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Documentof The WorldBank Report No: 17510-BIH Public Disclosure Authorized PROJECT APPRAISAL DOCUMENT ONA Public Disclosure Authorized PROPOSED CREDIT IN THE AMOUNT OF SDR 18.5 MILLION TO BOSNIA AND HERZEGOVINA FOR A Public Disclosure Authorized SECOND ELECTRIC POWER RECONSTRUCTION PROJECT April 10, 1998 Public Disclosure Authorized Energy Sector Unit Bosnia and HerzegovinaCountry Unit Europe and CentralAsia RegionalOffice CURRENCYEQUIVALENTS (as of March 31, 1998) Currency Unit = Konvertible Marka (KM) KM1 .00=DM1 .00=US$0.55 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES GJ 10 billion joules kV Kilovolt kW Kilowatt MW Megawatt = 1,000 kW kWh Kilowatt hours GWh Gigawatt hour= Imillion kWh MVA Megavolt amperes = 1,000 volt amperes ABBREVIATIONSAND ACRONYMS BiH Bosnia and Herzegovina CAS Country Assistance Strategy DFID Department for International Development (UK) DM Deutsche Mark EBRD European Bank for Reconstruction and Development EMP Environmental Management Plan EU European Union EPBiH Elektroprivreda Bosnia and Herzegovina EPM Elektroprivreda Mostar EPRS Elektroprivreda Republika Srpska GDP Gross Domestic Product IC1B Intemational Competitive Bidding JUGEL Yugoslav Electric Power Industry NBF Not Bank Financed LIB Limited International Bidding NCB National Competitive Bidding IS International Shopping NL The Netherlands NS National Shopping OECD Organization for Economic Cooperation and Development OECF Overseas Economic Cooperation Fund (Japan) PIU Project Implementation Unit RS Republika Srpska RUT Tuzla Coal Mines RUSB Central Bosnian Coal Mines SDR Special Drawing Rights SOE Statements of Expenditure USAID US Agency for International Development Vice President :Johannes F. Lmfn Country Director :Christiaan J. Poorttman Sector Director :Hossein Razavi Sector Leader :Henk Busz Task Team Leader :Richard Hamilton Bosnia and Herzegovina Second Electric Power Reconstruction Project CONTENTS A. ProjectDevelopment Objectives .................................................................. 2 1. Project developmentobjectives and key performanceindicators ............................................... 2 B. StrategicContext .................................................................. 2 1. Sector-relatedCAS goal supportedby the project..................................... ; . 2 2. Main sector issues and Governmentstrategy ..................................... 2 3. Sector issues to be addressedby the project and strategicchoices .5 C. ProjectDescription Summary .6 1. Project components .6 2. Key policy and institutionalreforms supportedby the project .6 3. Benefitsand target population .7 4. Institutionaland implementationarrangements .7 D. Project Rationale .8 1. Project alternativesconsidered and reasons for rejection .8 2. Major related projects financedby the Bank and/or other developmentagencies . 9 3. Lessons learnedand reflected in the proposedproject design.10 4. Indicationsof borrower commitmentand ownership.10 5. Value added of Bank supportin this project.10 E. SummaryProject Analysis .11 1. Economic.11 2. Financial.12 3. Fiscal impact.12 4. Technical.13 5. Institutional.13 6. Social.14 7. Environmentalassessment .14 8. Participatoryapproach .15 F. Sustainabilityand Risks.15 1. Sustainability.15 2. Criticalrisks .17 3. Possiblecontroversial aspects .18 G. Main Loan Conditions .18 1. Effectivenessconditions .18 ii 2. Other....................................................... 18 3. Readiness for implementation....................................................... 19 4. Compliancewith bank policies....................................................... 19 Annexes Annex 1. Project Design Summary....................................................... 20 Annex 2. Project Description ....................................................... 21 Annex 3. Estimated Project Cost ....................................................... 27 Annex 4. Cost-BenefitAnalysis Summary....................................................... 31 Annex 5. Financial Summary ....................................................... 42 Annex 6. Procurement and Disbursement Arrangements ....................................................... 52 Table A Project Costs by Procurement Arrangements .............................................. 54 Table Al: Project Procurement Plan and Implementation Schedule............................ 55 Table B. Thresholds for Procurement Methods and Prior Review ............................. 58 Table C. Allocation of Loan Proceeds ....................................................... 59 Annex 7. Project Processing Budget and Schedule ....................................................... 60 Annex 8. Documents in Project File ....................................................... 61 Annex 9. Statement of Loans and Credits ....................................................... 62 Annex 10.Statement of IFC's Committed and Disbursed Portfolio . .............................................63 Annex 11.Country at a Glance ....................................................... 64 Map IBRD 29266 Bosnia and Herzegovina: Second Electric Power Reconstruction Project Bosnia and Herzegovina Second Electric Power Reconstruction Project Project Appraisal Document Europe and Central Asia Regional Office Energy Sector Unit Date: April 10, 1998 Sector Leader: Henk Busz Country Director: Christiaan J. Poortman Sector Director: Hossein Razavi Project ID:BA-PE-45483 Sector: Power Program Objective Category: Environmentally Sustainable Development Lending Instrument: Specific Investment Loan Program of Targeted Intervention: [] Yes [X ] No Project Financing Data [] Loan [X] Credit [] Guarantee [ Other [Specify] For Loans/Credits/Others: Amount: SDR 18.5 million/US$25 million equivalent Proposed terms: [] Multicurrency [] Single currency Grace period (years): 10 [] Standard Variable [] Fixed [] LIBOR-based Years to maturity: 35 Commitment fee: 0.50% Service charge: 0.75% Financing plan (US$m): Source Local Foreign Total Local 32.9 0 32.9 Cofinanciers 0 111.9 111.9 IBRD 0 0 0 IDA 0 25.0 25.0 Total 32.9 136.9 169.8 Borrower: Bosnia and Herzegovina Guarantor: Responsible agencies: EPBiH, EPM, EPRS Estimated disbursements (Bank FY/US$M): 1998 1999 2000 Annual 1.2 18.7 5.1 Cumulative 1.2 19.9 25.0 For Guarantees: [] Partial credit [ Partial risk Proposed coverage: Project sponsor: Nature of underlying financing: Terms of financing: Principal amount (US$) Final maturity Amortization profile Financing available without guarantee?: [ Yes [ No If yes, estimated cost or maturity: Estimated financing cost or maturity with guarantee: Project implementation period: 2 years Expected effectiveness date: June 30, 1998 Expected closing date: June 30, 2000 Page 2 A: Project Development Objectives 1. Project development objectives and key performance indicators (see Annex 1): The primary objective is to restore electric power supply at least cost. The project would help to restore the generation, transmission and distribution systems to meet at least part of the expected increase in demand within Bosnia and Herzegovina (BiH), reconnect many consumers still without power after the war, and reduce power outages, variations in voltage level, and other quality of service defects. It would help to minimize electricity supply costs by focusing on the most cost-effective investments in the power sector and in the coal mines which supply the power sector, by rehabilitating only economically viable power stations and coal mines, reducing losses in generation, transmission and distribution, and improving power exchanges within BiH. Power and coal sector restructuring actions that would be implemented under the project would also help to minimize electricity supply costs. The key performance indicators are increases in electricity generation and sales within BiH, and reduction in losses in transmission and distribution. The secondary objective is to improve cost recovery. While the ultimate goal is to make the power companies completely financially autonomous of the Government, this can be achieved only gradually as consumer incomes recover from extremely low wartime levels. The key performance indicators are revenue collection relative to amounts billed and to cash operating costs for Elektroprivreda Bosnia and Herzegovina (EPBiH), Elektroprivreda Mostar (EPM) and Elektroprivreda Republika Srpska (EPRS) respectively, and gradual increases in tariff levels. The project includes investments to reduce pollution at coal power stations. The main indicator is reduction in dust emissions at the Gacko Thermal Power Station. B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1): GAS document number: 16866 Date of latest CAS discussion: August 28, 1997 The project would contribute to the CAS objective of eliminating key bottlenecks in the power sector through investments in rehabilitation of power generation, transmission and distribution facilities. It would also contribute to the CAS objective of full cost recovery in the power sector in the medium term. The project would support coordination between the three Elektroprivredas and the Energy Ministries of the two Entities and encourage economically beneficial electricity exchanges. The project components, which were selected in accordance with their degree of urgency, are distributed throughout the country. They also include transmission interconnections between the three Elektroprivredas. The project would support institutional strengthening