Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 32379-YF

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 16.6 MILLION (US$25.0 MILLION EQUIVALENT)

TO

SERBIA AND MONTENEGRO

FOR A

SERBIA IRRIGATION AND DRAINAGE REHABILITATION PROJECT

June 8,2005

Environmentally and Socially Sustainable Development Unit South East Europe Country Unit Europe and Central Asia

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

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CURRENCY EQUIVALENTS

(Exchange Rate Effective March 3 1,2005)

CAS C I D A D o W DTD EA EAR EU FA0 FRY GEF GDP GoS H M S ICPDR MAFWM MIDP MIDPU M S E P D E P

O&M P I M PHRD ROS S a M Serbiavode Vode Vojvodine WUAs

CurrencyUnit = Euro Euro 1.00 = US$1.194

US1.45133 = SDR 1.00

FISCAL YEAR January1 - December31

ABBREVIATIONS AND ACRONYMS

Country Assistance Strategy Canadian International Development Agency Directorate o f Water, under MAFWM Danube-Tisa-Danube canal system Environmental Assessment European Agency for Reconstruction European Union Food and Agriculture Organization o f the Uni ted Nations Federal Republic o f Yugoslavia Global Environment Facil ity Gross Domestic Product Government o f Serbia Hydrometeorological Service o f Serbia International Commission for Protection o f the Danube River Ministry o f Agriculture, Forestry and Water Management M i n o r Irrigation Development Program M i n o r Irrigation Development Program Unit Ministry of Science and Environmental Protection, Directorate o f Environmental Protection Operations and Maintenance Participatory irrigation management Japan Policy and Human Resource Development technical assistance grants Republic o f Serbia Serbia and Montenegro Public Water Authority under D o W for a l l areas o f Serbia except Vojvodina Public Water Authority under D o W for Vojvodina region Water Users Associations

Vice President: Shigeo Katsu Country Director: Orsalia Kalantzopoulos

Sector Manager: Marjory-Anne Bromhead Task Team Leader: Usaid I. El-Hanbali

FOR OFFICIAL USE ONLY

SERBIA AND MONTENEGRO

PROJECT A P P R A I S A L D O C U M E N T

SERBIA IRRIGATION AND DRAINAGE REHABILITATION PROJECT

CONTENTS

without W o r l d Bank authorization .

Page

STRATEGIC CONTEXT AND RATIONALE ............................ .................................... 1 1 . Country and sector issues .................................................................................................... 1 2 . Rationale for Bank involvement 4 3 . Higher level objectives to which the project contributes .................................................... 5

A .

.........................................................................................

B . PROJECT DESCRIPTION ................................................................................................. 5 1 . 2 . 3 .

Lending instrument ............................................................................................................. 5 Project development objective and k e y indicators .............................................................. 5 Project components ............................................................................................................. 6

4 .

5 . Lessons learned and reflected in the project design ............................................................ 7 Altematives considered and reasons for rejection .............................................................. 8

C . IMPLEMENTATION .......................................................................................................... 8 Partnership arrangements (if applicable) ............................................................................ 8 1 .

2 . 3 . Moni tor ing and evaluation o f outcomes/results .................................................................. 9 4 . Sustainability ..................................................................................................................... 10 5 . Crit ical r isks and possible controversial aspects ............................................................... 10 6 . Loadcredi t conditions and covenants ............................................................................... 11

Institutional and implementation arrangements .................................................................. 9

D . APPRAISAL SUMMARY ................................................................................................. 11 Economic and financial analyses ...................................................................................... 11 1 .

2 . Technical ........................................................................................................................... 11 3 . Fiduciary ........................................................................................................................... 11 4 . Social ................................................................................................................................. 12 5 . Environment ...................................................................................................................... 12 6 . Safeguard policies ............................................................................................................. 13 7 . Pol icy Exceptions and Readiness ...................................................................................... 14

Annex 1: Irrigation. Drainage and Flood Control Background ............................................. 15 Annex 2: Ma jo r Related Projects Financed b y the Bank and/or other Agencies ................. 24 Annex 3: Resul ts Framework and Monitor ing ........................................................................ 25 Annex 4: Detailed Project Description ...................................................................................... 29 Annex 5: Project Costs ............................................................................................................... 37 Annex 6: Implementation Arrangements ................................................................................. 38 Annex 7: Financial Management and Disbursement Arrangements ..................................... 40 Annex 8: Procurement Arrangements ...................................................................................... 45 Annex 9: Economic and Fiscal Analysis ................................................................................... 49 Annex 10: Safeguard Policy Issues ............................................................................................ 63 Annex 11: Project Preparation and Supervision ..................................................................... 71 Annex 12: Documents in the Project F i le ................................................................................. 72 Annex 13: Statement o f Loans and Credits .............................................................................. 73 Annex 14: Country at a Glance ................................................................................................. 75

MAP

BRD 33897: Irrigation and Drainage Rehabilitation Project

SERBIA IRRIGATION AND DRAINAGE REHABILITATION PROJECT

PROJECT APPRAISAL DOCUMENT

EUROPE AND CENTRAL ASIA

ECSSD

Date: June 8, 2005 Country Director: Orsalia Kalantzopoulos Sector Manager: Marjory-Anne Bromhead

Team Leader: Usaid I. El-Hanbali Sectors: Irrigation and drainage (1 00%) Themes: Water resource management (P);Rural services and infrastructure (P);Infi-astructure services for private sector development (S) Environmental screening category: Partial Assessment Safeguard screening category: Limited impact

Project ID: PO87964

Lending Instrument: Specific Investment Loan

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

For Loans/Credits/Others: Total Bank financing (US$m.): IDA Credit o f US$25.00 mi l l ion Proposed terms: 20 years to maturity, inclusive o f 10 years grace period, with no acceleration clause

Borrower: Serbia and Montenegro

Responsible Agency: Ministry o f Agriculture, Forestry and Water Management - Directorate o f Water Nemanjina 22-26 1 1000 Belgrade Serbia and Montenegro Tel: 381-1 1-201-33-66 Fax: 381-1 1-31 1-53-70 E-Mail : nikola.marj anovic@minpolj .sr.gov.yu

Cumulative1 1.06 I 5.21 I 12.45 I 19.61 1 23.82 1 25.00 I Project implementation period: Start December 1,2005 End: November 30,2010 Expected effectiveness date: November 30,2005 Expected closing date: M a y 31,201 1 Does the project depart from the CAS in content or other significant respects? Ref: PAD A.3 [ ]Yes [XINO

Does the project require any exceptions from Bank policies? Re$ PAD D. 7 [ ]Yes [XINO Have these been approved by Bank management? I s approval for any pol icy exception sought f rom the Board?

[ ]Yes [ IN0 [ ]Yes [ IN0 [XIYes [ ] N o

[X]Yes [ ] N o

Does the project include any critical risks 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 main objectives are to: (a) improve the capacity for increased efficiency o f agricultural production through support to high priori ty rehabilitation o f drainage and irrigation infrastructure; (b) reduce the risk o f damage from flooding to land, crops, property, infrastructure as well as reducing risk o f l i fe loss from flooding in project areas; and (c) improve water resources management and strengthen the associated water resource management institutions and policies.

Project description [one-sentence summary of each component] Re$ PAD B.3.a, Technical Annex 4

Component 1. Rehabilitation and Improvement of Drainage and Flood Control Infrastructure (US$20.4 million): Rehabilitation and improvement works would include: (a) rehabilitation o f drainage facilities, including pumps and maintenance equipment; and (b) rehabilitation o f flood control defenses to give a 1 in 100 year flood protection for agricultural and minor settlements, and a 1 in 1,000 year protection for large settlements and industry.

Component 2. Minor Irrigation Development Program (US$6.0 million): This program wil l support the development and/or rehabilitation and improvement o f minor irrigation schemes mainly in the hilly regions o f Central and Southern Serbia. These schemes would-be o f less than 300 ha each and total about 4,000 ha. Selection o f areas for the schemes wil l be based on a set oi criteria, chief among them is farmers’ willingness to establish a Water Users Association (WUA) that wil l bear full costs o f the future O & M o f the new or rehabilitated infrastructure.

Component 3. Institutional Strengthening and Capacity Building (US$4.9 million): This component wil l aim to strengthen the institutional capacity o f water sector institutions. I t wil l strengthen D o W capacity in i t s regulatory and strategic functions, particularly in the irrigation and drainage sub-sector, and at field testing participatory irrigation and drainage management principles (including Water Users Associations and Water Boards). The component wil l also

include provision o f various equipment and studies for other public institutions in the water sector.

Component 4. Project Management and Monitoring (US1.4 million): The project wi l l provide support for: (a) overall project management and technical assistance in such areas as detailed design and construction supervision, procurement, financial management and participatory water management; (b) implementation o f environmental management plans for rehabilitation and construction activities that wil l be carried out under the project; and (c) annual financial audit o f Droiect accounts. Which safeguard policies are triggered, if any? Re$ PAD D. 6, Technical Annex 10

The project i s rated Category B. An Environmental Assessment (EA) has been prepared for the project as a part o f the Framework Environmental Impact Study. The EA includes assessment o f the potential impacts o f the proposed project and the l ikely significance o f impact, recommended mitigation measures, outline o f monitoring plan and organization responsible for implementation of mitigation measures. Specific EAs have been prepared for the proposed f lood protection and drainage schemes, while framework EA has been prepared for the irrigation schemes. Public consultations to review and discuss EA were held on February 21 and 22,2005 in Belgrade and N o v i Sad. The final EA and record o f public consultation was delivered to the Wor ld Bank in early March 2005 and has been posted in the Infoshop.

The Bank safeguards pol icy on Projects o n International Waterways (OP 7.50) has been triggered because the project areas involve the Danube River Basin, an international waterway. In accordance with this policy, Serbia has requested the Bank to not i fy other riparian states about the project and i t s components. By a letter o f March 17,2005, the Bank noti f ied the riparian states through the International Commission for Protection o f the Danube River (ICPDR). By a letter o f June 9,2005, the ICPDR thanked Serbia and the Bank for sharing o f information, and indicated that the riparian states do not have any objections to the proposed activities under the project. Additionally, the Bank determined that the project wil l not cause appreciable harm to the riparian states, nor would i t be appreciably harmed by the other riparian states’ possible water use.

Significant, non-standard conditions, if any, for: Re$ PAD C.6 Board presentation: None.

Loadcredit effectiveness: The Sub-credit Agreement between Serbia and Montenegro and the Republic o f Serbia has been executed and al l conditions to the effectiveness o f such agreement have been fulfil led.

A Project Operational Manual has been adopted and i s acceptable to the Bank.

Covenants applicable to project implementation: None.

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues

The Republic o f Serbia (ROS) has a population of about 10 million, o f which some 50% live in rural areas, and 17% derive their living from agriculture and associated industries. The ROS has three major land forms - the plain areas in Vojvodina and the flood plains o f the Danube, Sava and Drina rivers; the Morava valley in i t s main stream and two southem arms; and the mountainous areas which cover most o f the central and southern parts o f the country. The water resources o f ROS in addition to rainfall are dominated by the river inflows from upstream riparian sources estimated at 85% o f available water. The balance i s derived from the River Morava from within the country. Due to seasonal variations there are some 160 storage dams, some o f which have hydro-electric generation facilities. The rivers are subject to extreme flows which cause damaging floods along the adjacent lands.

About ha l f o f the Serbian population lives in rural areas where poverty has been on the r ise despite the recent decline in the overall national poverty rate. Agriculture, including ago- processing, accounts for about 25% o f Serbia’s GDP and 26% o f i t s exports. The sector sustained the population through the difficult decade o f the 1990s which was marked by economic sanctions, a m e d conflicts and dramatic economic decline. Nevertheless, when FRY rejoined the wor ld community in 1999, misguided policies and economic hardships had le f t Serbia’s agriculture with most o f i t s global market share lost and significant inefficiencies in production which make Serbian agricultural products uncompetitive on global markets. The latter are mainly due to high production costs and average yields that are lower than Westem European levels, brought about by reduced nutrient content, outdated field and processing equipment, poor drainage in large areas in Vojvodina and Central Serbia on the one hand and low precipitation in parts o f Central Serbia on the other hand, and, exposure to f lood hazard in large parts o f Serbia. Addressing these issues would help Serbia agriculture attain i t s full potential in contributing to the economy o f Serbia and poverty reduction in rural areas.

Geographical dimensions o f Serbian agriculture

Serbia can be largely divided into three agricultural regions where topography, soil type and climatic conditions have influenced the type of agricultural products and farming systems. About 65% o f Serbia’s arable land l i es in Vojvodina, which is characterized by large stretches o f flat plains and highly fertile “black soils”. The region mainly produces f ield crops, notably wheat, maize, sugar beet, other industrial crops and livestock, including most pig production o f Serbia, and to a lesser extent cattle and poultry, mostly in large farms. The region i s flat with a high water table and subject to flooding. A vast and complex system o f canals, pumping stations and associated structures, the Danube-Tisa-Danube Hydro system, was established to serve the purposes o f drainage, f lood control and irrigation, as wel l as transportation and municipal water supply in the region. The topography in Central Serbia includes both flood plains o f the Danube, Sava and Morava rivers, and hills. Here farms are mainly o f small and medium size, and farming systems are more diverse than in Vojvodina. Arable land is limited, but soil fertility and climatic conditions favor fairly intensive production o f high-value fruits, notably berries, and vegetables. Cattle for milk production dominate livestock production. Southern Serbia i s mostly

hilly, farm sizes are small, production i s mostly extensive, fruits and vegetables are the main crops, and sheep grazing on natural pastures dominates livestock production.

Agricultural Pol icy

Serbia inherited from i t s socialist past a pol icy and institutional framework that is centered around large scale agrokombinats' ( A K s ) , which covered about 15% o f arable land. Agricultural input and credit provision were channeled through the A K s , as was the procurement o f crops from small holders at predetermined prices. Agricultural research and extension as well as irrigation and drainage services were geared towards the needs o f A K s , practically ignoring the needs o f small producers which cultivated around 85% o f arable land. Trade pol icy was geared towards s e l f sufficiency as well as export promotion o f industrial crops, whereby economic costs and benefits rarely played a role.

Recent years have witnessed a gradual, albeit slow reform process in the agriculture sector. Restructuring o f A K s i s underway and a number o f agro-processing units have been privatized, while the Government i s now seeking the privatization o f farm units as well. Progress has been made in trade restrictions in a bid for WTO membership and init ial steps have been taken to establish an EU rural development payment agency to replace crop based subsidies. The recently published Agricultural Development Strategy o f the Ministry o f Agriculture, Forestry and Water Management (MAFWM) prescribes far reaching reforms in the agricultural sector with the ultimate aim o f improving the sector's competitiveness in the world. One o f the pillars of the Strategy i s to reform the policy and institutional set-up in such a way that private farmers can operate o n a level playing field so that they can realize their potential o f becoming the motor force o f agncultural development and provide for employment. This includes the replacement o f crop-based subsidies with rural development grants, restructuring o f the agricultural research and extension system to respond to the needs o f farmers and agro-processors in a competitive market economy, putting in place an enabling environment for bottom-up establishment o f marketing cooperatives, and addressing demand and supply side constraints to access to financial services in rural areas. The 2005 - 2007 Wor ld Bank Country Assistance Strategy for Serbia and Montenegro includes a Rural Business Environment Project that would support the Government in these objectives. The EU has provided significant assistance for the restructuring o f the sector, most notably in support o f harmonization o f the sanitary and phyto-sanitary control system.

Water Resource Management

All agricultural and hydraulic activities fa l l under the Ministry o f Agriculture, Forestry, and Water Management (MAFWM). The Directorate o f Water (DoW) under MAFWM controls most hydraulic operations through two Public Water Authorities, the Vode Vojvodine Authority for Vojvodina specifically, and the Serbiavode Authority for the remainder o f the country. MAFWM and i t s subordinate Departments and Directorates are supported by long established technical institutes and the universities. These agencies at present suffer from diminished

' Agrokombinats are large scale integrated production units made up o f crop and livestock farms, agro-processing facilities, and in some cases, own distribution chains. They were socially owned.

2

professional staff due to migration. Also, their equipment and facilities require modernization and rehabilitation.

The key issues facing water resources management in RoS can be summarized as follows:

Policy and Institutional Issues in irrigation, drainage and flood control. Despite i t s long tradition, water management in Serbia i s currently suffering a serious challenge. This is the incapacity o f the current water sector institutions to provide a sufficient level o f operations and maintenance (O&M) for water infrastructure that i s rapidly deteriorating and, in some cases, i s already collapsed or at r i s k of collapsing. As a result o f poor O&M, recovery o f costs i s also poor. Since budget transfers are limited, implementation o f O&M activities i s continually on the decline (currently estimated to be at 10-30 % o f the amount needed).

There i s an urgent need to reorganize the sector by introducing measures, such as a more participatory and integrated approach to water management that would include changes in the legal and regulatory framework and would aim to achieve an increased accountability from institutions involved in water resources management. The water sector strategy o f MAFWM addresses these issues broadly. I t emphasizes legal tools, such as the law on water management and the law on financing of water management. A new Water Law has also been drafted and i s in l ine with the EU Water Framework Directive, including principles o f the “user pays”, “polluter pays” and river basin management. However, much remains to be done to implement the improved strategy, though measure such as improved management, financing, govemance, regulation and provision o f support services.

Drainage: I t is estimated that 29% o f the surface area o f the country and 2.67 mi l l ion ha (or 52%) o f agricultural land is affected by poor drainage. In Vojvodina specifically, due to i t s leve l terrain, some 1.61 mi l l ion ha are affected, representing about 90% o f agricultural lands in that region. T o address the drainage and waterlogging threat, some 2.08 mil l ion ha nationwide have been provided with drainage facilities in over 400 drainage areas, and incorporating 210 pumping stations and 22,600 km o f drainage channels. Over 58,000 ha are equipped with t i le sub-drainage. Due to neglect caused principally by lack o f funds during the past decade period, the drainage channels have generally deteriorated by siltation and weed growth, and the associated structures and pumping stations have also deteriorated. Widespread rehabilitation i s required. It i s estimated that for f ield crops, which would be most affected, correction o f defective drainage would result in crop yield increases o f between 20% and 30%.

Flood Control: I t i s estimated that some 1.57 m i l l i on ha, especially in areas adjacent to the large flood plain rivers, are subject to flooding. Of this area, 1.45 mi l l ion ha are in Vojvodina and the plains east o f Belgrade; the rest are in Central Serbia. About 30% o f agricultural land is vulnerable to flooding, as are 512 larger settlements, 515 industrial installations, 4,000 km o f roads, and 680 km o f railways. To meet this hazard, the Government has constructed 3,434 km o f flood amelioration levees and 30 f lood control reservoirs. However, even with this large investment, extreme floods can s t i l l cause damage. Crop loss due to flooding ranges from marginal to complete, depending on the inundation period.

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The lack o f maintenance on the levees, dams, and their appurtenant structures, necessitates rehabilitation to the system. Gaps need to be filled, and older levees should be heightened to meet more stringent protection criteria. Without attention to these f lood protection facilities, additional investments in irrigation and drainage improvements in the areas prone to flooding would b e meaningless. Work in this sub-sector i s therefore o f the highest priori ty and would result in rapid and substantial benefits.

Irrigation: Irrigation development in Serbia has focused almost exclusively o n public sector funded and managed large-scale (major) irrigation. Under the former Federal Republic o f Yugoslavia (FRY), irrigation development took place predominantly in the plain lands o f Vojvodina in the form o f large mechanized installations on state and collective farms. L i t t le attention was given to minor irrigation by small farmers, especially in the hilly areas o f Central Serbia. This i s clearly a neglected sector that i s in need o f analysis, support and development. The present project represents the f i rs t attempt to help initiate a program in that direction.

T o date about 120,000 ha o f essentially major irrigation has been developed in Serbia. This represents only about 3% o f the arable land o f the country. The majority o f schemes covering some 90,278 ha were in Vojvodina, with the balance located in Central Serbia, mainly in the Drina-Sava enclave near Belgrade, and in the Morava valley. Today, due to various factors outlined below, only about 35,000 ha are actually fully utilized, with a further 47,000 ha partially functional. Schemes have ceased to function optimally or totally due to lack o f maintenance, breakdown in management, deterioration and disincentives due to lack o f markets, etc.

In the valleys o f Central Serbia, with their more sloping terrain and smaller private farms, a combination o f sprinkler, drip and surface methods i s practised. However, irrigation in this area i s not common. The introduction o f small irrigation in selected areas o f Central Serbia with low rainfall and light soils could significantly increase the yields o f high value horticultural crops, notably raspberries, blackberries, cherries, plums, blueberries, apples, pears, vineyards and vegetables.

2. Rationale for Bank involvement

A t the request o f the Government o f Serbia (GoS), the Bank has looked at the above issues facing water resources management in RoS. I t has concluded that during the past decade o f unrest, the water sector has seriously deteriorated and i t s reinstatement and improvement are necessary in order to restore the functionality o f essential drainage and flood control infrastructure and permit Serbian agriculture to function optimally again to meet national needs. Additionally, there is a need for longer-term institutional reform to make sector management more productive, efficient and sustainable.

The Bank i s uniquely positioned to support critical investments in rehabilitation and modernization o f high priori ty drainage, flood control and irrigation infrastructure, with decades of experience in every region o f the wor ld (including the former Yugoslavia) under al l conditions imaginable. I t offers extensive experience in helping countries pi lot the adoption o f new participatory approaches for development and management o f water resources at the field level,

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such as small-scale irrigation and drainage, and undertaking legal and institutional reform at the central level, including adopting innovations in govemance, management and financing.

The Bank i s also able to complement ongoing initiatives in the sector. Currently, the EU i s assisting Serbia to adopt the EU Water Framework Directive. EU assistance focuses primari ly on environmental protection, with limited focus on the economically productive uses o f water for agriculture, water supply and industry. The Bank wil l complement EU activities by providing further support to build capacity o f the DoW and its collaborative partners to develop a framework and process for long-term policy, legislative and institutional reform in the water sector, particularly in the irrigation and drainage subsectors.

3. Higher level objectives to which the project contributes

The project i s included in the Country Assistance Strategy (CAS) for 2005-2007 (Base Case and High Case). I t supports the medium-term CAS goal o f creating a larger, more dynamic private sector by enhancing the security o f the agricultural sector and improving the capacity for growth in the sector. Rehabilitation o f the irrigation and drainage system will increase agricultural productivity. Rehabilitation o f flood control infrastructure wi l l reduce damage to land, crops, property and infrastructure.

The project contributes to the CAS objective o f reducing poverty by increasing employment and income generation. This is particularly the case for the development o f a minor irrigation program in the hillsides, but also applies for reduction o f r isks from damage to crops, land and livelihoods through improved drainage and flood control in the lowlands. The project wi l l also contribute to the objective o f promoting private sector participation in water management by introducing new methods for participatory irrigation system development, govemance, management and financing, in project areas.

The project also supports the medium-term CAS goal o f creating a smaller, more efficient public sector by promoting user-based management and financing o f irrigation and drainage systems and improved capacity o f the Government to regulate the sector and build the capacity o f the private sector to provide support services.

B. PROJECT DESCRIPTION

1. Lending instrument

This sector investment project wil l be financed by a Specific Investment Credit for the equivalent of US$25 million.

2. Project development objective and key indicators

In order to address the above issues o f water resources management in Serbia, the project’s main objectives are to: (a) improve the capacity for increased efficiency o f agricultural production through support to high priori ty rehabilitation o f drainage and irrigation infrastructure; (b) reduce the risk o f damage from flooding to land, crops, property, infrastructure as wel l as reducing r isk

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of l i f e loss f rom flooding in project areas; and (c) improve water resources management and strengthen the associated water resource management institutions and policies.

The above objectives are in accordance with the recommendations o f current pol icy studies, as agreed by MAFWM, notably those o f the Policy Advisory Unit under the EU funded European Agency for Reconstruction (EAR). K e y performance indicators would be: (a) area benefited from reduced water logging and improved drainage; (b) area protected against flooding; (c) increased standard o f protection for population under flooding risk; (d) number o f emergency interventions carried out in flood prone areas; (e) area benefited from minor irrigation development; ( f ) increase in crop production in the areas benefiting from improved drainage, irrigation and flood control; (g) number o f water users associations and drainage boards established; and (h) finalized legal and regulatory aspects o f water resources management.

3. Project components

The project size i s about US$32.7 mi l l ion consisting o f a US$25.0 mi l l ion credit, a US$6.97 mi l l ion borrower contribution and a US$0.73 mi l l ion contribution from project beneficiaries. The project has a five year implementation period. The land benefiting f rom improved drainage i s about 278,000 ha, with 250,000 inhabitants benefiting from improved f lood protection. The returns to the economy, from increased agricultural productivity, increased incomes and associated fiscal benefits, and reduced losses from flooding, would be substantial. The project would include the following four components:

Component 1. Rehabilitation and Improvement of Drainage and Flood Control Infrastructure (US$20.4 million): Rehabilitation and improvement works would include: (a) rehabilitation o f drainage facilities, including pumps and maintenance equipment; and (b) rehabilitation o f flood control defenses to give a 1 in 100 year f lood protection for agricultural and minor settlements, and a 1 in 1,000 year protection for large settlements and industry.

Component 2. Minor Irrigation Development Program (US$6.0 million): This program wil l support the development and/or rehabilitation and improvement o f minor irrigation schemes mainly in the hilly regions o f Central and Southern Serbia. These schemes would be o f less than 300 ha each and total o f about 4,000 ha. Selection o f areas for the schemes will be based o n a set of criteria, chief among them i s farmers’ willingness to establish a Water Users Association (WUA) that wil l bear full costs o f the future O&M o f the new or rehabilitated infrastructure. Other technical, environmental and economic considerations wil l also be taken into account during the selection process. Project support to build capacity o f DoW to provide technical assistance to the WUAs i s included under the Institutional Strengthening Component (Component 3). The project wi l l also support provision o f O&M equipment for the W A S . Beneficiaries o f the minor irrigation schemes component are expected to contribute 10% o f the costs of constructionhehabilitation in cash or in kind and 20% o f the costs o f O&M equipment that wil l be provided to them.

Component 3. Institutional Strengthening and Capacity Building (US$4.9 million): This component wil l aim to strengthen the institutional capacity o f water sector institutions. I t wil l strengthen DoW capacity in i t s regulatory and strategic functions, particularly in the irrigation

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and drainage sub-sector, and at field testing o f participatory irrigation and drainage management principles under the assumption that only limited changes in the legal, regulatory and institutional framework wil l be introduced in Serbia during the project implementation period. Fol lowing this approach the component will: (a) establish and support a Working Group in the D o W to oversee and coordinate development o f information (including an information database), policy, legalh-egulatory, and strategic innovations for integrated water resources management, especially in the irrigation and drainage sub-sector; (b) support the Government program to reform the public water authorities and their district water control agencies; (c) test Water Users Associations type o f organizations to provide the institutional basis for ensuring that the construction or upgrading of several minor irrigation systems (under the Minor Irrigation Development Program in Component 2) incorporates participatory mechanisms o f water management; and (d) pi lot test the formation and development o f an irrigation and drainage board in Vojvodina under the assumptions that it will be govemed by farmer representatives, regulated by the government, and financed by farmers.

The component wil l also include provision o f various equipment and studies for other public institutions that have been deemed to be crucial, independently from the institutional option to be sought by the Government in the medium-term and in the long-term. Specifically, the project will: (i) upgrade the flood forecasting and warning system that has been developed by the Hydrometeorological Service of Serbia; (ii) support irrigation research for vegetable and horticulture crops; (iii) strengthen the agromet system; (iv) install and calibrate a software modeling system for control o f the DTD hydrosystem; and (v) study the feasibility requirements for rehabilitating two priori ty major irrigation schemes.

Component 4. Project Management and Monitoring (US$ 1.4 million): The project wi l l provide support to the Government to implement the project. I t wil l include support for: (a) overall project management, and technical assistance in such areas as detailed design, contract administration and construction supervision, procurement and financial management, and participatory water management institutions; (b) monitoring and evaluation o f project impacts; (c) implementation o f environmental management plans for rehabilitation and construction activities that wil l be carried out under the project; and (d) annual financial audit o f project accounts.

4. Lessons learned and reflected in the project design

This i s the f i rs t Bank project in this sector in Serbia in more than a decade. However, the conceptual approach and design o f the project draws on World Bank experiences with the implementation o f similar water projects in the region, from which several lessons can be drawn. Bank experience in Eastern Europe, Central Asia and Turkey has demonstrated the need for sector loan programs to combine both infrastructural and institutional components, even in programs such as Serbia’s that are primari ly for emergency restoration o f infrastructural capacity.

Bank experience with development of water users associations in Albania, Armenia and Turkey has demonstrated both the need to involve water users in the governance, management and financing o f irrigation systems and the need to create a new partnership relationship between the

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government, water users and private sector organizations for governance, management, financing and provision o f support services for irrigation and drainage. Bank experience has shown that essential incentives and accountability mechanisms to ensure productive and sustainable irrigation and drainage systems require that distinctive roles, rights and responsibilities be designated for government, water users and the private sector.

Also, Bank experience has demonstrated that basic and effective water sector reforms cannot be designed and implemented immediately. Capacity building for strategic change, stakeholder consultations, studies, pi lot interventions and negotiations are al l required to identify, design and implement an acceptable strategy for water sector reform. This requires a step-wise process o f learning and adjustment that stretches over several years. In this project, the Bank wil l focus on the preliminary phase o f strategic change, which includes capacity building for strategic change, pi lot interventions for irrigation and drainage, studies for strategic issues, stakeholder consultations and development o f legal and institutional regulations for water users associations and investment strategies for irrigation and drainage. The project wil l also benefit f rom the lessons learned from other World Bank projects in Serbia and from collaborating with the EU on their work to reform environmental protection aspects in the sector.

5. Alternatives considered and reasons for rejection

The Bank was originally presented with an extended program to rehabilitate and improve f lood protection works, drainage systems and irrigation as wel l as reorganizing and reforming the water sector. Due to the limited Bank funds available to the sector, the relatively short project preparation period, and the on-going EU involvement in the institutional change process (but not on infrastructure rehabilitation), the Bank’s init ial approach was to focus the project primari ly o n the critical and emergency elements o f the flood protection works and drainage systems, as priority areas for intervention with some pi lot irrigation activities. In response to the Government’s request to expand project benefits to central and southern Serbia, the irrigation component has been increased to US$6.0 mi l l ion in order to support the development, rehabilitation and improvement o f 4,000 ha o f minor irrigation schemes; and in each o f these schemes users participation wil l be tested.

Additionally, the project would include some institutional strengthening activities, complementary to those sought by EU, aimed at both increasing institutional capacity in the DoW and to pi lot users participation in the irrigation schemes to be built under the irrigation component.

C. IMPLEMENTATION

1. Partnership arrangements (if applicable)

The project has no formal partnership arrangement. However, the World Bank will coordinate with the EU, which i s providing support to MAWFM for the preparation o f the water sector legislation. The project will collaborate with other donors and build upon their work by assisting MAWFM to consider more participatory approaches to water management. In particular, the project wil l help establish W A S and Irrigation and Drainage Boards to encourage local farmer

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communities to become more directly involved in the management o f irrigation, drainage and flood control. The World Bank i s currently exploring the possibilities for Dutch funding to support some o f these institutional capacity building activities.

2. Institutional and implementation arrangements

Overall project implementation would be under the responsibility o f the Director for Water o f MAFWM. For day to day management o f project activities, the latter wil l be supported by a team from the Ministry staff (Project Implementation Team, PIT) comprising team coordinator, one staff member to work on the project procurement aspects and another staff to work on the project financial management aspects. This team wil l be supported by several consultants including two engineers (one for design and O&M and one for supervision o f construction works), two institutional specialists (one for water users organizations and one for public and private institutions), one monitoring and evaluation specialist, one financial management specialist, and a water resources management specialist. In addition, D o W will hire an additional procurement specialist as an individual short-term consultant.

The World Bank and the GoS counterparts are in the process o f discussing the plan o f establishing a multi-project management (fiduciary) capacity within MAFWM. Under this arrangement, the financial management and procurement functions would be provided to ongoing and future Bank financed projects in Serbia. I t i s expected that such a capacity would be established within the next 12 to 18 months. Once this i s in place, these two fiduciary functions under the above project implementation arrangements would be transferred from D o W to this new structure. Office equipment and operational costs o f project management would be also funded by the project. Minor irrigation schemes wil l be developed with full participation o f the beneficiary farmers that wil l be organized in Water Users Associations (WAS). Operational arrangements for the W A S are described in Annex 6 and they wil l be expanded further in the project operational manual.

3. Monitoring and evaluation of outcomes/results

The project wil l include a program for monitoring and evaluation o f project impacts under Component 4. The objective o f the monitoring and evaluation studies would be to evaluate the success in project implementation in terms o f meeting the project’s goals, and to assess i t s physical, environmental/ecological, social, economic and agricultural impacts. The project impact evaluation studies would focus on: (i) agricultural yields; (ii) impact o n surface and groundwater supplies and water quality; (iii) performance o f drainage systems to reduce waterlogging; (iv) performance o f the irrigation system, farmers activities, performance o f water users’ associations, effectiveness and approach to community mobilization for organizing W A S ; (v) estimation o f project’s overall benefits and economic rate o f retum; (vi) collection rate o f O&M costs for irrigation and drainage; (vii) enactment o f new law and regulations for water; and (viii) improvement o f institutional set up and policies in the water sector.

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4. Sustainability

Risks

The formation o f Irr igation and Drainage W A S may not proceed o n schedule o r in a suitable format. Reforms in the water sector may no t proceed as planned

Project management may no t have enough capacity and resources to implement the project. Also, the transfer o f the fiduciary functions from the DoW to the MAFWM central office may slow d o w n and disrupt project implementation.

Overall Risk Rating

Sustainability o f the project benefits wil l depend mainly on the capacity in the long te rm o f a l l water management bodies (public water companies and water users associations) to provide adequate and regular maintenance o f water infrastructure. I t will also depend o n the users’ capacity and the Government’s commitment to providing needed funds for operations and maintenance. However, in order for this to be realized an improved legal and regulatory framework for water resource management and participatory irrigation management (PIM) needs to be developed. The project wil l support policy and sector reform, by financing selected high priori ty activities which promote social and economic sustainability, especially for irrigation and drainage systems. I t wil l also support the introduction o f participatory irrigation development and management and supporting preparation o f a needed legal and regulatory framework for irrigation and drainage. Specifically farmers wil l be organized into users groups and would pay for the full cost o f O&M. This has been discussed and agreed upon with the Government and i t wil l be reflected in the new Water Code and Water Users legal and regulatory framework, following the “users pay” principle. For minor irrigation schemes farmers would also assume full responsibility for O&M. Additionally, in the minor irrigation schemes the farmers are expected to participate by paying 10% o f the construction and 20% o f the cost o f the O&M equipment that wil l be provided to them under the project. This would contribute to improving the ownership and l ikely sustainability o f those schemes. The project wil l strengthen the strategic capacities o f DoW in this area by providing technical assistance and stimulating a dialogue with the international community to increase commitment toward a better balanced and participatory management o f water resources.

Risk Mitigation Measures Risk Rating with Mitigation

S The project wil l provide technical assistance

The Government i s committed to bringing

The project wil l provide training and technical

and build DoW’s capacity to support the new W A S .

legislation into l ine with EU Framework Directives.

assistance to a l l staff assuming project management technical, institutional o r f iduciary responsibilities

S

M

S

Regarding flood control works and because o f their strategic importance, they should continue to be publicly funded.

5. Cri t ical risks and possible controversial aspects

The main risks o f the proposed operation and mitigation measures to address the r i sks are listed below.

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6. Loadcredit conditions and covenants

Board conditions: None.

Effectiveness conditions:

The Sub-credit Agreement between Serbia and Montenegro and the Republic o f Serbia has been executed and al l conditions to the effectiveness o f such agreement have been fulfilled.

A Project Operational Manual has been adopted and i s acceptable to the Bank. Dated covenants: None.

D. APPRAISAL SUMMARY

1. Economic and financial analyses

Separate economic benefit / cost analyses were carried out for the Sub-components 1.1 Drainage Rehabilitation and 1.2 Flood Protection and Component 2 M ino r Irrigation Development Program. The results o f each analysis indicate high economic viability o f the proposed project interventions, as discussed in Annex 9. The high level o f the rates o f returns o f these components suggests that the project i s also overall economically viable even without incorporating the costs and the benefits o f institutional and technical capacity building interventions supported under Component 3, the latter o f which are inherently difficult to estimate. Sensitivity analyses o f the economic rates o f return to variations in main assumptions indicate that the results are robust. The fiscal impact o f the project i s also expected to be positive.

2. Technical

The project was designed based on lessons learned f rom previous RoS, World Bank, and FA0 experiences in the sector, technical studies, advice from local and international experts at Seminars and Conferences sponsored by MAFWM, WBI and the donor community, and intensive discussions with the MAFWM and several water companies and institutions.

The major works to be undertaken under the project (embankments, excavation o f drains, minor irrigation schemes, and repair o f pumping stations) are relatively simple, and the Serbia’s experience in constructing pump irrigation and drainage schemes stretches back to over 120 years. However, to ensure quality o f c iv i l works construction, the works would be packaged for bidding purposes to attract qualified contractors, and contract management and construction supervision would be carried out with the assistance o f qualified engineering firms.

3. Fiduciary

A financial management review was undertaken during project appraisal, to determine whether the financial management arrangements for the Project are acceptable to the Bank. I t was concluded that the Project satisfies the Bank’s financial management requirements.

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The S a M CFAA report notes that there are a number o f r isks on the management o f public funds in SaM. The risks to the public funds include: (a) poor public sector financial management in the past, (b) unfinished reforms - the govemments o f both Serbia and Montenegro have commenced a process o f major reform, which looks good as designed, but i t i s s t i l l too early to say if the reforms wil l be totally successful, (c) capacity constraints in the Republic governments, (d) weak banking sectors, (e) weak audit capacity, (0 poor implementation capacity in l ine ministries, and ( g ) the lack o f extensive Bank implementation experiences within SaM. Since re-joining the membership o f the World Bank, SaM has been using individual implementation units for each investment project (traditional PIU model), located within the relevant l ine ministries or project beneficiaries, to mitigate some o f these r isks.

Consistent with the approach adopted in the recently negotiated, Serbia Danube River Enterprise Pollution Reduction Project, also to be implemented by the MAFWM, disbursements from the IDA credit wi l l follow the report-based method.

4. Social

A rapid assessment for the social component o f the project was carried out as part o f project preparation and i s detailed in Annex 10. The proposed project i s expected to directly and indirectly benefit farmers within the project study areas. Reliable irrigation water wil l substantially increase agricultural output and wil l help some farmers shift from subsistence farming to competitive commercial agriculture. The rehabilitation o f drainage and flood control measures will reduce r i s k for farmers and enhance agricultural output.

A major social objective o f the proposed project i s to further promote participation and decentralization in the irrigation and drainage sectors. In particular, the project will support formation o f W A S and drainage/water boards. In this regard, Component 3, Institutional Strengthening and Capacity Building will help strengthen institutional capacity o f the water sector. I t wil l help pi lot innovative and participatory approaches to water management by establishing W A S and the f i rs t Irrigation and Drainage Board. The aim o f the above i s to create demonstration projects that wil l prove the capacity o f Serbian farmers to help manage the water infrastructure serving them at the local level. This could later encourage expansion o f investment in drainage, irrigation, and f lood control in other parts o f the country.

5. Environment

The project i s rated Category B. An Environmental Assessment (EA) has been prepared for the project as a part o f the Framework Environmental Impact Study. The Study includes assessment of potential impacts o f the proposed project and the likely significance o f such impact, recommended mitigation measures, outline o f monitoring plan and organization responsible for implementation o f mitigation measures. Specific EAs have been prepared for the proposed f lood protection and drainage schemes, while a framework EA has been prepared for the irrigation schemes. Site specific EAs for the f i rs t three irrigation schemes (already identified) wil l be prepared during next stages o f the project with support from CIDA.

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Issuedimpacts known to occur in flood control, drainage and irrigation rehabilitation projects, which have been considered as a part o f the EA include: (i) relocation o f population associated with land acquisition; (ii) disturbance to local residents; (iii) water and soil contamination and/or pollution by construction activities; (iv) social conflict between construction staff and local population; (v) pressure o n local environmental services; (vi) disturbance o f on-going agricultural activities by construction activities; (vii) permanent damage/alteration o f land; (viii) disposal o f contaminated sediment from cleaning o f canals; (ix) disruption to wildlife or sensitive ecological habitats; (x) soil and canal erosion; (xi) water logging and soil salinization; (xii) deterioration o f downstream water or groundwater quality; (xiii) reduction o f downstream flow and impact on ecologically sensitive areas; (xiv) conflict between irrigation and water management practices; (xv) disruption to fisheries ; (xvi) impact on water-borne and water related disease, and (xvii) threat to archeological and/or cultural heritage.

The major findings from the EA indicate that the main negative impacts could only be expected during the construction phase if the contractor does not comply at a l l times with the relevant national environmental, health and safety legislation. The EMPs, therefore, stress the importance of following good construction practice for both the rehabilitation o f the already existing schemes as well as for the construction o f new ones. The necessary engineering measures and operational practices to ensure proper construction and operation wil l be incorporated in the detailed design o f the schemes and in the bidding documents. Implementation o f a monitoring program after completion o f the flood protection, drainage and irrigation schemes (that wil l be developed in consultation with the Ministry o f Science and Environment) wil l ensure that any potential negative impact i s uncovered at early stage, monitored and mitigated in the most cost- effective way. A public consultation process was undertaken in accordance with World Bank policy and guidelines. Key stakeholders were identified, interviewed and their concerns discussed and taken into account in preparation o f the EA. The EA was publicly disclosed in early February 2005. The public consultations to review and discuss EA were held o n February 21 and 22, 2005 in Belgrade and N o v i Sad. The final EA and record o f public consultation were delivered to the World Bank in early March 2005 and have been posted in the Infoshop.

6. Safeguard policies

Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP/GP 4.01) Natural Habitats (OP/BP 4.04) Pest Management (OP 4.09) Cultural Property (OPN 11.03, being revised as OP 4.1 1) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OD 4.20, being revised as OP 4.10) Forests (OP/BP 4.36) Safety o f Dams (OP/BP 4.37) Projects in Disputed Areas (OP/BP/GP 7.60)* Projects on Intemational Waterways (OP/BP/GP 7.50)

* By supporting the proposedproject, the Bank does not intend to prejudice the f inal determination of the parties' claims on the disputed areas

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The Bank safeguards pol icy o n Projects on International Waterways (OP 7.50) has been triggered because the project areas involve the Danube River Basin, an international waterway, The Bank has determined that the pol icy does not apply to the drainage and flood control works, because they deal only with existing drainage and flood control schemes (no new schemes will be constructed). However, project activities related to the minor irrigation component are considered relevant, because they have the potential to impact water flows into the Danube River. I t i s anticipated that the estimated abstraction for the minor irrigation program would be built up over about 5 years commencing in 2006. The net water quantity abstracted would be about five mi l l ion cubic meters per year, which constitutes a negligible percentage o f the f low o f the Danube River, equivalent to about 15 minutes per year o f the average f low at Belgrade below the confluence o f the Sava, and a very small percentage o f the storage volume o f the I ron Gate reservoirs at the Romanian border on the Danube River.

In accordance with this policy, Serbia has requested the Bank to noti fy other riparian state countries about the project and i t s components. By a letter o f March 17, 2005, the Bank noti f ied the riparian states through the International Commission for Protection o f the Danube River (ICPDR). By a letter o f June 9, 2005, the ICPDR thanked Serbia and the Bank for sharing o f information, and indicated that the riparian states do not have any objections to the proposed activities under the project. Additionally, the Bank determined that the project wil l not cause appreciable harm to the riparian states, nor would it be appreciably harmed by the other riparian states’ possible water use.

7. Policy Exceptions and Readiness

N o policy exceptions.

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Annex 1 : Irrigation, Drainage and Flood Control Background

REHABILITATION PROJECT SERBIA AND MONTENEGRO: SERBIA IRRIGATION AND DRAINAGE

Geographic Setting and Climate2

The Republic o f Serbia (RoS) has a land mass covering 77,474 sq km. It i s federated with Montenegro in the south (with a surface area o f 13,812 sq km), which gives i t access to the Mediterranean Sea (see Map 1). The RoS has the semi-autonomous region o f Vojvodina in the north covering some 21,506 sq km. The landform i s clearly divided between the extensive regular plain lands o f Vojvodina and the Macva region o f Serbia, formed by the major rivers Danube, Tisa and Sava at elevations o f between about 85 m and 110 m, and the hilly and mountainous topography o f Central Serbia (with a maximum elevation o f 2656 m). The main feature o f Central Serbia i s the Morava River which meets the Danube east o f Belgrade, and which forms a valley between i t s two arms.

The climate o f Serbia is o f Mediterranean-mountain type in the south adjacent to Montenegro, moving to a moderate continental type in the north, with variations in Central Serbia reflecting altitude. The mean annual rainfall over the country i s about 750 mm. Rainfall varies across the country, and the mean annual rainfall is greatest in the central west areas, at over 850 mm per year. The minimum annual precipitation on the other hand i s in the extreme north and southeast, at below 550 mm per year. Generally the wettest months are May, June, July, and August, with the driest months January, February and March. This regime is very favorable for agriculture with regard to early maturing crops, but constraining to late maturing crops. However the monthly and seasonal actual rainfalls are highly variable, and severe droughts and floods occur.

Water Resources and Hydrology

The major features o f the water resources are the large rivers Danube, Sava, Drina and Tisa arising outside Serbia, and the Morava which is largely derived in country. The Danube has a catchment area upstream of Bezdan, where i t enters Serbia, o f some 210,250 sq km. The major tributaries o f the Danube include Sava (88,000 sq km), Drina (18,000 sq km), Tisa (145,500 s q km) and Morava (37,400 s q km). The overall catchment area i s in excess o f 580,000 sq km, and in-country Danube basin covers about 87% o f the land area.

Serbia i s not prolific in internally generated water supply, and about 85% o f available water originates upstream o f i t s borders. Average annual precipitation for the in-country Danube basin amounts to some 74,000 M C M , o f which only 23,500 M C M enters the rivers after evapotranspiration, while the average annual in-f low o f water from trans-boundary rivers i s 154,500 M C M . Due to seasonal variations in river yield, some 60 medium and large reservoirs and 100 small reservoirs have been constructed in the Danube Basin in Serbia and Montenegro, giving a total storage o f about 6,500 M C M . The largest dams o n the entire Danube are the I ron

* Information in this section refers to the Republic o f Serbia, and excludes Montenegro and Kosovo unless specifically stated.

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Gate 1 and 2 dams on the border with Romania that store 2,550 M C M and 870 M C M respectively. These dams, together with other dams in Serbia, provide about 37% o f installed power in the country. The I ron Gate dams have caused a long backwater effect that extends beyond N o v i Sad, and which exacerbates the drainage problem on either side o f the river. Before the fragmentation and dispersal o f the former Federal Republic o f Yugoslavia (FRY), agreements existed with neighboring riparian countries that covered al l transborder rivers. Few of these are now in force, but are being progressively renegotiated and ratified with the normalization o f relations.

-~ River and Station

Danube at Bezdan Danube at Smederevo Tisa at N o v i Becej D r ina at Radalj i Morava at Ljubicevo

All the rivers f lowing in or through Serbia are subject to floods, which periodically cause damage to urban centers and agriculture. The 100 year probability f lood discharges for some o f the major rivers are estimated in the table below. Due to these f lood hazards, a comprehensive network of f lood dykes has been established.

Flood Discharge Average Discharge

7 324 2263 16 114 5222 3 867 792 5 831 371 2 465 230

(cu m i s ) (cu d s )

Surface water quality i s poor and deteriorating except in minor streams in the hilly areas o f the country. Most water entering Serbia i s already Class 3 and must b e treatment for chemicals before drinking. Within the country, water i s further contaminated by municipal, industrial, and agricultural effluent, and by fertilizers and pesticides.

Groundwater i s abundant in Vojvodina, in Macva (the enclave formed by the Drina and Sava rivers and the mountains to the south), and in certain other locations such as the Morava valley. The annual groundwater abstraction in Vojvodina i s estimated at 208 M C M per year, and 70% o f drinking water and much o f the industrial supply are f rom groundwater. However, serious pollution problems exist regarding municipal supply, in particular due to high arsenic concentrations in some areas derived from the Vojvodina deep aquifer. In the valleys o f the hill and mountain areas, small local aquifers exist that are largely untapped. Very l i t t le groundwater i s used for irrigation at present.

The Danube - Tisa - Danube System

A complex system o f large canals, intakes, regulators and navigation locks, known as the DTD Hydro-system, has been developed in Vojvodina to permit navigation and the distribution o f surface water to agriculture, industry and municipalities. The system takes in water from the Danube at several points in the west and from the Tisa, and releases i t back into the Danube at N o v i Sad and where it meets the Romanian border. The DTD Hydro-system comprises some 600 km o f main canals, which link to the navigation routes o n the Danube, Tisa and Sava rivers, and 40 ports and transfer points. The system can accommodate boats and barges up to a 1000 ton capacity, and has the potential to transport about 7.0 m i l l i on tons o f cargo per year. Sand and gravel are the primary goods transported on the system; coal and agricultural products account

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for a minor but important amount. The system i s one o f the main sources o f irrigation supply in inland Vojvodina. I t also provides significant fishing initiatives. In the Banat and Backa regions there are some 2 1 fish farms and four fish cages, totaling about 5,230 ha.

Agriculture and Water

Agriculture accounts for 25% of GDP and 26% o f exports. The agriculturally suitable land amounts to some 5.15 mi l l ion ha, of which some 4.28 mi l l ion ha are classified as arable. About 62% o f the nation’s arable land l i es in Vojvodina. In general the Vojvodina region mainly produces field crops such as wheat, maize, sugar beet and other industrial crops. Intensive production o f pigs, cattle and poultry i s also characteristic o f the region, in particular in large government farms (Kombinats), most o f which have been partially privatized or are employee owned. This contrasts with Central Serbia where rural areas are characterized by hilly topography, small farms and diverse farm production systems. Arable land i s limited, but soil fertility and climatic condition are favorable leading to fair ly intensive production o f high-value fruits, notably berries, and vegetable crops. As in Vojvodina, there i s also a high concentration o f livestock; however, cattle for milk production predominate.

Agriculture o f Serbia i s limited by the hard winters, which preclude the cultivation o f most crops between October and April. The only major field crops to over-winter are winter wheat and alfalfa. The best agricultural soils are located in Vojvodina and include chernozems and cambisols soil-types. Interspersed among these are saline and alkali pockets, and marshy areas that could be productive if drained and improved. The soils in the Macva area are mixed but productive and contain areas o f river alluvium and meadow soils. The major productive areas in Central Serbia are the river alluvium soils in the Morava valley. In the valley bottoms, soils are generally o f medium texture, but are lighter on the side slopes.

There is very limited irrigation in Serbia, and originally installed systems account for only about 3% o f the arable area, located mainly in Vojvodina on the former agricultural state farms or Kombinats. Considerable damage to crops i s done in wet years due to inland flooding and high water tables, in spite o f and a comprehensive system o f drains and pumping stations that have been installed to evacuate this drainage and f lood water. Sub or tile drains have been installed in areas o f heavy soil andor where water tables are persistently high. High river levels cause overtopping and outflanking of flood dykes resulting in large areas o f flooding.

Land Ownership

Some 50% o f the Serbian population lives in rural areas. Unl ike many other ex-socialist countries, Serbia has always had most o f i t s agricultural land in private ownership. In 2000, about 1.7 mi l l ion farmers owned 81% o f the total arable land. The remainder i s under government, Kombinat, large private estate or company ownership. Seventeen percent o f the population derive their living from agriculture and associated industries, 61% o f which are completely dependent on it. Hal f o f the farmers own land that is between one and five hectares, and only 4.5% o f farmers own land in excess o f 10 ha. The average holding size is 2.4 ha and i s divided into 5 parcels, a factor which wil l inhibit irrigation development. The land in the hilly areas o f Central Serbia has traditionally been privately owned in small units, whereas most o f the

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government, Kombinat, estate and company land i s situated in Vojvodina. Privatization o f government and combinat lands i s on going.

Water Institutions

Ministry o f Agriculture, Forestry and Water Management (MAFWM)

All agricultural activities and water resource applications for agriculture fa l l under the Ministry of Agriculture, Forestry and Water Management (see Figure 1 for an organizational chart o f the Ministry). Seven l ine departments and the Directorate o f Water (DoW) fal l under MAFWM. Since Vojvodina has the status o f an Autonomous Region, al l agricultural activities therein are controlled by the Secretariat for Agriculture for the Region. The Secretariat falls under MAFWM for national pol icy matters, but i s autonomous in al l other respects.

Directorate o f Water (DoW)

The Directorate o f Water, which has departmental status in the Ministry, controls al l water resources, their monitoring, use, allocation and protection. The Directorate has two implementing agencies (Public Water Authorities): (i) Serbiavode for Central Serbia area, and (ii) Vode Vojvodine for Vojvodina. The latter is also under the direction o f the Secretariat for Vojvodina.

Serbiavode has two Water Centers that are responsible for local authorization o f small works, licensing, etc.. The Danube-Sava Center, located in Belgrade, i s responsible for the areas bordering the Danube (other than those areas that are in Vojvodina), areas in Macva, and other areas not in the Morava valley. The Morava Center, located in Nis, i s responsible for the areas in the Morava valley. These Centers, in turn, have Water Control Units under them. There are some 20 District Leve l Water Control Agencies under Serbiavode, similar to those described for Vojvodina, which control and administer works and maintenance in their hydro-geographic areas.

Vode Vojvodine has 18 semi-private District Level Water Control Agencies throughout Vojvodina. These Agencies are based approximately on oblasts and conform with hydro- geographic boundaries. They are para-statal organizations that are in the course o f partial privatization. They control water distribution and maintenance o f facilities in their domains, and work under financing provided by Vode Vojvodine through annually renewable contracts.

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Supporting Institutes and Universit ies

Class Class 1 Class 2 Class 3

Various institutes and universit ies support the activities o f DoW, including the Hydrometeorological Service of Serbia, the Water Resources Institute “Yaroslav Cerni”, the engineering and agricultural faculties o f the universities, and others. These agencies assist D o W and i t s sub-agencies as required, usually on a contractual basis.

Description Area affected (ha) very poor natural drainage pattem, very affected poor natural drainage pattem, medium affected insufficient natural drainage pattem, moderately

422,000 523,400

Social and Agricultural Support Agencies

Class 4

There are weaknesses in the capacity of the organizations responsible for the formation o f Water User Associations (WUA). Additionally, there i s l imited support to agricultural cooperatives, including provision of affordable agricultural credit or a comprehensive extension service.

affected 668,600 moderate natural drainage, least affected 1,060,600

Overall, there i s a need to reorganize the sector and introduce a more participatory and integrated approach to water management. The GoS has drafted a new Water Law, with support from the EU, to serve as an umbrella law for rationalizing the sector and making it more modem, participatory and efficient. The draft Water Law meets many o f the principles and requisites o f the EU Water Framework Directive, including the principle that “the users and the polluters pay.” However, the draft law could do more to promote more participatory systems o f water management, such as establishing Water Users Associations (WUAs) and/or irrigation and drainage boards to manage irrigation, drainage and flood controls and small dam infrastructure. This objective could alternatively be met through a separate WUA and irrigation and drainage laws.

Drainage

Large areas o f the lower lying lands of the country are periodically flooded by excess rainfall, causing serious damage to agriculture and other interests. In certain areas, especially on heavy soils, high groundwater tables are persistent. I t i s estimated that lands prone to rainwater flooding or water logging amount to some 29% of the surface area o f Serbia and 52% o f agricultural land, or about 2.67 mi l l ion ha. Some o f this flooding i s also associated with river overflowing. In general, maximum precipitation occurs in the highest rainfall month o f June, but problems can also occur due to frozen ground in winter months. The largest concentration o f inland flooding and waterlogging i s in Vojvodina. Vode Vojvodine estimates that o f a total area o f 1.84 mi l l ion ha, some 1.61 mi l l ion ha or 90% are directly threatened.

Over the country, five drainage classes have been derived. These are:

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In addition, a further 2.0 mi l l ion ha are not affected under Class 5. The sum o f Classes 1 to 3 amounts to 1.61 m i l l i on ha.

Currently, over the whole country, 400 drainage systems drain a gross area o f 2.08 mi l l ion ha. There are 210 pumping stations, with an installed capacity to pump 542.7 cubic meters/second, and 22,643 km o f drainage channels, o f which 11% are primary channels and 45% are secondary or tertiary channels. The total area under tile drainage is 58,270 ha. As a national average, i t is estimated that the drainage systems operate at about 30% capacity. In Vojvodina, where most o f the systems areas are located, 1.78 mi l l ion ha o f area are drained. Vojvodina has 303 drainage systems and 159 pumping stations. O f i t s 20,094 km o f drainage channels, 7.5% are primary channels, 36.8% are secondary channels, 40.2% are tertiary channels and 15.6% are quartemary (field) drains, and t i le drainage covers an area o f 45,146 ha. In Vojvodina, the DTD Hydro- system is extensively used for the evacuation o f drainage water, with 1.06 mi l l ion ha directly drained by it.

Flood Control

Large areas o f the country are periodically flooded by high river levels, causing serious damage to agriculture and other interests. The extent o f the flood prone areas in Serbia covers some 1.57 mi l l ion ha, o f which 1.45 mi l l ion ha occur in Vojvodina. Some 80% o f the potentially flooded area i s agricultural land. 512 larger settlements, 515 industrial installations, 4,000 km o f roads and 680 km o f railways are also prone to flooding. In Vojvodina specifically, 1.0 mi l l ion ha o f agricultural land, 260 settlements, 3,840 km o f roads, and 150 km o f railways are prone to flooding at the 1 in 100 year risk level. Vojvodina also has a special problem outside i t s control, in that uncontrolled flows across the border f rom Romania must be absorbed.

Floods are considered to be caused by cyclonic systems moving up from sub-tropical regions. Earliest flood records date from 1282 and 1518. More recently large floods were recorded in 1864 and 1890. In recent history, the highest 24 hour rain f e l l on the Vlasina River basin in June 1988, recording 220 mm. This caused a peak f low o f over 1 200 cu d s , inf l ict ing heavy damage and loss o f l i fe . Other lesser rainfall occurred in October 1955, M a y 1967, and June 1996 causing flooding in Central Serbia. Certain o f these storms were over 1 in 1,000 year frequency occurrence. In Vojvodina, the Tisa and Tamis rivers are notorious for extreme floods, mainly caused by snow melt in the Carpathian mountains. For example, in 1970 flooding lasted about three months, in 1999 a flood of between 70 and 100 year frequency occurred, and in 2000 the largest flood ever recorded occurred at over 100 year frequency.

T o attempt to alleviate the damage from such events, an extensive network o f f lood dykes or levees has been constructed. In addition, where waters do f lood local areas, the drainage systems together with their associated pumping stations remove the water when the river levels permit. Levees have reached a cumulative length o f some 3,434 km over the whole country, with 1,362 km located in Vojvodina. On the major rivers, levees constructed prior to 1965 do not give adequate protection and need to be upgraded. There are also gaps in the levees and places with incomplete lengths. On the smaller streams, construction has in many cases been unsystematic and technically deficient. About 30 reservoirs have been constructed for flood attenuation and multi-purpose use. Certain towns such as Leskovac and Krusevac rely o n purpose-built

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reservoirs, whereas others at Bajina Basta, Uvac and Kok in Brod have multi purpose use. The DTD Hydro-system plays an important role in f lood absorption in Vojvodina. With more accurate control this could be even more effective. Finally, a flood waming system has been established by the Hydrometeorological Service o f Serbia using observations o f r iver levels, coordination with upstream riparian countries, radar, river gauging stations, and weather stations linked to a central flood control centre.

Irrigation

Under the former Federal Republic o f Yugoslavia, irrigation development took place predominantly on the plain lands o f Vojvodina in the form o f large mechanized installations on state farms and collective farms. These installations were mainly o f the center pivot and rol l - move Ranger-type, suitable for monocrop and estate conditions. Lit t le attention was paid to smaller farmers, especially in the hilly areas in Central Serbia.

I t i s estimated by Yaroslav Cemi that there i s potential for the ultimate development o f some 3.6 mi l l ion ha gross o f irrigation coverage in Serbia. However, to date only about 120,000 ha have been installed (in 288 schemes). Moreover, at present only about 35,000 ha o f schemes are fully operational (a further 47,000 ha are partially functional). This i s due variously to shortage o f markets, redistribution o f the Kombinats, adverse farmer financial positions, deterioration in the physical systems, land ownership problems, legal changes and institutional weakness. To restore the sector to i t s previous level o f coverage, 85,000 ha o f irrigation need to be rehabilitated. However, this may not be feasible, given that the previous system was based o n large mechanized units that are unsuitable for the newly privatized areas involving small independent farmers with diversified cropping. Moreover, small-scale farmers may not want irrigation facilities if they have to invest in the irrigation equipment.

Irrigation in Vojvodina

Due to i t s suitable land and water resources, and to i t s communications advantage, Vojvodina has been the focus o f past irrigation development. I t i s estimated that some 1.7 m i l l i on ha are potential irrigation lands. Some 198 schemes totaling 90,278 ha have been installed, although at present only about 30,000 ha are operating fully. Some 28% o f systems are over 20 years old, with only about 27% o f systems less than 10 years old. In the Backa and Banat regions, only about 5% o f installations are drip or l o w pressure sprinkler systems, with the remainder under large center pivot and r o l l move systems.

Virtually al l water supply for irrigation in Vojvodina i s from the DTD Hydro-system, pumped from rivers, supply channels, and drains. A feature o f the area i s the use o f dual purpose drains, which evacuate water in the wet periods and intake water in the dry periods for irrigation. Virtually al l irrigation i s by pump lift due to the level nature o f the terrain, which precludes any gravity systems. In most cases, the pumps lift f rom the supply channels and directly pressurize the sprinkler irrigation systems.

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Irrigation in Central Serbia

The irrigation systems under Serbiavode for Central Serbia fal l under the two Water Centers, the Danube Sava Center and the Morava Center. These are based on geographic distribution, with the former controlling schemes in the Macva area (Drina-Sava enclave) and in lands bordering the Danube south of Vojvodina, and the latter controlling schemes in the Morava valley and in the hilly regions of the country. The Danube-Sava Water Center controls 22 irrigation schemes, covering 12,618 ha. The Morava Center i s responsible for 11,452 ha, in 24 schemes. Serbiavode has plans to expand irrigation coverage in the Macva region, and the Negotin scheme is slowly expanding. The soft fruit areas in the upper reaches o f the Zapadna Morava valley are a high priori ty for irrigation installation and are l ikely to develop under private farmer and company funding.

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

SERBIA AND MONTENEGRO: SERBIA IRRIGATION AND DRAINAGE REHABILITATION PROJECT

Project N a m e r--- 1. IBRDDDA Danube River Enterprise Pollut ion Reduction

2. E U - C A R D S (EAR):

Capacity Building fo r EPA and MSEP/ D E P Study to support Guiding Principles o f EU Water Framework Directive Preparation o f Sava River Basin Management Plan Preparation o f Wastewater Management Plan for Republic o f Serbia Preparation o f Water Resources Information Management System 3. GOVERNMENT OF NORWAY

Feasibility study for "Revitalisation o f the Grand Canal - DTD - and preparing the implementation o f modem wastewater treatment facilities for towns and industries in the Backa area" 4. GOVERNEMNT OF FINLAND

Development o f Environmental Legislation in Serbia and Montenegro

I D #

PO84604

I *Currency conversion factor used: Euro j TBD: Project costs and funding to be determined

- USD 1.2.

US$ Mi 11 i o n

22 ( o f which

8.0 GEF)

4.6*

TBD

TBD

TBD

TBD

1.8*

2.4*

Ins t i t u t i on

MAFWMI D E P

MSEPIDEP

MAFWMI D o W

MAFWMI DoW

MAFWM I D o W

MSEPIDEP

M S E P D E P

A p p r o v a l Date/ Status

~-

0312912005 under

preparation

2003 ongoing

2005 planned

2005 planned

2005 planned

2005 planned

2003 ongoing through

2004

2003 ongoing through

2005

[PDO Rat ing (For Bank projects O d Y )

24

Annex 3: Results Framework and Monitoring

SERBIA AND MONTENEGRO: SERBIA IRRIGATION AND DRAINAGE REHABILITATION PROJECT

PDO The project’s main objectives are to: (a) improve the capacity for increased efficiency o f agricultural production through support t o h igh priori ty o f drainage and irrigation infrastructure; (b) reduce the risk o f damage to land, crops, property and infrastructure f r o m flooding; and (c) improve water resources management and strengthen the associated water resource management institutions and policies.

Intermediate Results One per Component

Component One:

Drainage systems rehabilitated

F lood control infrastructure rehabilitated

Component Two:

Farmers managing small-scale irrigation schemes and using water more efficiently

Component Three:

Water resource management institutions properly equipped to better forecast floods, research irrigated vegetable crops and improve data collection for agricultural development.

Improved efficiency o f water resource management institutions (MAFWM, DoW, Water Companies)

Results Framework

Outcome Indicators Increased crop production resulting f r o m irr igation and drainage improvements

Increased area protected against f looding

Increase standards o f protection for population under flooding r isk

Results Indicators for Each ComDonent

Component One:

Area benefit ing f r o m reduced water logging and improved drainage

Number o f emergency interventions carried out for f lood prone areas

Length o f f lood embankments rehabilitated to 1 : 100 f lood levels

Component Two :

Area under minor irrigation schemes developed

Component Three:

Number o f H M S systems recording and transmitting r iver levels

Irr igation research for vegetable and horticulture crops carried out

Increased number o f agromet climate stations

DTD hydrosystem software control installed

Feasibil i ty study for irr igation

Use of Outcome Information 3valuate success o f project.

:valuate extent t o wh ich iarticipatory irr igation management P I M ) principles, legal and .egulatory improvements and brmation o f alternatives and/or :orrective measures are being idopted.

Use o f Results Monitoring

Component One:

Evaluate progress o f physical works md benefits achieved

Evaluate performance o f contractors

Component Two:

Evaluation design and sequencing o f interventions.

Component Three:

Evaluate abi l i ty o f water resource institutions to ut i l ize new equipment

Evaluate feasibil i ty o f large-scale irrigation development in Serbia and potential for future investments in the sector