.1 61.2 26.7 29.7

10.5 1.1

33.4 D.7 33.6 54.5

2,475 1,98

4,747

1.0 1.4

50 70 33 P

82 89 1y1 t(5 m

2005

61.7 18.4

4.2

2005 2005-09

2.6 5.9 3.3 6.5 3.1 6.3

D e v e l o p m e n t d iamond*

Life axpactancy

T

Gross per primary

enrollment GNi capita

1.

Access to improvedwater source

-Ukraine -- -- Lo wr-middle-income group

i c o n o m l c ra t ios '

Trade

Indebtedness

-Ukraine - Lo wr-middle-income gm up

I .. 34.6 23.3 21.9 40 .. 41.9 51.3 55.0 I o-

1985-95 1995-05 * O o 4 I G r o w t h o f expor ts and i m p o r t s (%) 1 laveracre annualomwthJ . - Agriculture Industry

Services

Household final consumption expenditure General gov't final consumption expenditure Gross capital formation Imports of goods and services

Manufacturing

-6.6 -216 -20.9 -9.5

-12.8 -2.2

-26.3 -20.9

1.2 B .4 1.8 5.0 n.4 2.3 7.8 14.6 2.6 11.1 0.1

4.6 14.5 7.2 1.3 5.4 14.1 5.2 -1.5 9.2 4.9 8.6 14.3

Nota: 2005 data are preliminaryestimates. This table was producedfrom the Development Economics LDB database. 'Thediamonds showfour key indicators in thecountry(in bo1d)comparedwith its income-groupaveraga.lfdataaremissing,thediamondwill

be incomplete.

Ukraine

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices Implicit GDP deflator

Government finance (% of GDP, includes current grants) Current revenue Current budget balance Overall surplusldeficit

TRADE

(US$ millions) Total exports (fob)

Ferrous and non-precious metals Mineral products Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (2000=100) Import price index (2000=100J Terms of trade (2000=100)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ millionsj Conversion rate (DEC, /ocaWS$j

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment (net inflows) Portfolio equity (net inflows)

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

~

1985

1985

1985

1985

1995

376.7 415.8

37.8 -2.3 -4.9

1995

14,244 4,222 2,718 2,693

16,946 1,220 7,841 3,189

103 87

119

1995

17,090 18.280 -1,190

-434 472

-1,152

1,640 -488

1,069 1.1

1995

8,429 491

0

1,137 8 0

64 385

-220 267

0

146 401

0 401

8 393

2004

9.0 15.2

35.0 0.7

-2.9

2004

38,099 14,186 3,351 5,110

29,823 2,619

10,393 1,338

148 132 112

2004

39,719 34,846 4,873

-645 2,576

6,804

-4,578 -2,226

9,525 5.3

2004

21,652 2,168

0

4,301 222

0

159 -385

5,493 1,715

-2,204

32 33

166 -133

56 -189

2005

13.5 18.2

33.4 2.1

-1.1

2005

39,322 14,421 3,455 5,098

33,592 2,899

11,101 9,225

145 133 109

2005

44,470 43,033

1,438

-989 2,951

3,400

2,394 -5,793

15,011 5.1

2005

2,429 0

244 0

484 168 316 76

240

Inflation (%) 1

00 01 02 03 04 05

-GDP deflator - 0 - C P I

Export and import levels (US$ mill.) I 40,000

30,000

20,000

10.000

0

I Exports .Imports

1 Current account balance to GDP (Oh)

l5 1

1 99 00 01 02 03 04 05

Composition of 2004 debt (US$ mill.)

G: 1,767 A: 2.168

E - Bilateral

G - Shorl-tern

A - IBRD B - IDA D - Other multilateral F - Pnvate C - IMF

Note: This table was produced from the Development Economics LDB database. 811 3/06

80

Annex 15: Social Assessment

Government agencies

Service or production providers in the sector

UKRAINE: URBAN INFRASTRUCTURE PROJECT

50%

40

Introduction: The highly deteriorated state o f water-related and sanitation infrastructure in states formerly under the Soviet Union i s endemic. Efforts to deal with the rehabilitation o f such systems on a cost-recovery basis in these states, however, must deal with both technical and social issues. Water, for example, had been considered a free commodity, a perspective that complicates both the collection o f tariffs and the conservation o f water itself. The preparation o f the Urban Infrastructure project, therefore, has included considerable consideration o f social issues and the conduct o f a comprehensive social assessment.

Methodology: The methodology used for the assessment follows the approach used by the water sector in other countries in the region. I t was carried out by a local NGO, MAMA-86, which has extensive water sector experience, in cooperation with the Center for Social and Political Investigation (SOCIS). The comprehensive assessment collected quantitative and qualitative data about the needs and priorities related to environmental protection and urban infiastructure as perceived by the residents o f (i) three communities/municipalities in the Odesa Oblast (including: Odesa, Illichevsk, and Teplodar), (ii) Kharkiv and (iii) Donetsk. Supplemental assessments, using an abbreviated methodology, will be carried out in Belgorod, Chernihiv and Ivan0 Frankivsk.

The comprehensive social assessment was structured to include: (i) a public opinion survey providing a representative sample o f citizens in each o f the three areas mentioned above; (ii) focus group discussions with (a) a representative m i x o f users in each community and (b) a representative mix o f local NGOs; and (iii) in-depth interviews with key informants or representatives o f the municipal authorities and other services. The mix o f informants is shown in Exhibit 1.

Exhibit 1: M i x of Informants

1 Research and development organizations/other 1 10 1 The supplemental assessments included focus groups to validate community-specific consistency with the findings o f the main social assessment. Assessment validation was also obtained through (i) six independently conducted “Satisfaction Surveys” for the delivery o f municipal services, (ii) a general analysis o f household willingness to pay more for better services, and (iii) a gender analysis o f user satisfaction, a l l o f which were prepared under the People’s Voice Project or other U S A I D finding. Public forums were also held in conjunction with the preparation o f the Environmental Assessments and Environmental Framework Policy discussed in the next section. These all provided validation mechanisms, confirming the conclusions of the comprehensive assessment.

81

General Results: Although there were variations from community to community as well as regionally, the overwhelming majority o f participants in the assessment were highly concerned about environmental quality in their communities. In contrast to what was expected from experience in other countries, the concern was fairly consistent without differentiation according to age, gender, social class, or the stability or size o f income.

Environmental Problem Odesa Ilichevsk Air pollution 61.5 49.5

This may be a function o f the higher level o f NGO activity in Ukraine revolving around environmental concerns, especially since the Chernobyl nuclear incident in 1986.

Teplodar 49.6

The participants focused especially on the pollution o f drinking water, in turn seen as related to inadequate waste water treatment. In Odesa Oblast, for example the average ranking o f water quality by respondents was 4.3 on a 10-point scale where 1 = very bad and 10 = very good. An average o f about 70% o f the respondents in the Oblast gave water pollution a priority status (See Exhibit 2).

Pollution o f drinking water 77.5 67.9 66.2

Inadequacies o f the sanitation system 30.0 17.4 14.3

Poor sanitary quality o f streets, delays in 47.0 37.2 13.6 garbage collection High noise levels 10.0 19.9 5.2

Growth o f the city landfill 10.0 9.7 4.6

No environmental problems 1 .o 5.1 19.5

I Shortage o f drinking water I 15.3 I 6.1 I 9.1 I

This was followed by concerns about air quality and a high concern for the poor sanitary state o f municipal streets, this time related to delays in garbage collection and transfer to solid waste management centers. Most respondents reported poor quality o f water in centralized municipal water supply networks, and only a few risked drinking tap water or using it for cooking without some such additional treatment as boiling or filtering. Some used alternative sources o f water. Concerns o f lesser significance included interruptions in the supply o f water and leaks in water supply and sewerage systems.

Although the pattern varied regionally, access to water was somewhat dependent upon type o f residence, but in any case respondents s t i l l relied on alternate sources to supplement their access to piped water. For example, in Kharkiv, most respondents in residential blocks had access to

82

piped water compared to not quite 50% o f al l respondents in private residences. Interestingly enough, however, over 60% o f those respondents living in residential blocks supplemented their water supply with purchases f i o m water trucks and over 35% sought supplemental water from other sources (see Exhibit 3). Even such other cities as Donetsk where both residential blocks and private residences had access to piped water, nearly 50% o f al l respondents supplemented their water supply with bottled water.

Exhibit 3: Water supply sources, by survey locations and housing types (% of respondents who answered relevant questions)

_I_I- .. -- - -- -_-.._____________ 100

80

60

40

20

0 Water Artesian Water Bottled Well- Wells supply wells carts water rooms

networks

Awareness of water quality and sanitation issues and incidencehmpact on Health: Most respondents were aware of the relationship between water quality and health problems, and about 2 1% indicate that they or members o f their households had had serious medical problems related to the poor quality o f drirhng water. Married respondents over unmarried respondents had a high incidence o f problems as did those living in apartments as opposed to private homes. Variation according to age was not significant, but variation according to specific regions was noted. As for the specific health problems associated with the l o w quality o f water, respondents referred to varied disorders not al l o f which could be attributed to poor water, indicating the need for improved customer service and information programs.

Stakeholder Analysis: A review o f key stakeholder interaction, capacity, and social capital was independently conducted by a political specialist. The results basically confirmed the findings o f the comprehensive survey. Communication between government authorities and NGOs has improved, but intra-agency communication lags. The attitudes o f NGOs and local sector technical experts often diverge from those o f the population at large, indicating both communication and information program needs. Popular confidence in government agents and services varies according to jurisdiction -- for example running fairly high in Teplodar but lower in Odesa City -- but i s often lower in central urban areas. The majority o f individuals in Ukraine are not members o f NGOs, citizens associations or social organizations. They do participate in collective actions, preferring direct personal action rather than making contributions to third parties. In contrast to overall environmental concerns the level o f social optimism did vary by age and income, for example being higher among those under thirty and lowest among pensioners.

83

Investment priorities: Respondents saw the age o f existing systems as a major constraint on water quality and sanitation and listed these rehabilitation concerns as the primary needs for immediate attention. They saw the age o f treatment systems and deteriorated pipes in the distribution and collection systems as key concerns. They cited infiltration from leaking sewerage collection systems and inadequately treated discharges o f sewage into the environment. Participants would be willing to pay for moderate increases in tar i f fs if good water quality could be assured. In part this willingness reflected the fact that they were already paying for alternate sources o f water or special treatment. As a secondary consideration they supported the recycling o f solid waste.

Options

In conjunction with the survey, discussions with municipal and oblast experts about mitigation measures to improve the handling o f municipal waste also focused heavily on the way waste i s processed rather than the need to allocate new areas for landfills. This resonated well with popular perceptions. In Donetsk, for example al l the experts agreed with the need to construct a waste-processing facility and the majority o f them positively responded to such proposals as involvement o f the private sector and investments for secondary waste processing, public awareness raising activities and involvement o f local residents into waste separation. None of the expert supported the option o f allocation o f new land areas for landfills (see Exhibit 4). Everyone supported closing down the number o f wild sites.

Percentage

Construction o f a waste-processing facility Involvement o f the private sector and investments into secondary waste processing Awareness raising activities and involvement

100 75

63 o f residents into waste separation Organizing waste delivery to landfills A waste-processing facility Allocation o f land for new landfills

84

38 25 0

Hora HoverlaHora Hoverla(2061 m) (2061 m)

C a r p a t h i a n Mt n s .

Dnieper Upland

Dnieper Lowland Donets Basin

V O L Y NV O L Y N RIVNERIVNE

ZHYTOMYRZHYTOMYR

L V I VL V I V

TERNOPILTERNOPILK

HM

ELN

YTS

KY

IK

HM

ELN

YTS

KY

I

V INNYTSYAVINNYTSYAZAKARPATZAKARPAT

KYIVKYIV

CHERKASYCHERKASY

KIROVOHRADKIROVOHRAD

POLTAVAPOLTAVA

CHERNIHIVCHERNIHIVSUMYSUMY

KHARKIVKHARKIV

ODESSAODESSA

DNIPROPETROVSKDNIPROPETROVSK

KHERSONKHERSON

ZAPORIZHZHIAZAPORIZHZHIA

LUHANSKLUHANSK

DONETSKDONETSK

C R I M E A NC R I M E A N

IVANO-IVANO-FRANKIVSKFRANKIVSK

CHERNIVTSICHERNIVTSI

???MYKOLAÏV???MYKOLAÏV

Inhule

ts

Inhule

ts

BuhBuh

Dniester South Buh

Desna

Dnieper

Donets

North KovelKovel SarnySarny

KorostenKorosten

KremenchukKremenchuk

Kryvyi RihKryvyi Rih

NykopolNykopol

TeodosiiaTeodosiia

IzmailIzmail

MelitopolMelitopol

SieverodonetskSieverodonetsk

ChernihivChernihiv

SumySumy

KirovohradKirovohrad

VinnytsyaVinnytsya

ZhytomyrZhytomyr

ZaporizhzhiaZaporizhzhia

Donets'kDonets'k

Dnipropetrovs'kDnipropetrovs'k

CherkasyCherkasy

PoltavaPoltava

RivneRivne

Ternopil'Ternopil'

Khmel'nyts'kyiKhmel'nyts'kyi

UzhhorodUzhhorod

ChernivtsiChernivtsi

L'vivL'viv

MykolayivMykolayiv

Luhans'kLuhans'k

KhersonKherson

Ivano-Ivano-Frankivs'kFrankivs'k

KharkivKharkiv

Luts'kLuts'k

KYIVKYIV(KIEV)(KIEV)

Uman'Uman'

P O L A N DP O L A N D

SLOVAKSLOVAKREPUBLICREPUBLIC

HUNGARYHUNGARY

ROMANIAROMANIA

RUSSIANRUSSIANFEDERATIONFEDERATION

RUSSIAN RUSSIAN FEDERATIONFEDERATIONBELARUSBELARUS

BULGARIABULGARIA

MO

L DO

VA

To To WarsawWarsaw

To To WarsawWarsaw

To To TarnowTarnow

To To Satu MareSatu Mare To To

Tirgu MuresTirgu Mures

To To BirladBirlad

To To BuzauBuzau

To To MedgidiaMedgidia

To To TecuciTecuci

To To SochiSochi

To To ArmavirArmavir

ToToVoronezh Voronezh

ToToVoronezh Voronezh

ToToOrelOrel

ToToBryanskBryansk

ToToMinskMinsk

ToToZhlobinZhlobin

V O L Y N RIVNE

ZHYTOMYR

L V I V

TERNOPILK

HM

ELN

YTS

KY

I

V INNYTSYAZAKARPAT

KYIV

CHERKASY

KIROVOHRAD

POLTAVA

CHERNIHIVSUMY

KHARKIV

ODESSA

DNIPROPETROVSK

KHERSON

ZAPORIZHZHIA

LUHANSK

DONETSK

C R I M E A N

IVANO-FRANKIVSK

CHERNIVTSI

???MYKOLAÏV

Kovel Sarny

Uman'

Korosten

Kremenchuk

Kryvyi Rih

Nykopol

Yevpatoriia

SevastopolYalta

Teodosiia

Izmail Vilkova

MelitopolBerdiansk

Mariupol

Kerch

Sieverodonetsk

Sumy

Kirovohrad

Vinnytsya

Zhytomyr

Zaporizhzhia

Dnipropetrovs'k

Cherkasy

Poltava

Rivne

Ternopil'

Khmel'nyts'kyi

Uzhhorod

Chernivtsi

L'viv

Mykolayiv

Luhans'k

Kherson

Simferopol’

Luts'k

Kharkiv

Chernihiv

Donets'k

Odessa

Ivano-Frankivs'k

KYIV(KIEV)

P O L A N D

SLOVAKREPUBLIC

HUNGARY

ROMANIA

RUSSIANFEDERATION

RUSSIAN FEDERATIONBELARUS

BULG.

MO

L DO

VA

Inh

ulets

Buh

Mouths ofthe Danube

Dniester South Buh

Desna

Dnieper

Donets

North

B lack Sea

Seaof

Azov

KyivReservoir

KakhovReservoir

KremenchugReservoir

To Warsaw

To Warsaw

To Tarnow

To Satu Mare To

Tirgu Mures

To Birlad

To Buzau

To Medgidia

To Tecuci

To Sochi

To Armavir

ToVoronezh

ToVoronezh

ToOrel

ToBryansk

ToMinsk

ToZhlobin

C a r p a t h i a n Mt n s .

Dnieper Upland

Dnieper Lowland Donets Basin

Hora Hoverla(2061 m)

25°E 30°E 35°E

35°E30°E

25°E

45°N

50°N 50°N

45°N

UKRAINE

0 50 100

0 50 100 150 Miles

150 Kilometers IBRD 34813

JUN

E 2006

UKRAINEURBAN INFRASTRUCTURE

PROJECTPROJECT CITIES

SELECTED CITIES AND TOWNS

OBLAST CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

OBLAST BOUNDARIES

INTERNATIONAL BOUNDARIES

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, o r any endo r s emen t o r a c c e p t a n c e o f s u c h boundaries.