PROJECT INFORMATION DOCUMENT (PID)
APPRAISAL STAGE
Report No.: 33765
NUTRIENT REDUCTION (GEF) PROJECT
Project Name
Public Disclosure Authorized
Region
EUROPE AND CENTRAL ASIA
Sector
Sewerage (50%); General water, sanitation and flood protection
sector (50%)
Project ID
P074971
GEF Focal Area
International waters
Borrower(s)
REPUBLIC OF HUNGARY
Implementing Agency

Ministry of Environment and Water
Fo u. 44-50
1011 Budapest
Environment Category
[ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined)
Date PID Prepared
September 20, 2005
Public Disclosure Authorized
Date of Appraisal

Authorization
Date of Board Approval
December 8, 2005
1. Country and Sector Background

One of the main reasons for environmental degradation of the water bodies of the central
European region and the Black Sea is the high content of nutrients. The Danube River, one of the
continent's largest and most important rivers, is by far the single most important contributor to
the nutrient pollution of the Black Sea. The loads of nitrogen (N) and phosphorus (P) transported
via the Danube River were recently estimated at about 690,000 and 70,000 tons per year1,
Public Disclosure Authorized
respectively. As a comparison, these amounts represent about ten times the loads of N and P
discharged to the North Sea from the river Rhine. The eutrophication on the northwestern shelf
of the Black Sea, at the mouth of the Danube, has had particularly disastrous impact on water
quality, natural habitat, and fish populations on which both biodiversity and human populations
depend. The strategic importance of the region is increasing in the context of an enlarged
European Union (EU), and future development of the river basin will further increase the
pressure on the ecosystems.

Since the mid 1980s, the countries of the Region have stepped up international cooperation for
the protection of the Danube River and the Black Sea. The Bucharest (1985) and Sofia (1994)
Conventions, signed by eleven Danube basin countries and the EU, led to the creation of the
International Commission for the Protection of the Danube River (ICPDR) in October 1998.
Under the Commission's lead, strategic action plans and monitoring programs have been
Public Disclosure Authorized
launched, setting baselines and identifying hot spots and investment priorities. In November
2000, the ICPDR adopted its first Joint Action Plan (JAP) for the years 2001-2005, which called
1 Source: Nutrient Removal Extension of North Budapest Wastewater Treatment Plant ­ Environmental Impact
Assessment (Imsys Ltd.) February 2005, based on MONERIS results.

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for the reduction of municipal discharges from major urban centers. Although, according to
studies, pollution from non-point sources pollution represents about 80% of N and 65% of P, it is
much more difficult to address them than point-source discharges. One method to achieve this,
the development of wetlands as nutrient traps, was therefore identified as a strategic priority to
improve the Danube River water quality, and thereby decrease the discharges of nutrients in the
Black Sea. Budapest is by far the most important source point of nutrient discharges identified by
the JAP in Hungary. As such, it has been included within the five top regional priorities of the
JAP.

Hungary has recently joined the EU (May 1st, 2004) and is in the process of adapting its
regulatory framework to comply with EU requirements, particularly with the Directives on
water. With this goal in mind, the Municipality of Budapest (MOB) has prepared a long-term
comprehensive plan for wastewater collection and treatment in Budapest. This plan represents a
substantial step toward Hungary's compliance with EU Directives. It entails the development, by
the end of 2010, of four major projects: the completion of the wastewater collection system in all
areas of Budapest; the rehabilitation and the development of nutrient removal facilities at
existing wastewater treatment plants (WWTPs); the construction of the Central WWTP; and the
increase of landfill capacity for mid-term sludge disposal. The proposed Project complements the
actions already undertaken by the MOB, in particular through the ongoing Hungary Municipal
Wastewater Project (HMWP), to further reduce nutrient discharges and achieve additional global
benefits (for additional information, see Annex 1).

Within the overall investment program of the JAP, construction of wastewater treatment
infrastructure is by far the most expensive investment, representing about 90 % of the investment
program (investments in wastewater treatment infrastructure in Hungary alone represent 25 % of
the JAP investment program). Although the Danube River is not declared a sensitive water body,
the Hungarian authorities have decided to add tertiary treatment in the North Budapest WWTP
(NBWWTP) to fulfill Hungary's commitments towards the reduction of nutrient discharges into
the Danube and the Black Sea.

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

2. Objectives

The Project's higher-level objectives are to assist national and local authorities in Hungary in the
implementation of top priority investments in the wastewater sector and to support the

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Government's commitments under the Danube Conventions and other international agreements
for the protection of the Danube River and the Black Sea.

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

3. Rationale for Bank Involvement

Under the ongoing HMWP, the Bank has provided an important part of the financial resources
needed for the baseline investment of the proposed Project, and has been critical in mobilizing
additional resources to support Project preparation in a coordinated way with other ongoing
investments. The HMWP, approved in 1999 and co-financed by an EU Phare Grant, is financing
the rehabilitation of the North Budapest and South Pest WWTPs to the secondary level of
treatment, the development of nutrient reduction at the South Pest WWTP, and the construction
of a secondary treatment WWTP in Dunaujvaros. Uncommitted funds under the HMWP will be
used to complement the GEF Grant for the proposed Project.

Additionally, the Bank/GEF helped to establish regional coordination and institutional
cooperation through the ICPDR, and played an instrumental role in the development of the
UNDP/ GEF Strategic Partnership for the protection of the Danube River and the Black Sea. To
support actions under the Partnership, the GEF created an investment fund, under which the
proposed Project is to be financed. The Bank has financed a wetland restoration project in
Bulgaria; it is also currently preparing an operation in the Russian Federation to reduce nutrient
discharges into the Don River and the Azov /Black Seas from the Rostov-on-Don WWTP. The
Bank, acting as an implementing agency on behalf of the GEF, is adding knowledge and
experience, and is incorporating lessons learned from the other Projects financed under the
Partnership, as well as from other projects in other regions.

The last full Country Assistance Strategy (CAS) for Hungary was discussed at the Board of
Executive Directors in January 1998, and covered the period FY98 to FY00. Since then, the
Hungarian authorities initiated an accelerated graduation process with the Bank, which is about
to be concluded. Consequently, the Bank prepared a CAS Progress Report which outlined a pre-
graduation assistance program supporting the Government efforts to comply with the
requirements derived from the accession to the EU. This program includes the completion of the
ongoing HMWP and the implementation of the proposed Project, in parallel with analytic and
advisory services. Therefore, the proposed Project is fully consistent with the Bank's CAS
Progress Report.

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4. Description

The Project's cost of US$32 million would be partially financed by a full-sized GEF Grant in the
amount of US$12.5 million. The Grant will be complemented by a reallocation in the amount of
EUR5.9 million (US$7.7 million equivalent) from the Bank's Loan 4512-HU to the MOB for the
HMWP, and additional counterpart funding of about US$10.4 million from MOB, and US$1.4
million from the Ministry of Environment and Water (MOEW).

5. Financing

Source: ($m.)
RECIPIENT 11.80
ASSOCIATED INTERNATIONAL BANK FOR RECONSTRUCTION
7.70
AND DEVELOPMENT
GLOBAL ENVIRONMENT FACILITY
12.50
Total
32.00

6. Implementation

Institutional and implementation arrangements

Implementation Period: Five years, from FY 2006 to FY 2011.

Project Management Structure: The MOEW will have overall responsibility for managing the
Project implementation, including Project oversight and reporting to the Bank, as well as for
inter-agency coordination between the two executing agencies. For overall Project management,
disbursement, supervision and reporting to the Bank and Hungarian authorities, the MOEW has
appointed a Project coordinator and established a small Project Management Unit (PMU) to
ensure quality and timely coordination. The MOEW has entered into a four-party agreement with
the MOB, the WA and the DDNPD that defines the main roles and responsibilities of each
partner institution for the implementation of the Project. Under this agreement, the day-to-day
implementation and administration of components 1 and 2 is decentralized to separate executing
agencies. Component 1 will be implemented by the MOB and Component 2 by the WA, on
behalf of the DDNP, the final beneficiary of the investments. Implementation of Component 3
will remain under the direct responsibility of the MOEW. To provide for inter-agency
coordination, the Project's institutional arrangements include the establishment of a Project
Steering Committee (PSC), composed of representatives of the main institutions involved in its
implementation.

MOEW, PMU: During Project preparation, the MOEW has designated a qualified staff from its
Budget and Finances Department as Project coordinator, who will continue the existing
responsibilities during Project implementation. The MOEW has established a PMU to assist the
coordinator, staffed with six professionals: a coordinator's assistant, a financial analyst, a
procurement specialist and three environmental specialists. The PMU will oversee, coordinate,

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administer and monitor Project implementation, and will act as Bank's counterpart for any matter
related to Project implementation. In addition, the PMU will coordinate the Project M&E, and
will be directly responsible for implementing the dissemination and replication component.

Project Steering Committee: The PSC will continue operating throughout Project
implementation. It comprises representatives from the MOEW, the MOB, the WA and the
DDNP. This committee plays an important role in the Project. It will bring the collective
expertise of the sectors concerned, at the national, regional and municipal level, and of the
stakeholders, to help ensure that Project implementation achieves its objectives. The PSC and
will also work as channel for the dissemination of experiences and lessons generated by the
Project. The PSC is to be formally appointed as early in the process as possible. It will be chaired
by a senior level official of the MOEW, who has direct access to the Minister, to ensure
appropriate support from the highest level. For these reasons, the establishment and appropriate
staffing of the PSC have been made a condition to Disbursement.

Project Implementation Unit-PIU, MOB: Implementation activities for the Budapest component
will be managed by the PIU, MOB. This unit was established more than ten years ago to
implement Projects financed by IFIs. The unit is composed of a group of staff who have
substantial experience in the implementation of Bank-financed projects, through the ongoing
HMWP (Loan 4512-HU), which is at an advanced stage of implementation. The unit will be
responsible for the technical and financial management of the Project component, and for
handling procurement and reporting requirements. The PIU, MOB will be advised in technical
matters by the Public Utilities Department of the MOB, which has experienced personnel. There
is a long and well established cooperation between the MOB and the BMSC, which has been
involved in all stages of Project preparation. During the implementation phase, the supervision of
the works to be performed at the NBWWTP has been awarded to the BMSC, under a contract
financed by MOB from its own funds. The MOB will create a joint review team consisting of
representatives of the MOB (Project Unit and Public Utilities Department), the BMSC, and the
Private Operator to monitor the implementation of the works. The responsibility for investments
remains under the responsibility of the MOB until the facilities are completed and
commissioned. Responsibility for their operations and maintenance will then be handed over to
the BMSC.

Project Implementation Unit-PIU, WA: Implementation of activities under the DDNP
component, including the development of the M&E system, will be supervised by the PIU, WA,
acting as an agent on behalf of the DDNP, whose staff has no experience in dealing with Bank-
or IFI-financed projects. This unit was established for the component's preparation, and it is
composed of a coordinator ­ a consultant was hired for that purpose - and seasoned professional
staff of the WA. The selection of the WA as an executing agency on behalf of the DDNP is
based on its experience in water project management, including projects financed by IFIs (other
than the World Bank), its knowledge of water management and of the area and its river basin
approach. In order to minimize risks related to the lack of experience in dealing with Bank-
financed projects, a Project launch workshop, including training in Bank's operational rules, will
be organized. Additionally, a detailed Project Operational Manual, including the Project's
operational procedures, as well as agreed implementation and procurement plans, has been
drafted and commented by the Bank. The PIU, MOB will provide assistance to the PIU, WA, as

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appropriate. Preparation of basic engineering designs and works supervision will be carried out
by consultants. As the lead-time requirements for the approval of the required environmental
licenses for the DDNP component could extend to about eighteen months, execution of works
under this component is scheduled to start late during Project implementation.

Operational Flow: Each PIU will be required to fulfill Project requirements in regards to the
investment planning, procurement, supervision of works and purchases, financial management,
and for auditing and reporting to the PMU for its respective Project component. Approval for
applications for disbursement, withdrawal of Grant and Loan funds, and consolidated reporting
to the Bank will be carried out by the PMU. Main roles and responsibilities in regard to financial
management, flow of funds, disbursement, reporting, and execution and monitoring of the
Project's environmental management plan are to be described in the four-party agreement.
Additionally, detailed responsibilities for operational processes, rules and standard forms and
documents are to be spelled out in sufficient details in the Operational Manual. Drafts of these
two documents have been submitted to the Bank for review. Comments have been provided.
Revised versions of these documents, incorporating Bank's comments, are to be further
discussed at Negotiations. Formalized agreed upon versions of these documents should be
received as a condition to start Disbursement under the Project.

Legal Arrangements: A Grant Agreement will be signed between the Bank, acting as an
implementing agency for the GEF, and the Republic of Hungary. This Agreement will include
the provisions for the implementation of Components 2 and 3, as both the WA and the DDNP are
under the direct responsibility of the MOEW. A Project Agreement is to be signed between the
Bank and the MOB for the purposes of Component 1. An amendment to the Loan Agreement is
being prepared by the Bank, at the request of the MOB, to authorize the use of uncommitted
funds under the Loan 4512-HU to partially finance Component 1 of the proposed Project 2
7. Sustainability

Sustainability. In the case of the MOB, as part of the HMWP, the Bank has financed the
construction of the South Pest WWTP and the rehabilitation of the biological secondary
treatment of the NBWWTP. These investments, along with the installation of tertiary treatment
in the NBWWTP under the proposed Project, and the foreseen construction of the Central
Budapest WWTP are included in the long-term comprehensive plan for wastewater collection
and treatment in Budapest. Tariff increases will be made as required to cover revenue
requirements. Further, the MOB has demonstrated its commitment to the Project objectives
through the implementation of the baseline investments and the approval of additional direct
financial support beyond the GEF contribution.

2 In addition, the amendment expressly includes such development in the Project description and to introduce the use
of the revised procurement guidelines dated May 2004. In parallel, a Memo is also being processed, in compliance
with OP/BP 13.25 on the use of Project Cost Savings, to seek the endorsement of the Country Director, (in
compliance with the ECAVP Memo dated July 8, 2005) to reallocate the uncommitted funds for that purpose. The
amendment will be signed concomitantly with the signing of the legal documents.

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

8. Lessons Learned from Past Operations in the Country/Sector

The main lessons learned from similar Bank operations in the country, in the region, and in other
countries suggest that:
· A clear understanding of the roles of and responsibility sharing between the MOEW, the
MOB, and the WA, on behalf of the DDNP, should be defined and agreed upon during
Project preparation and confirmed at negotiations. This issue has been addressed through
extensive consultations that led to the preparation of a four-party agreement between the
partner institutions, which determines the roles and responsibilities of each of them
during implementation. A draft of this agreement has been submitted to the Bank for
review and comments have been provided by the Project team. The drafting of such
agreement and of the Operational Manual, including financial accounting section, is a
condition of Negotiations. The signing of such agreement, satisfactory to the Bank, and
the provision of an agreed upon Operational Manual will be conditions of Disbursement.
· Poor quality at entry may result in unrealistic expectations, delays and unsatisfactory
achievement of the Project objectives. To address this risk, funds were made available by
the GEF for the purpose of Project preparation. These funds financed detailed
consultants' services for the preparation of economic and financial analysis,
environmental impact assessments, pre-feasibility studies and preliminary design (DDNP
component).
· The early involvement in Project design of key stakeholders as well as the local
communities is critical to ensure ownership, build trust and ensure lasting commitment
and collaboration. While socio-economic and local community development issues need
to be carefully considered in the Project design, the rationale, benefits and objectives of
the Project should be disseminated to all stakeholders early in the preparation process, if
not through active participation, through effective public awareness programs.
Preparation activities focused on ensuring quality and helped design a Project supported
by the main stakeholders and by the population. The Project foresees further public
involvement and provides for the development of public awareness, in particular through
the dissemination and replication activities.

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9. Safeguard Policies (including public consultation)

Safeguard Policies Triggered by the Project
Yes
No
Environmental Assessment (OP/BP/GP 4.01) [X]
[
]
Natural Habitats (OP/BP 4.04)
[X] [
]
Pest Management (OP 4.09)
[ ]
[X]
Cultural Property (OPN 11.03, being revised as OP 4.11)
[ ]
[X]
Involuntary Resettlement (OP/BP 4.12)
[ ]
[X]
Indigenous Peoples (OD 4.20, being revised as OP 4.10)
[ ]
[X]
Forests (OP/BP 4.36)
[ ]
[X]
Safety of Dams (OP/BP 4.37)
[ ]
[X]
Projects in Disputed Areas (OP/BP/GP 7.60)*
[ ]
[X]
Projects on International Waterways (OP/BP/GP 7.50)
[X] [
]
10. List of Factual Technical Documents

Extension of the North Pest Wastewater Treatment Plant: II Stage, Nutrient Removal. Estimation
of Investment and Operation Costs for Technological Alternatives (Hydrochem Kft. Vituki
Innosystem Kft.) Mai 2003

Nutrient Removal Extension of North Pest Wastewater Treatment Plant ­ Financial and
Economical Analysis (Oko Inc.) February 2005

Nutrient Removal Extension of North Pest Wastewater Treatment Plant ­ Environmental Impact
Assessment (Imsys Ltd.) February 2005

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

Reduction of Nutrient Discharges Project ­ (DDNP) Pre-Feasibility Study, Financial and
Economic Analysis (DHV Hungary Ltd.) March 2005
* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the
disputed areas

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11. Contact point
Contact: Xavier Chauvot de Beauchêne
Title: Water and Sanitation Specialist
Tel: (202) 473-6201
Fax: (202) 614-0902
Email: Xchauvot@worldbank.org

12. For more information contact:
The InfoShop
The World Bank
1818 H Street, NW
Washington, D.C. 20433
Telephone: (202) 458-5454
Fax: (202) 522-1500
Web: http://www.worldbank.org/infoshop

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