Results from the financial management audit and implementation of Project 9906 - Sofia Water, Waste Water Project carried out at CFCU and recommendations on improvement of the projects' management.

Pursuant to order P-65 of 28.05.2002 of the Chairman of the National Audit Office, an audit was carried out of the implementation of PHARE Project BG 9906 – Sofia Water, Waste Water Project at CFCU in accordance with the Financial memorandum, signed on 30.12.1999 between the Commission of the European Communities and the Government of the Republic of Bulgaria.

The audit report with the findings and recommendations was submitted to the Minister of finance on January 24, 2003.

The report on the audit results of Project BG 9906 was adopted with a decision, taken at a meeting of the NAO on 6.03.2003.

1.  Audit Objective

Evaluation of the lawful and expedient absorption of funds, committed for implementation of Project BG 9906. Expressing opinion on the financial management, efficiency of management control, compliance of the project objectives with the EU Regulations and the national priorities, economy and efficiency in achievement of the objectives and expected impact.

The findings and evaluations made in the report are designed for the management of the auditee and other interested institutions.

2. Brief description of the auditee

Large-scale Infrastructure Facility – Part 5 is a horizontal programme of the European Union for Bulgaria and the other associated countries, aimed at financing environmental projects. The overall goal is to support this country’s efforts in the course of preparation for accession.

Pursuant to Art. 3 “Terms and Duration” of the FM, all contracts must be concluded by 31.12.2000 and all payments effected by 31.12.2003.

Due to delays accumulated during the preparatory stage and the short time for approval of the contracts, an extension was requested of the deadlines under the Financial Memorandum; according to letter of 09.02.2001 of the EC Delegation, the contracting period under Project BG 9906 was extended by three months (until 31.03.2001) and the payment deadline – by 12 months.

Under the Financial Memorandum, the budget of Project BG 9906 amounts to EUR 23, 000,000.00.

The initial allocation of funds by projects was as follows: BG 9906 01 Rehabilitation and Upgrade of the Sofia Waste Water Treatment Plant EUR 22.4 million; BG 9906 02 Supervision – EUR 0.6 million.

The PHARE Programme funds actually contracted amount to EUR 17,899,950.35 (without co-financing by Sofia Municipality)

The tender for selection of the GKW consulting firm to prepare the tender dossier was held in Brussels. The Bulgarian party was only partially involved in this process and had no opportunity to request a commitment from the consultant vis-à-vis the subsequent project outcome. An EC consultant prepared a strongly inflated preliminary assessment of the budget of the full scope of project works in the amount of EUR 34,173,070, incl. EUR 700,000 for supervision.

Due to the fact that the funds appropriated under the financial memorandum were EUR 23 million and no co-financing was provided in the amount required, the SWWTP Project was divided into two parts. Later, after the conclusion of the tender procedure, an attempt was made to absorb the balance of EUR 5,074,066.17 applying the procedure of direct contracting and drawing up of Addendum № 1 to the already signed contract with the selected Contractor. According to protocol of negotiations, held on 24.12.2000 between the CFCU Executive Agency (EA) and the Sofia Municipality (SM) on one hand and the selected contractor on the other, it was proposed to contract supplementary facilities and equipment within the limits of the remaining project budget. The Addendum signed was sent to the EC Delegation on 27.12.2000, which declined to endorse it quoting lack of technical grounds to apply such a procedure.

There are some omissions and risks, which were not taken into consideration in the implementation of the project, which created prerequisites for a limited absorption of the allocated funds under the FM and lead to an inability to offer the whole scope of necessary construction works.

2.  Project Objective

The objective of Project BG 9906 is to upgrade the systems of water supply and waste water treatment of Sofia.

This objective is expected to be attained through the following main construction works and supply of equipment as specified in FIDIC’s Conditions of Contract (Orange Book), in conformity with Bulgarian legislation.

The construction contract includes: new construction of: a fuel oil chamber, three grit channels, a distribution and flow measurement chamber, two secondary sedimentation tanks, a sludge draw off chamber, a sludge pump station, a return activated sludge pumping station; rehabilitation works: on the inlets, on the aeration system of the aeration tanks – tanks № 2, 3, 4 and 5; delivery of new blowers, replacement of electrical fittings by new heavy current cables and transformers.

3.  Findings

4.1. Project BG 9906-01-01-0002 Upgrade and Rehabilitation of the Sofia Waste Water Treatment Plant

On 29.12.2000, in conformity with the tender held and based on the preliminary agreement submitted for a consortium dated 24.11.2000, an implementation contract was concluded with the companies Va Tech Wabag Kulmbach of Germany and Hydrostroitelstvo Gorubliane LTD, of Bulgaria.

The Contract is in conformity with the FIDIC terms, Orange Book regarding design, construction and turnkey transfer and in accordance with Bulgarian legislation.

The overall contracted value amounts to Euro 17,299,950.35.

Under the contract the implementation time is 24 months, starting 25.01.2001 and the defect liability period is 12 months.

A notarised and stamped letter of 29.03.2001 was submitted regarding new registration and consolidation of one of the parties to the contract, according to which Va Tech Wabag Kulmbach was renamed Va Tech Wabag Deutschland GmbH &Co.KG, and assumed responsibilities regarding implementation.

Overall, as at 05.11.2002, funds in the amount of Euro 4,214,775.37 have been approved and paid out, which represents 24.36% of the project budget, provided by the PHARE Programme, amounting to EURO 17,299,950.35. These amounts correspond to the abstract from the Perseus as at the same date.

The project is in a process of implementation. Delays in implementation are evident, for which the following prerequisites have contributed:

Different institutions and units are involved in the implementation, management and supervision of the project, which creates difficulties for normal communication: CFCU - IA, Joint Project Implementation and Management Unit (JPIMU), Sofia Municipality, Unit for Implementation and Monitoring of Projects under EU pre-accession, National Construction Control Directorate (NCCD).

The tender project, developed by the GKW consulting company, based on which offers were made, is not linked to commitments for the subsequent approval of the technical project. This lead to reflection of the omissions made (particularly in the technological scheme), to later failures and overlapping in design, as well as in the organization of construction;

The tender documentation presented does not clarify conclusively the issue of possible halting of the SWWTP in the process of implementation for a maximum of 5 consecutive days (volume II, section 13 of the final tender documentation) and its non-conformity to the provisions of section 8 regarding “ensuring non-stop operation during the implementation stage at the current capacity and efficiency”. In its letter under their reg. № 08-00-1350/12.03.2002 the MEW have stated that “halting the operation of the plant for 5 consecutive calendar days and channelling untreated sewerage and industrial waters from the city of Sofia directly into the Iskar river would cause an environmental disaster”. This was the reason for the Contractor to request and be granted an extension of the contract term.

Existence of omissions and inconsistencies in the technical specification, as well as an incomplete scope of the mandatory works, which have to be remedied for acceptance and signing of Protocol 16. These circumstances, reflected in a report of the Supervisor of September 2002, allow opportunities for different interpretations and/or requests for additional funds;

Delays of the actual start of construction works after obtaining the respective permits (one month in the case of temporary works, more than a month in the case of repair works and full-scope works);

Unjustified delays exist in the course of design and implementation of the project, as well as non-stop changes and resulting delays for the construction calendar schedule – in about 71% of the contractual term of implementation the value of the works performed was about 21.46% (incl. the 6-th certificate and the works on administrative order № 2). The delays established are related mainly to drawing up the working designs for the sub-projects, the clearance process, problems in negotiations with sub-contractors, inefficiency in the work of the representative of the Contractor, lack of progress in implementation, of which also the DEC was notified.

Discrepancies between the 4.1 clause of FIDIC (orange) and the Bulgarian legislation – according to Art. 160 (2) of the Spatial Development Act (SDA) effective as of 31.01.2001, the functions of designer and builder may not be combined; the Bulgarian regulatory framework envisages issuance of Permit of Access to the Project and of Act 15 before issuance of the Taking over certificate. These problems were resolved with the support and co-operation of the Assignor and the MRDPW;

There was a misunderstanding in the initial period on the part of the Supervisor regarding his obligations with regard to the control of the works - letter of the Supervisor regarding the clearance procedures while complying with national requirements.

It would be difficult to apply sanctions in the course of implementation for delays established in the stages of design and construction. The general provisions (Clauses 4.1 and 8.2) of the contract regulate the obligations of the Contractor for completing the signed commitments on time, but the financial sanction (0.05% of the contractual value for each day of delay, but not to exceed 10% of the said value) may be applied in case of failure to meet the deadline for completion of the project.

The legal status of the Contractor in the person of Va Tech Wabag Kulmbach/Hydrostroitelstvo LTD is not clarified.

The funds appropriated are being spent according to purpose and in conformity with the law according to the requirements of DIS, FIDIC, the contractual commitments and the available supporting documentation. No omissions or violations have been ascertained.

4.2. BG 9906-01-01-0001 Supervision

The main goal of the Project is to exercise control over the expedient use of the funds, performance of construction and successful commissioning into operation.

The VAI-VA- Project AB company concluded contract № 9906-01-01-0001 on 28.12.2000, of a total amount of Euro 639,978.00 and a term of 34 months (from 31.01.2000 until 31.10.2003)‚ Euro 600,000 being provided by the PHARE Programme‚ and Euro 39,978 represented co-financing from SM.

The total of payments made by 05.11.2002 amounted to Euro 365,669.12 (57% of the amount envisaged), of which Euro 344,106.33 under the PHARE Programme and Euro 21,562.79 in co-financing from the SM.

All payments and documents related to them have been checked (invoices, payment orders and the related correspondence). The required documents attached correctly reflect the expenditures made.

The extension of the term for completion of the construction works requires a respective extension of the term of the supervision contract. Supplementary expenses for supervision must be covered by additional co-financing by the Sofia Municipality. A letter of the SM stated that the MF and the SM would find a joint solution to the problem prior to the expiry of the agreed terms.

The VAI VA company is implementing good construction supervision and actively contributes to the implementation of the project.


5.1. The Project is in its implementation stage. The goals set are expected to be achieved in accordance with the written commitments. Financial management and control of the funds disbursed under the Financial Memorandum are in conformity with the legal framework and the priorities set.

5.2. The funds disbursed are expended according to their purposes and in conformity with the laws following the sequence of procedures, the obligatory rules of the PHARE Programme and the contracts signed. No omissions or violations have been established. By 05.11.2002 under project BG 9906 funds have been absorbed totaling Euro 4,580,444.49, representing 25.53% of all contracted funds in the amount of Euro17,939,928.35. Accounting of the payments is in conformity with the requirements of the European Commission in Brussels and the DIS Manual.

5.3. Economy has been achieved in management of the funds allocated. Contractors for the individual contracts were selected by tender procedures, carried out in conformity with the DIS rules. No overlapping of activities, overruns of project budgets, increases of contracted funds in the course of implementation and/or reductions of the volumes of contracted tasks, have been allowed. The contingency funds were used in conformity with the requirements.

5.4. As to project planning, potential risks at the different stages of the project cycle were not taken into account and the preliminary evaluation of the required construction works was inflated. These circumstances created prerequisites for contracting Euro 17,899,950.35 out of the funds, appropriated under the Financial Memorandum in the amount of Euro 23,000,000.00, as well as an impossibility to offer the full scope of construction works when dividing the SWWTP project into two parts. The omissions in the tender documentation could have been avoided or minimised if a more stringent control and better co-ordination existed in the process of design planning, as well as committing the consulting company, which prepared the tender dossier to subsequent liability in terms of completeness and conformity of the documentation prepared.

5.5. In pursuance of the goals the following concrete results have been achieved:

a)  Project BG 9906-01-01-0002 – Upgrading and Rehabilitation of the Sofia Waste Water Treatment Plant. Lack of rhythm and delays in implementation have been observed, to which the following prerequisites have contributed: involvement of different institutions and units in implementation, management and supervision of the project; in the process of design planning no option was reviewed for separating the design part from the construction part; the existence of unclear issues in the tender documentation; poor information; failure to observe internal regulations and the legal status of the Contractor; difficulties in implementing extreme administrative measures and sanctions during implementation phase in cases of contracts, based on the design-construction-turnkey transfer scheme. These circumstances have led to an extension of the completion deadline from 24.01.2003 until 15.05.2003, as well as to absorption of EUR 3,149,405.66 which represents 21.30% of the contracted funds in the amount of Euro 14,785,702.00 (activities, related to implementation) during 71.16% of the term of the project, which has already expired;