Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized

Report No: 47906-BA

PROJECT APPRAISAL DOCUMENT

ON A

Public Disclosure Authorized PROPOSED LOAN

IN THE AMOUNT OF EURO 23.6 MILLION (US35 MILLION EQUIVALENT)

TO

BOSNIA AND HERZEGOVINA

FOR A Public Disclosure Authorized SARAJEVO WASTE WATER PROJECT

November 24,2009

Sustainable Development Department South East Europe Country Unit Europe and Central Asia Region Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS

(Exchange Rate Effective 11/18/2009)

Currency Unit = BAM (Bosnian Mark) BAM 1.32 = US$l US$1.59 = SDR US$1.48 = EUR

FISCAL YEAR January 1 - December31

ABBREVIATIONS AND ACRONYMS

BH Bosnia and Herzegovina BOD5 Five-day Biochemical Oxygen Demand CAS Country Assistance Strategy CFAA Country Financial and Audit Assessment CPS Country Partnership Strategy CQ Consultant's Qualification DPA Dayton Peace Agreement EBRD European Bank for Reconstruction and Development EC European Commission ECA Europe and Central Asia EIA Environmental Impact Assessment EMP Environmental Management Plan EU European Union FBH Federation of Bosnia and Herzegovina FIRR Financial Internal Rate of Return FM Financial Management FMS Financial Management System GAP Governance Accountability Project GDP Gross Domestic Product GEF Global Environment Facility IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding IDA International Development Association IFAC International Federation of Accounting IPA Instrument for Pre-Accession Assistance IS International Shopping JICA Japan International Cooperation Agency LCS Least-Cost Selection LDP Local Development Pilot Project MIS Management Information Systems MoFT Ministry of Finance and Treasury MoFTER Ministry of Foreign Trade and Economic Relations FOR OFFICIAL USE ONLY MTR Mid-Term Review NCB National Competitive Bidding NPV Net Present Value NS National Shopping NGO Non-Governmental Organization O&M Operations and maintenance OSCE Organization for Security and Co-operation in Europe PAD Project Appraisal Document PHRD Policy and Human Resources Development Fund PIT Project Implementing Team PMT Project Management Team POM Project Operational Manual PP Procurement Plan PPL Public Procurement Law QCBS Quality and Cost Based Selection RS Republika Srpska SIDA Swedish International Development Agency SIL Specific Investment Loan SOE Statement of Expenditure SWWP Sarajevo Waste Water Project TA Technical Assistance UISDP Urban Infrastructure and Service Delivery Project UNDP United Nations Development Program USAID United States Agency for International Development VIK Sarajevo Water and Waste Water Company WWTP Waste Water Treatment Plant

Vice President: Philippe H. Le Houerou Country Director: Jane Armitage Country Manager Marco Mantovanelli Sector Manager: Wael Zakout Task Team Leader: Jonathan S. Kamkwalala

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

BOSNIA AND HERZEGOVINA Sarajevo Waste Water Project

CONTENTS

Page

I. STRATEGIC CONTEXT AND RATIONALE ...... 1 A . Country and sector issues...... 1 B. Rationale for Bank involvement ...... 2 C . Higher level objectives to which the project contributes ...... 3 I1. PROJECT DESCRIPTION ...... 3 A . Lending instrument ...... 3 B. Program objective and Phases ...... 3 C . Project development objective and key indicators ...... 3 D. Project components ...... 4 E. Lessons learned and reflected in the project design...... 4 F. Alternatives considered and reasons for rejection ...... 5 I11. IMPLEMENTATION ...... 6 A . Partnership arrangements ...... 6 B. Implementation Arrangements ...... 6 C . Monitoring and evaluation ofoutcomesh-esults ...... 7 ... D. Sustainability...... 7 E. Critical risks and possible controversial aspects ...... 8 F. Loadcredit conditions and covenants ...... 10 IV. APPRAISAL SUMMARY ...... 11 A . Economic and financial analyses ...... 11 B. Technical ...... 13 C . Fiduciary ...... 14 D. Social...... 15 E. Environment...... 15 F. Safeguard policies ...... 16 G. Policy Exceptions and Readiness ...... 17 Annex 1: Country and Sector or Program Background...... 18 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ...... 21 Annex 3: Results Framework and Monitoring ...... 23 Annex 4: Detailed Project Description...... 25 Annex 5: Project Costs ...... 27 Annex 6: Implementation Arrangements ...... 28 Annex 7: Financial Management and Disbursement Arrangements...... 29 Annex 8: Procurement Arrangements ...... 36 Annex 9: Economic and Financial Analysis ...... 44 Annex 10: Safeguard Policy Issues ...... 51 Annex 11: Project Preparation and Supervision ...... 54 Annex 12: Documents in the Project File ...... 55 Annex 13: Statement of Loans and Credits ...... 56 Annex 14: Country at a Glance ...... 58 Annex 15: Maps...... 60 BOSNIA AND HERZEGOVINA

SARAJEVO WASTE WATER PROJECT

PROJECT APPRAISAL DOCUMENT

EUROPE AND CENTRAL ASIA

ECSSD

Date: November 18,2009 Team Leader: Jonathan S. Kamkwalala Country Director: Jane Armitage Sectors: Sanitation (100%) Sector DirectodManager: Peter Thomson / Themes: Access to urban services and housing Wael Zakout (P); Municipal governance and institution building (S) Project ID: PO90675 Environmental screening category: B Lending Instrument: Specific Investment Loan Project Financing Data [XI Loan [ ]Credit [ ]Grant [ ]Guarantee [ ]Other:

Source Local Foreign Total

BORROWERRECIPIENT 2.00 0.00 2.00 International Bank for Reconstruction and 0.50 34.50 35.00 Develonment Total: 2.50 34.50 37.00

Borrower: Bosnia and Herzegovina

FY 201 1 2012 2013 2014 2015 2016 hual 2.5 4.5 I 12.0 I 10.0 1 4.0 I 2.0 hnulative 2.5 7.0 I 19.0 I 29.0 I 33.0 I 35.0 Expected effectiveness date: June 15,2010 Expected closing date: November 30,20 15 Does the project depart from the CAS in content or other significant respects? [ ]Yes [XINO Re$ PAD I.C. Does the project require any exceptions from Bank policies? Re$ PAD IKG. [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [ IN0 Is approval for any policy exception sought from the Board? [ ]Yes [ IN0 Does the project include any critical risks rated “substantial” or “high”? [ ]Yes [XINO Re$ PAD III.E. Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ]No Re$ PAD IKG. Project development objective Re$ PAD II.C., Technical Annex 3 Improve the living conditions ofpopulations in the areas covered by the Sarajevo Water and Waste Water Company and in downstream riverside communities by: (a) reducing the populations’ exposure to, and reliance on highly polluted water from the Miljacka and Bosna rivers; and (b) improving the efficiency ofthe waste water collection network in the Sarajevo Canton. Project description [one-sentence summary of each component] Re$ PAD II.D., Technical Annex 4 Component A - High Priority Infrastructure Rehabilitation. This component will finance priority investments for rehabilitation ofwaste water infrastructure in the Sarajevo Canton.

Component B - Institutional Development Support. This component will finance technical assistance (TA) to the Sarajevo Water and Waste Water Company (VIK) for capacity building and institutional strengthening.

Component C - Project management. This component will support project implementation by the Project Management Team (PMT) and Project Implementing Team (PIT). Which safeguard policies are triggered, if any? Re$ PAD IKF., TechnicalAnnex 10 The activities envisaged under the project trigger the Bank’s Environmental Assessment Safeguard Policy OP 4.01.; and Projects on International Waterways OP 7.50. Significant, non-standard conditions, if any, for: Re$ PAD III.F. Board presentation: None

Loan effectiveness: Adoption of Project Operational Manual, including Financial Manual acceptable to the Bank.

Execution of Project Agreement on behalf of the Bank and the Project Implementing Entity on terms and conditions satisfactory to the Bank.

Execution of Subsidiary Loan Agreement on behalf of the Borrower and the Project Implementing Entity, under the same terms as the loan, and on terms and conditions satisfactory to the Bank, and including the Anti-Comption Guidelines. Execution of Subsidiary Financing Agreement on behalf of the Project Implementing Entity and the Sarajevo Canton, under the same terms as the subsidiary loan, and on terms and conditions satisfactory to the Bank, and including the Anti-Corruption Guidelines.

Execution of Project Implementation Agreement on behalf of the Project Implementing Entity, the Sarajevo Canton and VIK, on terms and conditions satisfactory to the Bank

Covenants applicable to project implementation: Maintain the PMT and the PIT at all times during Project implementation with terms of reference and resources satisfactory to the Bank, and with competent staff in adequate numbers.

Duly perform all obligations under the Operational Manual, the Environmental Impact Assessment and the Environmental Management Plan in a timely manner and in accordance with their respective terms, and apply and implement, as the case may be, the actions, criteria, policies, procedures and arrangements therein set forth

Not amend or waive, or permit to be amended or waived the Operational Manual, the Environmental Impact Assessment or the Environmental Management Plan or any provisions ofany one thereof, except with the prior written approval ofthe Bank.

Ensure that no land acquisition, relocation of population or temporary and/or permanent restrictions on access to economic resources shall be required under the Project.

Make the proceeds of the Loan available to the Project Implementing Entity under a subsidiary loan agreement between the Borrower and the Project Implementing Entity, under the same terms and conditions, approved by the Bank, for on-lending by the Project Implementing Entity to the Sarajevo Canton, for the benefit ofVIK.

Make the proceeds of the Subsidiary Loan available to the Sarajevo Canton, for the benefit of VIK, for purposes of carrying out the Project, under a subsidiary financing agreement between the Project Implementing Entity and the Sarajevo Canton, under the same terms and conditions as the Subsidiary Loan, approved by the Bank.

All Standard Reporting and Financial Management Covenants apply.

I. STRATEGIC CONTEXT AND RATIONALE

A. Country and sector issues

1. The Dayton Peace Agreement (DPA), signed in December 1995, ended three years of conflict in Bosnia and Herzegovina (BH). Since then, the country has experienced political stability, extensive reconstruction, and gradual economic recovery. In June 2008, a Stabilization and Association Agreement was signed with the European Union (EU), putting the country on track for eventual EU membership. While slower in the first half of the decade since 2000, GDP growth has accelerated since 2005 and reached an annual average of 6 percent through 2008. Despite the progress achieved thus far, BH, with a per capita income of US$4,510, still lags behind the average of US$7,418 per capita in the Europe and Central Asia Region (ECA).' About 14 percent of the country's population of around 4.6 million still lives in poverty, while the quality and availability of most basic local services remain at a significantly lower level than in the neighboring countries. The global economic downturn will put further stress on the BH economy, particularly as the recent growth was boosted by strong exports.

2. The DPA established a complex four-level governance structure in BH with a view to carefully balance ethnic interests and reduce potential sources of conflict. The main feature of this structure is that Bosnia and Herzegovina consists of two largely autonomous second-level political entities: the Federation of Bosnia and Herzegovina (FBH) and the Republika Srpska (RS). FBH comprises ten Cantons as a third level of Government, and there are no cantons in the RS. At the forth and lowest level, there are 74 municipalities in the FBH and 63 in the RS. Municipalities are key providers of basic local public services such as water supply, sewerage, solid waste collection and disposal, heating, local roads as well as various social services. However, despite the adoption of a series oflaws, municipalities remain ill-equipped for the task and, in particular, lack the necessary financial resources. As shown in a recent study conducted by the Bank,2 the quality of local service delivery in BH is extremely uneven across municipalities and sectors. Access to services is poor, and overall user satisfaction is low. Almost 1.4 million people have no adequate and permanent water supply or waste removal. While the problems are more acute in smaller municipalities, they exist at all levels even in the larger cities including Sarajevo the capital, which has an estimated urban population of 490,000 in the Sarajevo Canton.

3. Enabling the municipalities to better perform their tasks has been high on the agenda of the various levels of government in BH for a long time. However, effectively implementing municipal reform in the political context of BH is a complex undertaking as it requires a continuous intensive effort of political consensus building. Continuing strong support from the Donor community is essential to keep its momentum. Over the past decade, a number of Donors have carried out extensive investment and capacity building programs to support municipal development, ranging from utility management reforms and budgeting and planning, to social inclusion and increasing accountability. One prominent example is the USAID/SIDA/Dutch financed Governance Accountability Project (GAP) which supports reform-minded

GNI per capita, Atlas method (current US$, 2008) World Bank (2009): From Stability to Performance - Local Governance and Service Delivery in Bosnia and Herzegovina. January

1 municipalities and plays a major role in the policy dialogue at the entity level. At the local level, GAP promotes capacity building in 53 municipalities. The Organization for Security and Co- operation in Europe (OSCE) supports municipal public administration and democratization reforms through three main projects under its local governance program. UNDP is investing in the local governance area with a total amount of US$55.0 million and is planning to further extend its work program in the next phase. The EU has focused on regional development issues and strengthening the state level.

4. Service delivery problems are compounded by the lingering after-effects of the conflict that left vast portions ofbasic infrastructure destroyed or severely damaged. A case that vividly illustrates the problem is waste water collection and treatment in the city of Sarajevo. A Waste Water Treatment Plant (WWTP) was built close to the confluence of the Miljacka and Bosna Rivers in the early 1980s on the occasion ofthe 1984 Winter Olympics. Construction ofthe plant was supported by the World Bank-financed Sarajevo Water Supply and Sewerage Project (Loan 1263-YU), which closed in December 1982. However, the plant was extensively damaged in the spring of 1992 at the outset ofthe conflict, during which the sewer network was also destroyed in various places. Since the end ofthe conflict in 1995, the WWTP has been ‘mothballed’ with only minimal conservation works carried out to prevent further deterioration and a result, virtually all ofthe city’s waste water is discharged into the Miljacka and Bosna Rivers without any treatment, causing severe pollution ofthe downstream water bodies.

B. Rationale for Bank involvement

5. The Bank has been involved in the municipal and local public services sectors in BH for almost a decade. Over this period the Bank has played an important role in supporting the development ofthe local government sector. As experience has shown the Bank has a number of comparative advantages among which the most salient are: (i) its ability to operate simultaneously at the central and local levels, linking capacity building and investments to help implement policy reforms at central level and strengthening of local government; (ii)the convening power and coordinating force at the policy ffont, a crucial role for a municipal sector engagement that is multi-sectoral in nature and involves various Government agencies; and (iii) the knowledge base and long-term relationship sustained in the municipal sector by analytical work and investment lending operations.

6. The proposed Sarajevo Waste Water Project (SWWP) builds up on the experience of previous projects such as the Urban Infrastructure and Service Delivery Project (Credit No. 3954-BA)’ and the First and Second Solid Waste Management Project (P057950; Credit Nos. 3672-BA and 3672-1-BA; Loan No. 7629-BA); while the analytical basis for the policy dialogue with governments is provided by the 2009 sector study “From Stability to Performance: Local Governance and Service Delivery in Bosnia and Herzegovina.” The Sarajevo Canton, as the main urban agglomeration in BH, has repeatedly requested the Bank to provide financing for rehabilitation of the WWTP. In 1999, the Japan International Cooperation Agency (JICA) prepared a feasibility study, but no financing had become available since then. Given the Bank’s experience in the sector and its earlier involvement in construction of the plant, the Bank is well suited to provide the support and funding to the Sarajevo Canton to help address this priority infrastructure rehabilitation. S WWP will also complement a project currently envisaged by the European Bank for Reconstruction and Development (EBRD) which will address water supply

2 problems in Sarajevo and support critically-needed financial management reforms in the Sarajevo Water and Waste Water Company, (KJKP Vodovod i Kanalizacija - VIK), the operator of water supply and sanitation services in the Sarajevo Canton. VIK is currently in a weak financial position due to high losses in the water network (up to 70 % according to latest estimates). EBRD will focus its investments in water network rehabilitation to address the high water losses, while at the same time implementing institutional reforms to improve the financial performance ofVIK.

C. Higher level objectives to which the project contributes

7. The proposed SWWP was identified and agreed upon in the Country Partnership Strategy (CPS) 2008-201 1. The project aims to support the second pillar of the CPS, namely improving the quality of Government spending and the delivery of public services for the vulnerable through enhancing the delivery ofmunicipal services and strengthening municipal finance.

11. PROJECT DESCRIPTION

A. Lending instrument

8. The choice ofthe lending instrument is a Specific Investment Loan (SIL).

9. The Borrower of the World Bank loan will be Bosnia and Herzegovina. The Borrower will on-lend the funds through its Ministry of Finance and Treasury to the FBH Ministry of Finance (FBH MOF) on the same terms and conditions. FBH MOF, in turn, will on-lend the funds on the same terms and conditions to the Sarajevo Canton Ministry of Finance, as the representative of the Sarajevo Canton which is the legal owner of the Sarajevo Water and Waste Water Company (VIK) serving the nine municipalities ofthe Sarajevo Canton.

B. Program objective and Phases

10. Not applicable.

C. Project development objective and key indicators

11. The Project Development Objective (PDO) of SWWP is to improve the living conditions of populations in the areas covered by the Sarajevo Water and Waste Water Company and in downstream riverside communities by: (a) reducing the populations’ exposure to and reliance on highly polluted water from the Miljacka and Bosna Rivers; and (b) improving the efficiency of the waste water collection network in the Sarajevo Canton. The project aims to achieve this objective through financing investments in the rehabilitation of the Sarajevo waste water treatment plant (WWTP) and sewerage network in the Sarajevo Canton.

12. The outcome indicators would be: (i)reduction in river pollution measured by amount of BOD5 removed at the WWTP; (ii)volume of waste water collected treated at primary level (m3/day); (iii)number of sewer connections benefiting from rehabilitation works; and (iv) number of sewer blockages per year.

3 D. Project components

13. The cost of SWWP, as proposed, is estimated at US$37.0 million equivalent of which US$35.0 million equivalent will be provided by the Bank loan, and US$2.0 million equivalent will be provided by the Sarajevo Canton as counterpart financing.

14. Component A - High Priority Infrastructure Rehabilitation (US36.0 million equivalent, of which Bank financing US$34.0 million equivalent). This component will finance priority investments in the rehabilitation of waste water infrastructure in the Sarajevo Canton. The component will include two sub-components:

a) repair and replacement of primary and secondary sewers in Sarajevo (estimated cost US$l1 .O million equivalent); and

b) rehabilitation of the Sarajevo waste water treatment plant (WWTP) in four work phases (estimated cost US$25.0 million equivalent) including: (i) rehabilitation of pumping station for raw waste water, screening station, aerated grit chamber, substation, and air blower room; (ii) rehabilitation of primary sedimentation, primary sludge pumping station, sludge thickener, and sludge pumping station; (iii) rehabilitation of sludge digester, holding tank, pumping station and dehydration facility; and (iv) rehabilitation of sand grit removal facilities.

15. Component B - Institutional Development Support (US0.5 million equivalent, of which Bank financing US$0.5 million equivalent). This component will finance TA to VIK for capacity building and institutional strengthening. Activities under this component will include:

(i) institutional strengthening for improving financial management capacity and operational efficiency to enhance long-term financial viability; and (ii) support the preparation of feasibility studies, technical designs, and other technical studies for follow-up investments in water and waste rehabilitation.

16. Component C - Project management (US0.5 million equivalent, of which Bank financing US0.5 million equivalent). This component will support project implementation by the Project Management Team (PMT) and Project Implementation Team (PIT). Activities to be financed under this component will include training of staff on financial management and procurement, project monitoring and evaluation, operating costs, office equipment, financial audits, and other incremental costs.

E. Lessons learned and reflected in the project design

17. The Bank has considerable experience in the municipal sector in BH since it has financed a number of investment projects supporting key municipal services, such as water, waste water and solid waste management. The project design draws lessons from four Bank supported operations. The Local Development Pilot Project (P056192; Credit No. 3 191-BA, US$18.5 million) was approved in 1999 and completed in 2005. Its aim was to strengthen the institutional

4 and financial capacity of local governments and initiating, on a pilot basis, the development of a municipal credit market to provide a long-term source of financing for creditworthy municipalities for infrastructure investments. The Community Development Project (P070995; Credit No. 3538-BA, US$15 million; approved in 2001) functions as a social fund, investing in social and community-level infrastructure through participatory means of identification and budgeting. CDP focuses on small-scale investments in the poorest communities. The first Solid Waste Management Project (P057950; Credit No. 36720-BAYUS$l8 million, approved in 2002) supports the cost-effective improvement of solid waste services through rehabilitation of regional sanitary landfills in seven priority regions (Banja Luka, Bihac, Bijeljina, Sarajevo, Tuzla, Mostar and Zenica). Additional financing to the Solid Waste Management Project (P095382; Credit No. 3672-1-BAYUS$8 million) was approved in 2005. A second Solid Waste Management Project (P107998; Loan No. 7629 and Credit No. 4540-BA; US$40 million) was approved by the Board in November 2008 and will scale-up the operation to additional six to eight regions. The Urban Infrastructure and Service Delivery Project (P083353; Credit No. 3954-BA; US$20 million; approved in 2004) aims at strengthening the capacity to prepare and implement Urban Management Development Plans in selected larger municipalities (Mostar, Sarajevo, Banja Luka, Tuzla, Livno) and smaller municipalities (Srebrenica, Vares, PosuSj e, Lukavac, Cazin and StolaE). Additional financing to the Urban Infrastructure and Service Delivery Project (P 102 170; Credit No. 3954-1-BA) in the amount of US$5 million was approved in 2007.

18. All these operations have achieved substantial results-ither in a specific sector (Solid Waste Management Project); or in pre-selected municipalities (Urban Infrastructure and Service Delivery Project); or with a focus on small-scale investments in poorer municipalities (Community Development Project); or in creditworthy municipalities through on-lending via commercial banks (Local Development Project). The main lessons learned from the projects include: (a) in an environment with a complex governance structure such as Bosnia and Herzegovina, project design should be simplified as much as possible; (b) while policy reforms maybe critical to project sustainability, a balanced approach that takes into account local capacity to absorb often challenging reforms, including leveraging other donors’ activities should be followed; and (c) project readiness at appraisal is necessary to avoid disbursement delays. SWWP takes these lessons into account in its design and aims at leveraging the experience gained in these operations by: (i)providing significant investment funding for rehabilitation of infrastructure and basic local services in the biggest urban agglomeration in the country; (ii) leveraging EBRD’s support for institutional capacity building at VIK Sarajevo; and (iii)ensuring that designs for the first year’s investment program are ready at appraisal to minimize implementation delays.

F. Alternatives considered and reasons for rejection

19. There are no meaningful alternatives to the proposed project design and/or approach to implementation. A possible alternative that could have been considered was to try to turn over the WWTP to a private operator under a lease agreement. However, in the context of BH, such a solution would not have been feasible not only for political reasons but also because the still uncertain and fragile fiscal base of sub-national governments and/or municipalities prevents them from engaging in public-private partnerships.

5 20. A Specific Investment Loan (SIL) is the most appropriate instrument and given the urgent and critical needs for rehabilitation of the Sarajevo WWTP, the proposed design represents the most effective approach to addressing the problems of pollution and service provision in Sarajevo.

111. IMPLEMENTATION

A. Partnership arrangements

21. While SWWP will not involve any formal co-financing at this point, it will establish close coordination with EBRD and the EU to increase the effectiveness of the Project and leverage additional resources for the WWTP rehabilitation and sewer repair works. EBRD is preparing a Sarajevo water supply and institutional development project with financing ofup to Euro 30 million to be carried out by VIK. EBRD’s support would focus on investments in water network rehabilitation and institutional support to increase the financial performance of VIK. Furthermore, IPA funding has been provisionally approved by the EU to support additional rehabilitation works at the Sarajevo WWTP. Instrument for Pre-Accession (IPA) fwnds are expected to become available in 201 1 and could further complement SWWP.

B. Implementation Arrangements

22. The project will be implemented through a Project Management Team (PMT) established in the BH Ministry of Foreign Trade and Economic Relations (MoFTER). The PMT will be responsible for all aspects ofproject implementation.

23. The PMT, created for the Urban Infrastructure and Service Delivery Project, already exists in MoFTER, and is experienced with implementation of Bank projects. It will assume full responsibility for all aspects of S WWP implementation; including procurement, financial management, safeguards compliance, supervision, reporting, monitoring and evaluation. The PMT is staffed with qualified personnel and consists of a PMT Head, Procurement Manager, Procurement Officer, Financial Management Specialist and Accountant. During S WWP implementation the PMT will also hire the services of consultants for sanitation and other local services as the need arises.

24. In order to improve the financial management capacity of the project, the PMT will, by December 31, 2009, upgrade the accounting software currently being used for the on-going projects to accommodate the new project.

25. A Project Implementing Team (PIT) will be created and located in VIK and will consist of an Engineer to assist the PMT Procurement Officer in reviewing technical specifications and certifying completion ofworks; and a Financial Officer reporting to the Sarajevo Canton and the PMT to oversee the implementation of the project’s activities to improve VIK’s financial performance. Even though the PMT will have overall responsibility for implementation of the project, including all procurement and financial management, the PIT will handle day-to-day project matters and technical supervision, including construction monitoring. The PIT will conduct all procurement in coordination with the PMT and then submit the documents to the PMT for clearance. Once cleared by the PMT, the documents will be submitted to the Bank for

6 final no-objection in accordance with the Procurement Plan. Contracts will be signed by a representative designated by the Sarajevo Canton, as the final borrower ofthe funds.

' 26. The PMT will also be responsible for ensuring compliance with Bank safeguards requirements (environment and social); supervise to that effect the PIT in applying safeguard policies; and certify that all relevant national and Bank requirements on safeguard policies have been consistently observed and complied with.

C. Monitoring and evaluation of outcomeshesults

27. The PMT will be responsible for the monitoring and evaluation of the project including reporting and discussions with the Bank. Baseline indicators were provided by VIK and will be used to monitor the project outcome indicators.

28. The monitoring and evaluation of project progress will be done through quarterly progress reports prepared by PMT and provided to the Bank. The PMT would collect and present data and progress reports from the PIT for review by the Bank in conjunction with supervision missions, and undertake necessary corrective actions needed to sustain or improve progress. In discussions with government stakeholders, the Bank team will also monitor and evaluate progress and achievement of outcomes at least once annually and intensively during the mid- term review. The quarterly progress reports required by the Bank will also include financial management reports and updates ofthe procurement plans.

D. Sustainability

29. The Sarajevo WWTP and sewerage network are both operated by VIK, which as a public utility is owned by the Sarajevo Canton. VIK's current financial position is relatively weak. TA provided under Component B of the Project will address this issue and aims at improving the long-term financial viability of the utility. In addition, VIK is now also engaged in the preparation of a water supply rehabilitation operation to be supported by EBRD which will include the implementation of a series of financial and organizational reforms that should ensure its long-term viability and provide it with the capacity to operate and maintain the SWWP investments in an adequate fashion.

7 a, 9

c,m 0 P) !$ R Q .Im h Q)* El c,n s Q) I 2m B a 'Ff n Q m 9 .Iv1 h 2Y I 5 Q 0 u a, .I .Ic, a A i; 8 w n T 3Q. Adequate mitigation measures have been incorporated into the project, and Bank staff will closely monitor performance during implementation. Specific procedures have been developed under the project to ensure proper financial accountability of this project and to minimize project financial management risks. Additional financial management arrangements in the project will include the audit of project financial statements by an independent auditor acceptable to the Bank, and on the terms of reference acceptable to the Bank. In addition, VIK will forward to the World Bank its utility audited annual financial statements audited by local auditors and in compliance with the local laws and regulations.

F. Loadcredit conditions and covenants

31. There are no conditions of Board. For effectiveness, the Borrower will submit a Project Operational Manual, including a Financial Management Manual acceptable to the Bank. Standard covenants for financial management and audit requirements will apply. The PMT and PIT will maintain a financial management system acceptable to the Bank. The project financial statements, including Statement of Expenses (SOE) and Designated Account (DA) Statements will be audited by independent auditors acceptable to the Bank and on terms of reference acceptable to the Bank. The annual audited financial statements and the audit report will be provided to the Bank within six months of the end of each fiscal year. The PMT shall also prepare and furnish to the Bank not later than 45 days after the end of each calendar quarter, interim unaudited financial reports for the project covering the quarter, in form and substance satisfactory to the Bank. In addition, VIK will forward their utility financial statements audited by local auditors and in compliance with local laws and regulations. Auditor’s reports and audited financial statements would be forwarded to the Bank within six months of the end of the utility’s fiscal year.

32. The conditions for effectiveness are as follows:

(i) Adoption of a Project Operational Manual, including a Financial Management Manual (FM), acceptable to the Bank.

(ii)Execute Project Agreement on behalf of the Bank and the Project Implementing Entity on terms and conditions satisfactory to the Bank.

(iii)Execute Subsidiary Loan Agreement on behalf of the Borrower and the Project Implementing Entity, under the same terms as the loan, and on terms and conditions satisfactory to the Bank, and including the Anti-Conuption Guidelines,

(iv) Execute Subsidiary Financing Agreement on behalf of the Project Implementing Entity and the Sarajevo Canton, under the same terms as the subsidiary loan, and on terms and conditions satisfactory to the Bank, and including the Anti-Corruption Guidelines.

10 (v) Execute Project Implementation Agreement on behalf of the Project Implementing Entity,.the Sarajevo Canton and VIK, on terms and conditions satisfactory to the Bank

33. The following covenants will be applicable to project implementation:

(i) Maintain the PMT and the PIT at all times during Project implementation with terms of reference and resources satisfactory to the Bank, and with competent staff in adequate numbers.

(ii)Duly perform all obligations under the Operational Manual, the Environmental Impact Assessment and the Environmental Management Plan in a timely manner and in accordance with their respective terms, and apply and implement, as the case may be, the actions, criteria, policies, procedures and arrangements therein set forth.

(iii)Not amend or waive, or permit to be amended or waived the Operational Manual, the Environmental Impact Assessment or the Environmental Management Plan or any provisions of any one thereof, except with the prior written approval ofthe Bank.

(iv) Ensure that no land acquisition, relocation of population or temporary and/or permanent restrictions on access to economic resources shall be required under the Project.

(v) Make the proceeds of the Loan available to the Project Implementing Entity under a subsidiary loan agreement between the Borrower and the Project Implementing Entity, under the same terms and conditions, approved by the Bank, for on-lending by the Project Implementing Entity to the Sarajevo Canton, for the benefit of VIK.

(vi) Make the proceeds of the Subsidiary Loan available to the Sarajevo Canton, for the benefit of VIK, for purposes of carrying out the Project, under a subsidiary financing agreement between the Project Implementing Entity and the Sarajevo Canton, under the same terms and conditions as the Subsidiary Loan, approved by the Bank.

(vii) All Standard Reporting and Financial Management Covenants apply.

IV. APPRAISAL SUMMARY

A. Economic and financial analyses

34. Economic and financial analyses have been undertaken for the investments to be financed under this project. The results of the analyses for the WWTP are summarized below. For additional details, refer to Annex 9.

11 35. Economic analysis: The main economic benefit ofthe project is the reduction of negative environmental impacts due to direct discharging of untreated waste water from the water and waste water plant into the Miljacka River close to its confluence with the Bosna River. The main economic costs of the project are the investment costs and incremental operations and maintenance (O&M) costs associated with the investments, mainly. the operation of the WWTP, which is currently non-functional. The economic analysis ofthe sub-project yields economic NPV equal to USD 54.9 million and EIRR of 32%.

36. Financial analysis: The primary problems facing VIK include: (i)tariffs that are well below the operating and maintenance costs with no adequate provisions for assets renewal; (ii)inadequate collection of service charges for water and waste water that is resulting in increasing accounts payables and receivables; (iii)very high levels of network losses (estimated at about 70%) ; (iv) poor operational efficiency, with high levels of staff costs compared to other water utilities of a similar size; and (v) inadequate short and medium term operating and capital planning. Although tariff increases have been long recognized, these have not been increased in over a decade. VIK charges a water tariff, which is supposed to include a percentage for waste water collection. Currently, the waste water portion is not collected, since the WWTP is not operating. To meet operating expenses, the Sarajevo Canton provides an annual subsidy, which has been increasing over years. However, this subsidy cannot be sustained, as the Canton Government must now reduce the subsidies to limit it to the most vulnerable consumers in the city. VIK has therefore incurred operating losses over the past few years. Tariff reform and efforts to improve revenue generation and collection will therefore be critical to the future sustainability of VIK. Although current legislation allows tariffs to be determined taking into account actual costs and expenditure related to the production and sale of water and waste water services, the tariff approval process is subject to political considerations. The Canton Government is responsible for approval oftariffs.

37. The financial crisis facing VIK, the current conditions of the water and waste water infrastructure (especially the WWTP, which has not been operational since the 1990s), makes it difficult, if not impossible to expect a significant revenue increase, leading to an immediate full recovery of VIK and full collection of its revenues. VIK is preparing a water supply project to be supported by EBRD, some of whose objectives would be to help VIK to improve its financial and operational performance. The project’s overall objectives will be to assist the Canton authorities and management of VIK to implement an investment plan in an amount of EUR3O million, which will focus on reduction of losses through the replacement of water and sewerage networks, the rehabilitation of pumps, storage facilities and the improvement of the financial and operational sustainability of VIK. As part ofthis program, VIK has prepared a long-term investment plan (2009-20 1S), which includes a gradual financial improvement plan, with the help of EBRD consultants, whose main objective is to achieve a basic level of financial sustainability where VIK can collect sufficient revenues from water and waste water activities to cover its operations, basic maintenance of both services and some debt service. As part of the World Bank-financed project, VIK will reintroduce the waste water portion ofthe tariff once the WWTP is operational again.

12 38. The main financial benefit ofthe project is the incremental net cash flow resulting from the introduction ofhigher waste water tariffs due to increased quality ofwaste water treatment service and improved water bill collection rates. These benefits will result from the financial and institutional reforms to be carried out under the EBRD funded water supply project, which will result in overall improvements in the performance of VIK in the medium to long term, as well as the reintroduction of the waste water tariff once the WWTP is put back into operation. The main financial costs of the project are the investment costs and the incremental O&M costs. The financial analysis of the project yields financial NPV equal to USD 58.9 million and FIRR of 24%. The sensitivity analysis of the economic and financial appraisal suggests that the both economic and financial rates of return remain robust in case of significant variation of key parameters affecting viability.

B. Technical

39. The Sarajevo WWTP was built in the early 1980s in connection with the 1984 Winter Olympics and operated satisfactorily until the outset of the conflict in 1992. The plant suffered heavy damage in the spring of 1992 and as a result stopped operating. In 1999 JICA prepared a feasibility study for rehabilitation of the plant. Since then, minor rehabilitation works have been carried out by VIK to prevent further deterioration of the plant, but these have been insufficient to put it back into operation. Furthermore, damage to the sewer network and accumulation of debris in secondary sewers creates hazardous conditions when raw sewage from blocked pipes overflows into residential areas and nearby bodies ofwater, thus contributing to unhealthy living conditions.

40. SWWP will finance WWTP rehabilitation works that will be carried out in four phases: a Pumping station for raw waste water, screening station, aerated grit chamber, substation, and air blower room. Detailed designs and bidding and tender documents have been prepared. Investments under this phase are expected to cost about US$4.9 million equivalent. e Primary sedimentation, primary sludge pumping station, sludge thickener, and sludge pumping station. Preliminary designs have been prepared. Investments under this phase are expected to cost about US$7.4 million equivalent. a Sludge digestion, sludge holding tank, sludge pumping station, and sludge dehydration facility. Terms of References for the final design studies are under preparation by VIK. Investments under this phase are expected to cost about US$6.3 million equivalent. a Sand grit removal facilities. Two solutions are under consideration: creation of several removal facilities at appropriate locations in the sewerage network or the construction of one removal facility at the plant intake. The final design for the investments under this phase will depend on the results of a hydraulic model study and will be completed before project effectiveness. Depending on the solution adopted

13 investments under this phase are expected to cost between US$ 3.0 million and US$ 6.0 million.

41. Additionally, SWWP will finance the repair and/or replacement of various sections of primary and secondary sewers that have damaged or are blocked by debris and waste accumulation. Together with the sand grit removal facilities, the network rehabilitation will help reduce incidences of sewage overflow, particularly during the rainy season.

C. Fiduciary

42. As the project will be implemented in an environment where corruption can be perceived as an important issue, adequate mitigation measures have been put in place and will be closely monitored to ensure that the residual project risk is acceptable, including: (a) a formal internal control framework described in the financial management manual; (b) the enforcement of a mechanism agreed with the Borrower for the flow of funds; (c) audit of the project financial statements by independent auditors and on terms of reference acceptable to the Bank; (d) audit of VIK annual financial statements by local auditors and in compliance with the local laws and regulations; and (e) carrying out regular FM supervision and procurement prior and post reviews to monitor and assess the corruption risk.

43. The PMT will be responsible for the financial management (FM) function of the project including disbursements, flow of funds, budgeting, accounting, reporting, and auditing.

44. Fiduciary Risk at the Project Level. The FM arrangements of the PMT were reviewed during the financial management assessment conducted in February 2009 and were found to be satisfactory and to meet the Bank's minimum financial management requirements.

45. The overall financial management risk for the project before mitigation measures is substantial and after mitigation measures, is moderate.

46. Procurement for the Project will be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits'' published May 2004 and revised in October 2006 (Procurement Guidelines); and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" published May 2004 and revised in October 2006 (Consultant Guidelines) and the provisions stipulated in the Loan Agreement (LA).

47. Procurement activities will be carried out by the PMT, which has been established under the Ministry of Foreign Trade and Economic Relations of BH. Procurement capacity of the PMT was found to be satisfactory and meet the Bank's requirements. Procurement positions are staffed with a full time, senior employee with sufficient professional experience relevant to procurement under the Bank procurement procedures and one junior staff. The risks associated with procurement and the mitigation measures were identified in the assessment of the PMT's procurement capacity and the risk is

14 moderate. Further details on procurement and the procurement plan can be found in Annex 8.

D. Social

48. A household survey conducted in twenty municipalities as part of the study “Local Governance for Service Delivery in Bosnia and Herzegovina” found that overall satisfaction rates with services are low and citizens are unsatisfied with the outcome of crucial public services. Access to critical basic services such as water supply and waste collection remains unacceptably low. Half a million people lack any sanitation service. Only 65 percent of households receive their water from the public system. Almost 1.4 million people in.BHdon’t have a running water connection in their household and lack regular waste removal services. One-third of rural households use water from unsafe sources such as rivers, streams, springs, or wells because they lack municipal water connections. Overall satisfaction rates with services are low. Less than half of the households surveyed were satisfied with sewage services.

49. The project will focus on improving service delivery in one ofthe priority sectors, and address citizens’ concerns. Residents living in areas directly targeted by the project in Sarajevo will benefit most from the project, but it is expected that the project will also have positive effects for the population of other neighboring municipalities.

E. Environment

50. The project will have overall positive impacts by improving the current environmental situation in the Sarajevo Canton specially the water quality of rivers Miljaska and Bosna Rivers through the treatment of waste water currently released untreated directly into these rivers. The Sarajevo WWTP has an Environmental Impact Assessment (EIA) that was prepared as part of the JICA Feasibility Study in 1999. In addition, the WWTP received a Conditioning Plan as prerequisite for obtaining the environmental permit dated May 2008. An updated Environmental Assessment (EA) including an Environmental Management (EMP) has been prepared in September 2009 for the proposed Bank financed project. Main potential temporary environmental impacts identified for the construction stage include: dust, noise, engine exhausts, disruption to traffic and disposal of non-hazardous construction debris and management of asbestos waste. During operation of the rehabilitated sections of the plant, the main issues may include storage and disposal of sludge arising from waste water treatment. The EMP includes a: (i)mitigation plan and associated costs, (ii)monitoring plan with estimated costs, (iii)implementation schedule, (iv) institutional arrangements for effective environmental management, and (v) record ofthe public consultation.

15 F. Safeguard policies

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.0 1) [YI [I Natural Habitats (OP/BP 4.04) [I [NI Pest Management (OP 4.09) 11 [NI Physical Cultural Resources (OP/BP 4.1 1) [I [NI Involuntary Resettlement (OP/BP 4.12) [I EN1 Indigenous Peoples (OPBP 4.10) [I IN1 Forests (OP/BP 4.36) [I [NI Safety of Dams (OP/BP 4.37) [I [NI Projects in Disputed Areas (OPBP 7.60)* [I [NI Projects on International Waterways (OP/BP 7.50) [YI [I

51. Environmental Assessment (World Bank OP 4.01). The Project has triggered OP 4.01 and has been assigned Category B for environmental assessment purposes. An updated Environmental Assessment (EA) including an Environmental Management Plan (EMP) has been prepared in September 2009 for the proposed Bank financed project. The draft EA document including the EMP was posted on the VIK website following Bank review and no objection, and was also made available at the VIK office buildings in Sarajevo in local language on October 19, 2009. The draft ENEMP was subject to two public consultation meetings (on October 13 and 26, 2009) in Sarajevo, following disclosure of the ENEMP document in local language in country. The final ENEMP, including all relevant comments from the public consultation meetings, has been submitted to the World Bank's Infoshop for disclosure on October 26,2009.

52. International Waterways (World Bank OP 7.50). Since the Sarajevo WWTP discharges its effluents into the Miljacka River, a tributary of the Bosna River which, in turn, is a tributary of the Sava and, consequently of,the Danube rivers, SWWP triggers the International Waterways policy. However, the project qualifies for an exemption from the notification to the governments of riparian countries because the proposed project activities will neither attempt to modify the course of waterways nor increase the volume of discharge. A Memorandum to the Regional Vice President seeking his agreement to the findings of the Project Team that the investment activities under the project qualify for an exception from the riparian notification requirement under OP 7.50 was submitted to, and signed by, the Regional Vice President on September 29,2009.

53. Involuntary Resettlement (World Bank OP 4.12). SWWP will not trigger OP 4.12 as it will deal exclusively with the rehabilitation and repair of existing infrastructure and installations on existing premises and within public rights of way which will not entail any land acquisition, relocation of population, or temporary and/or permanent restrictions on access to economic resources.

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

16 G. Policy Exceptions and Readiness

54. No policy exception is required.

55. Final design and bidding documents for the first phase of investments are ready. The submission of a final Project Operational Manual, including the Financial Manual acceptable to the Bank will be a Condition for Effectiveness. In addition, the execution of the Project Agreement, the Subsidiary Loan Agreement, the Subsidiary Financing Agreement, and the Project Implementation Agreement will be Conditions for Effectiveness.

17 Annex 1: Country and Sector or Program Background BOSNIA AND HERZEGOVINA: Sarajevo Waste Water Project

A. Background

1. The Dayton Peace Agreement (DPA), which was signed in December 1995, ended three years of conflict in Bosnia and Herzegovina (BH). Since then, the country has experienced a period of political stability, extensive reconstruction, and gradual economic recovery. In June 2008, a Stabilization and Association Agreement was signed with the European Union (EU), putting the country on track for eventual EU membership. While slower in the first decade of 2000, GDP growth has accelerated since 2005 and reached an annual average of 6 percent through 2008. However, despite the progress achieved thus far, BH still ranks low with a per capita income ofUS$4,5 10 compared to an average ofUS$7,418 in the Europe and Central Asia Region (ECA). About 14 percent of the country’s population of around 4.6 million still lives in poverty, while the quality and availability of most basic local services remain at a significantly lower level than in the neighboring countries. The global economic downturn will put further stress on the BH economy, particularly as the recent growth has been helped much by strong exports.

2. The DPA established a complex four-level governance structure in BH with a view to carefully balance ethnic interests and reduce potential sources of conflict. The main feature of this structure is that Bosnia and Herzegovina consists of two largely autonomous second-level political entities: the Federation of Bosnia and Herzegovina (FBH), and the Republika Srpska (RS). FBH comprises often Cantons, as a third level of Government (there are no cantons in the RS). Finally, at the forth and lowest level, there are seventy-four municipalities in the FBH and sixty-three in the RS. Municipalities are key providers of basic local public services such as water supply, sewerage, solid waste collection and disposal, heating, local roads as well as various social services. However, despite the adoption of a series of laws municipalities remain ill-equipped for the task and, in particular, lack the necessary financial resources. As shown in a recent study conducted by the Bank the quality of local service delivery in BH is extremely uneven across municipalities and sectors. Access to services is poor, and overall user satisfaction is low. Almost 1.4 million people have no adequate and permanent water supply or waste removal. While the problems are more acute in smaller municipalities, they exist at all levels even in the larger cities including Sarajevo the capital which has an estimated urban population of490,000 in the Sarajevo Canton.

3. Enabling the municipalities to better perform their tasks has been high on the agenda of the various levels of government in BH for a long time. However, effectively implementing municipal reform in the political context of BH is a complex undertaking that can only advance at a very slow pace as it requires a continuous intensive effort of political consensus building. Continuing strong support from the Donor community is essential for keeping its momentum. Over the past decade a number of Donors have carried out extensive investment and capacity building programs to support municipal development, ranging from utility management reforms, budgeting and planning, to social inclusion, and accountability. Among these, a prominent one is the USAID/SIDA/Dutch financed Governance Accountability Project (GAP) which supports reform minded municipalities and plays a major role in the policy dialogue at entity level. At the

18 local level, GAP promotes capacity building in 53 municipalities. OSCE supports municipal public administration and democratization reforms through three main projects under its local governance program. UNDP is investing in the local governance area with a total amount of US$55.0 million and is planning to further extend its work program in the next phase. The EU has focused on regional development issues and strengthening the state level.

4. Service delivery problems are compounded by the still lingering after-effects of the conflict, that left vast portions of basic infrastructure destroyed or severely damaged. A case that vividly illustrates the problem is the waste water collection and treatment in the city of Sarajevo. A Waste Water Treatment Plant (WWTP) was built in the early 1980’s on the occasion of the 1984 Winter Olympics. Construction of the plant was supported by the World Bank financed Sarajevo Water Supply and Sewerage Project (P009171), which closed in December 1982. However, located close to the confluence of the Miljacka and Bosna Rivers the plant was extensively damaged in the spring of 1992 at the outset of the conflict, during which the sewer network was also destroyed in various places. Since the end of the conflict in 1995, the WWTP has been ‘mothballed’ with only minimal conservation works carried out to prevent further deterioration and a result, virtually all of the city’s waste water is discharged into the Miljacka and Bosna Rivers without any treatment, causing severe pollution of the downstream water bodies.

B. Waste Water Management in Sarajevo.

5. Virtually the entire population of the Sarajevo Canton has access to sewerage connections. The Central Sarajevo Sewerage System, managed by VIK covers approximately 460,000 or 94% of the Canton population of about 490,000. The remaining population is served by two smaller separate systems (Vogoska-Ilijas and Trnovo). The total length of the Central Sarajevo trunk collector network is approximately 45 km. Some sections of the collection system (particularly in the Stari Grad and the City Centre) were built more than 100 years ago of masonry work. Most of the newer sections consist of asbestos cement pipes with diameters ranging from 0.5 to 2.0 meters.

6. The Sarajevo Waste Water Treatment Plant (WWTP) is located in Butila (Novi Grad municipality), on the bank of the Miljacka River, close to its confluence with the Bosna River. It was built by a French Company around 1982 in connection with the Winter Olympics which were held in Sarajevo in 1984. The designed capacity of the plant was 600,000 PE (people equivalents) with an expansion capacity to 900,000 PE. After operating satisfactorily until the outbreak of the conflict, it suffered severe damage in Spring 1992, stopped working, and remained inaccessible until 1996. Minor investments have been made since then to prevent further degradation but treatment operations could not be resumed and waste water is therefore discharged directly into the Miljacka River.

7. In 1999, JICA funded a very comprehensive feasibility study (FS) for the WWTP aimed at providing a detailed assessment and proposals for bringing the WWTP back into commission. The proposals aimed to put the complete WWTP back into operation and provide additional pre- treatment facilities to address serious grit problems that had damaged parts of the plant during its short operational life. While the FS provided a good basis for developing an investment plan for rehabilitation of the WWTP, funding for such a plan was never agreed. Almost 10 years later the

19 government has requested the World Bank to consider financing priority rehabilitation investments ofthis plant.

8. The WWTP includes four main sections: (a) preliminary and primary treatment, (b) secondary treatment, (c) sludge processing, and (d) bio-gas production (used to cover some of the plant’s energy needs). Investments under SWWP will support the rehabilitation of the first three ofthe plant sections and are based on the feasibility study carried out by JICA in 1999.

C. Financial viability of VIK Sarajevo

9. VIK’s current financial position is weak. Tariff rates, and hence revenues, do not cover the operating costs and debt servicing of the utility. Only about 50% of VIK’s costs are covered by revenues collected. In 2007 the costs of producing and delivering water including all of. the utility operating costs and debt servicing was estimated to be BAM2.37/m3; and BAM2.55/m3 in 2008. Revenues for these years averaged BAM1.22/m3 (2007) and BAM1.18/m3 (2008)-a reduction due to the reduction ofa fixed fee to a water testing institution. The watedwaste water tariff (70%/30%) has not been increased since it was established in 1997, except of the 17% VAT introduced in 2006. Although the tariff rates were raised at this time, an increase of 17% was deemed too much; so that the actual tariff for water and waste water services was in effect decreased. With commissioning of a rehabilitated WWTP operating costs will further increase. The gap between costs and tariffs and the distortion ofthe tariff structure is a serious issue which needs to be addressed during the course ofproject implementation.

20 Annex 2: Major Related Projects Financed by the Bank^and/orother Agencies BOSNIA AND HERZEGOVINA: Sarajevo Waste Water Project

Project Amount N Sector Issues Addressed IEG Rating for in USD Bank Projects

Bosnia and Herzegovina 20 FY04 Improve the availability, quality On-going Urban Infrastructure and million and reliability of municipal Service Delivery Project - services, particularly water IP = s P083353; Cr. No. 3954-BA supply and sanitation, and to DO=S strengthen cantonal and municipal governments to improve management and institutional capacity of Urban Management Development Plans Bosnia and Herzegovina 15.0 FYOl Improve basic services and On-going Community Development million facilities of low-income families IP = s Project - P070995; Cr. No. and poor communities in DO=S 3 53 8-BA underserved municipalities Bosnia and Herzegovina 18.0 FY02 To cost effectively improve solid On-going Solid Waste Management million waste management services in IP = s Project - P057950; Cr. No. priority areas and increase DO=S 36720-BA technical capacity of solid waste institution Bosnia and Herzegovina 40.0 FY08 Improve availability, quality, On-going Second Solid Waste million environmental soundness and Management Project - financial viability of solid waste IP = s P107998; Ln. No. 7629; Cr. management services in DO=S NO.4540-BA participating utilities and regions

Bosnia and Herzegovina 12.0 FY00 The two major objectives of the Closed in 2005 Mostar Water Supply and million project are: (a) to create a unified ICR rated DO Sanitation Project - water supply and sanitation utility satisfactory PO5795 1; Cr. 34000-BA for the city of Mostar; and (b) to improve service by establishing a modern planning and management system, network system rehabilitation and major improvements in financial management and bill collection. Bosnia and Herzegovina 4.0 FY99 To improve the climate for Closed in 2004 Pilot Cultural Heritage million reconciliation among the peoples Implementation Project - P059763; Cr. in Bosnia and Herzegovina (BH) Completion 32690-BA through recognition and Report (ICR) rehabilitation oftheir common rated DO sultural heritage in Mostar. satisfactory. Bosnia and Herzegovina 11.1 FY99 Strengthen the institutional Closed in 2005 Local Development Pilot million sapacity of selected local Implementation Project - P056192; Cr. Sovernments and utilities so as to Completion

21 enable them to provide improved Report (ICR) municipal infrastructure and rated DO services in response to citizens satisfactory. demand and to initiate on a pilot basis the development ofa municipal credit market

USAID Water Supply, Solid Waste Flood Control and Sanitation Projects USAID Financial Management Training Seminars (completed) USAID and SIDA Governance Accountability Project (on-going) Norway Bijelo Piolo Project Mostar (completed) European Union Nationwide Solid Waste Management Strategy (TA completed)

22 Annex 3: Results Framework and Monitoring BOSNIA AND HERZEGOVINA: Sarajevo Waste Water Project

Results Framework

PDO Project Outcome Indicators Use of Project Outcome Information To improve the living conditions 0 Reduction in river pollution measured Monitor implementation progress of populations in the areas by amount of BOD5 removed at the 3fproject in meeting PDO covered by the Sarajevo Water WWTP; and Waste Water Company and Monitor operation ofthe WWTP 0 Volume of waste water collected in downstream riverside treated at primary level (m3/day); communities by: (a) reducing the populations’ exposure to, and 0 Number of sewer connections reliance on highly polluted water benefiting from rehabilitation works; from the Miljacka and Bosna Number of sewer blockages per year. River; and (b) improving the efficiency ofthe waste water collection network in the Sarajevo Canton. Intermediate Outcomes Intermediate Outcome Use of Intermediate Indicators Outcome Monitoring Component A Sewer network rehabilitated and Cumulative length of sewerage lines 4ssist VIK in tracking physical extended rehabilitated progress and take early remedial %ction,as necessary. WWTP partly rehabilitated and YOof WWTP rehabilitation works primary treatment brought back completed3 in operation Component B Improved conditions for 0 Increased revenues (in %) Assist VIK in improving enhanced long-term financial institutional efficiency. viability of VIK Sarajevo.

Refers only to rehabilitation supported under MDP.

23 m *m *m -0 -3 C 0 .-* .e*

$a fia 0 & b-i 5- 5-

e .re b C c .r e i cU rr 0 j Ifi 5 z 0 b 0 0 8 0 4 d 0 rJ0 vl cU 2 8 80&* 2 W W 5 E 0 :e z * W d b 0 b 0 0 0 0 0 d t-4 8 8s 0 3 z t-4 W W m 0 0 0 0 0- 0 vl 0 0 zx vl - 0

0 0 0 0 0 2 0 0 0 Annex 4: Detailed Project Description BOSNIA AND HERZEGOVINA: Sarajevo Waste Water Project

A. Project Development Objective

1. The Project Development Objective (PDO) of SWWP is to improve the living conditions of populations in the areas covered by the Sarajevo Water and Waste Water Company and in downstream riverside communities by: (a) reducing the populations’ exposure to, and reliance on highly polluted water from the Miljacka and Bosna River; and (b) improving the efficiency of the waste water collection network in the Sarajevo Canton. The project aims to achieve this objective through financing investments in the rehabilitation of the Sarajevo waste water treatment plant (WWTP) and sewerage network in the Sarajevo Canton.

2. The outcome indicators would be: (i)reduction in river pollution measured by amount of BOD5 removed at the WWTP; (ii)volume of waste water collected treated at primary level (m3/day); (iii)number of sewer connections benefiting from rehabilitation works; and (iv) number of sewer blockages per year.

B. Project Components

3. The cost of SWWP, as proposed, is estimated at US$37.0 million equivalent of which US$35.0 million equivalent will be provided by the Bank loan, and US$2.0 million equivalent will be provided by the Sarajevo Canton.

4. Component A - High Priority Infrastructure Rehabilitation (US$ 36.0 million equivalent, of which Bank financing US$34.0 million equivalent). This component will finance priority investments in the rehabilitation of waste water infrastructure in the Sarajevo Canton. The component will include two sub-components: a) repair and replacement of primary and secondary sewers in Sarajevo (estimated cost US$ 11 .O million); and b) rehabilitation of the Sarajevo waste water treatment plant (WWTP) in four successive work phases (estimated cost US$25 .O million equivalent) including:

(i) rehabilitation of pumping station for raw sewage, screening station, aerated grit chamber, substation and air blower room; (ii) rehabilitation of primary sedimentation, primary sludge pumping station, sludge thickener, and sludge pumping station; (iii)rehabilitation of sludge digester, sludge holding tank, sludge pumping station and sludge dehydration facility; and (iv) rehabilitation of sand grit removal facilities.

5. Component B - Institutional Development Support (US$0.5 million equivalent, of which Bank financing US$0.5 million equivalent). This component will finance TA to the Sarajevo VIK for capacity building and institutional strengthening. Activities under this component will include:

25 (i) institutional strengthening for improving financial management capacity and operational efficiency to enhance long-term financial viability; and

(ii) support the preparation of feasibility studies, technical designs, and other technical studies for follow-up investments in water and waste rehabilitation.

6. Component C - Project management (US$0.5 million equivalent, of which Bank financing US$0.5 million equivalent). This component will support project implementation by the PMT and PIT. Activities to be financed under this component will include training of staff on financial management and procurement, project monitoring and evaluation, operating costs, office equipment, financial audits, and other incremental costs. Operating costs of the Project will be subject to approval by the Sarajevo Canton and the Bank on an annual basis; and overall costs of this component will be limited to US$0.5 million, including price contingencies. There will be also a limit for the operating costs of the PMT in the amount of US$O.l5 million equivalent; and a limit for the operating costs of the PIT in the amount of US$0.3 million equivalent.

C. Financing

7. The total cost of SWWP is estimated at US$37.0 million equivalent, of which US$35.0 million equivalent will be provided by the World Bank through an IBRD loan. Counterpart financing in the amount of US$2.0 million equivalent will be provided for Component A by the Sarajevo Canton. Indicative project financing is summarized in Table 1.

Table 1: Project financing (in US$ million) I US$million 1 WorldBank I Government I Total I Component A 34.0 2.0 36.0 Component B OS -- 0.5 Component C OS -- 0.5 I TOTAL I 35.0 1 2.0 1 37.0 I

8. The Borrower of the Bank loan will be Bosnia and Herzegovina, represented by its Ministry of Finance and Treasury, which will on-lend the funds to the Federation Ministry of Finance (FBH MoF) on the same terms and conditions. The FBH MoF, in turn, will on-lend the funds on

I the same terms and conditions to the Sarajevo Canton Ministry of Finance, as the representative of the Sarajevo Canton which is the legal owner of the Sarajevo Water and Waste Water Company (VIK).

26 Annex 5: Project Costs BOSNIA AND HERZEGOVINA: Sarajevo Waste Water Project

Local Foreign Total Project Cost By Component and/or Activity US$ million US$ million US$ million Component A: High Priority Infrastructure Rehabilitation A1 Repair and replacement of primary and 0.70 7.20 7.90 secondary sewers A2 Rehabilitation ofpumping station for raw 0.20 3.88 4.08 sewage, screening station, aerated grit chamber, substation and air blower room A3 Rehabilitation of primary sedimentation, 0.40 5.92 6.32 primary sludge pumping station, sludge thickener, and sludge pumping station A4 Rehabilitation of sludge digester, sludge 0.40 5.04 5.44 holding tank, sludge pumping station and sludge dehydration facility. A5 Rehabilitation of sand grit removal facilities 0.30 4.00 4.30 Total Component A 2.00 26.04 28.04 Component B: Institutional Development Support B1 Institutional strengthening for improved 0.00 0.20 0.20 financial management capacity and operational efficiency B2 Support feasibility studies, technical designs, 0.00 0.30 0.30 and other technical studies Total Component B 0.00 0.50 0.50 Component C: Project Management c1 PMT operation 0.15 0.00 0.15 c2 PIT operation 0.30 0.00 0.30 c3 Other project management costs 0.05 0.00 0.05 Total Component C 0.50 0.00 0.50

Front-end Fee 0.88 Total baseline cost 29.92 Physical contingencies 5.21 Price contingencies 1.87 Total Project Costs 37.00

Total Financing Required 37.00

27 Annex 6: Implementation Arrangements BOSNIA AND HERZEGOVINA: Sarajevo Waste Water Project

1. The project will be implemented through a Project Management Team (PMT) established in the BH Ministry of Foreign Trade and Economic Relations (MoFTER). The PMT will be responsible for all aspects ofproject implementation.

2. The PMT, created for the Urban Infrastructure and Service Delivery Project, already exists in MoFTER, and is experienced with implementation of Bank projects. It will assume full responsibility for all aspects of S WWP implementation; including procurement, financial management, safeguards compliance, supervision, reporting, monitoring and evaluation. The PMT is staffed with qualified personnel and consists of a PMT Head, Procurement Manager, Procurement Officer, Financial Manager and Assistant. During S WWP implementation the PMT will also hire the services of independent consultants for sanitation and other local services as the need may arise.

3. A Project Implementing Team (PIT) will be located in the Sarajevo Water and Waste Water Company (VIK) and consist ofan Engineer assisting the PMT Procurement Officer in reviewing technical specifications and certifying completion of works; and a Financial Officer reporting to the Sarajevo Canton and the PMT on VIK’s financial performance. Even though the PMT in MoFTER will have overall responsibility for implementation of the project, including all procurement and financial management, the PIT will handle day-to-day project matters and technical supervision. The PIT will conduct all procurement in coordination with the PMT and then submit documents to the PMT for clearance. Once cleared by the PMT, the procurement documents will be submitted to the Bank for final no-objection. Contracts will be signed by a representative designated by the Sarajevo Canton, as the final borrower ofthe funds.

4. A detailed Project Operational Manual (POM), including Financial Manual, will be developed by the PMT and submitted to the Bank for review. The submission of a final POM, acceptable to the Bank, will be a Condition of Effectiveness. In addition, the execution of the Project Agreement, the Subsidiary Loan Agreement, the Subsidiary Financing Agreement, and the Project Implementation Agreement will be Conditions for Effectiveness.

28 Annex 7: Financial Management and Disbursement Arrangements BOSNIA AND HERZEGOVINA: Sarajevo Waste Water Project

1. ' Country Issues 1. A report providing an update on the assessment ofthe country's public financial management (FM) was prepared in 2006. Although BH has made good progress in establishing modern public FM institutions and systems since 1995, systemic and structural weaknesses in public sector budgeting, accounting, reporting, and auditing remain a challenge. The Treasury accounting system now provides reliable information; systems are in place to record, report, and track receipt and use of funds; and there is independent audit of the budget execution reports. However, weak compliance with the existing internal control rules and procedures is further compounded by the absence of a modern internal audit system thus weakening the internal control framework. Moreover, current public procurement practices are weak and fail to comply with the Public Procurement Law.

2. Risk analysis 2.1 Risk assessment The overall FM risk for the project is substantial before mitigation measures, and with adequate mitigation measures agreed, the FM residual risk is rated moderate. The table below summarizes the FM assessment and risk ratings ofthis project:

~~ Risk Risk Risk Mitigation Measures Risk after Rating mitigation Inherent Risk Country level. Perceived S Corruption risk will be mitigated by instituting additional M corruption in the country is high. procedures and strengthening system of internal controls. Compliance on internal controls is The internal controls to be applied in practice are described in weak. Stat Internal audit lacks Financial Manuals. Quarterly IFRs will be submitted to the experience. Capacity of State Bank. Risk imposed by low capacity of State Audit Audit Institutions is still low Institution (SAI) will be mitigated by using private auditors acceptable to the Bank for the project audits. Entity level. Potential weak S The risk will be mitigated by instituting additional key M financial management structures controls to be applied during implementation of the project in'the PMT. Large infrastructure by dedicated project staff, FM capacity building. Any investments prone to corruption. changes to the PMT project financial management staff structure will be subject to agreement with the Bank. Project level. Complexity of the S The PMT has previous experience in implementing Bank M project is high. funded projects. Overall Inherent Risk S Control Risk 1. Budgeting and Planning. The S capacity and reliability of on the World Bank financed projects, support the Sarajevo budgeting and planning functions Canton in the development, monitoring budgeting for funds at the Sarajevo Canton may affect needed for the project. availability of counterpart funding. 2. Accounting. Weak Accounting M Current accounting systems will continue being used in the M systems PMT. 3. Internal controls: Weak S FM manual would be prepared by the PMT. Such manual S internal controls could affect the would describe a detailed description of internal control monitoring of project funds procedures, and monitoring and supervision of the

29 Risk Risk Risk Mitigation Measures Risk after Rating mitigation - participating utility. 4. Fundsflow. The Sarajevo S The funds would flow from the World Bank to the PMT, who M Canton and VIK lack appropriate would then make payments from the designated account to financial management capacity suppliers. Any specific procedures would be developed and and knowledge about the World described in the financial management manual. PMT is Bank procedures familiar with the World Bank disbirsement guidelines. 5. Financial reporting S Financial reporting will be based on the current systems used M in accordice with project-specific formats agreed at negotiations. PMT would continue using a tailor made software for project reporting purposes. 6. Auditing. M No additional mitigation measures needed. A private audit M company acceptable to the Bank will perform -audit of the project based on existing audit arrangements. In addition, and in order to ensure that the main beneficiary under this project remains financially viable, VIK will be requested to submit its regular annual audited utility financial statements to the Worldbank. S In the PMT the FM staff have gained experience with M 7. Staffing UISDP, PHRD grant for SWWP (former Municipal Development Project), and Neretva and Trebisnjica Riier I Basin Management Projects. Overall Control Risk S M Overall FM Risk S M

2.2 Strenahs. The significant strengths that provide a basis of reliance on the project’s financial management arrangements include:

- Prior financial and project management experience gained by implementing World Bank financed projects such as Urban Infrastructure and Services Delivery Project (UISDP), PHRD grant for the preparation of the SWWP (former Municipal Development Project), and the Neretva and Trebisnjica River Basin Management Project.

2.3 Weaknesses.

Actions Responsibility Deadline Ensure accounting software upgraded for the new project PMT 31 December 2009

3. FM Implementation Arrangements 3.1 Implementing agencies. 3.1.1 The PMT will be in charge of overall implementation ofthe project through a designated team of staff. The PMT will have overall responsibilities for implementation, including procurement and financial management for the project.

3.1.2 Planning and Budgeting. The PMT has adequate capacity for planning and budgeting in terms of human resources, availability of quality information and IT system. Staff has experience in budget preparation. The PMT will ensure that variances of actual versus budgeted

30 figures are monitored on a regular basis, appropriately analyzed and corrective actions taken. The PMT will need to coordinate with VIK in order to include its budget in the project budget. This process and lines of communication between the PMT and VIK would be described in detail in the financial management manual.

3.1.3 Accounting Policies and Procedures. Project accounting, on cash basis, will be maintained in PMT. Accounting procedures will be set out in detail in the FM Manual prepared by the PMT. The FM Manual will cover: (a) the FM system proposed under the project, with special emphasis on accounting and auditing policies, standards and internal controls; (b) the role ofthe FM systems in project management and implementation; (c) the accounting arrangements required for project management, the format for and content of project financial reporting; (d) the auditing arrangements that will be used during project implementation; and (e) budgeting and planning.

3.1.4 Stuffing. The PMT employs one Financial Management Specialist and one Financial Accountant. This staffing level is satisfactory for the financial management aspects of the project implementation.

3.1.5 FMManual. Project specific controls and procedures relating to FM will be described in the FM Manual prepared for the project and included in the Project Operational Manual. Key internal controls to be applied include appropriate authorizations, control checks, segregation of duties, reconciliations and documenting transactions. The Manual will set out the FM and internal control policies and procedures and are intended to guide staff and minimize the risk of errors and omissions, as well as delays in recording and reporting. These written standards will also clarify responsibilities, including level of authority, clear control over assets, cash, and bank accounts, and will ensure timely and accurate financial reporting. The FM manual will be prepared before Project Effectiveness.

3.1.6 Internal Controls. The controls for the project are expected to follow the following procedures: The PMT (and VIK) receive an invoice and verify it in terms of quality and quantity of the goodslservices received versus amounts invoiced. The invoice is then forwarded to the project units where it is registered as received and forwarded to the Project Director. The invoice is immediately submitted to the project accountant who registers the invoice in a simple log file with name of the supplier, amount, and date of payment. The accountant checks the invoice, the calculation of the invoice, and decides on the appropriate budget from which the amount will be charged (contract number, item number and program (component)). The accounting code is written on the invoice by the accountant. After initialing it, the invoice is submitted to the project procurement staff. The procurement staff checks the invoice against the relevant contract number, if necessary attaches a copy of the relevant paragraph on which the invoice is based from the contract and signs it. All relevant documentation is attached to the invoice enabling the relevant staff to immediately confirm that the necessary checks have been performed. The invoice is finally submitted again to the project accountant. The receipt of the approved invoice is recorded in the registry mentioned above to ensure that payment can be made as per the payment terms. The payment order and the invoice with all designated approvals and signatories (described in the FM Manual) are submitted to the commercial bank where the Designated Account is opened for payment, or in case of Direct Payment the application form for such payment method is submitted to the World Bank.

31 3.1.7 Bank Statements will be received weekly by the PMT. Based on the Bank Statements, the project accountant will record executed payments and perform due reconciliation of the loan balances. The PMT will prepare interim un-audited financial reports on a quarterly in the agreed format and submit the reports to the Bank. The project’s financial records will be reconciled with the World Bank’s Disbursement Summary statement on a monthly basis by the Financial Management Department. The Financial Management Specialist will reconcile on a monthly basis the balance on Designated Account as per the project’s accounting records with statements received from the bank at which the Designated Account is held.

4. Reporting and Monitoring 4.1 FM Reporting and Monitoring. Arrangements. The PMT will maintain financial records for the Project and will ensure appropriate accounting for the funds provided. The PMT will prepare on a cash basis and submit quarterly Interim Un-audited Financial Statements (IFRs) in a format agreed with the Bank, due within 45 days of the end of each quarter. The PMT will also prepare annual project financial statements, in a form acceptable to the Bank, and these will be audited by an external audit firm acceptable to the Bank. The IFRs will comprise the following reports presented in the agreed format:

- Statement of Sources and Uses ofFunds; - Uses ofFunds by Activity; - Designated Account statement; - Unit ofOutput by Activity; - Narratives to the reports.

4.2 FM Reporting, and Monitoring, Capacity. The PMT, which is already in charge of the implementation of the UISDP, PHRD grant for SWWP (former Municipal Development Project), and the Neretva and Trebisnjica River Basin Management Project submits Interim Un- audited Financial Statements on a quarterly basis. The reports are always submitted on time and are acceptable to the Bank. The same arrangements will be retained for the new project. However the format of IFRs has been revised in order to reflect the new sources and uses of funds for the new project. The project interim un-audited financial statements will be prepared in the loan currency.

4.3 The PMT has procured and implemented the software that was developed by e-Line d.o.0. Sarajevo. It is used for all projects currently implemented by the PMT. The accounting software system uses MS SQL database. It consists of the following modules: financial, procurement and reporting. The financial modules include 4 sub-modules: Payments, Reports, Other Categories, and Reports by Other Categories. The payments are entered into the system based on disbursement categories. The reporting sub-modules allow the production of detailed reports and the financial statements. The procurement module enables entering all necessary information on procurement matters. The financial software has adequate security levels. The system meets the Bank’s reporting requirements. The system updates needed for the new project will be completed by project commencement.

32 5. External Audit 5.1 Audit Arrangements. The Borrower will be responsible for ensuring that project financial statements, designated accounts, and Statement of Expenditures (SOEs) are audited by an independent auditor, acceptable to the Bank, in accordance with standards of auditing that are acceptable to the Bank. The annual project audit will be carried out in accordance with the Chapter V of the FM Practices Manual (November 2005). The audit report shall be in a format in accordance with the International Standards on Auditing promulgated by the International Federation of Accountants (IFAC). The audited project financial statements will be sent to the Bank within six (6) months of the end of the Government’s fiscal year. The annual cost of the audits ofthe project will be covered by the loan funds.

5.2 In addition, and in order to ensure that the main beneficiary under this project remains financially viable, VIK will be requested to submit its regular annual utility financial statements audited by local auditors and in compliance with local laws and regulations. The auditor’s reports and audited financial statements would be forwarded to the World Bank within six (6) months ofthe end ofthe utility’s fiscal year.

5.3 Audit Compliance. The UISDP, also financed by the World Bank is also being implemented by the PMT under the same Ministry. The project auditor’s report and audited project financial statements for the financial year 2008 were received by due date. The auditors’ opinion on the project financial statements was unqualified (clean). The auditors raised no issues in the project management letter. The audited project financial statements for PHRD grant and Neretva and Trebisnjica River Basin Management Project were not yet due because the projects started disbursing in FY 2008.

5.4 The following chart identifies the audit reports that will be required to be submitted by the Project Management Team together with the due date for submission.

Audit Report Due Date Project financial statements (PFS), including SOEs and Designated Within six months of the end of account, scope extended to grants (PHRD and GEF). The PFSs include each fiscal year and also at the sources and uses of funds by category, by components and by financing closing ofthe project source; SOE statements, Statement of designated account, notes to financial statements, and reconciliation statement. VIK will forward to the World Bank its utility audited annual financial Within six months of the end of statements audited by local auditors and in compliance with the local laws each fiscal year and also at the and regulations. closing ofthe project

5.5 Audit Capacity. There are government-wide audit arrangements covering all Bank financed projects in Bosnia and Herzegovina (with the exception of revenue earning entities). The BH Ministry of Finance and Treasury (MoFT) has recently renewed a one-year contract for the audit of fiscal year 2008 with Price Waterhouse Coopers, Macedonia for the audits of World Bank financed projects. The SWWP will be included on the list of projects audited under the master audit agreement with Price Waterhouse Coopers, Macedonia. There is option of contract extension up to two additional years subject to successful audit performance.

33 Note: A local auditor issued a qualified opinion (except for - limitation on scope) on the financial statements of Vodovod iKanalizacija Sarajevo (VIK) for the year ended December 3 1, 2007.

6. Funds Flow and Disbursement Arrangements 6.1 Disbursement Arrangements. Disbursements from the loan will follow the transaction- based method, i.e., the traditional Bank procedures including reimbursements with full documentation, Statements of Expenditure (SOE), direct payments and special commitments. Disbursements from the loan and credit proceeds would be administered by the PMT. The PMT is responsible for retaining supporting documentation for SOEs and making them available to supervision missions, as well as to the auditors. The Country Financial and Audit Assessment (CFAA) (2003) for BH recommended that report-based disbursements should not be introduced in the BH portfolio at this stage because ofsignificant risks relating to (i)project FM weaknesses and lack of capacity in PMUs; (ii)the shaky banking system; and (iii)the unstable political situation and general governance problems presently affecting Bosnia and Herzegovina.

6.2 Designated Accounts. The State Ministry of Finance and Treasury will open a Designated Account for FBH for IBRD loan proceeds in a bank acceptable to the World Bank. The Designated Account will be denominated in Euros. The funds will be initially transferred from a credit account of the World Bank to the Designated Account and then the authorized signatories will conduct payments from IBRD proceeds to suppliers on behalf ofVIK.

6.3 The Ceiling for this Designated Accounts will be indicated in the disbursement letter. Applications for replenishment of the Designated Account will be submitted quarterly or when one-third of the amount has been withdrawn, whichever occurs earlier. Documentation requirements for replenishment would follow standard Bank procedures as described in Disbursement Handbook. Monthly bank statements ofthe Designated Account, which have been reconciled, would accompany all replenishment requests.

6.4 Disbursement Allocations. The amount of US$35.0 million will be allocated as indicated in the table below. The table sets forth the Categories of items to be financed out ofthe proceeds of the loan, the allocation of the amounts of the loan to each Category and the Percentage of expenditures for items so to be financed in each Category.

Allocation for Activities: Category Amount of the loan YOof Expenditures (in US$ million) to be Financed5 Works and goods 33.1 95% Consulting services, audits and other 1 100% operating expenses Front-end Fee 0.9 100% Total 35

Describes the percentage of expenditures to be financed out of the loan proceeds under each Category.

34 6.5 Financial Management Conditions and Covenants The PMT will continue to maintain a project financial management system acceptable to the Bank. The project financial statements will be audited by independent auditors acceptable to the Bank and on terms of reference acceptable to the Bank. The annual audited statements and audit report will be provided to the Bank within six months of the end of each fiscal year. Quarterly IFRs will be forwarded to the Bank no later than 45 days after the end ofeach quarter.

6.6 The condition for effectiveness is as follows:

Condition Responsibility Deadline Adoption of a Project Operational Manual, including a PMT Before Financial Management Manual (FM), acceptable to the effectiveness

6.7 Supervision Plan: During project implementation, the Bank will supervise the project’s FM arrangements in two main ways: (a) review the project’s quarterly IFRs as well as the project’s annual audited financial statements and auditor’s management letter and remedial actions recommended in the auditor’s Management Letters; and (b) perform on-site supervisions, review the project’s FM and disbursement arrangements to ensure compliance with the Bank’s minimum requirements. Supervisions will be performed by the Bank accredited FM Specialist. The strengthening offiduciary capacity in the PMT will be closely monitored. 6.8 Retroactive Financing: There will be no retroactive financing. 6.9 On-lending Agreements: There will be two on-lending agreements. Loan proceeds will be on-lent from the BH Ministry of Finance and Treasury to the Federation Ministry of Finance through the Subsidiary Loan Agreement; and from the Federation Ministry of Finance to the Sarajevo Canton through the Subsidiary Financing Agreement.

35 Annex 8: Procurement Arrangements BOSNIA AND HERZEGOVINA: Sarajevo Waste Water Project

A. General

1. Procurement for the Sarajevo Waste Water Project will be carried out in accordance with the World Bank’s ”Guidelines: Procurement under IBRD Loans and IDA Credits” published May 2004 and revised in October 2006 (Procurement Guidelines); and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” published May 2004 and revised in October 2006 (Consultant Guidelines) and the provisions stipulated in the Loan Agreement. The various procurement actions under different expenditure categories are described in general below. For each contract to be financed under the project, the various procurement or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame have been agreed between the Borrower and the Bank in the Procurement Plan (PP). The PP will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. A General Procurement Notice (GPN) was published in November 2009 in UNDB on-line and in its printed version as well as in dgMarket online. Specific Procurement Notices (SPN) will be published for all ICB procurement and Consulting contracts as per Guidelines as the corresponding bidding documents and RFPs become ready and available.

B. Assessment of the agency’s capacity to implement procurement

2. A Country Procurement Assessment Report (CPAR) was prepared in 2002 and updated in Sept 2006: “The Fiduciary Update on Public Financial Management Bosnia and Herzegovina”. It concluded that the environment for project implementation in Bosnia and Herzegovina is of moderate risk. The following recommendations were provided: (i)evaluation of Tenders needs to be based on monetarily quantifiable criteria, (ii)consultancy services of intellectual nature should be covered appropriately by the Public Procurement Law (PPL); (iii)the PPL has a limitation period of one year for bidder’s complaints which is too long and needs to be modified; (iv) an implementing regulation is required to clarify provisions of the PPL regarding contracts exempted from the law under Article 5(1) (c) for “contracts awarded pursuant to an agreement under which the particular procedure of an international lending or donor organization applies”; (v) tender documents should include General Conditions of Contract, Special Conditions of Contract and Contract Agreement Form; (vi) in case of a joint venture, there should be provisions for qualification criteria in the tender documents; (vii) there is a need to include in the PPL clauses on partnership with the private sector; and (viii) procurement competence among staff of the procuring entities needs to be improved. Despite all these recommendations, only minor changes were introduced in revised PPL ofFebruary 2009.

3. An assessment of the capacity of the PMT to carry out procurement under the project was conducted by the Bank staff during the period ofOctober 2009 and is included in the project file.

4. Procurement activities will be carried out by the PMT, which is established under the Ministry of Foreign Trade and Economic Relations of BH. The position of Procurement Officer in the PMT is staffed with a full time, senior employee with sufficient professional experience

36 relevant to procurement under the Bank procurement procedures; plus one junior staff with more limited professional experience but relevant to Bank procurement procedures.

C. Procurement risk assessment

5. The overall procurement risk is rated moderate after mitigation. The risks associated with procurement and the mitigation measures were identified in the assessment of the PMT' s procurement capacity and are summarized in the table below:

Table 1: Summary Risk Assessment

Description of risk Ratinga of Mitigation measures Ratinga of risk residual risk

VIK and the Sarajevo Canton Moderate VIK will dedicate adequate Moderate are going to implement staff resources to assume the additional projects with additional responsibilities financing from other donors, related to the implementation and local finds using local ofthe Bank financed project, procurement procedures, thus as well as other programs. creating a significant work load for the utility. This could affect the timely preparation of technical specifications, BoQ, etc., for the project funded by the Bank

PMT may lack experience to Moderate PMT will continue to be Moderate handle procurement under WB staffed with experienced projects, in particular with personnel, who will receive regard to bigger scale on-going procurement training infkastructure activities. during project implementation.

Bank's supervision ofthe project will be enhanced during the early stage ofthe implementation period, and will closely monitor the procurement management process. Overall rating Moderate Moderate

37 D. Procurement implementation and arrangements

6. The project will be implemented through a Project Management Team (PMT) established in the BH Ministry of Foreign Trade and Economic Relations (MoFTER). The PMT is experienced with the implementation of Bank financed projects. The PMT will have full responsibility for all aspects of project implementation; including procurement, financial management, safeguards compliance, supervision, reporting, monitoring and evaluation. A Project Implementing Team (PIT) will be located in the Sarajevo Water and Waste Water Company (VIK) and consist of an Engineer to assist the PMT Procurement Officer to prepareheview technical specifications and certify completion of works; and a Financial Officer reporting to the Sarajevo Canton and the PMT responsible for overseeing the project activities to improve VIK’s financial performance. Even though the PMT will have overall responsibility for implementation of the project, including all procurement and financial management, the PIT will handle day-to-day project matters and technical supervision. The PIT will prepare all procurement documents as draft, and then submit them to the PMT for clearance. Once cleared by the PMT, the procurement documents will be submitted to the Bank for final no-objection. Contracts will be signed by a representative designated by the Sarajevo Canton, as the final borrower of the funds.

7. Procurement of Works: This will include rehabilitation and replacement of primary and secondary waste water collectors and other network rehabilitation. To the extent possible, contracts for these works will be grouped into bidding packages estimated to cost more than: US$500,000.00 equivalent and procured following International Competitive Bidding (ICB) procedures, using relevant Bank-issued Standard Bidding Documents for procurement of works. Contracts for works which cannot be grouped into larger bidding packages and estimated to cost less than US$500,000.00 equivalent per contract may be procured using NCB procedures and bidding documents for procurement of works satisfactory to the Bank.

8. Procurement of Goods: This will include: procurement of special vehicles. Procurement will be carried out using the Bank’s SBD for all ICB. To the extent possible, contracts for these goods will be grouped into bidding packages estimated to cost more than US$100,000.00 equivalent and procured following International Competitive Bidding (ICB) procedures, using relevant Bank-issued Standard Bidding Documents for procurement of goods. Contracts for goods estimated to cost less than US$lOO,OOO equivalent per contract may be procured using Shopping procedures based on a model request for quotations satisfactory to the Bank.

9. Procurement using, Supply and Installation method: This will include rehabilitation of waste water treatment plant. Pre qualification will be conducted for this component.

10. Procurement of Consultina Serves: Consulting services contracts procured under the project will include but not be limited to: (i)assistance to VIK for capacity building and institutional strengthening, (ii)preparation of feasibility studies, designs, and construction supervision.

11. Selection of Consultants: Short lists of consultants for services estimated to cost less than US$lOO,OOO equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

38 12. Training: This will include training of staff on financial management and procurement, consultancy services to support project management and supervision based on an annual budget approved by the Bank and procured using the PMT’s administrative procedures which were reviewed and found acceptable to the Bank.

13. Operating Costs: This may include reasonable and necessary incremental expenditures related to the operation of the PMT and PIT for project implementation, management, coordination, and monitoring and evaluation, as approved by the Bank and the Sarajevo Canton and including, inter alia, the costs of: (i)maintenance and operation of equipment and vehicles used for the management of the Project; (ii)capacity building, training and salaries for PMT and PIT staff hired for the purposes of the Project, other than civil servants’ salaries and salaries of VIK staff; (iii)travel costs and per diems; (iv) consumable office supplies; (v) communication, printing and publications; and (vi) costs of translation and interpretation.

14. Technical issues as part of procurement decisions: Preparation of the technical specifications/TORs in the bidding documents / RFPs will be carried out by VIK. VIK will also specify the composition of the committee to conduct the technical evaluation of bids.

15. Filing and records keeping: The procurement staff of the PMT will have responsibility for maintaining procurement records in hard copies. All documents on procurement will be maintained with a logging system in the PMT until the completion and closure of the project. The PMT will maintain a computerized procurement database. Agreed reporting formats are included in the Project Operation Manual (POM)

E. Procurement Plan

16. A Procurement Plan (PP) for first 18 months of the project implementation was agreed between the Borrower and the Bank at negotiations, and will be available in the PMT’s project database and on the Bank’s external website. The PP will be updated in agreement with the Bank project team annually or as required to reflect the actual project implementation needs and improvements in the PMT’s institutional capacity.

F. Frequency of Procurement Supervision 17. In addition to the prior review supervision to be carried out by the Bank team, the capacity assessment of the PMT recommends post reviews to be carried on at least for 10 percent of the contracts subject to prior review. It is expected that a supervision mission in the field will be conducted every six months during which post reviews will be conducted. As a minimum one post review report which will include physical inspection of sample contracts including those subject to post review will be prepared each year. No less than 10% of the contracts will be physically inspected.

39 G. Additional Provisions for National Competitive Bidding

18. In order 'to ensure economy, efficiency, transparency and broad consistency with the provisions of Section Iof the Guidelines, the following criteria shall be followed in procurement under National Competitive Bidding procedures: subject to the following additional provisions: Registration: i. Bidding shall not be restricted to pre-registered firms; ii. Where registration is required, bidders (a) shall be allowed a reasonable time to complete the registration process, and (b) shall not be denied registration for reasons unrelated to their capability and resources to successfully perform the contract, which shall be verified through post-qualification; and iii. Foreign bidders shall not be precluded from bidding. If a registration process is required, a foreign bidder declared the lowest evaluated bidder shall be given a reasonable opportunity to register.

Advertising: Invitations to bid shall be advertised in at least one widely circulated national daily newspaper allowing a minimum of 30 days for the preparation and submission of bids.

Pre-qualification : When pre-qualification shall be required for large or complex works, invitations to pre- qualify for bidding shall be advertised in at least one widely circulated national daily newspaper a minimum of 30 days prior to the deadline for the submission of pre- qualification applications. Minimum experience, and technical and financial requirements, shall be explicitly stated in the pre-qualification documents.

Participation by Government-owned enterprises: Government-owned enterprises in Bosnia and Herzegovina, including those in the Federation and Republika Srpska, shall be eligible to participate in bidding only if they can establish that they are legally and financially autonomous, operate under commercial law and are not a dependent agency of the contracting authority. Furthermore, they will be subject to the same bid and performance security requirements as other bidders.

Bidding Documents: Procuring entities shall use the appropriate standard bidding documents for the procurement of goods, works or services, acceptable to the Bank.

Bid Opening and Bid Evaluation: i. Bids shall be opened in public, immediately after the deadline for submission of bids; ii. Evaluation of bids shall be made in strict adherence to the monetarily quantifiable criteria declared in the bidding documents; and iii. Contracts shall be awarded to the qualified bidder having submitted the lowest- evaluated, substantially responsive bid and no negotiation shall take place.

40 (7) Price Adjustment: Civil works contracts of long duration (more than 18 months) shall contain an appropriate price adjustment clause.

(8) Rejection ofBids: i. All bids shall not be rejected and new bids solicited without the Bank’s prior concurrence. ii. When the number of bids received is less than three, re-bidding shall not be carried out without the Bank’s prior concurrence.

(9) Securities: i. bid security and performance security should follow the generally accepted practice used in the local market; ii. alternative methods such as bid securing declaration may be acceptable, in which case the Borrower may require bidders to sign a declaration accepting that if they withdraw or modify their bids during the period of validity or they are awarded the contract and they fail to sign the contract or to submit a performance security before the deadline defined in the bidding documents, the bidder will be suspended for bidding in any contract with the implementing unit; and iii. no advance payment shall be made to contractors without a suitable advance payment security. These securities shall be included in the bidding documents in a text and format acceptable to the Bank.

Right to inspect and audit: Each contract financed out of the proceeds of the Loan shall provide that the suppliers, contractors and subcontractors shall permit the Bank, at its request, to inspect their accounts and records relating to the procurement and performance of the contract and to have said accounts and records audited by auditors appointed by the Bank. The deliberate and material violation by the supplier, contractor or subcontractor of such provision may amount to obstructive practice.

Fraud & Corruption: The Bank shall declare a firm or individual ineligible, either indefinitely or for a stated period, to be awarded a contract financed by the Bank, if it at any time determines that the firm or individual has, directly or through an agent, engaged in corrupt, fiaudulent, collusive, coercive or obstructive practices in competing for, or in executing, a contract financed by the World Bank Group.

41 Initial Procurement Plan Dated October 27,2009

a) Works and Goods

B Description of 4 Package Assignment/ No. c) Location z.I a- c(

A /SIC D E F G H IIKIL/ 1. WORKS Reconstruction of the July 1. Sarajevo Waste Water blankle' one I prior May 2010 2010 2010 Treatment Plant. vi Reconstruction ofthe Oct Nov 2. Sarajevo Waste Water left one prior blank 2010 2010 2010 2011 2012 Treatment Plant. I I Oct Construction of gravity primary sedimentation on Nov Dec 3. main collector ofthe left one -r prior blank 2010 2010 Sarajevo canalization

network ICB~ No Reconstruction of Sarajevo left Feb March April ICB No prior 4' lcanalization network blank One 1 201 1 201 1

March June Aug Dec 1. Special vehicles left one ICB No prior July 1 blank I I I I I 2010 2010 2010 2010 2010

...... LePend:! .../ ...... ~ ...... "...... i /International Competitive Bidding (in accordance with section 2 ofthe Guidelines) ICB =! ' For works contracts valued at or more than USD 500,000

...... I...... 
j For goods contracts valued at or more than USD 200 ,? 000...... S&I=' ...... #upply ...... ”
and Installation of Plant and Equipment (in accordance with section 2 ofthe Guidelines) : !National Competitive Bidding (in accordance with section 3.3 of the Guidelines) NCB =I j For works contracts valued less than USD 500,000 For goods contracts valued less than USD 200,000. However, it is not expected under the project ...... &: ...... ¡
IDirect Contracting (in accordance with section 3.6 ofthe Guidelines) ...... DC=j ~~ ...... : Shopping (in accordance with section 3.5 ofthe Guidelines)

SH=I ' : For goods contracts valued at or less than USD 100,000 hopping...... j
amount for the project: US%1,000,000to be monitored during the project period

-...... :...... y
...... I For Works contracts: All ICB contracts. First two contracts under NCB regardless of value of contract. For S&I contracts: All contracts For Goods contracts: All ICB contracts. First two contracts under NCB regardless of value of contract. First two shopping contracts...... :...... ù
Prej : For the rehabilitation of the WWTP (in accordance with section 2.9 of the Guidelines)

42 lQualification8- - Domestic; will not apply Preference=

b) Consultants' Services

Description of Package Assignment1 No. Location

AI B EIF ...... G ...... H I J 3. CONSULTANTS' SERVICES - Design and supervision of works on renovation of the Sarajevo March April April leftblank QCBS Prior Jan 20 10 May Waste Water Treatment Plant 2010 2010 2010 2013 - Design and supervision of works construction of gravity primary March vIarch Dec 2 sedimentation on main collector left blank CQ Prior Jan 20 10 Feb2010 2010 2010 2010 of the Sarajevo canalization network - Design and supervision of works Dec 3 on reconstruction of Sarajevo left blank QCBS Prior May June 2010 2010 Aug 2010 2010 2012 canalization network I 4 [Audit * /leftblank I LCS Prior

...... Legend: ! ...... :...... "...... "...... " ......

~ Quality and Cost-based Selection (in accordance with sections 2.1 2.28 of the Consultant's Guidelines) QCBS =i - ...... ;For contract of cost estimate of US$ 100,000 equivalent or more. ~ ...... =
QBS=!Quality Based Selection (in accordance with section 3.2 of the Consultant's Guidelines) CQ,/Consultants Qualifications (in accordance with section 3.7-8 of the Consultant's Guidelines) ...... !For contracts of cost estimate ...... X
less than US$ 100,000 equivalent. LCS =: Least-Cost Selection (in accordance with section 3.6 of the Consultant's Guidelines) ...... :,...... «
SSS=jSingle source Selection (in accordance with section 3.9- 13 of the Consultant's Guidelines) ...... ì
IC =/ Individual Consultant (in accordance with section V of the Consultant's Guidelines)

'rior...... Review, 'For fms: All contracts equal to USD 100,000 or more. First two contracts regardless of value and all SSS Icontracts. lFor individual consultants: All contracts equal to USD 50,000 equivalent or more. First two contracts :regardless of value and all SSS contracts. I(*) Audit fiihas been already selected by Ministry of Finance and Treasure to audit all projects in the iote : Icountry. The MOF follows the Bank consultants' guidelines for the selection of the auditor. -This will be lsubject to prior review by the Bank.

43 Annex 9: Economic and Financial Analysis BOSNIA AND HERZEGOVINA: Sarajevo Waste Water Project

A. Introduction

1. The project will finance rehabilitation of the Sarajevo Water and Waste water Treatment Plant (WWTP) and the repair andor replacement of about 12.5 km of primary and secondary sewage collectors and lines in Sarajevo.

Table 1: Key general assumptions underlying economic and financial analysis of the Component A

B. Economic analysis

2. Investments in the Sarajevo WWTP will be targeted at improving the treatment of sewage. The main assumptions used in economic and financial analysis of the Sarajevo WWTP investments are presented below:

Feasibility Study on the Waste Water Treatment Plant of Sarajevo City in Bosnia and Herzegovina, 1999. * Feasibility Study on the Waste water Treatment Plant of Sarajevo City in,Bosnia and Herzegovina and financial books of Sarajevo WWTU. 3 Bank team estimate. IMF and Economist Intelligence Unit. World Bank country statistics.

44 Incremental O&M cost (% of investments) 10% ' Population served as of 2008 400,000 ' Average annual rate of population growth in service area 1.02% ' Estimated willingness to pay for improved waste water treatment (WWT) service of household consumers 4.9 BAWmonth ' Estimated willingness to pay for improved waste water treatment (WWT) of non-household consumers 2.04 BAW m3 Share of non-household consumers 30%' Estimated WWT tariff for households 0.30 BAW m3 I Estimated WWT tariff for non-households I 0.78 BAW m3 I Tariff collection efficiency of household consumers 50% ' Estimated annual increase of household consumer tariff collection rate 1.75% Tariff collection efficiency of non-household consumers 80%' Estimated annual increase of non-household consumer tariff collection rate 0.5%

3. The main economic benefit ofthe project is a reduction ofthe negative environmental impact due to direct discharging of untreated waste water from the water and waste water plant to the Bosna River close to the confluence with the Miljacka River. The environmental benefits were quantified using the results of willingness-to-pay survey conducted by the JICA consultants in 1999 and the results of the EBRD financial assessment for Sarajevo canton water and waste water project. The willingness-to-pay survey estimated the value household and non-household sewage generators place on improved environment due to waste water treatment at the Sarajevo WWTP. However, since the results of the 1999 willingness-to-pay survey may not fully capture the value of environmental benefits of improved waste water treatment due to several economic and social factors, including significant increase in per capita GDP during the last 10 years, increase in water tariffs and other factors. Thus, for the purpose of the economic analysis, the willingness-to-pay was re-estimated assuming real growth ofper capita GDP from 1998 to 2008. The possible impact of the variation of willingness-to-pay as well as other key variables is presented in the sensitivity analysis below.

4. The main economic costs ofthe project are the investment costs and incremental O&M costs associated with the investments. The economic analysis of the. project yielded economic NPV equal to USD 54.9 million and EIRR of32%.

5. Sensitivity Analysis. The sensitivity analysis determines the impact of uncertainty or variation in the key parameters of interest on the economic appraisal of the project. The key parameters, which may significantly affect the project economic viability, are the willingness to

Feasibility Study on the Waste water Treatment Plant of Sarajevo City in Bosnia and Herzegovina and financial books of Sarajevo WWTU. 1999 Bank team estimates based on similar projects. Bank team estimates based on Economist Intelligence Unit and Ih4F inflation forecasts for the country.

45 pay for waste water treatment by household and non-household consumers. The impact of defined variation in these parameters is presented in the following table.

Table 3: Sensitivity analysis for Sarajevo WWTP economic appraisal

-20% I Basecase +20%- . .. . - .- - .- .- - - Estimated willingness-to-pay 3.9 1.9 r5.9 by households (BAMlmontWhousehold) NPV (million USD) 51.1 54.9 58.7 EIRR (%) 3 1% 32% 33% Estimated willingness-to-pay 1.7 2.04 I SO by non-households (BAMlm3)

NPV (million USD) 44.5 54.9 67.3 EIRR (%) 29% 32% 35%

C. Financial analysis

6. The primary problems facing VIK include: (i)tariffs that are well below the operating and maintenance costs with no adequate provisions for assets renewal; (ii)inadequate collection of service charges for water and waste water that is resulting in increasing accounts payables and receivables; (iii)very high levels of network losses (estimated at about 70%) ; (iv) poor operational efficiency, with high levels of staff costs compared to other water utilities of a similar size; and (v) inadequate short and medium term operating and capital planning. Although tariff increases have been long recognized, these have not been increased in over a decade. VIK charges a water tariff, which includes a percentage for waste water collection. To meet operating expenses, the Sarajevo Canton provides an annual subsidy, which has been increasing over years. However, this subsidy cannot be sustained, as the Canton Government must now reduce subsidies and limit them to the most vulnerable consumers in the city. VIK therefore has incurred operating losses over the past few years. Tariff reform and efforts to improve revenue generation and collection will therefore be critical to the future sustainability of VIK. Although current legislation allows tariffs to be determined taking into account actual costs and expenditure related to the production and sale of water and waste water services, the tariff approval process is subject to political considerations. The Canton Government is responsible for approval oftariffs.

7. The financial crisis facing VIK, the current conditions of the water and waste water infrastructure (especially the WWTP, which has not been operational since the 1990~)~makes it difficult, if not impossible to expect a significant revenue increase, leading to an immediate full recovery ofVIK and full collection ofits revenues. VIK is also preparing a water supply project to be supported by EBRD, some of whose objectives would be to help VIK to improve its financial and operational performance. The project’s overall objectives will be to assist the Canton authorities and management of VIK to implement an investment plan in an amount of EUR30 million, which will focus on reduction of losses through the replacement of water and sewerage networks, the rehabilitation of pumps, storage facilities and the improvement of the financial and operational sustainability of VIK. As part ofthis program, VIK has prepared a long

46 term investment plan (2009-20 1S), which includes a gradual financial improvement plan, with the help of EBRD consultants, whose main objective is to achieve a basic level of financial sustainability where VIK can collect sufficient revenues from water and waste water activities to cover its operations, basic maintenance of both services and some debt service. The main elements of this recovery plan include: (a) improvements of the tariff setting procedures; increases in tariffs to reach partial cost recovery of O&M in the medium term and full cost recovery in the long term; (c) reduce accounts receivables and improve revenue collections to reach close to 100% by the end of the investment plan period; (d) implement a metering program, including the introduction of a mandatory single meter for each apartment and residential building; (d) reduce water losses by implementing a program of water and waste water network replacement; and (e) energy cost reductions through the replacement of pumps with high energy efficiency models. In addition, VIK will also establish improved and better financial management, accounting and commercial systems and procedures that will provide timely information on costs, revenues and customers to allow VIK to make better policy recommendations regarding tariffs and other commercial decisions.

8. It is important to note that the current financial situation of VIK is so poor that it immediate improvements leading to full cost recovery in the short term maybe unrealistic. Therefore the project aims to complement the EBRD funded financial improvement program with technical assistance support to further enhance VIK’s performance. Bank funded TA will therefore support: (a) further studies and support to VIK financial improvement; and (b) additional support for the institutional and financial sustainability ofthe waste water systems.

9. The main financial benefit of the project is the incremental net cash flow of the WWPT resulting from the higher water treatment tariffs for household and non-household consumers and improved water bill collection rates. The estimates ofthe waste water treatment tariffs are taken from the 2009 EBRD Feasibility Study. VIK will reintroduce the waste water tariff once the WTTP is operational again. The estimate of the incremental cash flows resulting from introduction of waste water treatment tariffs is based on the assumed waste water treatment tariff collection rates. The estimates of the household and non-household waste water treatment tariff collection rates are based on the conservative collection rate growth assumptions drawn from the similar Bank projects and the 1999 JICA Feasibility study.

10. The main financial costs of the project are the incremental investment and the O&M costs. The financial analysis of the project yielded financial NPV equal to USD 58.9 million and FIRR of24%.

11. Sensitivity analysis. The sensitivity analysis determines the impact of uncertainty or variation in the key parameters of interest on the financial appraisal of the sub-project. The key parameter, which may significantly affect the project financial viability, is the expected waste water treatment tariff for household and non-household customers. The impact of defined variation in this parameter is presented in the fol.lowing table.

47 Table 4: Sensitivity analysis for Sarajevo WWTP financial appraisal

Estimated WWT tariff for ' 0.24 0.30 1 0.36 households NPV (million USD) 54.3 58.9 63.5 FIRR (%) 22% 24% 2 6% Estimated WWT tariff for non- 0.624 0.78 0.94 households ' KPV (million USD) 51.7 58.9 66.1 FIRR Wo) 20% 23% 129%

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2 mz- -m - C Annex 10: Safeguard Policy Issues BOSNIA AND HERZEGOVINA: Sarajevo Waste Water Project

Environmental Aspects

1. The proposed project will support the Government of Bosnia and Herzegovina in its efforts to improve sanitation services in the city of Sarajevo through specific infrastructure investments including repair and replacement of existing sewage collectors and the partial rehabilitation of the existing Sarajevo waste water treatment plant. The project will have a positive impact on the environment and the quality of life of the inhabitants of both the city of Sarajevo and the downstream riverside communities of the Bosna River thanks to the improved collection and treatment of sewage (which currently is discharged without treatment). The current surface water quality of Miljacka and Bosna Rivers is degraded by the untreated sewage releases, which may pose serious health threats to the population either through direct use of the surface waters or through subsequent water supply or irrigation systems that are heavily reliant on surface and ground water.

2. The project has been classified as environmental category “B” in accordance with the Bank policies because it will finance rehabilitation of existing sewerage infrastructure. In order to deal with the potential adverse impacts related to the rehabilitation investments proposed under Component A, the Sarajevo Water and Waste Water Company (VIK) has prepared a draft Environmental Assessment (EA) report to analyze the potential adverse environmental issues related to the proposed rehabilitation investments and to ensure that these aspects are mitigated during the project design. The draft EA report including the Environmental Management Plan (EMP) was discussed at public meetings held on October 13 and October 26, 2009 in Sarajevo. The draft document including the EMP was posted on the VIK website in the local language and was also available at the VIK office buildings in Sarajevo on October 19, 2009. The final EA/EMP document including comments from the public meetings was submitted to the World Bank’s Infoshop for disclosure on October 26,2009.

EnvironmentalImpact Assessment Findings

3. The EA report presents the environmental baseline conditions at the project site, analyzes possible environmental impacts on air quality, soil and water resources, physical cultural properties, and population related to the project investments, proposed project alternatives and the environmental management plan. The key environmental issues identified by the EA include pollution of the downstream rivers due to lack of waste water treatment which the Sarajevo Waste Water Project aims to mitigate.

4. The Sarajevo WWTP is located at the confluence of the Miljacka and Bosna Rivers. The Bosna River originates in BH and flows into the Sava, a tributary of the Danube, which forms the border ofBH with Serbia. The Sarajevo WWTP was built in the early 1980’s on the occasion ofthe 1984 Winter Olympics, but was severely damaged during the 1992-95 conflict and has not been operating since then.

5. Prevention of long-term main environmental issues analyzed by the EA in relation with the project investments is linked to meeting effluent discharge waste water standards (for COD,

51 BODS,total P and N, ammonium nitrogen, etc.), air and odor emissions (ammonia and hydrogen sulfide), noise management and workers health and safety. Minor environmental impacts including noise generation, construction waste and dust pollution, and temporary effect on local vegetation are typical rehabilitation works related effects that could properly be mitigated and monitored if appropriate construction standards and operational practices are followed. The key potential environmental impact linked to the generation of waste water sludge has been addressed in the EMP, taking into account alternative approaches to the management and final disposal of such sludge. The EMP includes a set of specific environmental mitigation measures and monitoring requirements to be followed by the contractors, PMT, PIT, affected municipalities and local relevant institutions during implementation and operation.

6. Responsibilities for daily monitoring during works will be part of construction supervision. Implementation of mitigation measures related to possible temporary environmental effects during excavations is the Contractor responsibility as stipulated in the technical specifications of their contracts. Under supervision by the PMT, the overall EMP implementation will be managed by the PIT and consultants that will be responsible for preparation of the project environmental monitoring reports. The monitoring reports should include water and soil quality information sampled within the project area. VIK has an on-site laboratory equipped to conduct routine daily monitoring of main environmental parameters as indicated in the project Monitoring Plan.

7. Physical Cultural Resources (OP 4.11) There is no indication that cultural resources will be affected by proposed repair and replacement of sewage collectors and the rehabilitation of the Sarajevo WWTP since works will be done to replace existing pipes and equipment on existing premises and in the same rights of way. However, the EMP includes measures to be taken in the case of “chance finds” during excavations, which are consistent with the local regulations and inserted in the contractor’s bidding documents. If “chance finds” are encountered, specific notification will be required, works will stop and local experts on archeology and architecture will be brought in for special assessment before further rehabilitation work could continue.

8. Projects on InternationalWaterways (OP/BP 7.50) The works to be funded under SWWP consist exclusively in the rehabilitation of existing facilities and will not (i)adversely change the quality or quantity ofwater flows to the other riparian countries; and (ii)be adversely affected by the other riparians’ possible water use. There will be no additional use of water under the Project. Accordingly, because ofthe rehabilitation nature ofthe activities under the proposed Project, the Task Team view is that the project falls under the exception to the notification requirement under OP 7.50 in accordance with paragraph 7(a). A memorandum to ECAVP was prepared for by the Project Team, and cleared by LEGEN and LEGEM; before receiving final clearance from the ECARVP on September 29,2009.

9. Involuntary Resettlement (OP/BP 4.12) The Project will not trigger OP 4.12 as it will deal exclusively with the rehabilitation and repair of existing infrastructure and installations on existing premises and within public rights of way which will not entail any land acquisition, relocation of population, or temporary and/or permanent restrictions on access to economic resources.

52 10. Public Consultation and disclosure: An updated Environmental Assessment (EA) and Environmental Management (EMP) have been prepared for the proposed Bank financed project in September 2009. The draft EA document including the EMP was posted on the VIK website in local language on October 19, 2009; and was also available at the VIK office buildings in Sarajevo. The drafts ENEMP were subject to two public consultation meetings (on October 13 and 26,2009) in Sarajevo, following disclosure of the document in the local language in country. The final EA/EMP, incorporating all relevant comments from the public consultation meetings, has been submitted to the World Bank’s Infoshop for disclosure on October 26,2009.

53 Annex 11: Project Preparation and Supervision BOSNIA AND HERZEGOVINA: Sarajevo Waste Water Project

Planned Actual PCN review 09/17/08 09/17/08 Initial PID to PIC 11/21/2008 12/0 1/2008 Initial ISDS to PIC 11/21/2008 12/0 1/2008 Appraisal 10/27/2009 10/27/2009 Negotiations 11/04/2009 11/05/2009 BoardRVP approval 12/2 1/2009 Planned date of effectiveness 06/15/20 10 Planned date of mid-term review 09/15/20 13 Planned closing date 11/30/2015

Key institutions responsible for preparation of the project: Bosnia and Herzegovina Ministry of Foreign Trade and Economic Relations

Bank staff and consultants who worked on the project included:

Name Title Unit Aniruddha Dasgupta Advisor MDW Jonathan S. Kamkwalala Country Sector Coordinator (TTL) ECSSD Yan F Zhang Urban Economist (previous TTL) ECSSD Vesna Francic Sr. Operations Officer ECCBA Bjorn Philipp Urban Specialist ECSSD Natasa Vetma Operations Officer (Environment Specialist) ECSSD Paula Lytle Senior Social Development Specialist ECSSD Esma Kreso Environmental Specialist ECSSD Ruxandra Floroiu Environmental Engineer ECSSD Nikola Kerleta Procurement Analyst ECSPS Lamija Hadzagic Financial Management Specialist ECSPS Dominique Bichara Senior Counsel LEGEM Felix Jakob Engineer (Consultant) ECSSD Delphine A. Hamilton Senior Program Assistant ECSSD Senad Sacic Team Assistant ECCBA

Bank funds expended to date on project preparation: 1. Bank resources: US$339,236.60 2. Trust funds: US$O.OO 3. Total: US$339,236.60

Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$25,000 2. Estimated annual supervision cost: US$90,000

54 Annex 12: Documents in the Project File BOSNIA AND HERZEGOVINA: Sarajevo Waste Water Project

1. Project Documents

Project Concept Note

Project Information Document

Integrated Safeguards Data Sheet

Minutes of PCN Review Meeting

Quality Enhancement Review package

Results of Quality Enhancement Review Meeting

Minutes of Bosnia Municipal Development Project Meeting - August 20,2009

2. Other Documents

a Municipal Development Project: Report on the Preliminary Assessment of the Proposed Municipal Development Project

a JICA EIA Butila WWTP - Chapter 8: Environmental Impact Assessment

55 Annex 13: Statement of Loans and Credits BOSNIA AND HERZEGOVINA: Sarajevo Waste Water Project

Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d P107998 2009 Solid Waste Mgmt 2 25.00 15.00 0.00 0.00 0.00 39.88 0.15 0.00 P100792 2008 ROAD INFRASTRUCTURE AND 0.00 25.00 0.00 0.00 0.00 24.52 4.15 0.00 SAFETY PROJECT P101213 2007 AGR./RURAL DEVELOPMENT 0.00 21.00 0.00 0.00 0.00 18.13 6.60 0.00 P100415 2007 AVIAN FLU - BA 0.00 5.00 0.00 0.00 0.00 4.37 3.09 2.44 PO90666 2006 ECSEE APL3-BH 0.00 36.00 0.00 0.00 0.00 37.86 23.34 0.00 PO96200 2006 LAND REGISTRATION 0.00 15.00 0.00 0.00 0.00 10.67 0.09 0.00 PO88663 2005 HLT SEC ENHANC 0.00 17.00 0.00 0.00 0.00 3.59 3.25 3.25 PO83353 2005 URB INFRA & SERV DEL 0.00 25.00 0.00 0.00 0.00 14.60 6.02 0.00 PO79161 2003 FOREST DEVTKNSRV TA 0.00 7.09 0.00 0.00 0.00 1.80 -2.25 -1.03 PO55434 2003 SM SC COM AGRIC 0.00 12.00 0.00 0.00 0.00 0.34 -1.09 0.00 PO57950 2002 SOLID WASTE MGMT 0.00 26.00 0.00 0.00 0.00 7.79 -4.44 1.86 Total: 25.00 204.09 0.00 0.00 0.00 163.55 38.91 6.52

BOSNIA AND HERZEGOVINA STATEMENT OF IFC’s Held and Disbursed Portfolio In Millions of US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1999 Bosnalijek 0.00 1.84 0.00 0.00 0.00 1.84 0.00 0.00 2001 Bosnalijek 0.00 0.00 0.54 0.00 0.00 0.00 0.54 0.00 2005 Bosnalijek 9.22 0.00 0.00 0.00 7.94 0.00 0.00 0.00 1985 Energoinvest 9:93 0.00 0.00 0.00 9.93 0.00 0.00 0.00 1997 Enterprise Fund 0.00 1.48 0.00 0.00 0.00 0.95 0.00 0.00 2002 FCL 11.05 0.00 0.00 2.03 11.05 0.00 0.00 2.03 2004 HVB CPB 11.24 10.97 0.00 0.00 11.24 8.95 0.00 0.00 2005 HVB CPB 0.00 3.82 0.00 0.00 0.00 3.82 0.00 0.00 2006 MI-BOSPO 2.55 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2006 Nova Banka 12.75 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2002 Procredit Bosnia 2.87 0.00 ’ 0.00 0.00 2.87 0.00 0.00 0.00 Raiffeisen-BOS 19.12 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 Raiffeisen-BOS 14.41 0.00 0.00 0.00 14.41 0.00 0.00 0.00 2005 Raiffeisen-BOS 14.02 0.00 0.00 0.00 14.02 0.00 0.00 0.00 1998 SEF Akova 0.20 0.00 0.00 0.00 0.20 0.00 0.00 0.00 1999 SEF Lijanovici 0.90 0.00 0.00 0.00 0.90 0.00 0.00 0.00 1977 TKA Cazin 4.34 0.00 0.00 0.00 4.34 0.00 0.00 0.00 Wood Konjuh 1.75 0.00 0.00 0.00 1.43 0.00 0.00 0.00 Total portfolio: 114.35 18.11 0.54 2.03 78.33 15.56 0.54 2.03

56 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. 2002 Lukavac 0.01 0.00 0.00 0.00 2006 MI-BOSPO 0.00 0.00 0.00 0.00 2006 EKI Bosnia 0.00 0.00 0.00 0.00 2006 Nova Banka 0.00 0.01 0.00 0.00 Total pending commitment: 0.01 0.01 0.00 0.00

57 Annex 14: Country at a Glance BOSNIA AND HERZEGOVINA: Sarajevo Waste Water Project Bosnia Europe & Lower- POVERTY and SOCIAL and Central mlddle. 2evelopment dlamond' Herzegovina Asia income 2007 Population, mid-year (miiiionsj 3.8 445 3,437 Life expectancy GNIpercapita (Atlas method, US$) 3,790 6,052 1887 GNI (Atlas method, US$ billions) 14.3 2,694 6,485 T Average annual growth, 2001-07 Population (s/d 0.3 0.0 11 Gross Laborforce (4 0.7 0.5 15 primly Most recent estimate (latest year available, 2001-07) capita enrollment Po vert y (%of popuiation below natlo nai po verty iine) 20 Urban population (%oftotalpopulation) 47 64 42 Life expectancy at birth (pars) 75 69 69 1 Infant mortality (per lOOOlive births) 13 23 41 Child malnutrition (%ofchildrenunder5j 2 25 Access to improvedwatersource Access to an improved water source (%o fpopuiationj 99 95 88 Literacy (%ofpopulation age 59 97 89 Gross primary enro ilment (Xo f Schooi-age population) 97 111 -8 osnia and HeRegO Vina Male 98 172 ~ Lo wr-middieincome grn up Female s6 D9

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1987 1997 2006 2007 Economic ratios. GDP (US$ biilions) .. 3.7 P.3 %1 Gross capital formation/GDP .. 42.0 6.2 78 Trade Eports of goods and services/GDP .. 27.8 36.6 36 4 Gross domestic savings/GDP .. -3.0 -13.7 -15 4 Gross national savings/GDP .. 119 5.1 16 Current account balanceiGDP .. -30.1 -D.7 -15 8 Domestic Capitai Interest payments/GDP 11 savings formation Total debt/GDP 46.2 Total debt service/exports 8.9 Present value of debt/GDP 40.1 Present value of debtlexports 74.6 indebtedness 1987-97 1997-07 2006 2007 2007.11 (average annuaigrordh) GDP .. 6.0 6.9 6.8 -Bosnia andHerzegovina GDP percapita 5.2 7.0 7.0 .. ~ ~ouer-middie-incomeQ~UD Exports of goods andsewices 7.6 0.7 P.6 D.2

STRUCTURE of the ECONOMY

1987 1997 2006 2007 Growth of capltal and GDP (Oh) (%of GDPj Agriculture .. 213 D.4 9.7 'O T industry .. 30.7 24.7 23.5 Manufactunng .. 13.7 11.9 113 Services .. 47.9 64.9 66.8 Household final consumption expenditure 89.8 92.3 l.,ol02 03 04 05 06 07 General gov't final consumption expenditure 23.9 23.1 Imports of goods and services .. 72.8 66.4 69.7 i -GCF -GDP

1987-97 1997-07 2006 2007 Growth of exports and imports (K) (average annualgrowth) Agriculture .. -10 1.9 5.0 60 T Industry .. 3.6 5.3 6.0 Manufacturing .. 4.2 8.4 6.0 Services .. 9.4 6.5 9.1 Household final consumption expenditure .. 5.8 -0.4 7.3 General gov't final consumption expenditure .. 9.9 -11 6.5 Gross capital formation 0.3 7.4 9.3 .. -Exports -Imports Imports of goods and services .. 5.1 -D.6 7.0

Note 2007 data are preliminaryestimates This tablewas producedfrom the Development Economics LDB database 'Thediamonds showfour keyindicators in thecountry(1n bo1d)comparedwth its incomegoupaverage If dataare missing thediamondwll be incomplete

58 Bosnia and Herzeaovina

PRICES andGOVERNMENT FINANCE 1987 1997 2006 2007 lnflatlon (%) Domestic prices (%change) i Consumer prices 06 19 2.0 Implicit GDP deflator 00 5.7 5.9 Government finance (%of GDP, includes current grants) Current revenue 27 1 36.1 34.4 02 03 04 05 06 Current budget balance 12 2.9 3.6 ~ -GDPdeflator -CPI Overall surplus/deficit -63 0.2 06 OI

TRADE 1987 1997 2006 2007 IExport and Import levels (US$ mlll.) (US$ millions) Total exports (fob) 595 2,437 2,834 /e 000 T n.a. n.a. Manufactures 1,918 2,256 Total imports (cif) 2 568 5,524 5,892 2.000 Food Fuel and energy lu Capital goods 1,399 1545 01 02 03 04 05 06 Export price index(2000=?J0) Import pnceindex(2000=WO) IExpons 6 Imports O7 Terms of trade (2000=WO) 1 I

BALANCE of PAYMENTS 1987 1997 2006 2007 Current account balance to GDP (Oh) (US$ millions) ~vortsof goods and services 1022 4,485 5,518 Imports of goods and services 2 673 8,149 13,553 Resource balance -1651 -3,663 -5,035 Net income -228 462 530 Net current transfers 772 1,892 2,113 Current account balance -1137 -1,309 -2,395 -20 Financing items (net) 1198 1,368 2,456 Changes in net reserves -91 -58 -61 1-30-<:11111’1 1 Memo: Reserves including gold (US$ rniilions) 2,457 2,509 Conversion rate (DEC,/ocal/US$) 17 16 14

EXTERNAL DEBT and RESOURCE FLOWS 1987 1997 2006 2007 Composltion of 2006 debt (US$ mill.) (US$ miiiions) Total debt outstanding and disbursed 5,669 IBRD 566 466 453 IDA 67 983 1068 Total debt service 589 IBRD 36 47 50 IDA 1 11 TI Composition of net resource flows Official grants 258 Official creditors 13 Pnvate creditors -185 Foreign direct investment (net inflows) 423 Portfolio equity(net inflows) 0 World Bank program Commitments 0 63 39 A - IBRD E- Bilatm-BI Disbursements 65 27 57 E. IDA D - Other MltillerBl F. Private Pnncipal repayments 0 27 32 C-IMF G- Short-terr Net flows 65 -1 24 Interest payments 37 31 34 Net transfers 28 -3 1 -13

Note:Thistablewas producedfrom the Development Economics LDB database. 9/24/08

59

IBRD 33375R BOSNIA AND HERZEGOVINA

SELECTED TOWNS MAIN ROADS NATIONAL CAPITAL RAILROADS MAIN RIVERS DAYTON AGREEMENT LINES MUNICIPAL BOUNDARIES

This map was produced by the Map Design Unit of The World Bank. INTERNATIONAL BOUNDARIES The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries.

° To Zagreb ° ° ° 16 E 17 E To Bjelovar 18 E 19 E To Osijek CROATIA

To Una Karlovac Bosanska Gradiska ˇ Sa Bosanski Brod Bosanska Novi (Srp. Gradiska) ˇ va (Srp.Brod) s To Belgrade (Novi Grad) a 45°N r 45°N Cazin Prijedor b DerventaDerventa a V sn o Sava B

Bosanska Brcko ˇ Bihac ´ Krupa

Banja a Luka n Sanski Most Bijeljina i r To Belgrade Gracanica ˇ D To Sa U n Sveti Rok n a a Kotor Varos Varo ˇs Bosanski TesliTeslic c´ Petrovac SERBIA TuzlTuzlaa

KljucˇKljucˇ REPUBLIKA SRPSKA Maglaj ˆ ˆ S CROATIA K pre ca ri To Medak DrvarDrvar Vlasic´ Mts. va To Valjevo ja Jajce D TravniTravnikk To Obrovac Zenica Kladanj i Vlasenica V VaresVare ˇs rb n a s Bosna Srebrenica a Bugojno ° VisokoVisoko REPUBLIKA D ° 44 N rin 44 N r a FEDERATION OF SRPSKA i To Kraljevo To SARAJEVO Zadar c BOSNIA AND

Livno Pale HERZEGOVINA ˆ VisegradVisegrad Jablanicko A jezero Gorazde ˇ l Jablanica Konjic im N L p e To Sjenica r e tv Foca ˇ s a (Srbinje)

Mostar

T ar Gacko a

P iv a Stolac 43°N 43°N

Bileca ´ MONTENEGRO

TrebinjeTrebinje To Podgorica

BOSNIA and HERZEGOVINA Adriatic Sea To Shkodër

0 10 20 30 40 50 Kilometers ALBANIA 0 10 20 30 Miles

16°E 17°E 18°E 19°E

JULY 2006