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. Benefits and 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 and power sector reform that could lead to eventual privatization of segments of the power sector, as well as measures to initiate coal sector restructuring.

The project is the second stage of a three stage rehabilitation program for the power sector. A proposed Third Power Project would accompany further implementation of electricity and coal sector restructuring measures. 2. Main sector issues and Government strategy: The main sector issues and Government strategy for dealing with them are the following:

(i) Reconstructing the power system. In 1990, BiH produced 12,900 Gigawatt hours (GWh) of electricity from generating plants located on its territory. Electricity consumption was 11,822 GWh. The system comprised 13 hydropower plants with a total capacity of 2,034 Megawatts (MW) and an average output of 6,922 GWh/year, and 12 thermal power plants with a total capacity of 1,957 Megawatts (MW) and an output Page 3

of 9,252 GWh in 1990. The thermal power plants were brown coal and lignite fired, with the fuel coming from mines within BiH. BiH was responsible for operating its own system and meeting local demand. However, being part of the former Yugoslav network, the 400 kilovolt (KV) power grid in BiH was controlled by the Yugoslav Electric Power Industry's (JUGEL) dispatching center in Belgrade. Power exchanges were also controlled by JUGEL.

At the beginning of 1996, over 56% of total generating capacity in the Federation was reported to have been damaged. Part of the remaining capacity was out of operation due to destroyed transmission lines or lack of coal. Most plants in the Federation and Republika Srpska (RS) suffered from lack of maintenance during the war. About 60% of the transmission network and control system in the Federation was seriously damaged, including transmission facilities and interconnection lines to neighboring countries. The transmission network and control system in RS was also heavily damaged, particularly in those areas located close to confrontation lines. Many distribution networks were badly damaged in both the Federation and RS as a result of fighting and lack of maintenance. Many transformer stations, buildings, telecommunications and maintenance facilities and equipment were also either seriously damaged or destroyed. In 1997, total net electricity generation reached 71% of the 1990 level, compared to 60% in 1996. Similar progress had been made in rehabilitating transmission and, to a lesser extent, distribution. However, many facilities remain to be reconstructed, some of the repairs are of a temporary nature, others are barely sufficient to restore facilities to operation and do not provide for adequate reliability, and there is still a shortage of spare parts.

The Federation and RS Governments place high priority on rehabilitating or reconstructing the power systems as one of the primary means to relaunch economic activity. The Bank has been providing assistance through the Emergency Recovery Credit (TF-024030), the Emergency Electric Power Reconstruction Project (2903-BOS) and the Reconstruction Assistance Project (3028-BOS), but much more remains to be done.

(ii) Restoring coal production in the economically viable mines. In the Federation, coal production dropped to 1.1 million tons in 1993, or 9% of the pre-war level of about 12 million tons per year. The Federal Government's strategy is to restore production so as to provide fuel for the coal-fired power generating plants at Tuzla and Kakanj, which are being rehabilitated/reconstructed. By 1996, production had recovered to 2.1 million tons. It continued to rise in the first half of 1997, reaching an annual rate of 3.1 million tons (26% of the pre-war level). The coal mines in the Federation are grouped into two companies: the Tuzla Coal Mines (RUT) and the Central Bosnian Coal Mines (RUSB), which presently supply 82% of their output to the Tuzla and Kakanj power plants, and 18% to small industries, municipalities and households. So far, little effort has been made to concentrate production in a few large and economic mines. Since the war, employment in the mines has increased from about 7,000 to 12,000 persons, reaching about 50% of the pre-war level. In addition to providing employment, the mines presently pay unemployment benefits to about 7,000 ex-workers, many of them returned soldiers. The social pressure for employment has so far kept the coal industry from restructuring. Despite rising output, productivity is very low by international standards. Present production costs per ton are at or above the world market level. Production costs continue to rise due to lack of replacement and rationalization investments, and rising labor costs. Therefore, major restructuring of the Federation's coal sector is needed urgently. The first step should be to continue the restoration and rationalization of the Page 4

lowest-cost mines only. The second step should be to consolidate production in the viable mines and close uneconomic capacity.

In RS, coal production dropped to 0.2 million tons in 1995, or 6% of the pre-war level of 3.5-4.0 million tons per year. Production has now increased to about 60% of the pre-war level. The coal mines, one surface brown coal mine at Ugljevik and one surface lignite mine at Gacko, are completely integrated with the Ugljevik and Gacko power plants, respectively. The mines are modem and could produce coal efficiently after repair of the main equipment and addition of key auxiliary equipment. While the Ugljevik mine is well managed, operations and maintenance should be improved at Gacko. RS strategy is to restore the output of the Ugljevik and Gacko mines to a level compatible with the electricity generation of the respective power plants.

(iii) Improving cost recovery. All three power enterprises were severely affected during the war by revenue constraints arising from the inability of citizens as well as commercial and industrial enterprises to pay for their electricity consumption. Given that repair of war-damaged equipment had absolute priority, this made normal repair and maintenance virtually impossible. Revenue collection during the war had dropped to as low as 25 percent of invoiced amounts, leading to severe cash deficits. Since the peace accord, the revenue situation, both in terms of tariff levels as well as collection performance, has improved significantly, albeit to varying extents in the case of the three enterprises. In 1997, EPM, EPBiH and EPRS are estimated to have been able to cover 100, 90 and 80 percent of their respective cash operating expenses. Further progress is required, however, first to reach cash break-even levels, and, subsequently, to achieve full cost recovery, including coverage of normal depreciation charges. This will require progressive increases in: (i) billing and collection results, including unequivocal support from the concerned Governments for enforcement of collection in case of non-payment; (ii) cost efficiency through adequate repair and maintenance, enabled by the improving financial situation of the enterprises; and (iii) tariff levels.

(iv) Improving electricity tariff levels and structures. In March 1998, average industrial electricity tariff rates of US$0.07/kWh (kilowatt hour), US$0.07/kWh and US$0.04 kWh for EPBiH, EPM and EPRS respectively compared favorably with those in OECD Europe (US$0.06). By contrast, the household rates of US$0.05/kWh, US$0.05/kWh and US$0.04/kWh were much lower than the OECD Europe average of US$0.13/kWh. The low household rates reflect the temporarily low incomes within the country. The strategy of the companies and Governments is to gradually raise household rates towards the economic level in accordance with the financial requirements of the companies and as ability of households to pay increases. Prior to the war, the tariff structures were differentiated by season and time of day for most consumer categories, thereby approximating economic cost differences. Some of these differences have been dropped temporarily. For example, in 1997, EPRS continued to charge the higher winter rates after the end of the 1996-97 winter. It is expected that the pre-war tariff structures will be gradually re-introduced when conditions permit. A power tariff study being carried out under European Bank for Reconstruction and Development (EBRD) supervision will calculate long-run marginal cost estimates, which will provide a basis for determining new economic cost-based tariff differentials.

(v) Increasing mutually beneficial power exchanges between EPBiH, EPM and EPRS. Since the war, power exchanges between the different parts of BiH have been limited because of the breakdown of many transmission lines and the creation of three separate power enterprises. Re-establishment of unhindered power exchanges would: (i) permit Page 5

surplus power in one part of the country to be used to alleviate shortages in another part (caused, for example, by outages of large generating units or surges in power demand); (ii) reduce transmission costs (e.g., by allowing load centers in western RS to be served by relatively nearby power stations in the Federation rather than by the more distantly located power stations in eastern RS); and (iii) reduce generating costs by permitting the lowest cost generating units in the country to be used at each time of day and year. Until now, the limited power exchanges which have occurred have been handled on an ad hoc basis. Measures are needed to establish a formal coordination mechanism that would provide for largely automatic power exchanges when they are needed, on a commercial basis, and at least cost.

(vi) Power sector restructuring. Prior to the war, BiH had a single vertically integrated state-owned power company. There are currently three vertically integrated power companies serving three separate groups of consumers (Bosniacs, Croats and Serbs). The current arrangements lack the economies of scale and coordination that existed before the war. They also lack the potential benefits that could be reaped from competition (lower prices). The Federation is preparing a law that would provide for restructuring and eventual privatization of Federation power enterprises. RS has a law which confirms EPRS as the vertically integrated single electricity company within the Entity, but it allows for eventual private involvement. The legal frameworks should be strengthened to ensure their investor friendliness and provide for independent regulation.

3. Sector issues to be addressed by the project and strategic choices:

Carrying out the project through credits to state-owned enterprises is necessary at this stage in order to restore full electricity supply to thousands of households as soon as possible and enable the economy to return quickly towards the pre-war level. Private lending or investments in the BiH power companies are not possible for the time being because of perceived country risks and the fact that economic recovery is still in the early stages. While priority will continue to be given to reconstruction of the power system and rehabilitation of the associated coal mines to provide sufficient fuel for the rehabilitated thermal power stations, the implementation emphasis is increasingly shifting to the financial and institutional aspects of power sector rehabilitation. The project would address the cost recovery and tariff issues in order to enhance the self-financing capability of the power companies and avoid the need for government financial support.

The project includes both investments and institutional measures to improve power exchanges because of the potential cost savings.

Sector restructuring and privatization would also bring important economic benefits and contribute to improved coordination between Bosniacs, Croats and Serbs. The project would support first steps towards sector restructuring and the establishment of an appropriate regulatory framework for sector restructuring and privatization.

The project would address the issue of coal sector restructuring because of the economic and social importance of determining early on just how much of this sector is economically viable, and then making sure that only the economically viable mines are rehabilitated. These actions are closely linked to an evaluation of how much reconstruction should be carried out at the Tuzla and Kakanj coal power stations, which accounted for 48% of total power generation in BIH in 1990. The project covers only a small part of the potential total reconstruction requirements, and includes only components that have obviously high priority and that do not require first completing the coal sector restructuring analysis. Page 6

C: ProjectDescription Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown):

Component Category Cost Inel. % of Total IDA % of IDA Other Contingencies financing financing Donor (US$M) (US$M) __I_Financing 1. Generation Physical 46.01 27.1 23.96 96 15.15 Rehabilitation of the hydropower stations of Rama, Jajce 1, Capljina, Trebinje I and 2, and Bocac; and the coal-fired power stations of Tuzia (Second Phase), Kakanj (Second Phase), Gacko and Ugljevik 2. Transmission Physical 44.30 26.1 0.54 2 36.69 Rehabilitation of transmission facilities in the Federation, Republika Srpska, and between them 3. Distribution Reconstruction and rehabilitation of distribution Physical 47.02 27.7 36.92 networks in the Federation and Republika Srpska 4. Associated Coal mines Rehabilitation of coal mines associated with the Physical 24.97 14.7 21.30 coal power stations of Tuzla, Kakanj, Gacko and Ugljevik 5. Technical Assistance Transmission and institutional rehabilitation Institutional 7.44 4.4 0.50 2 1.80 study and project Coal sector restructuring study management Engineering and project management support

Total 169.74 100.0 25.00 100 111.86

The foreign cost financing plan for the proposed project is shown in Annex 3, Attachment 1. Of the total foreign cost of US$137 million equivalent, IDA would provide US$25 million to be used to finance the rehabilitation of the Rama, Jajce 1, Capljina, Trebinje I & 2, and Bocac hydro power plants, Tuzla and Gacko thermal power plants, and project implementationsupport. The European Union (EU), US Agency for InternationalDevelopment (USAID) and The Netherlands are financing the rehabilitation of distribution networks. The UK Department for International Development (DFID), Japan and Canada Initiative Program would finance the reinforcement of the existing transmission system. The EU would also finance a part of the transmission lines and substations rehabilitation. The Overseas Economic Cooperation Fund (OECF) of Japan would finance the rehabilitation of Kakanj thermal power plant and Tuzla, Central Bosnia (Kakanj), Gacko and Ugljevik coal mines. DFID would also finance part of the rehabilitation of thermal power plant, associated coal mine, distribution networks, and technical assistance for a transmission study. Canada would also finance a power expert group to assist in engineering and project implementation.

2. Key policy and institutional reforms supported by the project: The reforms summarized in Section B3 would be concretely supported by:

(i) establishment by July 30, 1998 of an Electricity Coordinating Center, with staff from the Elektroprivredas and functions and powers satisfactory to the Association; (ii) agreement to take appropriate measures to achieve safe, secure and economic operation of a technically integrated power system of BiH; (iii) exchange of electric power on a commercial basis, by October 31, 1998, using prices which cover the economic costs of the electricity traded and which, depending on the cost estimates, may differ by time of day as well as season; Page 7

(iv) establishment of billing and collection systems resulting in revenue collection (as a percentage of total cash operating expenses) in the years 1998, 1999 and 2000 of: 110%, 145% and 165% for EPBiH; 150%, 170% and 185% for EPM; and 110%, 125% and 140% for EPRS; (v) completion, by December 31, 1998, of an electricity tariff study, and implementation of agreed actions thereafter; (vi) adjustments in the structures and levels of electricity tariffs, including provision for the economic cost of fuel, as appropriate and required for the financial performance of EPBiH, EPM and EPRS; (vii) cash payments by EPBiH to the coal mines of at least 50% of the price of coal consumed, starting June 30, 1998; (viii) completion, by March 31, 1999, of a sector restructuring study for the Federation's coal mining sector, and implementation of agreed actions thereafter; (ix) start of implementation, by October 31, 1998, in accordance with a timetable to be agreed with the Association, of power sector restructuring and regulatory reform actions acceptable to the Association. These reforms should be based, inter alia, on selected recommendations of the Privatization Project Report, "Electric Power Sector Restructuring and Privatization" (August 1997); and (x) submission, by October 31, 1998, of a draft Electricity Law, acceptable to IDA, to the Federation Parliament; and submission to the RS Parliament of amendments to the RS Electricity Law, acceptable to IDA. These reforms should be based, inter alia, on acceptable recommendations of the Privatization Project.

3. Benefits and target population: The benefits would consist of an increase in electricity generation, improved access to electricity supply for large numbers of consumers, improvement in the quality of electricity supply (e.g., fewer outages and less variation in voltage levels), and cost reductions achieved through reduced coal mine costs, transrnission and distribution losses and increased power exchanges on a commercial basis between EPBiH, EPM and EPRS. Institutional benefits would include: improved cost recovery and financial performance of the three Elektroprivredas and the two Federation coal mine companies; improved arrangements for power exchanges; first steps toward power sector restructuring; and first steps toward coal mine restructuring. Environmental benefits would include lower dust emissions at the Gacko power plant and reduced pollution at the Gacko coal yard. The target population would be household and non- household consumers of electricity in the areas served by the three Elektroprivredas, including those in small towns and rural areas who did not benefit from the previous rehabilitation of the power system.

4. Institutional and implementation arrangements: The IDA credit would be lent to Bosnia and Herzegovina and onlent through the Federation Government to EPBiH and EPM and through the Government of Republika Srpska to EPRS. Onlending would be at the IDA service charge, for a 20-year term, with five years of grace.

Co-financing would be provided through parallel financing arrangements, with each donor responsible for separate components. As a result, possible delays in implementation of one donor's components would generally cause little or no delay in implementationof other donors' components.

Electric Power. The proposed project is expected to be completed by December 31, 1999. Management of project implementation would be carried out by EPBiH, EPM and EPRS, who would be responsible for execution of their respective parts. Procurement and disbursement of funds would be handled in accordance with the agreements reached between each donor and Bosnia and Herzegovina. All three Page 8

Elektroprivredas have adequately qualified staff and expert support required for project management. The Federation Ministry of Energy, Mining and Industry has established a joint Project Implementation Unit (PIU) for the Federation components of the project, and branch PIU units have been established in EPBiH and EPM. EPRS has established its own PIU. All these units have acceptable functions and staffing. The implementation of the sub-projects would be the responsibility of the local generation, transmission and distribution entities. To ensure coordination, the three Elektroprivredas would hold regular meetings to resolve particular project problems and advise their governments and donors on major coordination and implementation issues, if any. The IDA credit would include US$0.5 million to finance basic PIU office equipment and operating costs including salaries of PIU directors and overtime for staff involved in project management. Financing of these costs would be gradually phased out during the project period.

Coal Mining. The coal components are expected to be completed by June 30, 1999. Under the ongoing Emergency Electric Power Reconstruction Project (2903-BOS), RUT and RUSB have been successful in carrying out procurement and project implementation satisfactorily. Under the proposed project, these companies would again be responsible for implementation of their respective components. RUT and RUSB are supervised by the Federation Ministry of Energy, Mining and Industry, as are EPBiH and EPM. The Ministry will also be responsible for restructuring the Federation's coal industry. The PIU within EPRS will also be responsible for the execution of the Ugljevik and Gacko coal mine components, since these mines are owned by EPRS.

Accounts, Auditing and Reporting. The financial management of EPBiH, EPM and EPRS is adequate for project monitoring. In addition, an EBRD managed study is expected to recommend measures to strengthen the companies' overall financial management systems in the medium termn. Separate and auditable project accounts would be established by EPBiH, EPM and EPRS. It was agreed that the World Bank will design an amendment to the Charts of Accounts of the three Elektroprivredas that would provide for the preparation of a set of project financial reports corresponding to the categories of expenditures and other relevant components of the Credit.

In the past, financial audits were carried out by government auditors in accordance with Bosnian regulations. According to the Institute of Accounting and Audit, BiH is now applying International Audit Standards. Under the project, the financial statements of the Beneficiaries of the IDA Credit and the project accounts would be audited annually by qualified, independent, external auditors acceptable to IDA and under terms of reference approved by IDA. The auditors for the 1998 statements would be appointed prior to effectiveness of the IDA credit. Separate audit statements would be prepared for the special accounts and for statements of expenditure (SOE). All audit reports would be made available to IDA within six months after the end of the fiscal year. Project accounts would be maintained for one year after they have been audited. The Beneficiaries would separately prepare and furnish to IDA quarterly project implementation reports, summarizing the status of procurement and disbursement, implementation progress for each component, as well as financial reports in a format acceptable to IDA.

Monitoring and Evaluation. Due to the complexity of the project, close supervision would be required by IDA, especially during the first 12 months of implementation. Implementation progress would be formally evaluated through a mid-term review approximately 12 months after effectiveness, when project implementation should be in full swing. In addition, the Resident Mission in Sarajevo would assist in closely supervising initial project implementation and would assist on matters requiring advice and rapid decisions by IDA, such as procurement and disbursements.

D: Project Rationale 1. Project alternatives considered and reasons for rejection: The project covers rehabilitation of existing power facilities rather than construction of new ones. This Page 9 was considered to be the fastest and least costly approach to meeting electricity demand. Because of limited financial resources, the project cannot cover all the rehabilitation needs. Therefore priorities were determined from among the rehabilitation options. First, it was agreed at Donors' Conferences and by the Council of Ministers of BiH to share the project on a roughly two-thirds - one-third basis between the Federation and RS. Second, efforts were made to ensure a balanced restoration of generation, transmission and distribution in order to avoid bottlenecks or surpluses in one or more of these three systems. Within each of the generation (including coal supply), transmission and distribution systems the priorities were determined as follows. For hydropower stations, the critical requirement was to ensure that the plants are able to operate. Needed expenditures to improve plant availability rates and increase security of civil works were left for the future. Rehabilitation of the Tuzla and Kakanj coal power stations would be limited mainly to the 32 MW units, which are needed for heat and industrial steam supply as well as electricity supply. The project economic analysis confirms the economic justification of rehabilitating these units in comparison with constructing a new combined-cycle natural gas-fired power station, the lowest-cost new source of supply. Rehabilitation of the larger units would be carried out later on the basis of ongoing studies to evaluate the economic viability of these units and the best timing of work to be done on them. Rehabilitation of coal mines would be limited to the lowest cost mines and to ensuring just enough production to provide fuel for expected additional thermal power generation over the next three years. Rehabilitation of transmission would be confined to the 110 kV and 220 kV systems, with a relatively small amount of work being done at this stage to reconstruct the 400 kV system, pending the establishment of improved coordination of power exchanges between the three Elektroprivredas. Measures towards improving this coordination would be taken under this project. A future third electric power reconstruction project, which would complete the reconstruction phase, would focus on further transmission system rehabilitation, including construction of a coordinated dispatching system, in cooperation with other major donors. Distribution system investments would be focused on: (i) networks which have been seriously damaged and/or cut off from the transmission system; (ii) those which have been temporarily repaired but operate unreliably; and (iii) those in areas receiving or expected to receive large numbers of refugees.

2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned): Sector issue Project Latest Supervision (Form 590) Ratings (Bank-financed projects only) Implementatio Development n Progress (IP) Objective (DO) Bank-financed Repair war damages for specific Emergency Recovery S S sectors Project

Emergency reconstruction of power Emergency Electric S S facilities; cost recovery Power Reconstruction Project

Reconstruction in Republika Srpska Reconstruction NA NA Assistance Project/a Other development azencies Many agencies, including the EU, NA NA USAID and EBRD, are helping to finance the above projects and parallel power sector investments IPIDORatings: HS (HighlySatisfactory), S (Satisfactory),U (Unsatisfactory),HU (HighlyUnsatisfactory) a/ Not yet effective (Board approval on 12/23/97). Page 10

3. Lessons learned and reflected in the project design:

The project would build on the successful performance of the Emergency Electric Power Reconstruction Project. One lesson learned from this project is the importance of ensuring the timely availability of cofinancing. Under the proposed project, nearly all of the co-financing has been identified, leaving a financing gap of less than US$4 million. However, further actions are needed to make the cofinancing arrangements effective as soon as possible and to ensure that the Elektroprivredas are kept fully informed of the donors' activities on their respective project components. Under the proposed project, each Elektroprivreda would sign a separate project implementation agreement with each of the donors. These agreements would cover, inter alia: (a) the scope of the supply of goods and/or rehabilitation works; (b) the procurement plan, including the procurement method and procurement procedures to be followed; (c) the delivery schedule and/or construction plan; (d) estimated cost, schedule of disbursements, and the method and procedure for disbursements; and (e) responsibility for project implementation. IDA could exercise its remedies if these agreements are not effective by December 31, 1998. One reason for the success of the Emergency Electric Power Reconstruction Project is a strong and well-staffed PIU in EPBiH. For the proposed project, a Federation PIU has been established, with branch units in EPBiH and EPM, and a separate PIU has been established in EPRS. All have adequate staffing. Another lesson from previous involvement in BiH is that local labor and suppliers should be used as much as possible, when consistent with economy and efficiency. Under the proposed project, most of the installation and civil works would be carried out by qualified local firms with local financing.

4. Indications of borrower commitment and ownership: Counterpart personnel of EPBi]H,EPRS and EPM have been extensively involved in preparation of the project, and have made frequent trips to meet Bank staff, occasionally at some risk to their personal safety. All three Elektroprivredas have supplied requested information in accordance with the agreed time schedules. There has also been full involvement in project preparation of the Energy Ministers of the Federation and RS, including participating in joint meetings. The Energy Ministers as well as the counterpart personnel of the Elektroprivredas have shown a great interest in the choice of project components and the shares of the project for their respective areas, and these have been fully agreed upon. The Council of Ministers has provided written agreement on the proposed allocation of IDA funds and the proposed allocation of other donor funds. The Prime Minister of the Federation has taken an active interest in the project, notably by proposing the establishment of a PIU at the Federation level as a means to strengthen integration of the power sector within the Federation. Both the Federation and RS Governments have indicated a desire to establish legal frameworks for the power sector based on European Union models. The three Elektroprivredas are committed to the establishment of a coordinating mechanism for power exchanges and have been engaged in extensive discussions with each other and with IDA and the project cofinanciers on the choice of mechanism. The Federation Ministry of Energy, Mining and Industry has shown strong support for the coal sector restructuring component of the project.

5. Value added of Bank support in this project: (i) The Bank has taken the lead role among donors in establishing overall sector rehabilitation and reconstruction investment priorities from the point of view of the whole country. It has been able to do this because of its leadership in the two largest post-war electric power projects for the power sector, the Emergency Electric Power Reconstruction Project and the proposed project, and its involvement with all three Elektroprivredas as well as because of its involvement in other energy sector projects in Bosnia and Herzegovina; (ii) Bank involvement in the proposed project is serving as a catalyst for other donor co- financing. OECF Japan, in particular, would contribute an amount slightly larger than the IDA credit. As a result, although IDA would provide only US$25 million towards the total foreign cost of US$137 million, the financing gap was less than $4 million as of early March 1998; (iii) Because of its broad sector involvement, the Bank is able to take the lead role among donors in encouraging institutional Page 11 reform and strengthening; (iv) Bank involvement, both through the design of the project to include investments by all three Elektroprivredas and the emphasis on improved power exchanges, is significantly contributing to improved coordination between the three Elektroprivredas and the Energy Ministries of the two Entities. The Bank's role in this regard is considered absolutely indispensable by the other donors and will be increasingly important in the future, especially with regard to proper utilization of the proposed 400 kV system; (v) Procurement in accordance with World Bank procurement guidelines would help to minimize costs of equipment purchase and installation. Furthermore, the requirement of strong PIUs within the three Elektroprivredas would help to expedite project implementation.

E: Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (See Annex 4):

[A7 Cost-Benefit Analysis: NPV= US$280 million; ERR= 26% The project is part of the overall investment programs of EPBiH, EPM, EPRS, RUT and RUSB to rehabilitate the power and coal sectors. It includes many components of varying sizes for many power stations, transmission lines and distribution networks. The benefits of many individual project components could not be separated from the benefits of other project components and of simultaneous investments not covered under the project. Therefore, the main cost-benefit analysis was made for the whole investment program of which the project is a part. This program consists of all the actual power and related coal investment expenditures made in 1996 and 1997 plus all projected investment expenditures through 1999, but excluding investments not covered by the proposed project for which financing has not already been committed. The without program case, against which to evaluate the program benefits, was taken to be the continuation of the power supply situation which existed in 1996.

While, in the absence of the rehabilitation program, power supply would likely diminish over time, no account was taken of this possibility because of the difficulty of predicting the rate of decline. One consequence of this definition of the without program case is to provide conservative estimates of the program benefits.

The benefits were taken as the incremental electricity sales made possible by the investment program valued at the forecast weighted average financial electricity prices for the three Elektroprivredas.' The demand forecasts of these companies were evaluated in order to ascertain whether demand within BIH would be sufficient to absorb the capacity made available by the investments. The forecast growth rates of sales from distribution by EPBiH, EPM and EPRS of 11.5% per year, 11.9% per year and 10.2% per year, respectively, from 1997 to 2003 were considered to be reasonable in view of forecast economic growth of 12.3% per year (Country Assistance Strategy, July 31, 1997). Direct sales from transmission to large industries in the Federation are forecast to grow from 265 GWh in 1997 to 2,710 GWh in 2003, equal to 86% of the 1990 level. Realization of this forecast will depend on a return of electricity consumption by the aluminum and iron industries in the area served by EPM to the 1990 levels of 1,400 GWh and 600 GWh, respectively, or the emergence of new industries. While there is some uncertainty surrounding these forecast demands, they are sufficiently in excess of the amount of forecast total electricity supplies (including the increments resulting from the investment program analyzed) to provide assurance that all the new capacity will be needed as soon as it can be made available, except for 1998, when there could be a small surplus.2 This is shown in the following tabulation and in Table A4.2:

' This approachgives an estimateof willingnessto pay. It assumesthat prices will increase as projectedand that the incremental revenue collected would be as large as incremental sales multiplied by the sales prices. It is a conservative estimate in that it does not include consumers surplus, which cannot be reliably estimated for BiH. 2These estimates assume average hydrology. In years of less than average hydrology, the deficits would be much larger. Electric utilities throughout the world try to have sufficient capacity to cover demands even in dry years (i.e., which would occur as infrequently as once every 10 - 20 years). Page 12

Projected Electricity Consumption and SUDDly (GWh)

-----Actual------Projected------1996 1997 1998 1999 2000 2001 2002 2003 Consumption 5,805 6,974 9,689 10,988 12,018 12,615 13,074 13,360 Production 7,340 8,765 9,810 10,116 10,502 10,507 11,000 10,448 Surplus(+)/Deficit(-) 1,535 1,791 121 -872 -1,516 -2,108 -2,074 -2,912

The costs include the above-defined investment program, incremental operating costs of the coal mines that would benefit from the project, and other incremental operating and maintenance costs of the power sector. Taxes and import duties were excluded. The actual exchange rate was taken to be equal to the shadow exchange rate since the BiH currency is linked to the Deutsche Mark (DM). A shadow wage rate was not used in the main case because of difficulties in making a reliable estimate, and since its use would increase an already high rate of return.

Three additional sets of cost-benefit analysis were carried out covering several important project components for which the benefits could be separated from those of the overall power system investment program. These analyses included evaluation of: (i) the benefits relative to the costs of the coal mine investments in the Federation; (ii) the economic viability of the coal mines in the Federation that would benefit from the project investments; and (iii) the economic viability of the Gacko and Ugljevik coal- fired power plants and the 32 MW units at Tuzla and Kakanj. In all cases the estimated benefits exceeded the costs.

2. Financial (see Annex 5): NPV=US$280 million; FRR=26%

The project is financially sound. The financial benefits are equal to the economic benefits since shadow prices were assumed to be equal to actual prices, and no taxes would be applied to the project components or the Elektroprivredas, at least to the end of the disbursement period.

Entity financial performance, severely affected during the war period, has improved significantly since the peace accord. Revenue collections, which had plunged during the war period due to the difficulties in billing and collection, have steadily been improving as a result of reinstatement of billing and collection systems, and gradual increases in collection ratios. Consequently, EPM is now able to cover its cash operating expenses and EPBiH and EPRS are expected to do so by 1998; cost recovery in EPRS is particularly sensitive, however, to improvement in the social and economic conditions in the RS. Full cost recovery, including coverage of depreciation charges at appropriate levels, is expected by the year 2000 for EPBiH and EPM, and by 2002 for EPRS.

Financial projections, based on conservative assumptions as to increases in demand (as indicated above) and in achievable efficiency improvements, confirm that the enterprises will be able to generate the internal financing required for the project as well as meet the projected debt service levels during project operations.

3. Fiscal impact: In the short run, the project would have little positive or negative fiscal impact. The money from most donors is expected to be passed on to the Beneficiaries on the same terms as it would be given to Bosnia and Herzegovina (In the case of the IDA credit, however, the repayment term would be 20 years for the Beneficiaries, but 35 years for the Government). Debt service charges would be very small in the early years because of grace periods and low or zero interest rates. Budget subsidies would not be needed to Page 13

finance the local costs of the project. The Beneficiaries would be exempted from import duties and other taxes on imported equipment for the project, and none of the Beneficiaries will be in a position to pay corporate income tax over the next several years.

Although the Beneficiaries would be responsible for debt service, Bosnia and Herzegovina would bear a contingent liability as guarantor for repayment of donor credits. The project itself would contribute to economic recovery and thereby indirectly augment fiscal revenue from direct and indirect taxes.

4. Technical: The feasibility study for the rehabilitation of the transmission system, prepared by Mott Ewbank Preece of the UK, was reviewed by DFID and the Bank and found to be satisfactory. The study concluded that restoring the priority 110/220 kV transmission facilities and the principal 400 kV inter-entity tie-lines is essential to the security of power interchange. The engineering and design of the thermal power plants in the Federation are being carried out by EPBiH, with the assistance of Verbundplan of Austria. The engineering and design of the thermal power plants in RS are being prepared by EPRS, with the assistance of engineering consultants from the Federal Republic of Yugoslavia. Engineering works and studies for rehabilitationof hydro power plants and distributionnetworks were prepared by the Electroprivredas.These studies, including environmental impacts and mitigation measures, were reviewed by the Bank and found adequate. The project's technical design is appropriate to the needs of Bosnia and Herzegovina and conforms to required standards. Post-engineering coordination, including the balance of the engineering, design, preparation of equipment specifications and tender documents, and interface with the contractors will be performed jointly in BiH by the Elektroprivredas and a Canadian Power Expert Group. Cost estimates for the generation,transmission, distribution and general plant components were defined based on detailed damage assessments, rehabilitation studies, and engineering designs carried out by EPBiH, EPM, EPRS, the coal mine companies, their local consultants,Mott Ewbank Preece of the UK, and Verbundplan of Austria. The cost estimates reflect end- 1997prices and are based on the latest international tendering information available for similar works, which are realistic. Physical contingencies of 10% are used for both foreign costs and local costs. The price escalation for costs expressedin terms of foreign exchange is calculated according to anticipated international price increases of 2.2 percent per annum on average for 1997-2000. The price escalation for local costs is calculated according to the projected annual inflation rates of 5 percent for the Federation and 10 percent for RS during the same period. The allowances for physical contingencies and price increases during implementation are deemed to be adequate.

5. Institutional: Executing agencies: The Elektroprivredas' and Coal Mine Companies' ability to implement the project has been demonstrated by the satisfactory preparation and execution of the IDA-financed Emergency Recovery Project and Emergency Electric Power Reconstruction Project and the satisfactory preparation of the power component of the Reconstruction Assistance Project. The project has been designed and would be implemented according to internationally accepted technical criteria and standards. The technologies involved are proven. The executing agencies have the technical and managerial capabilities to successfully carry out the project.

Project management: To strengthen project management capabilities, EPBiH is already being assisted by a Norwegian Power Expert Group. EPM and EPRS would be assisted by a Canadian Power Expert Group. The Consultants would assist in reviewing the design of the project components, preparing the bid documents, procurement, coordination and project implementation. Training and transfer of knowledge would be included. Page 14

6. Social: An important objective of the project is to restore satisfactory power supply to about 400,000 persons, mostly in small towns or rural areas, who have had limited or no power supply since the war. The project would also provide improved quality of electricity supply to many more consumers. The benefits of fewer outages to consumers who depend on electricity for cooking and space heating would be considerable. The project would contribute to fuller and more productive employment of coal miners in both the Federation and RS. The labor needed to produce the incremental coal supply in the Federation under the project would be about 1,200 persons.

However, improved collection of bills and increases in tariffs would impose additional costs on consumers, most of whose incomes are still far below pre-war levels. The tariff structures of all three Elektroprivredas offer lower prices to households than to other consumers (section B2). The tariff study under EBRD is giving special attention to other ways to alleviate the burden of electricity bills on socially disadvantaged consumers. 7. Environmental assessment: Environmental Category []A [X] B In accordance with OD 4.01 (Environmental Assessment), Environmental Management Plans (EMPs) are required for the rehabilitation of the thermal power stations included under the project. EMPs for the Tuzla and Kakanj thermal power stations were already prepared under the Emergency Electric Power Reconstruction Project, and with slight modification serve adequately for the purpose of the present project. Separate EMPs were prepared for Ugljevik and Gacko.

The EMPs for all four thermal power stations have been reviewed by the World Bank. It was concluded that all environmental aspects are satisfactorily addressed and in compliance with Republika Srpska, Bosnia and Herzegovina, and World Bank environmental regulations, policies and procedures.

Since the project is one of rehabilitation, chief objectives of the EMP are to: (i) identify mitigating measures to minimize any adverse impacts that might arise from restoring the original operational performance; and (ii) identify opportunities for environmental enhancement over the original project concept.

The EMPs examined whether the following environmental aspects warranted remedial action:

* Atmospheric emissions (dust, S02, NOJ) and ambient air quality both locally and, in the case of Ugljevik, possible transboundary impacts from operations; * Wastewater discharges, and impacts on surface waters; * Ash and slag disposal, solids management at the mines (Gacko and Ugljevik), and impacts to both surface and groundwaters; * Noise (at Kakanj); and * Possible underground oil storage leaks at Tuzla and Kakanj.

A series of mitigating measures was identified on a priority basis. Because of the limited nature of direct involvement by the donors in some of these project components, only selected high priority elements of the mitigation plans for Tuzla, Kakanj, Gacko and Ugljevik could be included. It is hoped that the remaining actions identified will provide the donor community with a coherent basis for further future support of a more comprehensive program of environmental management at the four thermal power stations.

On June 6 and 7, 1997, EPBiH hosted a public meeting in Tuzla with 250 participants, including government officials from the community and the canton, academia, environmental organizations and associations, and the media. It was generally recognized that environmental problems in Bosnia and Page 15

Herzegovina were exacerbated by the power, mining and chemical industry developed during the 1980's, and that a concerted effort would be needed by both government and industry to remedy the situation over the long term. However, given the lack of funds and devastation inflicted by the war, priority should be given to rehabilitating, remediating and controlling pollution at those activities which would most benefit the economy.

Environmental issues associated with the project and addressed in the EMPs for Gacko and Ugljevik included all concerns expressed by affected parties in: (i) public meetings conducted for each power station in July 1997; and (ii) separate independent pollings of additional stakeholders at each site.

It was generally concluded that the beneficial aspects of continued power plant production surpass any adverse aspects, provided adequate care is taken to ensure environmental protection. To this end, environmental departments in mines and thermal power stations would be strengthened over time, as well as their monitoring capabilities. Municipal secretariats for town planning, housing and health would monitor both power stations and mines to assure mitigation actions are implemented. For the relatively new Ugljevik plant, installation of flue gas desulfurization within the next five years or so is high priority.

8. Participatory approach: The principal organizations involved in project preparation were: EPBiH, EPM, EPRS, RUT, RUSB and the Energy Ministers of the Federation and RS. There was no direct participation of final electricity consumers or non-governmental groups that would be affected by the project, except at the above- mentioned meeting on June 6 and 7, 1997 to discuss environmental aspects.

Wider participation was not invited for the following reasons:

(i) As far as is known, there is no significant disagreement within BiH on the need to rehabilitate the electric power system. Since the project would rehabilitate existing facilities rather than construct new ones, its justification and implementation would be relatively straightforward, and it would have minimal adverse environmental impacts; (ii) The project includes a large number of components affecting large numbers of persons spread throughout BIH so it would be very complicated to involve all affected final consumers directly; and (iii) There is broad agreement on the need for rapid action in order to restore electricity service as soon as possible to households, services and industry.

F: Sustainability and Risks

1. Sustainability:

EPBiH has demonstrated its ability to rehabilitate its power system by implementing the ongoing Emergency Electric Power Reconstruction Project on schedule. EPM and EPRS have also carried out rehabilitation projects promptly and effectively when financing has been made available. Factors critical for sustainability of the power sector components of the project include: (i) overall macroeconomic progress, which is needed to restore consumers' ability to pay for electricity; (ii) satisfactory financial performance of the three Elektroprivredas; and (iii) sufficient coordination between the companies to permit beneficial exchanges of electricity. Rapid economic growth during 1996 and 1997 has strengthened the ability of consumers to pay for electricity. The proposed bill collection targets for all three Elektroprivredas are realistic, provided economic recovery continues in both Entities of BiH. If the collection targets are achieved, the three Elektroprivredas will be able to cover the local costs of the project as well as finance future maintenance without any Government budget subsidies. Onlending the Page 16

IDA credit to the three Elektroprivredas at the IDA service charge over a 20-year term, including five years of grace, would help ensure that these companies maintain satisfactory financial performance. The measures to be taken under the project for improving electricity exchanges would contribute significantly to alleviating electricity shortages and reducing costs of supply. The critical factor for sustainability of the coal mine components of the project is sustained demand for domestic coal by the coal power stations. This demand will depend on the continued viability of the coal power stations and the price of domestically produced coal relative to the price of imported coal. The project economic analysis confirms the economic viability of the coal-fired power generating units expected to use the coal as well as of the coal mines supported by the project. The measures that would be supported by the project for coal sector restructuring would increase the sustainability of the coal sector. Page 17

2. Critical Risks (reflecting assumptions in the fourth column ofAnnex 1): Risk Risk Rating Risk Minimization Measure Annex 1. cell "from Outputsto Objective" Insufficientdemand for electricity. N Because of limited resources the project would likely not meet the expected demand. However, any time of day surplus power could be exchangedbetween companies.

Insufficientpower exchangesbetween the Elektroprivredas. M It is in the economic interest of the Elektroprivredasto exchange power. The project provides for the progressive creation of formal institutionalcoordination mechanisms.

Failure to restructure the power sector S The project provides for the enactment and implementation of legislation for sector restructuring.

Failureto rationalize the coal mining sector. S The project provides for a coal sector restructuring study and implementation of its agreed recommendations.

Annex 1, cell "fromComponents to Outputs" Incompleteforeign cost financing. M Firm or preliminary commitments have been made for all but US$4 million. Since each donor financesseparate project sub-components,failure to find financing for one sub-componentwould not prevent the others from going ahead.

Incompletelocal cost financing. M for EPBiHand EPBiHhas been able to cover the local costs of EPM;S for EPRS the Emergency Electric Power Reconstruction Project, and EPM has rehabilitated the Mostar Hydropower Station on its own. Mitigating measures include actions to improve bill collection and raise tariffs when necessary to allow the Elektroprivredas to meet agreed financial targets.

Delayedproject completion. M See above for mitigating measures for financial problems. Delays for technical reasons are unlikely since the project is for rehabilitation only and previous projects have been implemented on schedule. Technical and procurement problems would be minimized by establishing PlUs for all Elektroprivredas with assistancefrom foreign consultants.

Cost Overrun. M The cost estimates include physical contingencies of 10% plus price contingencies determinedon the basis of projectedinternational and local inflation.

Overall Risk Rating. M The Emergency Electric Power Reconstruction Project has been successful in meeting its physical and cost recovery objectives on time. The proposed project is also for rehabilitation, which is easier to implement than one involving completely new facilities, but it is more ambitious because of the simultaneous involvementof EPM and EPRS as well as EPBiH and because of added institutional objectives. However, all parties involved have a strong interestin makingthe project succeed. Risk Rating - H (High Risk), S (SubstantialRisk), M (Modest Risk), N (Negligibleor Low Risk) Page 18

3. Possible Controversial Aspects: There may be controversy over the choice of organizational arrangements to ensure the safe, reliable and economic operation of the Bosnia and Herzegovina power system on an integrated basis.

G: Main Loan Conditions

1. Effectiveness Conditions:

(a) appointment of independent auditors acceptable to the Association; and (b) execution of subsidiary loan agreements between Bosnia and Herzegovina, the Federation, Republika Srpska and the three Elektroprivredas.

2. Other:

The Borrower has agreed to: (a) onlend the IDA credit through the Federation and RS Governments to EPBiH, EPM and EPRS on standard IDA terms with 20 years of repayment including five years of grace; and (b) by December 31, 1998, allocate all electric power sector debts to the respective Elektroprivredas and determine the terms and conditions of repayment.

The Federation has agreed to:

(a) complete, by March 31, 1999, a sector restructuring study for the Federation's coal mining sector and take appropriate measures to implement agreed actions thereafter; (b) submit to Parliament, by October 31, 1998, a draft Electricity Law based, inter alia, on acceptable recommendations of the Privatization Project Report (August 1997); (c) start implementation, by October 31, 1998, in accordance with a timetable to be agreed with the Association of power sector restructuring and regulatory reform actions agreed with the Association; and (d) complete an electricity tariff study by December 31, 1998 and implement the agreed recommendations in accordance with a timetable agreed with the Association.

Republika Srpska has agreed to:

(a) submit to Parliament, by October 31, 1998, amendments to the RS Electricity Law based, inter alia, on acceptable recommendations of the Privatization Project; and (b) start implementation, by October 31, 1998, in accordance with a timetable to be agreed with the Association, of power sector restructuring and regulatory reform actions agreed with the Association.

EPBiH, EPM and EPRS have agreed to:

(a) institute billing and collection systems resulting in revenue collection (as a percentage of their respective total cash operating expenses) in the years 1998, 1999 and 2000 respectively, of: 110%, 145% and 165% for EPBiH; 150%, 170% and 185% for EPM; and 110%, 125% and 140% for EPRS; (b) not incur new debt unless that debt is covered at least 1.5 times by their net internal cash Page 19

generation; (c) reduce total distribution losses to 16% in 1999 and 12% in 2000; (d) submit within six months after the close of each fiscal year project accounts and financial statements audited by an independent auditor acceptable to IDA; (e) implement adjustments in the structure and levels of electricity tariffs, including provision for the economic cost of fuel, as appropriate and required for the financial performance of the enterprises; (f) establish, by July 30, 1998, an Electricity Coordinating Center, with members from the three Elektroprivredas and functions and powers satisfactory to the Association; (g) take appropriate measures to achieve safe, secure and economic operation of a technically integrated power system of BiH; (h) exchange electric power on a commercial basis by October 31, 1998; (i) make cash payments to the coal mines of at least 50% of the value of coal consumed, starting June 30, 1998 (EPBiH); and (j) furnish to the Association by December 31, 1998 revised implementation schedules for the environmental management plans for the Tuzla, Kakanj, Gacko and Ugljevik thermal power stations, including sources of financing for proposed investments (EPBiH and EPRS).

3. Readiness for Implementation:

The engineering design documents for the first year's activities are complete and ready for the start of project implementation. The procurement documents for the first year's activities are complete and ready for the start of project implementation. The Project Implementation Plan has been agreed.

4. Compliance with Bank Policies:

This project complies with all applicable Bank policies.

Task Team Leader: Richard Hamilton

Sector 1ader Henk Busz

Country Directo tiaan J. Poortman Page 20

Annex 1 BOSNIA AND HERZEGOVINA SECOND ELECTRIC POWER RECONSTRUCTIONPROJECT Project Design Summary

Narrative Summary Key Performance Monitoring and Critical Assumptions Indicators Evaluation Sector-related CAS Goal: 1. Minimization of Project progress reports (Goal to Bank Mission) Increase efficiency and unsatisfied demand (kWh). and supervision missions. 1. Continued political coverage of infrastructure 2. Avoidance of stability. networks. Government subsidies. 2. Satisfactory economic growth. Project Development 1. Electricity generation. Project progress reports (Objectives to Goal) Objectives: 2. Electricity sales. and supervision missions. 1. Meeting the revenue 1. Restore electric power 3. Losses in transmission collection targets is at least cost. and distribution. assumed to eliminate the 2. Improve cost recovery. 4. Net income of each need for Government Elektroprivreda. subsidies other than the 5. Electricity price levels. concessionary element in donor credits. Outputs: 1. Electricity supply Project progress reports (Outputs to Objective) 1. Increased electricity availability in MW and and supervision missions. 1. Rehabilitation by EPs supply capacity. GWh. proceeds on schedule. 2. Satisfactory financial 2. Revenue collection 2. Consumers are able to performance of the relative to amounts billed pay their bills. Elektroprivredas. and cash operating costs. 3. Governments are 3. Improved level and 3. Electricity prices willing to adjust structure of electricity compared to long-run electricity prices. tariffs. marginal cost. 4. The Elektroprivredas 4. Strengthened 4. Total number of kWh are willing to coordinate. coordination between the exchanged between the 5. Bosniacs and Croats Elektroprivredas. Elektroprivredas. are able to agree on a 5.Advances in power 5. Restructuring of EPBiH satisfactory Federation sector restructuring. and EPM. power sector structure. 6. Concentration of coal 6. Implementation of coal 6. The Federation production in the least- sector restructuring study. Government is willing to cost mines. rationalize the coal industry. Project Components/Sub- Inputs: (budget for each Project progress reports (Components to Outputs) components: (see Annex component, excluding and supervision missions. 1. Donors will cover all 2 for project description) contingencies) foreign costs. 1. Power Stations; 1. Power stations: US$40 2. Beneficiaries will 2. Transmission; million. cover all local costs. 3. Distribution; 2. Transmission: US$39 3. Capable project 4. Associated coal mines; million. management. 5. Technical assistance 3. Distribution: US$41 4. Avoidance of delays. and engineering. million. 5. Avoidance of project 4. Coal mines: US$22 cost overruns. million. 5. Technical assistance and engineering: US$6 million. Page 21

Annex 2 BOSNIA AND HERZEGOVINA SECOND ELECTRIC POWER RECONSTRUCTIONPROJECT Project Description

Electric Power

War-related damage to the power sector has been severe, not only because of direct destruction as a result of war activities but also because of the lack of maintenance due to shortage of materials, spare parts and manpower. The proposed project is part of the 1997-1999reconstruction program for the power sector. It is designed to meet the forecast energy and peak demand increases with acceptable levels of reliability. The generation component would consist mainly of the rehabilitation of existing hydro and thermal power plants throughout Bosnia and Herzegovina. The transmission component would focus on provision of urgent protection, communication and metering for existing 220/110 kV networks, and rehabilitation of 220/110 kV transmission facilities to reconnect cut-off areas, and priority inter-entity 400 kV tie-lines to improve power exchanges within Bosnia and Herzegovina. Many distribution networks are in very poor condition. The distribution component would focus on rehabilitation of networks that suffered extensive war-related damage and degradation, especially in the areas of Bihac, Anvil and Banja Luka, Sarajevo and surroundings, the Posavina corridor (including Brcko and Tuzla), and the Central Bosnia and Mostar areas, in order to restore power supply to facilitate economic reconstruction and the return of refugees and displaced persons. The technical assistance component would include an Electric Power Transmission and Institutional Rehabilitation study, and support to the PIUs of the three Elektroprivredas.

The project components consist of:

A. Generation

(1) Rama Hvdro Power Plant (US$4.94 million). The power plant is located at the upstream tributary of the Neretva River. The tail water of Rama Power station flows into the downstream Neretva River hydro power cascade. It is a high head (325 m) hydro power plant, with an installed capacity of 160 MW (2x80). There are war related damages in the tunnel and surge tank system, embankment dam and transformer station. First phase rehabilitation of the civil works and plant equipment has been completed with EPM's own resources. To improve the availability of the plant, this project would focus on rehabilitation of the 220 kV substation, including SF6 switchgear,2 generatorbays, 2 line bays, 1 transformerbay, and coupling busbar and measuring bay.

(2) Jaice 1 Hvdro Power Plant (Second Phase: US$1.21 million). The power station is located on the Vrbas River. During the war, the power plant changed hands several times between warring factions, and suffered significant damage. Replacement of the regulator for turbine/generator and mechanical auxiliary equipment, financed under the Emergency Electric Power Reconstruction Project, is underway. To complete plant rehabilitation this project component would focus on rehabilitation of the electrical equipment, including replacement of 110 kV SF6 circuit breakers and line and busbar disconnectors.

(3) Canliina Hydropower Plant (US$0.42 million). The Capljina reversible power plant is located south of Mostar, and can work both in conventional and pumped-storage modes. The rehabilitation would include replacement of the damaged air compressor for the plant.

(4) Trebinie 1 and 2 Hvdro Plant (US$1.62 million). The power plants are located on the Trebisnjica River in south-east Bosnia and Herzegovina,and were commissionedin the sixties. The rehabilitation of the plants is long overdue and would include: (i) overhaulof the dam monitoring system; (ii) replacement of the Page 22 instrumentation and control equipment for the turbine/generator units; (iii) overhaul of the power station control and supervisorysystem; and (iv) replacement of worn out maintenance equipment and tools.

(5) Bocac Hydropower Plant (US$2.67 million). The power plant is located on the Vrbas River, and is essential to ensure the reliability of power supply to the city of Banja Luka (about 35 km downstream).The power plant changed hands between warring factions, which caused considerable damage. The rehabilitation would include: (i) overhauling the dam monitoring system; (ii) rehabilitating the turbine/generator bearings and control equipment; (iii) replacing control, protection, measuring, signaling and communicationequipment; and (iv) replacing worn out maintenanceequipment and tools.

(6) Tuzla Thermal Power Plant (Second Phase: US$15.30 million). The first phase rehabilitation of the 100 MW cogeneration unit (financed under the EmergencyElectric Power Reconstruction Project), was completed in late 1997. The second phase rehabilitation would focus on common facilities and maintenance of the 32 MW cogeneration units, and includes: (i) reinforcement of the cooling tower; (ii) replacement of coal handling equipment; (iii) overhaul of the water treatment plant; (iv) rehabilitating instrumentationand control (I&C), and automation; (v) refurbishment of the 6 kV system; (vi) provision of spares for major maintenance of the two 32 MW cogeneration units to prevent breakdown; (vii) plant mechanical and electrical equipment; and (viii) balance of plant.

(7) Kakani Thermal Power Plant (Second Phase: US$9.45 million). The first phase rehabilitation of two 110 MW cogeneration units is being carried out under the Emergency Electric Power Reconstruction Project. The second phase rehabilitationwould focus on plant common facilities and maintenance of the 32 MW cogeneration units, and would include: (i) overhaul of the water treatment plant; (ii) replacement of the control and monitoring equipment for two 110 MW cogeneration units; and (iii) spare parts for major maintenance of the two 32 MW cogeneration units to prevent breakdown. With the 220 kV transmission trunk line linkage, rehabilitated under the Emergency Electric Power Reconstruction Project, the Kakanj and Tuzla thermal power plants will bring large benefits, especially during the dry seasons.

(8) Gacko Thermal Power Plant (US$6.29 million). This plant was commissioned in 1983 and has an installed capacity of 300 MW. Since commissioning there have been continual problems, which have limited both the power production and availability of the plant. The normal generating output is about 210 MW. The power plant caught fire in July 1996 and is under repair. The rehabilitation would include: (i) repair of the turbine/generator; (ii) repair and upgrade of the electrostatic precipitator; and (iii) environmental protection at the ash yard.

(9) Uglievik Thermal Power Plant (US$4.31 million). The plant was commissioned in 1982 and is generally in fair condition. With proper maintenance the plant should be available for continual operation until well after 2000. The component includes: (i) spare parts for boiler maintenance; and (ii) replacement of worn out maintenance equipment and tools.

B. Transmission

(I) Rehabilitation of Inter-Entity Transmission Facilities (US$35.41 million) to: (i) provide communication and metering equipment for power exchanges, and control equipment for existing 110 and 220 kV transmission lines; (ii) provide equipment for urgent protection measures on existing 220/110 kV transmission lines; (iii) provide equipment and materials for rehabilitation of the 400 kV transmission lines (Tuzla-Sarajevo,Sarajevo-Mostar, Mostar-Gacko, and Visegrad-Tuzla),with a total of 119 km of damaged lines and 495 damaged towers; (iv) rehabilitate 220 kV lines (Tuzla-Gradacac-Djakovo)witha total of 36 km of damaged lines and 50 damaged towers; and (v) rehabilitatethe Doboj and Tuzla regions' 110 kV ring connections, with a total of 106 km of damaged lines and 77 damaged towers. Page 23

(2) Rehabilitationof TransmissionFacilities in the Federation (US$4.78million). The rehabilitationof 110/220kV transmission facilities was given top priority in 1996, mainly for the central Bosnia and Bihac areas of the Federation (555 km of 110/220 kV lines and 752 MVA substation capacities were rehabilitated). The immediate priority under this project would be to rehabilitate: (i) Gradacac substation (220/110 kV), including replacement of power transformer, circuit breakers, disconnectors, measuring transformers,lightning arresters and auxiliary equipment; and (ii) the 110 kV transmission line from Mostar 2 to Stolac, including reconstructionof 28 km of damaged lines and 3 damaged towers.

(3) Rehabilitation of Transmission Facilities in RS (US$4.11 million). The immediate priority is to rehabilitate: (i) the 110 kV Brcko 2 and Srebrenica substations, including transformer overhaul and replacement of circuit breakers, disconnectors,measurement transformers,lightning arresters and auxiliary equipment; and (ii) the 110 kV transmission lines (Konjevik Polje-Srebrenica, Banja Luka 6-Prijedor 5, Banjaluka-Gradiska,and Pale-Gorazde),includingrepairof 655 km of lines and 386 towers.

C. Distribution

Rehabilitationof DistributionNetworks. Many of the distribution networks suffered major destruction as a result of heavy local fighting and lack of maintenance. The greatest destruction was in distribution transformer substations, MV and LV overhead lines, underground cables, distribution pylons, and maintenance equipment. The restoration of distribution networks is essential, particularly in: (a) heavily damaged and cutoff areas, which are populated today but have little or no electricity supply; (b) areas with war damage, where many connections are of a temporary nature and power supply is unreliable and unsafe; (c) areas with seriously overloaded networks, due to resettlement of refugees; and (d) areas earmarked for refugee return, where the networks need urgent repair and maintenance. All the network candidates were screened using these mentioned criteria. This project component would cover the following most urgent reconstructionneeds:

(i) Rehabilitation of Distribution Networks in the Federation (US$31.50 million) . The work would include rehabilitation of 35, 20, 10 and 0.4 kV networks in the most damaged areas of the following cantons: Unsko-Sanski, Posavski, Tuzlansko-Podrinjski, Zenicko-Dobojski, Srednjebosanski, Sarajevo and Zapadnobosanski. This component would consist of 7 distribution substations with voltage of 35/20(10) kV, 550 km of medium voltage network (overhead and cable), 339 distribution substations with voltage of 10-20/0.4 kV, and 1,104 km of low voltage network (overhead and cable), serving 172,000 customers. A detailed description of the main items follows:

Gan-ion RtXSbLet'nt. ;<,., No. of inhabitants: 266,000 35/20(10) kV substation: 1. Unsko Sanski No. of refugees: 100,000 Bosanska Krupa (switchgear and power transformer) EU $1.28 mn (EP BiH); Significant war damages in Bihac, 10-20/0.4 kV power transformers: Netherlands $1.1 mn (EP Bosanska Krupa, Buzim,Cazin, Velika 80 units (21 MVA). BiH) Kladusa, Bosanski Petrovac, Kljuc and 20 kV overhead lines (18 km): Sanski Most distribution areas. Damaged Tmova, Vrhpolje,Dabar - 9, Cekrcici, Hrustovo. distribution substations, medium and low 20 kV cable network (180 km): voltage networks need to be rehabilitated Otoka, Vodovod, Mahica brdo, Zanatski centar. to resume normal power supply. About 20 LV overhead line (59 km): % of consumers have only limited access Trnova, Vrhpolje,Dabar- 9, Cekrcici, Hrustovo. to power supply. LV cable network (122 km): Otoka, Vodovod, Mahica brdo, Zanatski centar. 2. Posavski No. of inhabitants: 59,000 35/20(10) kV substations (5 units): USAID $3.5 mn (EPM); No. of refugees: 30,000 Odzak, Novi Grad, Domaljevac, Tolisa, Brcko Ravne. EU $3.0 mn (EPM) Substation, medium and low voltage 10-20/0.4 kV substabons (47 units): networks were damaged in Odzak, Odzak, Orasje, Brcko Ravne. Orasje, Bosanski Samac and Brcko 35 kV overhead line (25 km): Ravne distribution areas, which need to Odzak, Orasje. be rehabilitated to enable normal power 20 kV overhead line (40 km): supply. About 50% of consumers have Odzak, Orasje, Brcko Ravne. only limited access to power supply. LV overhead line (250 km): Odzak, Orasje, Brcko Ravne. Page 24

3. Tuzlansko-Podrinjski No.of inhabitants:605,000 35/20(10)kV substation:Sapna USAID$2.7mn(EP BiH); No.of refugees:200,000 ( switchgear,power transformer, building) EU$1.07 mn (EPBiH) Substationswere totally destroyed and 10-20/0.4kV substations:Kalesija, Gradacac, Olovo, mediumand low voltage networkswere Sapna,Teocak damaged in Kalesija,Gradacac, Olovo, 10-20/0.4kV powertransformers: Sapna, Teocak distribution areas. 30 units( 8.9 MVA) Damaged facilities need to be 35 kV overheadline (20 km): rehabilitated and replaced to enable Gradacac. normalpower supply. 20 kV overhead line (34 km): Kalesija, Gradacac, Olovo,Sapna, Teocak. About 10% of consumershave limitedor 20 kV cable network (10 km): Kalesija, Gradacac, noaccess to powersupply. Olovo,Sapna, Teocak. LV overheadline (136 km): Kalesija,Olovo, Sapna Gradacac,Teocak. LV cablenetwork: Gradacac, Olovo, Kalesija. 4. Zenicko-Dobojski No.of inhabitants:481,000 35 kV overheadline (6 km): USAID$0.1i9mn(EPBiH); No.of refugees:100,000 Jelah- Tesanj. EU $1. 07 mn (EPBiH) Mediumand low voltage networkswere 20 kV overhead line (35 km): Zenica, Zavidovici damaged in Zenica, Nemila,Zavidovici, Cekrcici, Doboj,Zepce and Busovacadistribution Busovaca. areas,which need to be rehabilitatedand replacedto enablenormal power supply. LV overheadline (110km): Zenica,Kakanj, Busovaca,Zavidovici, Zepce. About 8% of consumershave no or limitedaccess to powersupply. 5. Srednjebosanski No. of inhabitants:195,000 10-20/0.4kV substations(12 units): USAID$1.45mn(EPM); No. of refugees:30,000 Novi Travnik,Vitez, Nova Bila, Busovaca,Kresevo EU $0.32mn (EPM) Substation, medium and low voltage andKiseljak. networkswere damagedin Novi Travnik, 35 kV overheadline (11 km): Vitez, NovaBila, Busovaca,Kresevo and NoviTravnik, Vitez, Kiseljak. Kiseljakdistribution areas, which need to 20 kV overheadline (30km): be rehabilitatedto enable normalpower Novi Travnik,Vitez, Nova Bila, Busovaca,Kresevo supply. About 25% of consumershave andKiseljak. only limitedaccess to powersupply. LV overheadline (70 km): Novi Travnik,Vitez, Nova Bila, Busovaca,Kresevo andKiseljak. 6. Sarajevo No.of inhabitants:409,000 10-20/0.4kVsubstations (62 units): Centar, Novo USAID$6.75mn(EPBiH); No.of refugees:20,000 Sarajevo,Novi Grad. EU $1.18mn (EPBiH) Mediumand low voltage networkswere llidza,Vogosca, Ilijas, Hadzici, Tmovo. damaged in Stari Grad, Centar, Novo 10-20/0,4kVpower transformers: Sarajevo, Novi Grad, llidza, Vogosca, 31 units(14,69 MVA). Hadzici, Trnovo and llijas distribution 35 kV overhead line (10 km): llidza. areas which need to be rehabilitatedto 35 kV cablenetwork (3 km): llidza. enablenormal power supply. 20 kV overheadline (51km): Star Grad, Centar,Novo Sarajevo,Novi Grad,llidza, About 30%of consumershave no access Vogosca,Illijas, Hadzici. or limitedaccess to powersupply. 20 kV cablenetwork (67 km): StariGrad, Centar, Novi Grad,llidza. LV overheadline (273 km): Stari Grad,Centar, Novo Sarajevo, Novi Grad, llidza, Vogosca,llijas, Hadzici,Trnovo. LV cablenetwork (40 km): Stari Grad, Centar,Novo Sarajevo,Novi Grad,llidza, Vogosca,Ilijas, Hadzici,Trnovo. 7. Zapadnobosanski No.of inhabitants:84,000 10-20/0.4kV substations(10 units): EU$1.39 mn (EPM) No.of refugees:30,000 Kupres,Bosansko Grahovo, Livno. Substation, medium and low voltage 10-20/0.4kV, 630 kVA powertransformers: networks were damaged in Livno, Kupres. Tomislavgrad,Drvar, Bosansko Grahovo, 20 kV overheadline (45 km): Glamoc and Kupres distributionareas, Kupres,Bosansko Grahovo, Livno. which need to be rehabilitatedto enable LV overheadline (42km): normal power supply. About 30% of Kupres,Bosansko Grahovo, Livno. consumershave only limited access to powersupply. Page 25

(ii) Rehabilitation of Distribution Networks in RS (US$15.52 million). This work would include rehabilitation of the 35, 20, 10 and 0.4 kV networks in the areas of Bijeljina, Pale, Trebinje, Doboj and Banja Luka. This component would consist of 5 distributionsubstations with voltages of 35 or 20 kV, 120 km of medium voltage network, 171 distribution substations with a voltage of 10/0.4 kV, and 330 km of low voltage network, serving 365,700 customers. A detailed description of the main items follows:

Bijeljina No.of customers:82,025 35kVtransmission lines (TL) (34 km): EU $0.54 mn; No. of Refugees:32.,591 Vlasenica - Sekovici - Brcko - Brezovo Poije - Bukovica UK$1.13 mn; Significantwardamage in Brcko,Vlasenica 35/10kV substation(SS): USAID$3.65 mn and Sekovicidistribution areas. Damaged BijeljinaII, BijeljinalIl (EPRS) transmissionlines and substatonsand LV 10kV TL (103km) networkneed to be replaced. 10/0.4kV substation:117 pcs. LV network: 85 km Pale No.of Consumers:38,833 35 kVTL: Visegrad,Rogatica (23 km). EU$0.54 mn; NumberofRefugees: 26,413 20 kVTL: Koran- Trebevic,Sokolac-Kaljina (49km) UK$0.62 mn Distributionnetworks in Pale, Rogatica, 35/10kV SS:Trnovo. (EPRS) Rudo,Visegrad and Trnovo. 20(10)/0.4 kV SS Brijezda, Sirokari II, Podhrid, Damages need to be rehabilitatedto Rogatica,Kovanj, Oskorusa, Cajnici. resumenormal power supply. 20 kV cables:Pale (3 km) 10 kV TL Sirokari1 - Trnovo,Sirokari II, PodhridII, Mresa- VucjaLuka, Sokolac- Kaljiva (50 km). LV networkarea: Plandiste, Dorici, Obrvena, Sokolovici, Maljkovici, Medjurecje,Slatina, Miljevo, Trnovo, Paviljoni Visegrad, OkruglaVisegrad, Rogatica (40 km). Trebinje No.of Consumers:24,500 110kV TL:Trebinje - Velicani(16 km) EU$0.54 mn; NumberofRefugees: 8,400 10 kV TL: Velicanistrujici, Duzi - Slivnica,Domastvo. UK $0.55mn Damagedconnectors, insulators poles, for Grab, Krivaca-vricka,Gacko - Nadanici- Lukavica, (EPRS) MV, MV and LV networksneed to be Nevesinje,Kifino selo, Ljubinje ograda (153km) replaced. 10/0.4kV SS:Ljubinje 250 kVA LV networkarea: Trebinje,Bileca, Gacko, Nevesinje, Ljubinje (52 km). Doboj No.of Customers:60,300 110/35/10kV SS:Samac. EU$0.75 mn; No.of Refugees:8,400 35/10kV SS:Petrovo. USAID$1.65 mn Distributionnetworks in Doboj, Stanari, 35 kVTL: Petrovo- Sockovac(10 km). (EPRS) Vukosavlje, Derventa, Modrica, Brod, 10kV TL: (178km). Samacand Teslic damaged during the war 10/0.4kV SS: 10pcs and need to berepaired. LVnetwork: (68 km). BanjaLuka No.of customers:160,000 35 kVTL: Grad-Jezero;Mrkonjic Grad-Previja. EU$0.75 mn No.of refugees:23,833 20(10)/0.4kV SS: 14pcs Kozaracarea, 8 pcsLjubija, 8 UK$1.20 mn The distribution networks in Kozarac, pcs.AmabrineTukovi, 6 pcs. OmarskaTrnopolje. (EPRS) Ijubinje,Ambarine, Tukovi and Omarska, 20(10)kV TL: (20km). Tmopoijeareas were deteriorateddue to LV networks:(85 km). war and need to be rehabilitated.

D. TechnicalAssistance

(1) Transmission and Institutional Rehabilitation Study (US$0.89 million). Consultants' services are being provided to assist the three Elektroprivredas to prepare a Transmission and Institutional Rehabilitation Study. The study is required to prioritize the rehabilitation of the remaining components of the transmission network of Bosnia and Herzegovina and to outline the institutional capacities required to operate the fully re-integratedelectric power system.

(2) Engineering and Proiect Management (US$6.35 million). The project will finance expatriate engineering services to assist in the preparationof sub-project detailed designs and bidding documents, and to provide assistance to the PIUs of EPRS and EPM for project implementation and construction supervision. The PIU within EPBiH has been receiving assistance from a Norwegian power expert group under the Emergency Electric Power Reconstruction Project. Local engineering services and sub-project management will be delivered and financed by the respective Elektroprivredas. To support the operation of the PIUs, the project will finance the supply of basic office equipment, and support part of the PIUs' operating costs. Page 26

Associated Coal Mines

A. Federation

The objectives of the coal component for the Federation are to further increase the coal output of the associated low-cost mines of RUT and RUSB, and to improve the reliability and efficiency of operating these mines. Supply of materials, spare parts and auxiliary equipment would support an efficient operation of the main equipment over the next two years, and restructuring of the industry for sustainable efficient production would commence. Total foreign costs are estimated at US$14.0 million.

RUT (foreign cost US$7.0 million). Materials, spare parts and auxiliary equipment for the Banovici, Sikulje and Dubrave surface mines as well as for the Mramor underground mine would be purchased and installed. Worn and damaged rubber belts of conveyors in the Dubrave and Sikulje mines would be replaced. Trucks of the Banovici mine would be fitted with urgently needed new tires. An adequate supply of spare parts would keep trucks, excavators and auxiliary equipment in the Banovici, Dubrave and Sikulje mines in good working condition. Bulldozers which have exceeded their useful lifetimes or are badly damaged would be replaced. Unsafe electrical equipment would be replaced in the Mramor underground mine and pumps would be purchased for this mine to keep working places dry.

RUSB (foreign cost US$7.0 million). Auxiliary equipment and spare parts for the Vrtliste surface mine and the Breza underground mine would be purchased and installed. The workshop of the Vrtliste mine would be furnished with essential tools and equipment to service and repair the mobile mining equipment donated by the USA and EU under the Emergency Electric Power Reconstruction Project. An additional drill, a small hydraulic excavator, lifting equipment and service vehicles would be added to the auxiliary mining equipment to enhance the performance of the main mining equipment in the Vrtliste surface mine, and the obsolete electrical equipment of the Russian EKG excavators would be replaced. In the Breza underground mine, a section of the coal transport conveyor would be replaced. In addition, spare parts for the hydraulic roof support and a coal shearer would further increase and stabilize coal output of the Breza underground mine.

Technical Assistance for Restructuring (US$0.30 million). Technical assistance would be provided to: design cost reduction measures for the low-cost mines selected under the project mines and introduce managerial and operational changes; support an optimal system to regulate the separation of uneconomic mines and introduce a conditional and temporary subsidy scheme for these mines; and prepare a program to mitigate the social and environmental impact of manpower reductions and mine closures.

B. Republika Srpska

The objective of the coal component for Republika Srpska is to secure adequate coal supply from the Ugljevik and Gacko mines at about two-thirds of their capacity over the next two years. This component would consist of the supply of materials, spare parts and auxiliary equipment to support the efficient operation of the existing main equipment.

Ugljevik (foreign cost US$3.0 million). Worn and damaged tires of the mine trucks would be replaced. Spare parts would be provided for trucks, excavators, bulldozers and auxiliary equipment. The main obsolete and worn bulldozers would be replaced.

Gacko (foreign cost US$4 million). Rubber belts of key coal and overburden conveyors would be replaced. Essential spare parts for key mining equipment would be provided. A few new trucks, service vehicles and pumps would be procured. Page 27

Annex 3 BOSNIA AND EIERZEGOVINA SECOND ELECTRIC POWER RECONSTRUCTIONPROJECT Estimated Project Cost

ITEM |COST (S million)7 |Local |Foreign |To tal |ENTITY l L ELECTRIC POWER A. GENERATION 1. Rama Hydro Plant (2x80 MW) 0.63 3.70 4.33 Fed. 2. Jajce I Hydro Plant (3x10 MW) 0.18 0.88 1.06 Fed. 3. Capljina Hydro Plant (2x215 MW) 0.11 0.26 0.37 Fed. 4. Trebinje I & 2 Hydro Plants (3x60 MW + lx8 MW) 0.25 1.14 1.40 RS 5. Bocac Hydro Plant (2x55 MW) 0.41 1.89 2.31 RS 6. Tuzla Thermal Plant (Second Phase - 2x32 MW) 0.99 12.45 13.44 Fed. 7. Kakanj Thermal Plant (Second Phase 2x32MW) 0.79 7.50 8.29 Fed. 8. Gacko Thermal Plant (lx300 MW) 1.71 3.66 5.37 RS 9. Ugljevik Thermal Plant (Ix300 MW) 0.77 2.94 3.71 RS Federation Generation Subtotal 2.70 24.78 27.48 RS Generation Subtotal 3.15 9.64 12. 79 Generation Subtotal 5.85 34.42 40.27 B. TRANSMISSION INTER-ENTITY 1. Communications, metering and control for 220/1 10 kV 1.98 11.58 13.56 Fed.& RS lines (first phase) 2. Urgent protection for existing 220/110 kV lines 0.09 0.35 0.44 Fed.& RS 3. Capital investment and forward provisioning for 400 kV 1.35 7.80 9.15 Fed.& RS lines Tuzla-Sarajevo, Sarajevo-Mostar, Mostar-Gacko, Visegrad-Tuzla 4. 220 kV lines (Tuzla - Gradacac - Djakovo) 0.21 1.32 1.53 Fed.& RS 5. Doboj and Tuzla regions 110 kV ring connection 0.90 5.28 6.18 Fed & RS Inter-entity Transmission Subtotal 4.53 26.33 30.86 FEDERATION 1. 220/110 kV Substation Gradacac 0.41 3.13 3.54 Fed. 2. 110 kV line Mostar 2 - Stolac 0.18 0.48 0.66 Fed. Federation Transmission Subtotal 0.59 3.61 4.19 REPUBLIKA SRPSKA 1. Rehabilitation of 110 kV Brcko 2 Substation 0.27 1.32 1.59 RS 2. Rehabilitation of 110 kV transmission lines and 0.45 1.50 1.95 RS substations in Srebrenica, Prijedor - Banja Luka area and Gorazde RS Transmission Subtotal 0.72 2.82 3.54 Transmission Subtotal 5.83 32.76 38.59 Page 28

Annex 3 BOSNIA AND HERZEGOVINA SECOND ELECTRIC POWER RECONSTRUCTIONPROJECT Estimated Project Cost (continued)

ITEM COST (US$ million) Local Foreign Total ENTITY C. DISTRIBUTION FEDERATION 1. Unsko-SanskiCanton (No. 1) 0.54 2.09 2.63 Fed. 2. Posavski Canton (No. 2) 1.35 5.72 7.07 Fed. 3. Tuzlansko-PodrinjskiCanton (No. 3) 0.86 3.32 4.17 Fed. 4. Zenicko-DobojskiCanton (No.4) 0.28 1.11 1.39 Fed. 5. SrednjebosanskiCanton (No. 6) 0.45 1.56 2.01 Fed. 6. Sarajevo Canton (No. 9) 1.78 6.98 8.76 Fed. 7. ZapadnobosanskiCanton (No. 10) 0.30 1.22 1.52 Fed. FederationDistribution Subtotal 5.55 22.00 27.55 REPUBLIKA SRPSKA 1. Bijeljina Area 1.21 4.68 5.89 RS 2. Pale Area 0.29 1.02 1.31 RS 3. Trebinje Area 0.27 0.96 1.23 RS 4. Doboj Area 0.68 2.11 2.79 RS 5. Banja Luka 0.44 1.72 2.16 RS RS DistributionSubtotal 2.88 10.49 13.37 DistributionSubtotal 8.43 32.49 40.92 D. TECHNICAL ASSISTANCE 1. TransmissionStudy 0.07 0.70 0.77 Fed.& RS 2. ConsultantsServices 0.00 0.88 0.88 Fed.& RS 3. Project ImplementationSupport 0.00 0.44 0.44 Fed.&RS TechnicalAssistance Subtotal 0.07 2.02 2.09 E. ENGINEERING & PROJECT MANAGEMENT FEDERATION 2.70 - 2.70 Fed. REPUBLIKA SRPSKA 1.35 1.35 RS Engineering& ManagementSubtotal 4.05 - 4.05

of which: FederationPower Subtotal 13.84 64.58 78.42 RS PowerSubtotal 10.40 37.11 47Z51 Page 29

Annex 3 BOSNIA AND HERZEGOVINA SECOND ELECTRIC POWER RECONSTRUCTION PROJECT Estimated Project Cost (continued)

ITEM COST(US$ million) Local Foreign Total ENTITY II. ASSOCIATED COAL MINES 1. Tuzla Coal Mines 0.63 6.16 6.79 Fed. 2. Central Bosnia Coal Mines 0.63 6.16 6.79 Fed. 3. Coal Sector RestructuringStudy - 0.26 0.26 Fed. 4. Gacko Coal Mines 0.59 3.52 4.11 RS S. Ugljevik Coal Mines 1.16 2.64 3.80 RS

of which: Federation Coal Subtotal 1.26 12.58 13.84 RS Coal Subtotal 1.75 6.16 7.91

TOTAL BASE COST 27.25 120.44 147.68 of which: Federation Base Cost Subtotal 15.10 77.16 92.26 RS Base Cost Subtotal 12.15 43.27 55.42

Physical Contingencies 3.03 13.69 16.71 Price Contingencies 2.60 2.74 5.34

Total Taxes and Duties (not included in Total Project Cost) of which, Federation 14.05 1405 13.32% RS 8.14 8.14 12.66% Page 30

Annex 3, Attachment I BOSNIA AND HERZEGOVINA SECOND ELECTRIC POWER RECONSTRUCTIONPROJECT Estimated Foreign Cost and Financing Plan US$ million

COMPONENT TOTAL FINANCING FINANCIER FOREIGN GAP COST IDA EU UK USA JAPAN NL OECF CANADA ENTITY 1. POWERSECTOR Generation 1. Rama HydroPlant (2x80 MW) 4.20 0.00 4.20 Fed. 2. Jajce 1 HydroPlant (3x10MW) 1.00 0.00 1.00 Fed. 3. CapljinaHydro Plant (2x215MW) 0.30 0.00 0.30 Fed. 4. Trebinje1 & 2 Hydro Plants(3x60 MW+ 1x8MW) 1.30 0.00 1.30 RS 5. Bocac HydroPlant (2x55 MW) 2.15 0.00 2.15 RS 6. Tuz(aTherrnal Plant (SecondPhase - 2x32MW) 14.14 0.00 11.14 3.00 Fed. 7. KakanjThermal Plant(Second Phase 4x32MW) 8.52 0.00 8.52 Fed. 8. GackoThermal Plant (1x300MW) 4.16 0.00 3.87 0.29 RS 9. UgljevikThermal Plant (1x300MW) 3.34 3.34 RS Subtotal 39.11 3.34 23.96 3.29 8.52 Transmission Inter-entities 1. Communications,metering and controlfor 400/220/110kV 13.16 0.00 13.16 Fed+RS lines (first phase) 2. Urgentprotection for existing220/110 kV lines 0.40 0.00 0.40 Fed+RS 3. Equipmentand materialsfor 400 kV linesTuzia-Sarajevo, 8.88 0.00 8.86 Fed+RS Sarajevo-Mostar,Mostar-Gacko, Visegrad-TuzIa 4. 220 kV lines (Tuzla-Gradacac- Djakovo) 1.50 0.00 1.50 Fed+RS 5. Dobojand Tuzia regions110 kV ring connedion 6.00 0.12 2.50 0.88 2.50 Fed+RS Subtotal 29.92 0.12 4.40 22.90 2.50 Federation 1. 220/110kV SubstationGradacac 3.56 0.00 1.00 2.56 Fed. 2. 110 kV Line Mostar2 - Stolac 0.54 0.00 0.54 Fed. Subtotal 4.10 0.00 0.54 1.00 2.56 RepublikaSrpska 1. Rehabilitationof 110 kV Brcko 2 Substation 1.50 0.00 1.50 RS 2. Rehabilitationof 110 kV transmissionlines and substations 1.71 0.00 1.71 RS in Srebrenica,Pnjedor - Banja Lukaarea and Gorazde

Subtotal 3.21 0.00 1.71 1.50 Distribution Federation 1. Unsko-SanskiCanton 2.38 0.00 1.28 1.10 Fed. 2. PosavskiCanton 6.50 0.00 3.00 3.50 Fed. 3. Tuzlansko-PodrinjskiCanton 3.77 0.00 1.07 2.70 Fed. 4. Zenicko-DobojskiCanton 1.26 0.00 1.07 0.19 Fed. 5. GomjedrinskiCanton 0.00 0.00 Fed. 6. SrednjebosanskiCanton 1.77 0.00 0.32 1.45 Fed. 7. NeretvljanskiCanton 0.00 0.00 Fed. 8. ZapadnohercegovackiCanton 0.00 0.00 Fed. 9. SarajevoCanton 7.93 0.00 1.18 6.75 Fed. 10. ZapadnobosanskiCanton 1.39 0.00 1.39 Fed. Subtotal 25.00 0.00 9.31 14.59 1.10 RepubilkaSrpska 1. BijeljinaArea 5.32 0.00 0.54 1.13 3.65 RS 2. PaleArea 1.16 0.54 0.62 RS 3. TrebinjeArea 1.09 0.00 0.54 0.55 RS 4. DobojArea 2.40 0.00 0.75 1.65 RS 5. Banja Luka 1.95 0.00 0.75 1.20 RS Subtotal 11.92 0.00 3.12 3.50 5.30 TechnicalAssistance 1. TransmissionStudy 0.80 0.00 0.80 Fed+RS 2. ConsultantsServices 1.00 0.00 1.00 Fed+RS 3. Project ImplementationSupport 0.50 0.00 0.50 Fed+RS Subtotal 2.30 0.00 0.50 0.80 1.00 II. COALSECTOR 1. TuzlaCoal Mines 7.00 0.00 7.00 Fed. 2. CentralBosnia CoalMines 7.00 0.00 7.00 Fed. 3. Coal SectorRestnucturing Assistance 0.30 0.30 Fed. 4. GackoCoal Mines 4.00 0.00 2.71 1.29 RS 5. UglievikCoal Mines 3.00 0.00 3.00 RS Subtotal 21.30 0.30 2.71 18.29 TOTAL FOREIGNCOST 136.86 3.76 25.00 14.14 15.70 19.89 25.46 1.10 26.81 5.00 Page 31

Annex 4 BOSNIA AND HERZEGOVINA SECOND ELECTRIC POWER RECONSTRUCTIONPROJECT COST BENEFIT ANALYSIS

The results of the economic and financial cost benefit analyses are summarized as follows:

Cost Benefit Analysis Summary (US$million, 1997 prices)

Present Value of Flows Fiscal Impact Economic Financial Analysis Analysis 'Taxes Subsidies Benefits Electricity Revenue 1,322 1,322 - Costs Investments 362 362 Fed. Coal Costs 103 103 - Other O&M 577 577 -

Net Benefits: 280 280 - IRR: 26% 26%

Main Assumptions.

The project is part of the overall investment programs of EPBiH, EPM, EPRS, RUT and RUSB to rehabilitate the power and coal sectors. It includes many components of varying sizes for many power stations, transmission lines and distribution networks. The benefits of many individual project components could not be separated from the benefits of other project components and of simultaneous investments not covered under the project. Therefore the main cost-benefit analysis was made for the whole investment program of which the project is a part. This program consists of all actual power sector investments for 1996 and 1997, all projected power system investment expenditures for 1998 and 1999 except investments not covered by the proposed project for which financing has not already been committed, plus the coal mine investments included under the project. For the investment program defined in this way, estimates were made of the net present value and the internal economic rate of return. The without program case, against which the program benefits were evaluated, was taken to be the continuation of the power supply situation which existed in 1996 (but for hydropower stations in full operation in 1996 the production in an average hydrological year was substituted for the actual 1996 production). While, in the absence of the rehabilitation program, power supply would likely diminish over time, no account was taken of this possibility because of the difficulty of predicting the rate of decline. One consequence of this definition of the without program is to provide conservative estimates of the program benefits.

Three additional sets of cost-benefit analyses were carried out covering several important project components for which the benefits could be separated from those of the overall power system investment program. These analyses include evaluation of: (i) the benefits relative to costs of the coal mine investments in the Federation; (ii) the economic viability of the coal mines in the Federation that would benefit from the project investments; and (iii) the economic viability of the Gacko, Ugljevik, Tuzla and Kakanj coal-fired power plants. Page 32

Demand Forecast. Gross electricity consumption in BIH grew by 20% in 1997 to reach 6,974 GWh (Table A4. 1). Sales from the distribution entities reached 4,914 GWh. The Elektroprivredas project sales by distribution entities to grow by 11% per year from 1997 to 2003. The growth rates for EPBiH, EPM and EPRS of 11.5%, 11.9% and 10.2% per year, respectively, are reasonable in view of forecast economic growth in Bosnia and Herzegovina of 12.3% per year over the same period (Country Assistance Strategy, Report No. 16866-BiH, July 31, 1997). Direct sales from transmission networks to large industrial consumers were 265 GWh in 1997, only 8% of the 1990 level. Direct industrial sales are forecast by the Elektroprivredas to increase to 2,740 GWh by 2003, 86% of the 1990 level. This forecast is uncertain. It assumes that electricity consumption by the aluminum and iron industries in the area served by EPM will return to their 1990 levels of 1,400 GWh and 600 GWh respectively, or the emergence of new industries. Transmission and distribution losses are assumed to decline from 28% in 1996 to 11% by 2001 as a result of rehabilitation of the transmission and distribution systems and reduction in non-technical losses. The high current distribution losses include large non-technical losses as well as abnormal technical losses due to the fact that the distribution networks have only been partially rehabilitated. The target of 11% in 2001 is realistic since this level was normal for BiH prior to the war. Failure to achieve this level, however, would require correspondingly higher electricity production.

Forecast Energv Balance. The forecast electric energy balance shown in Table A4.2 assumes the realization of the proposed project and all other power generation investments during the period 1996- 1999 for which financing has already been committed. It excludes planned investments in the Tuzla G6 and Kakanj G7 coal-fired units, which produced 2,400 GWh in 1990. The estimates of hydropower production assume average hydrological conditions. Total net generation is shown to rise from 7,340 GWh in 1996 to 10,500 GWh in 2000. The energy balance shows a supply deficit rising from 872 GWh in 1999 to 2,912 GWh in 2003.

Cost-Benefit Estimates of the 1996-99 Time Slice of Investment. Net present value and internal rate of return estimates were made with respect to the 1996-99investment program of the three Elektroprivredas and the Federation coal mine companies (Table A4.3). The benefits were taken as the incremental electricity sales in kWh made possible by the investment program valued at the weighted average forecast electricity price for the three Elektroprivredas. The incremental sales are estimated to exceed incremental projected production by 200 GWh per year from 2000 on because of a reduction in transmission and distribution losses by 200 GWh per year attributable to the project. The electricity sales revenue measures consumer willingness to pay, provided the billed amounts are actually collected. While average collections are expected to be slightly less than 100% of the amounts billed, the improvement in collections agreed under the project would have the result that incremental collected revenue would be at least as large as the incremental amount billed. No account was taken of consumer's surplus because of the difficulty of obtaining a reliable estimate for BiH.

The costs include: investments; incremental Federation coal mine operating costs; and other incremental power operating and maintenance costs. The investments include the proposed project plus other already committed investments over the period 1996-99 (Table A4.3). This investment program was used instead of the project cost because it was not possible to separate the benefits of the project from the total benefits of the program. The operating cost of coal for incremental production of electricity in EPBiH's coal-fired power plants was valued at US$10.8 per ton, which is the estimated incremental cost of coal attributable to the investment program. Operating and maintenance costs were estimated using the average O&M cost of the three Elektroprivredas of US$0.029 per kWh, which was calculated from the income statements (Annex 5). The O&M costs include the coal operating costs for the Ugljevik and Gacko power stations. The coal mines for these plants belong to the plants, and expenses on coal production are not separated from expenses for power production at these plants. Page33

The actual exchangerate was taken to be equalto the shadowrate since BiHcurrency is fixedto the DM. A shadowwage rate was not used becauseof uncertaintiesin its calculationand since it would increase an already large rate of return. The cost estimatesexclude taxes and import duties. The net present value of the economicand financialestimates are equal, as are the net internaleconomic and financial rates of return, since the benefits are valued at forecastelectricity prices, duties and taxes on imported goodsunder the projectwould be removedat the requestof the beneficiaries,beneficiaries would not be liable to income tax before 2004, and other taxes are negligible. There are no fiscal subsidiesto the Elektroprivredas. Page 34

Table A4.1 BOSNIA AND HERZEGOVINA SECOND ELECTRIC POWER RECONSTRUCTIONPROJECT Forecast Electricity Demand (GWh) | Actual Actual Actual | Forecast 1990 1996 1997 1998 | 1999 J 2000 | 2001 | 2002 J 2003 EPBiH: Sales from Distribution 3,553 1,624 2,087 2,560 3,011 3,406 3,696 3,890 4,004 Zeljezara Zenica 573 65 69 110 220 346 390 410 420 Polihem 191 9 16 140 140 150 150 150 150 ZBIH 120 2 4 40 50 80 80 80 80 Azot Gorazde 34 0 0 20 25 30 30 30 30 Zeljezara llijas 165 0 0 20 50 60 60 60 60 Total Direct Consumers 1,083 76 89 330 485 666 710 730 740 Distribution Losses 485 542 732 640 574 509 504 530 546 Losses as % of Dist. 12 25 26 20 16 13 12 12 12 Transmission Losses 182 102 110 120 125 130 140 150 153 Gross Consumption 5,303 2,344 3,018 3,650 4,195 4,711 5,050 5,300 5,443

EPM: Sales from Distribution 605 668 857 970 1,065 1,157 1,233 1,305 Total Direct Consumers 2,109 0 176 1,203 1,720 2,000 2,000 2,000 2,000 Distribution Losses 280 271 210 170 145 143 137 145 Losses as % of Dist. 32 29 20 18 12 11 10 10 Transmission Losses 56 36 57 58 70 80 83 85 86 Gross Consumption 2,939 921 1172 2328 2930 3290 3383 3455 3536

EPRS: Sales from Distribution 2,714 1,851 2,159 3,005 3,202 3,404 3,625 3,815 3,875 Total Direct Consumers 0 0 0 0 0 0 0 0 0 Distribution Losses 424 550 493 542 512 477 435 382 384 Losses as % of Dist. 9 23 19 15 14 12 11 9 9 Transmission Losses 115 139 132 160 149 136 122 122 122 Gross Consumption 3,293 2,540 2,784 3,707 3,863 4,017 4,182 4,319 4381

EPBiH+EPM+EPRS Sales from Distribution 7,989 4,080 4,914 6,422 7,183 7,875 8,478 8,938 9,184 Total Direct Consumers 3,192 76 265 1,533 2,205 2,666 2,710 2,730 2,740 Distribution Losses 1,372 1,496 1,392 1,256 1,131 1,082 1,049 1,075 Transmission Losses 354 277 299 338 344 346 345 357 361 Total Losses 1,649 1,795 1,730 1,600 1,477 1,427 1,406 1,436 BIH Gross Consum. 11,535 5,805 6,974 9,685 10,988 12,018 12,615 13,074 13,360 Losses/Consumption (%) 28 26 18 15 12 11 11 11

Sources: EPBiH, EPM and EPRS Page 35

Table A4.2 BOSNIA AND HERZEGOVINA SECOND ELECTRIC POWER RECONSTRUCTIONPROJECT Forecast Electricity Balance (GWh) Realized Forecast

1990 1996 1997 11998 11999 j2000 2001 |2002 J2003 Gross Consumption 11,822 5,805 6,974 9,689 10,988 12,018 12,615 13,074 13,360

Hydro: Jablanica 405 758 616 650 670 670 670 670 670 Grabovica 171 343 261 270 270 270 270 270 270 Salakovac 245 23 295 410 410 410 410 410 410 Mostar 156 0 24 192 192 192 192 192 192 Rama 429 660 624 660 660 660 660 660 660 Capljina 405 340 177 110 110 110 110 110 110 Jajce 1 140 204 198 204 204 204 204 204 204 Jajce 2 110 160 151 151 151 151 151 151 151 Trebinje and Dubrovnik 161 1341 1121 1115 1180 1210 1255 1290 1303 Bocac 167 280 266 274 280 280 285 285 285 Visegrad 575 1207 923 1120 1175 1190 1205 1215 1215 Small Hydro 76 111 103 112 147 148 168 168 168 Total Hydro 3040 5427 4759 5268 5449 5495 5580 5625 5638

Thermal: Tuzla Gl 121 104 70 90 90 90 90 Tuzla G2 104 43 66 82 82 82 82 Tuzla G3 419 450 136 320 360 310 360 360 320 Tuzla G4 953 0 0 0 0 0 0 0 0 Tuzla G5 1119 129 1192 720 700 850 500 900 850 Tuzla G6 1119 0 0 700 650 900 1050 1000 600 Kakanj Gl 156 9 64 Kakanj G2 162 38 2 80 80 80 80 80 0 Kakanj G3 125 54 73 0 0 0 0 0 0 Kakanj G4 142 2 0 80 80 80 80 80 0 Kakanj G5 270 Kakanj G6 517 22 425 400 360 210 180 350 400 Kakanj G7 1282 0 0 0 0 0 0 0 0 Gacko 1508 216 772 1020 1115 1180 1215 1240 1260 Ugljevik 1525 846 936 1050 1150 1225 1290 1365 1380 Total Thermal 9252 1913 4006 4542 4667 5007 4927 5375 4810

Total Net Production 12,292 7,340 8765 9,810 10,116 10,502 10,507 11,000 10,448

Net Exports(+)Ilmports(-) 1,078 1,535 1,791 121 -872 -1,516 -2,108 -2,074 -2,912

Sources: EPBiH, EPM and EPRS Page 36

Table A4.3 BOSNIA AND HERZEGOVINA SECOND ELECTRIC POWER RECONSTRUCTIONPROJECT National Power and Coal Investment Program (US$ million)

Actual Forecast 1996 1997 1998 1999 EPBiH: Jablanica 0.34 5 4.31 Grabovica 2.4 Salakovac 5.7 1.54 Una 1 1.94 1.49 Small Hydro 0.2 3.43 Tuzla 5.87 8.83 10.38 10.41 Kakanj 2.42 16.65 10.02 3.2 Total Generation 16.39 27.56 30.77 19.41 Transmission 16.29 19.24 14 7.71 Distribution 13.86 9.73 22.86 22.86 EPBiH Total 46.54 56.53 67.63 49.98

EPM: Rama 4.86 2.34 4.06 5.09 Mostar 0.58 14.86 2.86 1.71 Capljina 0.57 0.57 1.14 1.14 Jajce 1 0.29 0.86 4.29 0.57 Jajce 2 0.86 0.86 1.14 Total Generation 6.3 19.49 13.21 9.65 Transmission 5.01 2.29 18.91 30.29 Distribution 3.6 6.86 5.71 6.86 EPM Total 14.91 28.64 37.83 46.8

Fed. Coal Mines: Emergency Electric Power Project 19.5 5.2 Second Electric Power Project 6.1 8.2 Total Fed. Coal: 19.5 11.3 8.2

EPRS: Reconstruction Assistance Project 0.8 11.1 4 Second Electric Power Project 26.7 35.3 Other investments 13.6 11 EPRS Total 13.6 11.8 37.8 39.3

Total Investments 75.05 116.47 154.56 144.281

Sources: EPBiH, EPM and EPRS. Note: Forecasts for 1998 and 1999 include only amounts committed under existing projects and the proposed project. The forecasts are in 1997 prices. Page 37

TableA4.4 BOSNIAAND HERZEGOVINA SECONDELECTRIC POWER RECONSTRUCTION PROJECT CostBenefit Analysis (USS million)

_ ~f Costs Total Benefits Net Year Incremental Incr. Incr. Average Incr. Fed. Investment Fed. Coal O&M Costs Revenue Benefits Production Losses Sales Price Coal Power Op. Costs (GWh) (GWh) (GWh) ($/kWh) (GWh) ($million) ($million) ($million) ($million) ($million) 1996 75.1 0 0 75.1 0 -75.1 1997 1,966 1,966 0.048 1,203 116.5 14.3 57.0 187.8 94.4 -93.4 1998 3,011 3,011 0.049 1,621 154.6 19.3 87.3 261.2 147.5 -113.6 1999 3,317 3,317 0.057 1,551 144.3 18.4 96.2 258.9 189.1 -69.8 2000 3,703 -200 3,903 0.066 1,751 20.8 107.4 128.2 257.6 129.4 2001 3,708 -200 3,908 0.067 1,571 18.7 107.5 126.2 261.8 135.6 2002 4,201 -200 4,401 0.069 1,919 22.8 121.8 144.6 303.7 159.0 2003 3,649 -200 3,849 0.07 1,319 15.7 105.8 121.5 269.4 147.9 2004 3,649 -200 3,849 0.07 1,319 15.7 105.8 121.5 269.4 147.9 2005 3,649 -200 3,849 0.07 1,319 15.7 105.8 121.5 269.4 147.9 2006 3,649 -200 3,849 0.07 1,319 15.7 105.8 121.5 269.4 147.9 2007 3,649 -200 3,849 0.07 1,319 15.7 105.8 121.5 269.4 147.9 2008 3,649 -200 3,849 0.07 1,319 15.7 105.8 121.5 269.4 147.9 2009 3,649 -200 3,849 0.07 1,319 15.7 105.8 121.5 269.4 147.9 2010 3,649 -200 3,849 0.07 1,319 15.7 105.81 121.5 269.4 147.9

Present Value = $361.7 $103.6 $577.0 $1,042.3 $1,322.0 $279.7 InternalRate of Return = 26%

Sensitivity analysis

Sensitivity tests were carried out with respect to changes in key parameters. The changes needed to reduce the rate of return to the opportunity cost of capital, taken to be 12% are: 72% higher investment cost, or 21% reduction in benefits (equivalent to 21% smaller incremental sales or 21% lower sales price or collection of only 79% of the incremental amount billed), or an increase by 4 years in the delay between investments and benefits.

A formal risk analysis was not considered to be necessary or appropriate with respect to the overall investment program which includes the project. In principle such an analysis could help answer the question of whether it might be better to reduce or slow down the rehabilitation program. However, the program itself falls far short of completely restoring the pre-war BiH power system, and the benefits were found to be so large that major adverse changes in the assumed parameters would be needed to cause the benefits to be less than the costs. Evaluating the risks would require putting a quantitative measure on the likelihood of continued political as well as economic development. This measure would be highly subjective and subject to large variations from one observer to another.

Cost-Benefit Analysis of the Federation Coal Mine Investments

The results of the cost-benefit analysis for the Federation Coal Mine investments are summarized in Table A4.5. Page 38

Table A4.5 Summary Results of Economic Analysis of the Federation Coal Mine Investments Present Value of Flows Internal Rate of Return Switching (in 1997 US$ million) Value Net Reduction Base 50% Benefits Costs Benefits of Case production % Subsidies % IRR % IRR Production RUT Banovici 10.6 2.2 8.4 0 110 55 6 Dubrave 5.8 1.5 4.3 8.5 75 19 35 Sikulje 12.9 2.5 10.4 15.5 116 58 20 Mramor 1.3 0.8 0.5 8.7 15 15 n.a. Total 30.6 7.0 23.6 32.7 92 43 15

RUSB Vrtliste 15.6 5.0 10.6 8.1 70 21 30 Breza 5.0 2.0 3.0 0 55 < 0 55 Total 20.6 7.0 13.6 8.1 66 15 35

Main Assumptions

Table A4.5 shows the summary results of detailed cash flow calculations for the years 1998 to 2002'. Actual cost data for the first half of 1997 were extrapolated. For each mine, the operating costs with and without the project were then projected, broken down into major cost categories. Without the project, the output would increase in 1998, and also partly in 1999, as a result of the investments made under the Emergency Electric Power Reconstruction Project. Thereafter, production without the project is assumed to be stable, except for the Mramor underground mine, where a decline of production has been assumed due to increasing safety hazards in the absence of further investments. To project the operating cost, each cost category was broken down into a fixed and variable part, depending on the type of mine, and based on international experience. The production increase with the project was estimated based on the type of mine and the investment proposed, resulting in an average increase of about 30%. By estimating production increases and related expenses, varying rates of overburden removal as required by mine development status and geological conditions were taken into account. All costs were calculated in present (1997) prices. They are assumed to reflect economic costs. Taxes were not considered. Personnel costs were assumed to be proportional to the amount of overburden and coal mined. The value of the coal mined and delivered to the power stations has been assumed to be 4 DM/GJ (or 2.2 $/GJ), equivalent to the estimated cost of delivering imported coal to the Federation's power plants.

Although actual operating costs have been used as an input, a financial analysis of the two coal mining enterprises in the Federation has not been undertaken. All data shown in Table A4.5 are economic data. Costs exceeding 4 DM/GJ have been assumed to be equivalent to a subsidy. Such subsidies are presently not being paid by the Government to the mining companies, but indirectly (e.g., through inefficient barter, debt increase and other inefficiencies) they are a charge on the economy and need to be gradually eliminated in the future.

I A printoutof the spreadsheetswith the detailedcalculations is availablein the projectfiles. Page 39

Summary of Benefits and Costs

RUT. The total incremental benefits of the coal mine component of the project are equal to the incremental production valued at the coal import price of 4 DM/GJ less the incremental operating cost. They amount to US$ 30.6 million. The highest benefits occur in the Sikulje surface mine, the lowest in the Mramor underground mine. The total costs (the project capital cost) amount to US$7.0 million. The net benefit is US$23.6 million, equivalent to a high economic rate of return of 92%. While the three surface mines have a high rate of return (75-116%), the underground mine has a relatively marginal return of 15%.

RUSB. The total benefits amount to US$20.6 million, of which US$15.6 million generated by the Vrtliste surface mine and US$5.0 million by the Breza underground mine. The total costs amount to US$7.0 million. The net benefit is US$13.6 million. Both mines have a high rate of return (Vrtliste at 70% and Breza at 55%).

Sensitivity Analysis and Switching Values

The increase in production is the single most important factor in achieving the projected economic results. The sensitivity analysis shows that the economic rate of return is fairly robust against a lower than projected production increase. Even with a 50% reduction of the incremental production, the rate of return is acceptable for all mines except Breza. The switching value, i.e., the production level under which the rate of return would turn from positive to negative, is 55% of the projected level in the case of the Breza mine. This is equivalent to an increase of less than 20%, or 60,000 tons per year, over the projected production level in the without project case. The risk of not achieving this minimum increase at Breza is small. The other mines have switching values ranging from 6% to 35% of the projected incremental production, significantly lower than Breza, and therefore carry a low risk.

Economic Viability of the Federation Coal Mines

While the incremental operating costs at the Federation mines that would benefit from the project are estimated to be well below the price of imported coal of US$2.2 per GJ, the average after project operating costs at Mramor are above the import price (Table A4.6). The average operating cost at Mramor during the period 1998-2002 is projected to be US$3.1/GJ, compared to the estimated import price of US$2.2/GJ. This suggests that, despite the satisfactory internal rate of return shown in Table A4.6 for new investments in this mine, it might be better to close the mine and import coal. However, a social plan for closure of the Mramor mine is not ready and the investments under this project are needed for safety reasons. In addition, since there is a surplus of coal miners in BiH and unemployment in the country is still substantial, the economic cost of labor (shadow wage rate) is probably well below the actual wage rate. If, as seems likely, the shadow wage rate is less than 46% of the actual wage rate, the average total cost of Mramor coal (including the US$0.8 million project investment) would be less than the price of imported coal . While other RUT mines have a lower average cost than Mramor, the mine is needed to secure the coal quality required for the 32-MW units at Tuzla that would be rehabilitated under the project. A further consideration is that the import alternative would take time to implement and would probably only be viable on a long term basis, since the amount of coal needed to replace Mramor would be large - 360,000 tons per year. This option would require substantial investments in transport infrastructure. Page 40

TableA4.6 EstimatedCoal OperatingCosts in 2000

Incremental Average "With Project" Operating Cost Operating Cost (US$/GJ) (US$/GJ) RUT Banovici 1.0 1.7 Dubrave 0.9 2.1 Sikulje 0.8 2.2 Mramor 2.1 3.3 Subtotal 1.1 2.1 RUSB Vrtliste 0.4 1.8 Breza 1.4 1.7 Subtotal 0.8 1.8 Total 0.9 2.0

Economic Viability of the Coal-Fired Power Plants

The economic viability of the coal-fired power plants that would benefit from the project can be evaluated by examining: (i) their priority relative to other rehabilitation candidates; and (ii) whether the cost of electricity from the rehabilitated plants would be less than the cost of electricity from new power generation plants. The main generating units that would benefit from the project are: the 32 MW units at Tuzla and Kakanj, and the Gacko and Ugljevik coal power stations.

The order of rehabilitation of the various units at Tuzla and Kakanj has been evaluated by Verbundplan, "Long Term Rehabilitation Study - TPP - Tuzla", and "TPP - Kakanj" (November, 1997, in the Project File). These studies take as given that the 32 MW units will be rehabilitated early, because of their importance for meeting existing demands for district heat (Tuzla and Kakanj) and industrial steam (Tuzla). The economic justification for giving priority to Gacko and Ugljevik is that the cost of electricity from the rehabilitated units would be no greater than the costs at Tuzla and Kakanj (Bechtel Consulting, "Coal and Thermal Power Cost Study for Bosnia and Herzegovina" (August 1997, page 7.7, in the Project File).

In order to verify whether the coal-fired plants that would benefit from the project would be competitive with electricity from a new power station, the costs of production of electricity at Gacko, Ugljevik, Tuzla Gland G2, and Kakanj G2 and G4 were compared with the costs of a new combined-cycle gas-fired 120 MW power plant. (This comparison is not really needed for the justification of the Tuzla and Kakanj 32 MW units since their rehabilitation is required in order to ensure continuity in supply of district heat and industrial steam to existing consumers over the next few years before a new power station could be brought into operation or before altemative heat sources could be established. The 32 MW units are expected to be retired by 2002). The estimates for the comparison are based partly on data presented in Bechtel Consulting, "Coal and Thermal Power Cost Study for Bosnia and Herzegovina" (August 1997) (in Project Files). On the basis of comparison with selected new power generation options, Bechtel concluded that a combined-cycle plant would be the lowest-cost new option. The gas could be supplied through the existing pipeline which brings gas from Russia to BiH. For purposes of the analysis here, adjustments were made to the Bechtel estimates. First, a gas import price of US$134 per thousand cubic meters was selected based on 1998 contracts for gas imports into BiH (assuming current estimated penalties for reduced gas purchases during the summer). Second, the investment cost assumed for the Page 41

reference combined-cycle plant was US$600/kW, and the heat rate was taken as 8,200 kj per kWh. These figures are both below Bechtel's estimates. Third, the project investments were used in place of Bechtel's investment estimates. These are: Gacko (US$5.96 million), Ugljevik (US$4.12 million), Tuzla GI and G2 (US$6.6 million), and Kakanj G2 and G4 (US$5 million). Fourth, Bank estimates of average operating costs (Table A4.6) plus project investments in the Federation coal mines were used in place of the average cost estimates used by Bechtel. Average costs (excluding fixed costs such as debt service that would continue even if plant operation stops) were used instead of incremental costs since, unless the benefits of the power plants cover the average costs, it would pay to close the plants rather than to invest in keeping them open. Fifth, the benefits of industrial steam produced by Tuzla GI and G2 were subtracted from the costs.' No account was taken of the benefits of any district heat that could be produced by these units since it was assumed that all district heat requirements would be met from the 100 MW units. However, one reason for rehabilitating these units is to ensure continuity of heat supply to existing consumers in case of unavailability of the 100 MW units. The combined cycle power plant could also be designed to supply heat and steam, but if the 32 MW coal-fired units were to break down before the gas-fired plant entered service, there would be an interruption of heat and steam supply.

The results (Table A4.7) show that the investment plus operating cost per kWh for Gacko, Ugljevik, Tuzla GI and G2, and Kakanj G2 and G4 would be less than the cost of electricity from the combined- cycle option.

Table A4.7 Comparison of Costs of Gas- and Selected Coal-Fired Power Plants

(UScents/kWh)

Fuel Variable O&M Fixed O&M Investment Indust. steam Total benefit

Combined-Cycle 3.4 0.33 0.06 1.06 4.85 Gacko 3.0 0.57 0.39 0.07 4.03 Ugljevik 3.37 0.54 0.37 0.05 4.33 Tuzla G1&2 3.30 0.54 0.57 0.83 -3.0 2.24 Kakanj G2&4 3.02 0.54 0.57 0.68 4.81

These comparisons do not take full account of environmental considerations. The rehabilitated coal-fired plants would produce more pollution than a gas-fired plant in the absence of pollution control expenditures. The investment cost for Gacko under the project consists mainly of environmental control expenditures designed to limit pollution to acceptable levels. However, the project does not include pollution control investments at Ugljevik. The main requirement would be flue gas desulfurization equipment costing about US$29 million. Inclusion of this investment would increase the average cost of electricity from Ugljevik by 0.3 cents/kWh to 4.64 US cents per kWh. This is below the cost of electricity from a combined-cycle gas-fired power station.

'Accordingto EPBiH,Tuzla GI and G2 wouldsupply 60% of industrialsteam sales, which are projectedto increasefrom $7.5 millionin 1998 to US$10million in 2001. Page 42

Annex 5 BOSNIA AND HERZEGOVINA SECOND ELECTRIC POWER RECONSTRUCTIONPROJECT Financial Summary for Revenue Earning Project Entities Project Financing Plan (US$ million)

Source 1998 1999 2000 Total

IDA 1.2 18.7 5.1 25.0.

Cofinanciers 44.7 56.0 11.2 111.9

Local 11.0 17.9 4.0 32.9 of which:

EPBiH 3.2 5.2 1.2 9.6 EPM 1.5 2.5 0.6 4.6 EPRS 6.3 10.2 2.2 18.7

Total Financing 56.9 92.6 20.3 169.8 Page 43

BOSNIA AND HERZEGOVINA SECOND ELECTRIC POWER RECONSTRUCTIONPROJECT ELEKTROPRIVREDABiH Income Statements (US$ million)

1995 1996 1997 1998 1999 2000 2001 2002 2003

REVENUES from electricity sales domestic 62.7 89.6 117.4 202.0 299.6 386.4 418.1 438.4 450.1 exports 0 9.3 31.7 28.0 30.0 33.2 47.4 47.4 47.4 other revenues 12.6 14.8 24.4 32.1 40.6 49.3 56.5 60.2 64.2

total revenues 75.3 113.7 173.5 262.1 370.2 468.9 522.0 546.0 561.7

EXPENSES coal 29.4 46.7 83.0 110.8 132.2 149.3 165.5 167.3 164.6 other fuels 1.2 1.3 1.4 1.5 1.6 1.7 1.9 2.1 2.3 spares and maintenance 8.9 10.5 11.6 13.0 14.6 16.3 18.3 20.5 23.0 materials other materials 7.3 10.1 14.8 17.9 19.9 24.9 29.9 30.9 31.5 wages and salaries 5.6 17.6 33.6 44.5 49.0 54.1 58.3 68.6 70.2 other business expenses 7.4 8.5 13.3 14.6 16.1 17.7 19.5 21.5 23.6 taxes and compulsory 0.5 0.7 4.0 4.5 4.8 5.4 5.9 6.5 7.1 contributions

cash operating expenses 60.3 95.4 161.7 206.8 238.2 269.4 299.3 317.4 322.3 interest and financial charges 0.1 0.2 10.9 11.0 10.8 10.1 9.4 8.4 7.3

cash expenses including 60.4 95.6 172.6 217.8 249.0 279.5 308.7 325.8 329.6 interest depreciation 58.8 127.1 121.2 138.5 142.4 158.5 176.7 183.0 192.0

total operating expenses 119.2 222.7 293.8 356.3 391.4 438.0 485.4 508.8 521.6 losses on receivables 31.3 39.6 29.8 34.5 16.5 21.0 23.3 24.3 24.9

total expenses 150.5 262.3 323.6 390.8 407.9 459.0 508.7 533.1 546.5

NET INCOME (PROFIT/LOSS) -75.2 -148.5 -150.1 -128.9 -37.7 9.8 13.4 13.0 15.2

RATIOS operating ratio 2.7 3.0 2.0 1.6 1.1 1.0 1.0 1.0 1.0 cash operating ratio 1.4 1.3 1.1 0.9 0.7 0.6 0.6 0.6 0.6 collection ratio (as % of billings) 0.50 0.60 0.80 0.85 0.95 0.95 0.95 0.95 0.95 revenue collection/cash oper. 73 78 89 110 148 166 167 164 167 exp.(%) Page 44

BOSNIAAND HERZEGOVINA SECONDELECTRIC POWER RECONSTRUCTION PROJECT ELEKTROPRIVREDABiH BalanceSheets (US$million)

1995 1996 1997 1998 1999 2000 2001 2002 2003 ASSETS cashand securities 0.2 0.4 1.7 2.5 9.5 22.0 78.2 114.1 145.4 accountsreceivable 66.2 64.0 86.8 104.8 129.6 140.7 130.5 109.2 112.4 inventories 16.0 20.6 24.9 29.9 33.0 29.9 28.1 26.8 24.7 othercurrent assets 29.0 30.4 33.5 35.1 36.9 38.7 40.7 42.7 44.8 totalcurrent assets 111.4 115.4 146.9 172.3 209.0 231.3 277.5 292.8 327.3 grossfixed assets 5083.2 5344.4 5403.6 5472.9 5528.3 5586.9 5686.9 5811.9 5936.9 less: accumulated 2923.8 3249.5 3370.7 3509.2 3651.6 3810.1 3986.8 4169.8 4361.8 depreciation net fixed assets 2159.4 2094.9 2032.9 1963.7 1876.7 1776.8 1700.1 1642.1 1575.1 otherlong term assets 313.4 313.4 288.7 239.9 239.9 239.9 239.9 239.9 239.9

totalassets 2584.2 2523.8 2468.4 2376.0 2325.7 2248.0 2217.5 2174.8 2142.3

LIABILITIESAND EQUITY accountspayable 70.0 71.7 112.2 108.9 87.1 83.9 77.1 65.1 65.9 othercurrent liabilities 70.4 70.4 63.1 55.3 52.5 25.0 15.0 10.0 0.0 shortterm loans 17.9 47.0 43.1 38.8 36.9 0.0 0.0 0.0 0.0 totalcurrent liabilities 158.3 189.1 218.4 203.0 176.5 108.9 92.1 75.1 65.9 mediumand long term loans 229.2 286.5 352.0 403.8 417.6 397.8 370.6 331.9 293.2 founders'equity 2230.7 2230.7 2230.7 2230.7 2230.7 2230.7 2230.7 2230.7 2230.7 statutoryand otherreserves 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 retainedearnings -41.9 -190.4 -340.5 -469.3 -507.0 -497.2 -483.7 -470.8 -455.3 total equity 2196.6 2048.1 1898.0 1769.2 1731.5 1741.3 1754.8 1767.7 1783.2

total liabilitiesand equity 2584.1 2523.7 2468.4 2376.0 2325.7 2248.0 2217.5 2174.8 2142.3

RATIOS currentratio 0.7 0.6 0.7 0.8 1.2 2.1 3.0 3.9 5.0 debt:equityratio 9:91 12:88 16:84 19:81 20:80 19:81 18:82 17:83 15:85 Page 45

BOSNIAAND HERZEGOVINA SECONDELECTRIC POWER RECONSTRUCTION PROJECT ELEKTROPRIVREDABiH Sourcesand Applications of Funds (US$million)

1998 1999 2000 2001 2002 Total

SOURCES net income -128.9 -37.7 9.8 13.4 13.0 -130.3 depreciation 138.5 142.4 158.5 176.7 183.0 799.1

internalgeneration 9.6 104.7 168.3 190.2 196.0 668.8

IDA 10.5 8.1 2.4 0.0 0.0 21.0 otherforeign loans 54.9 32.9 5.0 0.0 0.0 92.8

total sources 75.0 145.7 175.7 190.2 196.0 782.6

APPLICATIONS capitalexpenditures EmergencyPower Project 45.0 8.0 0.0 0.0 0.0 53.0 SecondPower Project 23.6 38.2 8.6 0.0 0.0 70.4 otherinvestments 0.7 9.2 50.0 100.0 125.0 284.9 repaymentof loans 13.6 27.2 27.2 27.2 38.7 133.9 changesin workingcapital -7.9 63.2 89.9 63.0 32.3 240.4 and cash balances

total applications 75.0 145.8 175.7 190.2 196.0 782.6

RATIOS debtservice coverage 1.0 2.3 3.5 6.0 5.2 3.7 Page 46

BOSNIA AND HERZEGOVINA SECOND ELECTRIC POWER RECONSTRUCTIONPROJECT ELEKTROPRIVREDAMOSTAR Income Statements (US$ million)

1996 1997 1998 1999 2000 2001 2002 2003 REVENUES from electricity sales domestic 44.4 45.0 53.6 61.9 73.4 80.2 84.0 89.4 other revenues 14.4 14.1 6.4 4.7 2.6 5.8 8.7 12.2

total revenues 58.8 59.1 60.0 66.5 76.1 86.0 92.7 101.6

EXPENSES fuels 0.4 0.5 0.4 0.5 0.5 0.5 0.5 0.5 spares and maintenance materials 1.0 7.5 7.3 7.6 7.8 8.1 8.5 9.0 other materials 3.4 3.5 3.5 3.7 3.8 4.1 4.4 4.7 purchased services 2.3 4.5 4.5 4.7 4.9 5.2 5.5 5.8 wages and salaries 11.2 12.2 12.3 12.8 13.4 14.1 14.8 15.5 other business expenses 0.3 0.7 0.6 0.7 0.7 0.9 0.9 1.0 taxes and compulsory contributions 1.0 3.2 3.3 3.4 3.5 3.8 4.0 4.1

cash operating expenses 19.6 32.1 31.9 33.2 34.6 36.7 38.6 40.6 interest and financial charges 2.1 2.2 2.3 2.4 2.4 2.3 2.2 2.2

cash expenses including interest 21.7 34.3 34.2 35.7 37.0 39.0 40.8 42.8 depreciation 18.5 19.6 21.3 22.8 27.6 28.6 33.4 34.5

total operating expenses 40.2 53.8 55.5 58.5 64.7 67.6 74.2 77.3 losses on receivables 20.6 17.7 12.0 10.0 11.4 8.6 9.3 5.1

total expenses 60.8 71.6 67.5 68.4 76.1 76.2 83.5 82.4

NET INCOME (PROFITILOSS) -2.0 -12.5 -7.5 -1.9 0.0 9.8 9.2 19.3

RATIOS operating ratio 1.1 1.3 1.2 1.0 1.0 0.9 0.9 0.8 cash operating ratio 0.5 0.8 0.7 0.6 0.5 0.5 0.5 0.4 collection ratio (as % of billings) 65 70 80 85 85 90 90 95 revenue collection/cash oper. exp. 195 129 150 170 187 211 216 238 (%) Page 47

BOSNIA AND HERZEGOVINA SECOND ELECTRIC POWER RECONSTRUCTIONPROJECT ELEKTROPRIVREDAMOSTAR Balance Sheets (US$ million)

1996 1997 1998 1999 2000 2001 2002 2003 ASSETS cash and securities 3.2 1.9 2.5 2.9 3.4 15.9 30.9 56.5 accounts receivable 13.2 16.2 16.2 17.3 18.3 18.9 18.5 18.3 inventories 3.5 4.1 4.1 3.9 4.1 3.9 4.1 4.3 other current assets 7.8 5.3 5.5 5.6 5.8 6.0 6.1 6.3 total current assets 27.7 27.5 28.3 29.7 31.5 44.7 59.7 85.4 gross fixed assets 736.0 752.4 790.3 837.8 867.0 892.0 917.0 942.7 less: accumulated depreciation 367.0 386.6 407.9 430.7 458.3 487.0 520.4 554.9 net fixed assets 369.0 365.8 382.4 407.2 408.7 405.1 396.7 387.8 other long term assets 1.2 0.8 0.8 0.8 0.8 0.8 0.8 0.8

total assets 397.9 394.1 411.5 437.7 441.0 450.6 457.1 474.0

LIABILITIES AND EQUITY accounts payable 6.5 8.7 8.6 7.8 7.4 7.0 7.3 7.3 othercurrentliabilities 9.6 10.8 16.6 16.7 16.9 17.1 17.2 17.5 short term loans total current liabilities 16.1 19.5 25.2 24.5 24.3 24.1 24.5 24.8 medium and long term loans 30.7 30.7 49.9 78.6 82.2 82.2 79.1 76.5 founders' equity 141.0 146.3 146.3 146.3 146.3 146.3 146.3 146.3 revaluation surplus 209.7 209.7 209.7 209.7 209.7 209.7 209.7 209.7 retained earnings 0.4 -12.1 -19.6 -21.5 -21.5 -11.8 -2.6 16.7 total equity 351.1 343.9 336.4 334.5 334.5 344.2 353.4 372.7

total liabilities and equity 397.9 394.1 411.5 437.7 441.0 450.6 457.1 474.0

RATIOS current ratio 1.7 1.4 1.1 1.2 1.3 1.9 2.4 3.4 debt:equity ratio 8:82 8:82 13:87 19:81 20:80 19:81 18:82 17:83 Page 48

BOSNIA AND HERZEGOVINA SECOND ELECTRIC POWER RECONSTRUCTIONPROJECT ELEKTROPRIVREDAMOSTAR Sources and Applications of Funds (US$ million)

1998 1999 2000 2001 2002 Total

SOURCES

net income -7.5 -1.9 0.0 9.8 9.2 9.6 depreciation 21.3 22.8 27.6 28.6 33.4 133.8

intemal generation 13.8 20.9 27.6 38.4 42.6 143.3

IDA 0.3 4.3 1.1 0.0 0.0 5.7 other foreign loans 18.9 24.4 2.54 0.0 0.0 45.8

total sources 33.0 49.6 31.2 38.4 42.6 194.9

APPLICATIONS

capital expenditures Second Power Project 11.7 19.2 4.2 0.0 0.0 35.1 other investments 26.2 28.3 25.0 25.0 25.0 129.5

repayment of loans 0.0 0.0 0.0 0.0 3.1 3.1

changes in working capital -4.9 2.1 2.0 13.4 14.5 27.1 and cash balances

total applications 33.0 49.6 31.2 38.4 42.6 194.8

RATIOS debt service coverage 7.0 9.0 11.8 13.0 6.7 9.0 Page 49

BOSNIA AND HERZEGOVINA SECOND ELECTRIC POWER RECONSTRUCTIONPROJECT ELEKTROPRIVREDAREPUBLIKA SRPSKA Income Statements (US$ million)

1996 1997 1998 1999 2000 2001 2002 2003 REVENUES from electricity sales domestic 55.0 81.2 141.5 156.3 190.0 220.0 230.0 245.0 exports 31.2 34.8 54.5 71.5 71.5 75.0 80.0 80.0 other revenues 7.8 12.3 15.6 17.5 19.5 20.5 22.0 23.0

total revenues 94.0 128.3 211.6 245.3 281.0 315.5 332.0 348.0

EXPENSES fuels 7.4 12.4 20.3 24.5 28.0 30.1 32.4 34.8 spares and maintenance 12.4 31.5 42.8 48.5 52.1 56.0 60.3 64.8 materials other materials 7.8 28.2 30.0 31.5 33.1 34.7 36.5 38.3 wages and salaries 5.7 11.9 25.0 26.3 27.6 28.9 30.4 31.9 purchased services 6.0 12.3 15.4 16.2 17.0 17.8 18.7 19.7 other business expenses 5.6 7.0 12.0 12.6 13.2 13.9 14.6 15.3 taxes and compulsory 3.5 6.9 10.4 10.7 10.9 11.2 11.5 11.8 contributions

cash operating expenses 48.4 110.2 155.9 170.2 181.9 192.7 204.2 216.5 interest and financial charges 5.1 10.2 10.3 10.4 10.5 10.6 9.9 8.7

cash expenses including 53.5 120.4 166.2 180.6 192.5 203.3 214.2 225.2 interest depreciation 108.6 109.6 110.0 111.1 112.0 112.1 113.1 115.1

total operating expenses 162.1 230.0 276.2 291.7 304.4 315.4 327.3 340.3 losses on receivables 45.5 42.8 40.2 29.5 26.3 17.2 15.0 13.0

total expenses 207.5 272.8 316.3 321.2 330.7 332.6 342.3 353.3

NET INCOME -113.5 -144.5 -104.7 -75.9 -49.7 -17.1 -10.3 -5.3 (PROFITILOSS)

RATIOS operating ratio 3.3 2.7 1.6 1.4 1.2 1.1 1.0 1.0 cash operating ratio 1.0 1.3 0.9 0.8 0.7 0.6 0.6 0.6 collection ratio (% of billings) 52 67 81 88 91 95 95 96 revenue collection/cash. oper. 100 78 110 127 140 155 155 155 exp. (%) Page 50

BOSNIA AND HERZEGOVINA SECOND ELECTRIC POWER RECONSTRUCTIONPROJECT ELEKTROPRIVREDAREPUBLIKA SRPSKA Balance Sheets (US$ million)

1996 1997 1998 1999 2000 2001 2002 2003

ASSETS cash and securities 1.5 5.7 9.5 16.3 24.7 37.6 23.4 44.2 accounts receivable 23.8 27.9 30.9 41.0 47.1 50.2 52.7 55.3 inventories 63.8 82.0 105.8 110.4 112.4 110.4 116.2 121.8 other current assets 83.8 106.5 115.2 95.0 90.0 85.0 80.0 80.0

total current assets 172.9 222.1 261.4 262.6 274.2 283.2 272.3 301.3 gross fixed assets 3404.0 3649.5 3682.2 3721.3 3728.9 3728.9 3778.9 3828.9 less: accumulated depreciation 1867.3 1969.0 2079.0 2190.1 2302.1 2414.2 2527.4 2642.5 netfixed assets 1536.7 1680.5 1603.2 1531.2 1426.8 1314.7 1251.5 1186.4 other long term assets 39.6 40.7 40.7 40.7 40.7 40.7 40.7 40.7

total assets 1749.2 1943.3 1905.3 1834.5 1741.7 1638.6 1564.6 1528.4

LIABILITIES AND EQUITY accounts payable 20.4 52.5 91.4 81.3 67.4 61.0 53.5 45.0 other current liabilities 93.5 153.5 157.1 150.0 124.6 45.0 18.0 22.6 short term loans 13.7 14.8 12.6 9.2 0.0 0.0 0.0 0.0 current portion of long-term debt

total current liabilities 127.6 220.8 261.1 240.5 192.0 106.0 71.5 67.6 medium and long term loans 164.0 167.1 193.5 219.3 224.7 224.7 195.4 168.6 founders' equity 1505.1 1747.4 1747.4 1747.4 1747.4 1747.4 1747.4 1747.4 revaluation and other reserves 82.0 82.0 82.0 82.0 82.0 82.0 82.0 82.0 retained earnings -129.5 -274.0 -378.7 -454.7 -504.4 -521.5 -531.8 -537.2

total equity 1457.6 1555.4 1450.7 1374.7 1325.0 1307.9 1297.6 1292.2

total liabilities and equity 1749.2 1943.3 1905.3 1834.5 1741.7 1638.6 1564.5 1528.4

RATIOS current ratio 1.4 1.0 1.0 1.1 1.4 2.7 3.8 4.5 debt:equity ratio 10:90 10:90 12:88 14:86 14:86 15:85 13:87 12:88 Page 51

BOSNIA AND HERZEGOVINA SECOND ELECTRIC POWER RECONSTRUCTIONPROJECT ELEKTROPRIVREDAREPUBLIKA SRPSKA Sources and Applications of Funds (US$ million)

1998 1999 2000 2001 2002 Total SOURCES net incorne -104.7 -75.9 -49.7 -17.1 -10.3 -257.9 depreciation 110.0 111.1 112.0 112.1 113.1 558.4

internal generation 5.3 35.2 62.2 95.0 102.8 300.5

IDA 3.5 7.1 1.7 0.0 0.0 12.3 other foreign loans 22.9 18.7 3.7 0.0 0.0 45.3

total sources 31.7 61.0 67.6 95.0 102.8 358.1

APPLICATIONS

capital expenditures Reconstruction Assistance Project 11.1 4.0 0.0 0.0 0.0 15.1 Second Power Project 21.6 35.1 7.6 0.0 0.0 64.3 other investments 0.0 0.0 0.0 0.0 50.0 50.0

repayment of loans 0.0 0.0 0.0 0.0 29.3 29.3

changes in working capital -1.0 21.9 60.1 95.0 23.6 199.5 and cash balances

total applications 31.7 61.0 67.7 95.0 102.9 358.1

RATIOS debt service coverage 2.0 2.0 1.5 1.5 1.5 1.6 Page 52

Annex 6 BOSNIA AND HERZEGOVINA SECOND ELECTRIC POWER RECONSTRUCTIONPROJECT Procurement and Disbursement Arrangements

Procurement

1. All procurement of equipment and materials financed by IDA will be in accordance with the Bank's Guidelines for Procurement under IBRD Loans and IDA Credits (published in January 1995 and revised in January and August 1996, and September 1997). Contracts estimated to cost more than US$300,000 each would be procured through International Competitive Bidding (ICB). For some specialized equipment, and equipment due to retrofitting nature, which can only be purchased from a limited number of suppliers, estimated to cost between US$300,000 and up to US$1 million each, Limited International Bidding (LIB) will be used. The aggregate value of ICB is about US$20.01 million (or 80 percent of the total credit), and the aggregate value for LIB is about US$2.85 million (or 11 percent of the credit). Bank Standard Bidding Documents for procurement of goods will be used. International Shopping (IS) will be used for procuring readily available off-the-shelf goods or standard specificationcommodities, estimatedto cost between US$50,000 and US$300,000per contract up to an aggregate amount of US$1.35 million (or 5 percent of the total credit). IS shall solicit quotations from at least three suppliers in two different countries. Goods, i.e., basic office equipment, estimated to cost less than $50,000 equivalent per contract, up to an aggregate amount not to exceed US$0.15 million equivalent, may be procured under contracts awarded on the basis of National Shopping (NS) procedures in accordance with the Bank's Guidelines.

2. All three Elektroprivredashave qualified staff to carry out most of the engineering work and the preparation of specifications.From the experience gained in the Federation of Bosnia and Herzegovina, the Elektroprivredas,assisted by the Norwegian Power Expert Group (for EPBiH) and Canadian Power Expert Group (for EPRS and EPM), are expectedto be able to carry out procurement efficiently.

3. All procurement of equipment and materials financed by the UK and Canada will be undertaken through Crown Agents; and a Japanese Trading House will undertake procurement of goods and materials financed by Japanese funds. Procurement of goods and services financed by other donors would follow procedures set out by each donor's governmentrespectively.

4. The site preparation, civil works construction and installation of auxiliary electro-mechanical equipment are well within the capability of the local contractors and manufacturers. These will be financed by the Elektroprivredasand procured following local competitivebidding procedures.Installation of major equipment will be supervised by the manufacturers (suppliers). The Project Costs by Procurement Arrangements are summmarized in Table A. The Procurement Plan and Implementation Schedule are presented in Table A. 1. Thresholds for ProcurementMethods and Prior Review are shown in Table B.

Disbursement

Allocation of loan proceeds

1. Table C shows the allocation of loan proceeds. The estimated annual disbursement schedule by IDA fiscal year is shown in the Project Financing Data on page 1. The Credit is expected to be disbursed over a period of about two years. The project completion date would be December 31, 1999, and the closing date would be June 30, 2000. - Page 53

Use of statements of expenses (SOEs):

For goods worth less than US$300,000 disbursements would be made on the basis of statements of expenditures. Documentation supporting such expenditures would be retained in EPBiH's, EPM's, and EPRS's offices and made available for review by IDA supervision missions.

Special account

1. To facilitate timely project implementation,two SpecialAccounts (one each for the Federation and EPRS) will be established in a commercial bank, acceptable to the Bank. The authorized allocation will be limited to DEMI.30 million for the Federation, and DEMO.45million for EPRS, representing about four months (average) of IDA's share of estimated expendituresexpected to be paid from the Special Accounts. Replenishment applications would be forwarded to IDA with reconciled bank statements and other appropriate documentation.

2. Separate and auditable accounts would be established by EPBiH, EPM, and EPRS. These accounts would include: (i) a record of withdrawals on the IDA credit with copies of all disbursement requests and underlying documentation; and (ii) a record of transactions on the special Accounts and the copies of the bank statements on this account. Page 54

Annex 6, Table A BOSNIA AND HERZEGOVINA SECOND ELECTRIC POWER RECONSTRUCTION PROJECT Project Costs by Procurement Arrangements (in US$million equivalent)

Expenditure Category Procurement Method |

______ICB Other /a N.B.F /b Total

1. Works 28.09 28.09

2. Goods 20.30 4.35 109.46 134.11 (20.30) (4.35) (24.65)

3. Services 7.19 7.19

4. Operating Cost 0.35 0.35 (0.35) (0.35)

Total 20.30 4.70 144.74 169.74

______|(20.30) (4.70) (0.00) (25.00)/c

Note: /a Includes: (1) Limited International Competitive Bidding (aggregate amount US$2.85) million). (2) International Shopping (aggregate amount US$1.35 million). (3) National Shopping (aggregate amount US$0.15 million). (4) Operating Costs (for Project ImplementationSupport - Aggregate amount US$0.35 million). /b NBF = Not Bank-financed. /c Figures in parentheses are the amounts to be financed by the IDA credit. Page 55

Annex 6, Table Al BOSNIAAND HERZEGOVINA SECONDELECTRIC POWER RECONSTRUCTIONPROJECT Project Procurement Plan and ImplementationSchedule

Major ProcuremntActivtn Date of InstaatlonVRehablltalon

Project Es0mated Financed Procuremnt Submiion Award/Signing Completonof Commencement Completon Coat by Method of Bids of Contract Detiverte miL US$

I. POWERSECTOR EPBIH TuziaThemial Plant EPBIH G-01 CoolingTower 3.00 IDA ICB 06198 09198 04/99 11/98 06199 EPBiH G-02 CoalHandling System 0.59 IDA ICB 06i98 og09( 05/99 12/98 08199 EPBiH G-03 WalerTreatment Plant 1.20 IDA ICB 06/98 09198 03/99 11198 06/99 EPBiH G-04 l&Cand Automation 1.86 IDA ICB 06/98 09198 06/99 11/98 09/99 EPBIH G-05 6 kVPlant 1.49 IDA ICB 06/98 09198 03/99 12/98 00199 EPBiH G46 SpareParts 2x32 MW Units 3.00 IDA [CB 06/98 09/98 02199 -- EPBiH G-07 PlantMechanical Equipment 1.42 UK Donor'smethod 09/97 11/97 03/98 12197 05/98 EPBIH G-08 Electricalequipment, measuring 0.65 UK Donoesmethod 09/97 11/97 03/98 12197 05198 andcontrol EPBiH G-09 Balanceof plant 0.93 UK Donoesmethod 09/97 11/97 03/98 12/97 06/98 EPBiH G-10 Works 1.16 EPBiH 12/97 06199

KakanjThenral Plant EPBiH G-11 Controland monitoring equipment 2.88 OECF Donor'smethod 07/98 1/98 05/99 03/99 09199

EPBiH G-12 WaterTreatment Plant 0.85 OECF Donor'smethod 06/98 09/98 02/99 01/99 07/99 EPBiH G-13 Air Heaters 2.28 OECF Donor'smethod 06/98 09/98 05/99 05/99 11/99 EPSiH G-14 SpareParts for 2x32 MW Units 2.51 OECF Donor'smethod 06/98 09199 05/99 EPBiH G-15 Works 0.93 EPBiH 01/99 11/99

Transmisston EPBiH T-01 Equipmentfor 220/110kV 3.56 Japan/DFIDDonoes method 09/97 11/97 10/98 03/98 11/98 Gradacacsubstation EPBiH T-02 Works 0A7 EPBiH 03/98 11/98

Dlstribution EPBiH D-01 DistributionSubstatons and MV 9.64 USAID Donor'smethod 07/97 10/97 12/97 01/98 12/98 andLV cables EPBiH D-02 DistributonSubstation 35/20(10) 0.88 NL Donor'smethod 05/97 07/97 12/97 12/97 05/98 kVand 10-20kV EPBiH D-03 MVand LVPower Cables 0.22 NL Donor'smethod 05/97 07/97 10/97 10/97 06/98 EPBiH D-04 MVand LVOverhead Lines 4.60 EU Donor'smethod 12/97 01/98 06/98 07/98 12198 EPBiH D-05 Works 4.04 EPBiH 10/97 12/98

Officeequipment EPBiH O-01 Officeequipment 0.05 IDA NS 06/98

EPM RamaHydro Plant EPM G-01 220 kV Metal-dadSubstaton vith 4.20 IDA ICB 06/98 09/98 04/99 04/99 07/99 2 generatorbays, 2 line bays,I transfomwerbay, coupling busbar andmeasuring bay.

EPM G-02 Works 0.74 EPM 04/99 07/99 JaJceI HydroPlant

EPM G-03 110kVSF6 CircutBreakers (a) 0.60 IDA LIB 06/98 09/98 03/99 03/99 06/99

EPM G-04 Lineand bus bar disconnectors OAO IDA LIB 06/98 09/98 03/99 03/99 06/99 (24) EPM G-05 Works 0.21 EPM 03/99 06/99

CapVmnaHydro Plant EPM G-06 Compressair facilities 0.30 IDA LIB 06/98 09198 05/99 06/99 08/99 EPM G-07 Works 0.12 EPM 06S99 08/9 Page 56

Transmission 110 kV Stolac-Mostar 2 TL EPM T-01 Conductor and ground wire 0.22 IDA IS 06/98 08198 01/99 12/98 03/99 EPM T-02 Insulators and accessories 0.23 IDA IS 06/98 08/98 01/99 12/98 03/99 EPM T-03 Steel structure 0.09 IDA NCB 08/98 08/98 12/98 10/98 01/99 EPM T-04 Works 0.21 EPM 10/98 03/99

Distribution EPM D-01 Distributiontransformers 3.50 USA/EU Donor's method 01/98 03/98 06/98 06/98 12/98 EPM D-02 35/20/10 kV Substations 1.50 USA/EU Donors method 01/98 03/98 06/98 06/98 12/98 EPM D-03 Conductors and ground wires 0.50 USA/EU Donors method 01/98 03/98 06/98 06/98 12/98 EPM D-04 LV equipment 4.20 USAIEU Donoes method 01/98 03/98 06/98 06/98 12/98 EPM D-05 Works 2A6 EPM 06/98 12/98

Office equipment EPRS 0-01 Office equipment 0.05 IDA NS 06/98

EPRS Gacko Thermal Plant EPRS G-01 Electrostatic precipitators 2.65 IDA ICB 06/98 09/98 02/99 04/99 08/99 (overhaui) EPRS G-02 Environmental protection for ash 1.22 IDA ICB 09/98 12/98 04/99 05/99 10/99 disposal area EPRS G-03 Turbine/generator auxiliary 0.29 IDA IS 06/98 09/98 01/99 04/99 08/99 equipment EPRS G-04 Works 2.13 EPRS 04/99 10/99

UgljevIk Thermal Plant EPRS G-05 Spare parts for boiler 1.82 Donor's method 08/98 11/98 06/99 08v99 12/99 EPRS G-06 Maintenance equipment and tools 1.52 Donor's method 08/98 11/98 05/99 08/99 12/99

EPRS G-07 Works 0.97 EPRS 08/99 12/99

Bocac Hlydro Plant EPRS G-08 Dam monitonng system 0.15 IDA IS 06/98 09/98 02/99 04/99 09/99 EPRS G-09 Generator/turbine bearngs and 0.85 IDA LIB 08/98 11/98 05/99 07/99 11/99 control EPRS G-10 Protection, control, measurng, 1.00 IDA ICB 10/98 01/99 07/99 08f99 12/99 signaling and communication equ.

EPRS G-11 Maintenance equipmentand tools 0.15 IDA IS 08/98 11/98 05199 -

EPRS G-12 Works 0.52 EPRS 04/99 12/99

Trebinje Hydro Plant EPRS G-13 Dam monitorng system 0.20 IDA IS 06/98 09/98 02/99 04/99 09/99 EPRS G-14 Instrumentation and control for 0.70 IDA LIB 08/98 11/98 06/99 07/99 12/99 turbine/generator

EPRS G-15 Plant control and supervisory 0.20 IDA IS 08/98 11/98 06/99 07/99 12199 system

EPRS G-16 Maintenance equipment and tool 0.20 IDA IS 08/98 11/98 05/99 -

EPRS G-17 Works 0.32 EPRS 04/99 12/99

Transmission 110 kV TL and SS In Srebrenica, Prijedor-Banja Luka are and Goza'de EPRS T-01 Transformer (overhaul) 0.40 EU Donor's method 05/98 07/98 03/99 11/98 08/99 EPRS T-02 Conductors, overhead ground 0.56 EU Donors method 05/98 07/98 12/98 12/98 04/99 wire with optical fibers EPRS T-03 Auxiliary equipment 0.63 EU Donors method 05/98 07/98 12/98 12/98 08/99 EPRS T-04 Steel structure 0.12 EU Donor's method 05/98 07/98 11/98 12/98 02/99 EPRS T-05 Works 0.56 EPRS 12/98 06/99

SS 110 kV 110/35/10 kV Brcko 2 EPRS T-06 Transformer (overhaul) 0.28 Canada Donor's method 09/97 09/97 01/98 03/98 05/98 EPRS T-07 MV and LV equipment 0.67 Canada Donors method 10197 12/97 08/98 06/98 10/98 EPRS T-08 Substation auxiliary equipment 0.55 Canada Donors method 10/97 12/97 08/98 06/98 10/98 EPRS T-09 Works 0.34 EPRS o3/98 10/98

Distribution EPRS D-01 Distribution transformers 3.61 EU/UKiUSA Donor's method 12/97 05/98 10/98 05/99 12/99 EPRS 0-02 MV and LV cables 0.81 EU/UA/USA Donors method 12/97 05/98 09/98 05/99 12/99 Page 57

EPRS D-03 Conductorsand ground wirs 1.44 EU/UKWUSADonors method 12t97 05198 09198 05/99 12199

EPRS D-04 Auxiliaryequiprent 5.25 EU/UKtUSADonors method 12197 05198 10198 05199 12199 EPRS D-05 Steelstructure 0.81 EU/UK/USADonors method 12197 05/98 11/98 03199 11/99 EPRS D-06 Works 3.60 EPRS 03199 12199

Officeequipment EPRS 0-01 Officeequipment 0.05 IDA NS 05198

Inter-entitles T-01 Commujnicationmetering and 13.16 Japan Donorsmethod 07/97 09/97 02198 03198 12/98 Control(220110kViLines)

T-02 LineProtection 220/110kV Unes 0.40 DFID Donor'smethod 12197 02/98 05/98 07/98 12/98

T-03 Tie Lines400 kV 8.86 DFID Donor'smethod 07/97 09/97 02/98 07198 09/99 T-04 TransmissionLines 220kV Tuzla 1.50 DFID Donoesmethod 09197 11/97 12197 07/97 12/97 - Djakovo - Gradacac T-05 Dobojand Tuzla region 110 kV 6.00 DFID Donor'smethod 09/97 11197 03198 05/98 12198 ringconnection and substation equipment T-06 Works 5.49 EPBiH/RS/M 03/98 09/99

II. COALSECTOR Tuzia RUT C-01 Mechanical& electricalspare 3.40 OECF OECF(DC) 06/98 08198 09/98 09/98 10/98 parts RUT C-02 Conveyorbelts & trucktires 1.70 OECF OECF(CB) 06198 08/98 11/98 11/98 12198

RUT C-03 Bulldozers 1.20 OECF OECF(CB) 06/98 08/98 11198 11198 12198 RUT C-04 Servicesfor installation and 0.50 OECF OECF(CB) 06198 08198 11198 11198 06199 overhauls RUT C-05 Dewateringpumps 0.20 OECF OECF(CB) 061898 0e8 11/98 11198 12198 RUT C-06 Works 0.74 RUT 09/98 06199

CentralBosnia RUSB C-07 Completionof railwayconnection 2.60 OECF OECF(CB) 07198 09/98 12/98 12/98 03199

RUSB C-08 Mechanical& electricalspare 1.60 OECF OECF(DC) 07/98 09/98 12t98 12/98 02/99 parts RUSB C-09 Auxiliarymining equipment 1.20 OECF OECF(CB) 07198 09/98 12/98 12/98 01/99

RUSB C-10 Beltconveyor 1.00 OECF OECF(CB) 07198 09/98 12198 12198 03/99 RUSB C-11 Workshopequipment 0.60 OECF OECF(DC) 07/98 09198 12/98 12t98 03/99 RUSB C-12 Works 0.74 RUSB 10198 03/99

UglJevik C-13 Mechanicalspare parts 1.80 OECF OECF(DC) 06198 08/98 12/98 12198 03199 C-14 Bulldozers 0.90 OECF OECF(CB) 06198 08/98 02199 12t98 02199 C-15 Tires 0.30 OECF OECF(CB) 06898 08/98 01"99 12t98 01199 C-16 Works 1.46 Ugljevik 12/98 03t99

Gacko C-17 Auxiliarymining equipment 1.50 OECF OECF(CB) 07/98 09/98 12/98 1298 02/99 C-18 Conveyorbelts&spareparts 2.50 OECF OECF(CB/DC) 07/98 09/98 12/98 12/98 02199

C-19 Works 0.73 Gacko 12/98 02t99 Page 58

Annex 6, Table B BOSNIAAND HERZEGOVINA SECONDELECTRIC POWER RECONSTRUCTIONPROJECT Thresholds for Procurement Methods and Prior Review

Expenditure Contract Value Procurement Contracts Subject to Category (Threshold) Method Prior Review/ Estimated Total Value Subject to Prior Review US$ US$

1. Works

2. Goods $300,000 and above ICB $300,000 and above $300,000 - $1,000,000 LIB $300,000 and above $50,000 - $300,000 IS Below $50,000 National Shopping

3. Services

4. Miscellaneous

Total value of contracts subject to prior review: $22,860,000 (91% of the credit) Page 59

Annex 6, Table C BOSNIAAND HERZEGOVINA SECONDELECTRIC POWER RECONSTRUCTION PROJECT Allocation of Loan Proceeds

Expenditure Category Amount in Financing US$million Percentage

1. Goods 24.65 100% of foreign expenditures, 100% of local expenditures (ex-factory), and 85% of local expenditures procured locally

2. Operating Costs 0.35 100%

Total 25.00 ______Page 60

Annex 7 BOSNIAAND HERZEGOVINA SECONDELECTRIC POWER RECONSTRUCTION PROJECT Project Processing Budget and Schedule

A. Project Budget (US$000) Planned Actual (At final PCD stage) $239,000 $250,000

B. Project Schedule Planned Actual (At final PCD stage)

Time taken to prepare the project (months) 11 13 First Bank mission (identification) 03/03/1997 03/03/1997 Appraisal mission departure 11/21/1997 02/14/1998 Negotiations 01/05/1998 02/23/1998 Planned Date of Effectiveness 05/21/1998 06/30/1998

Prepared by: Richard Hamilton

Preparation assistance: Yolanda L. Gedse

Bank staff who worked on the project included: Name: Specialty: Richard Hamilton Senior Energy Economist Bernard Baratz Principal Environmental Specialist Weigong Cao Senior Power Engineer (Procurement Accredited Staff) Heinz Hendriks Senior Mining Engineer Kishore Nadkarni Senior Financial Analyst Marie-Theres Schurrer Energy Specialist Enar Wennerstrom Senior Financial Analyst Page 61

Annex 8 BOSNIAAND HERZEGOVINA SECONDELECTRIC POWER RECONSTRUCTION PROJECT Documents in the Project File

A. Project Implementation Plan

B. Bank Staff Assessments

Cost and Benefit of Incremental Coal Supplies to Tuzla and Kakanj TPP, October 1997.

C. Other

Bechtel Consulting, Coal and Thermal Power Cost Study for Bosnia and Herzegovina, August 1997

USAID Privatization Project, Electric Power Sector Restructuring and Privatization, Bosnia and Herzegovina, August 1997

Verbundplan, Long Term Rehabilitation Study, TPP-Tuzla, Final Report, October 1997

Verbundplan, Long Term Rehabilitation Study TPP-Kakanj, Final Report, November 1997 Page 62

Annex 9 BOSNIA AND HERZEGOVINA SECOND ELECTRIC POWER RECONSTRUCTIONPROJECT Status of Bank Group Operations in Bosnia and Herzegovina A. Statement of Bank Loans , (As of February 28, 1998)

US$ Million Loan Fiscal (Less Cancellations) No. Year Borrower Proiect Loan Undisbursed

Loans/Credits/Grants IBRD b/ 4038-BOS 1996 Bosnia and Herzegovina ConsolidationLoan A 28.6 0.0 4039-BOS 1996 Bosnia and Herzegovina Consolidation Loan B 284.9 0.0 4040-BOS 1996 Bosnia and Herzegovina ConsolidationLoan C 307.1 0.0 Total 620.6 0.0 Of Which: Repaid 24.9 Total Now Held by the Bank: 595.7

TFBHC/(Under Disbursement) TF-024030 1996 Bosnia and Herzegovina Emergency Recovery Credit 45.0 1.2 TF-024031 1996 Bosnia and Herzegovina Emergency Farm Reconstruction 20.0 0.0 TF-024032 1996 Bosnia and Herzegovina Emergency Water Supply 20.0 0.5 TF-024033 1996 Bosnia and Herzegovina Emergency Transport 35.0 5.8 TF-024034 1996 Bosnia and Herzegovina Emergency District Heating dl 20.0 1.4 TF-024035 1996 Bosnia and Herzegovina Emergency War Victims Rehabilitation 5.0 0.0 TF-024040 1996 Bosnia and Herzegovina Emergency Education Reconstruction 5.0 0.0 Total 150.0 8.9 IDA 2897-BOS 1996 Bosnia and Herzegovina Emergency Education Reconstruction 5.0 0.6 2896-BOS 1996 Bosnia and Herzegovina Emergency War Victims Rehabilitation 5.0 5.0 2902-BOS 1996 Bosnia and Herzegovina Emergency Housing Repair 15.0 1.3 2903-BOS 1997 Bosnia and Herzegovina Emergency Power Reconstruction 35.6 3.3 2904-BOS 1997 Bosnia and Herzegovina Emergency Public Works and Employment 10.0 1.7 2905-BOS 1997 Bosnia and Herzegovina Emergency Landmines Clearance 7.5 0.9 2906-BOS 1997 Bosnia and Herzegovina Emergency Demobilization and Reintegration 7.5 3.7 2914-BOS 1997 Bosnia and Herzegovina Transition Assistance Credit 90.0 0.0 N001-BOS 1997 Bosnia and Herzegovina Emergency Industry Re-Start Guarantee 10.0 0.5 N002-BOS 1997 Bosnia and Herzegovina Emergency Microenterprise/LocalInitiatives 7.0 2.6 N003-BOS 1997 Bosnia and Herzegovina Essential Hospital Services 15.0 11.4 0320-BOS 1997 Bosnia and Herzegovina Transport Reconstruction II 39.0 30.0 0350-BOS 1997 Bosnia and Herzegovina Education Reconstruction II 11.0 9.5 3028-BOS 1997 Bosnia and Herzegovina Reconstruction Assistance Project 17.0 15.7 3029-BOS 1997 Bosnia and Herzegovina Emergency Natural Gas 10.0 10.0 Total 284.6 96.2

a/ The status of these projects is described in a separate report on all Bank/IDA financed projects in execution, which is updated twice yearly and circulated to the Executive Directors on April 30 and October31. h/ ConsolidationLoans A, B, and C were approvedon June 13,1996 and became effectiveon June 14,1996.

&' Trust Fund for Bosnia and Herzegovina.

,v Disbursementsto date are from the ProjectStart-Up Advance (of which US$2 million is disbursed for Gas). Page 63

Annex 10 BOSNIAAND HERZEGOVINA SECONDELECTRIC POWER RECONSTRUCTION PROJECT B. Statement of IFC Investments (Asof November30, 1997) (In US$ millions)

Gross Commitments -- US$ Million------Fiscal Year Obligor Type of Business Loan Equitv Total

1977 Tvornica Kartona I Ambalaze Cazin Timber, Pulp and Paper 3.79 0.0 3.79

1985 Sour Energoinvest Industrial Equipment and Machinery 8.82 0.0 8.82

1997 Horizonte BiH Enterprise Fund SME Investment 0.0 2.00 2.00

1997 Microentreprise Bank Microcredit 0.0 0.57 0.57

1997 Sarajevska Pivara Brewery 8.04 0.0 8.04

Total Gross Commitments 20.65 2.57 23.22 Less: Participations, Cancellations, Terminations, Exchange Adjustments, Repayments, Write-offs and Sales 23.50 2.60 26.10 Total Commitments Now Held by IFC 20.65 2.57 23.22 Total Undisbursed 5.01 2.00 7.01 Total Outstanding 15.64 0.57 16.21 Page 64

Annex1 1 Bosnia and Herzegovinaat a glance

Bosnia Europe& POVERTYand SOCIAL and Central Low- Herzegovina Asia Income Developmentdiamond' Populationmid-1995 (millions) 4.1 488 3,180 GNPper capita 1995 (USS)l1 .. 2,220 430 Life expectancy GNP 1995(billions US$)l .. 1,084 1,382 T Averageannual growth, 1990-95 Population(%) 0.3 1.7 GNP Gross Laborforce (Y.) - 0.5 1.7 per Most recent estimate (latestyear availablesince 1989) capita enrollment Poverty:headcount index (% of population) Urbanpopulalion (% of totalpopulation) 49 65 29 Life expectancyat birth (years) 71 68 63 infantmortality (per 1,000five births) 19 26 69 Accessto safewater Child malnutrition(% of childrenunder 5) Accessto safe water (% of population) 53 Illiteracy(% of populationage 15+) 34 . Grossprimary enrollment (% of school-agepopulation) .. 97 105 -Hosnia andHezegovlna Male .. 97 112 -Low-income group Female .. 97 98

KEY ECONOMICRATIOS and LONG-TERMTRENDS 1975 1985 1995 1996 Economicratios' GDP (billions USS) .. .. 2.1 3.3 Grossdomestic investmenVGDP Opennessof economy Exportsof goodsand services/GDP .. .. 19.0 20.3 Grossdomestic savings/GDP .. Grossnational savings/GDP ..

Currentaccount balance/GDP .. .. -27.0 -43.0 Interestpayments/GDP .. .. Savings i Investment Total debtVGDP .. .. 167.0 116.0 Totaldebt service/exports .. .. 118.0 72.0 Presentvalue of debtUGDP .. Presentvalue of debt/exports Indebtedness

1975-85 1986-96 1995 1996 1997-05 (averageannua/ growth) - Bosniaand Herzegovina GDP . .. 33.0 50.0 14.0 Low-incomegroup GNPper capita ...... 59.0 o m Exportsof goodsand services ...... 74.0 19.0

STRUCTUREof the ECONOMY 1975 1991 1985 1996 (% of GDP) 7 Growthrates of outputand Investment(%) Agriculture 9.5 190 eso Industry .. 43.0 .. 23.0 40I Manufacturing .. .. 20 Services .. 47.5 .. 58.0 o l l

91 92 93 94 95 99 Private consumption .. Generalgovemment consumption ...... GI -- GDP Importsof goodsand services .. .. 63.0 73.0

197585 1986-96 1995 1996 (averageannual growth) Growthrates of exportsand Imports(%) Agriculture O.. Industry ...... [ 9o4 Manufacturing ...... 94 Services 4405

Prvate consumption ,...... o _!_,_i__ Generalgovemment consumption ...... 91 92 93 94 f9 99 Gross domesticinvestment .. .. Importsof goodsand services ,. . 23.0 78.0 -E xports -I-lmports Grossnational product .,

Note: 1996data are preliminaryestimates. Large proporton of data aremissing due to scantand partialdata in case of Bosniaand Herzegovinaat present,early, stage of post-warera. 111995GNP figureis not available. GDP percapita is estimatedto be US$501. The diamondsshow four key indicatorsin the country(in bold)compared with its income-groupaverage. If dataare missing,the diamondwill be incomplete. Page 65

AnnexI 1 Bosnia and Herzegovina

PRICESand GOVERNMENTFINANCE 1975 1985 1995 1996 Domesticprices Inflatlon(%) (% change) 20 Consumerprices .. .. -40.0 7.7 D ImplicitGDP deflator ...... o .l 92 -2- 91 92 93 94 95 96 Governmentfinance 2 (Y/oofGDP) -40. Currentrevenue .. .. 35.0 62.0 Currentbudget balance .. .. 0.0 -7.0 - GDPdef. --- CPI Overallsurplus/deficit ,. .

TRADE 1975 1985 1995 1996 (millionsUS$) Export and Import levels (mill. USS) Total exports(fob) 152 336 2,000 n.a. n.a. 1,500 - Manufactures Total imports(cifl .. .. 1,082 1,882 1.000 Food .. Boo Fuel and energy . . . o Capitalgoods .. .. o _ _ _l ______

Exportprice index (1987=100) 90 91 92 93 94 95 96 Importprice index (1987=100) * Exports a Imports Termsof trade (1987=100) ..

BALANCE of PAYMENTS 1975 1985 1995 1996 (millionsUSS) Current account balanceto GDPratio (%) Exportsof goodsand services .. .. 381 658 Importsof goodsand services .. .. 1.334 2,379 o 1 . _ Resourcebalance ,. ., -953 -1,721 - -10T Net factor income .. .. -242 -220 -15T Net currenttransfers .. .. 625 536 -20 - -25 Currentaccount balance. -30 before official capitaltransfers .. .. -570 -1,405 -35

Financingitems (net) .. .. 708 1,803 -40 Changesin net reserves .. ., -138 -398 45 Memo: Reservesincluding gold (mill. US$S) .. Conversionrate (locaU1US$) ..

EXTERNALDEBT and RESOURCEFLOWS 1975 1985 1995 1996 (millionsUS$) Compositionof total debt, 1996(mill. US$) Totaldebt outstandingand disbursed .. .. 3,518 3,790 IBRD .. ., 625 590 1 IDA .. .. 0 175 A Totaldebt service ,. ,. 451 476 590 lBORD. . . 12 IDA. 1 Compositionof net resourceflows F D Officialgrants .. 2024 56 Officialcreditors .. Private creditors .. 899 Foreigndirect investment .. Portfolioequity .. World Bank program Commitments ...... A - IBRO E - Bilateral Disbursements ...... B - IDA D- Othermultilateral F - Prvate Principal repayments ., ,, ,, , C- IMF G - Short-term Net flows .. .. _.._.. Interestpayments .. Net transfers ..

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