Operation Performance Evaluation Review

Belgrade Municipal Infrastructure Reconstruction Programme (A Technical Cooperation operation) August 2007

Evaluation Department (EvD) ab0cd OPERATION PERFORMANCE EVALUATION REVIEW (OPER)

PREFACE

This Evaluation Report

The subject of this Operations Performance Evaluation Review (OPER) Report is the Technical Cooperation (TC) operation: Belgrade Municipal Infrastructure Reconstruction Programme (“the TC”) in the amount of €598,188 and funded through the Bank’s Technical Cooperation Funds Programme (TCFP) from contributions by Germany, the Netherlands, Canada and the UK. The related TC assignments were carried out over a period from 2001 to 2006.

The Operation Leader (OL) of this TC was Ulf Hindstrom. The operation team and other relevant Bank staff commented on an early draft of this report. The Basic Data Sheet on page iv of this report is complementary to this OPER and are designed to be read together.

The evaluation was carried out by Victoria Millis, Evaluation Analyst, under the supervision of Dennis Long, Senior Environmental Evaluation Manager (“the OPER Team”). Information on the operation was obtained from relevant teams and departments of the Bank and its files as well as from external sector and industry sources. Fieldwork was carried out in July 2006. EvD would like to take this opportunity to thank those who contributed to the production of this report.

Evaluation Selection and Process Selection of an operation for post-evaluation by EvD uses the following criteria: relevance to the Bank's likely future operations; lessons-learned potential; size of the Bank's investment commitment/exposure; balance among countries of operation; balance among sectors and types of operations; relative priority of investment operation OPERs within EvD's overall work programme priorities and resources.

The Bank's post-evaluation process is described in Chapter 8 of the Operations Manual. The responsible Operation Leader first writes a TC PCR. The PCR serves a self-evaluation function and establishes the basic facts and lessons from the operation's preparation, implementation, and outcome. EvD’s independent evaluation follows, using the PCR as one of several inputs.

i OPERATION PERFORMANCE EVALUATION REVIEW SERBIA MUNICIPAL INFRASTRUCTURE RECONSTRUCTION PROGRAMME (SERBIA)

TABLE OF CONTENTS

Page

PREFACE i ABBREVIATIONS AND DEFINED TERMS iii BASIC DATA SHEET iv

1. THE PROJECT 1 1.1 Background 1 1.2 International cooperation 2 1.3 The investment operation 2 1.4 The scope of the study 4

2. PROJECT RATIONALE 5

3. ACHIEVEMENT OF OBJECTIVES 6 3.1 Public Transport Component 6 3.2 District Heating Component 7 3.3 Water Rehabilitation Component 8 3.4 Overall Achievement of Objectives 9

4. OVERALL ASSESSMENT 10

5. TRANSITION IMPACT AND THE BANK'S ADDITIONALITY 10 5.1 Overall Transition Impact 10 5.2 The Public Transport Component 10 5.3 The District Heating Component 11 5.4 The Water Component 11 5.5 Environmental Impact 11 5.6 Country strategy and sector policies 12 5.7 Additionality 12

6. BANK HANDLING 13

7. KEY OPER ISSUES AND LESSONS LEARNED 13 7.1 Selection and due diligence in “emergency” project financing 13 7.2 Coordination of complex, multi-donor project 14 7.3 Political issues and division of decision-making power 15 7.4 Loan to company not to city 15 7.5 Land ownership may be a critical issue 16

LIST OF APPENDICES

Appendix 1 Operations Performance Ratings Appendix 2 Transition Impact Analysis

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ABBREVIATIONS

DPAM Department for Public Affairs Management EAP Environmental action plan EIA Environmental impact assessment EIB European Investment Bank EvD Evaluation Department GSP Belgrade public transport company MEI Municipal and environmental infrastructure MIS Management information system(s) MIRP Municipal infrastructure reconstruction programme OL Operation leader OPER Operation performance evaluation review PIP Priority investment programme PIU Project implementation unit PPP Public-private partnership PR Public relations SMEs Small and medium-sized enterprises TA Technical assistance TC Technical cooperation TCFP EBRD Technical Cooperation Funds Programme TOR Terms of reference

TERMINOLOGY

The Bank European Bank for Reconstruction and Development The client The City of Belgrade The OPER team Staff of the Evaluation Department who carried out the post-evaluation The operation TC commitments totalling €598,188 supporting an EBRD loan for the reconstruction of public transport, district heating and water supply services for the city of Belgrade The operation team Staff in the Banking Department and other respective departments within the Bank responsible for the operation appraisal, negotiation and monitoring, including the XMR The project The Belgrade Municipal Infrastructure Reconstruction Programme

iii OPERATION PERFORMANCE REVIEW BELGRADE MUNICIPAL INFRASTRUCTURE RECONSTRUCTION PROGRAMME (SERBIA)

BASIC DATA SHEET

Operation Code 17300/21442 Location: Serbia Operation: Belgrade Municipal Infrastructure Rehabilitation Programme Sector: Municipal and Environmental Infrastructure Type: Technical Cooperation Facilitators: Germany, Netherlands, UK Bank Unit: Municipal and Environmental Infrastructure

A. Funding

TC TCFP Commitment Commitment number Commitment title Amount (€) TC1 NLT-2002-03-01 Environmental Due Diligence 3,760 TC2 HOL-2001-07-07 Project preparation and Institutional Framework 180,000 TC3 HOL-2002-05-05 Project preparation and Institutional Framework 55,351 - extension TC4 GERK-2001-05-04 Feasibility Study 28,563 TC5 GERK-2001-06-05 Restatement of Accounts 10,000 TC6 LUX-2003-08-01 Emission Reduction Study (cancelled) 70,000 TC7 HOL-2001-12-11PS/06 Environmental Impact Assessment 29,500 TC8 CANSE-2003-04-01 Public Participation and Awareness Campaign 191,514 TC9 UKF-2004-02-02 Lenders Supervisor 99,500

B. Procurement

Mode Sources by country TC1 Direct selection Yugoslav TC2 Selection from shortlist Dutch TC3 Direct selection Dutch TC4 Direct selection German TC5 Direct selection Yugoslav TC6 N/A N/A TC7 Selection from shortlist Dutch TC8 Evaluation of proposals Canadian TC9 Selection from shortlist British

C. Visits

Type of Visit No. of Visits Person-days EvD/OPER 1 9 (2 staff)

iv OPERATION PERFORMANCE EVALUATION REVIEW BELGRADE MUNICIPAL INFRASTRUCTURE REHABILITATION PROGRAMME (SERBIA & MONTENEGRO)

1. The project

1.1 Background

Serbia became a member of the EBRD on 18 January 2001, following the downfall of Slobodan Milošević in October 2000.1 To address the country’s urgent requirements, the EBRD developed a Yugoslav action plan, which was approved by the Board of Directors on 13 March 2001. The plan identified three “quick start” initiatives that could be promptly approved and that were started in the first part of 2001. These initiatives comprised a microfinance bank, a small and medium-sized enterprise (SME) facility and a working capital facility.

It also identified several other “priority projects” that were under development in the second half of 2001. Among the latter group of projects was the municipal infrastructure reconstruction programme (MIRP), which combined a loan from the Bank with grant co-financing in order to finance investments in water supply, waste-water treatment, solid waste management, urban transport and district heating in up to eight cities.

On 24 July 2001 the Board approved the Belgrade Municipal Infrastructure Reconstruction Programme, consisting of a €60 million loan to the City of Belgrade (the “City”) in three equal tranches for urgent improvements to public transport, water supply and district heating services. The loan was supported by significant TC funds for pre-feasibility studies, legal advisory services and project implementation support.

For the public transport component the investment was relatively clear. A priority investment programme, together with a provisional timetable, had been prepared, which specified the purchase of 100 articulated buses and 50 solo buses, tram track renewal and improvements to maintenance equipment and workshops. The district heating component was described in some detail and included: • improvements to networks • replacement of substations and other equipment • heat generation measures, both at generation and customer level • new management information system (MIS) • training.

The MIS and training component would complement a similar programme already being implemented by another financial institution. The level of detail was less developed for the water component. The investment programme only identified the main use of funds: following a pre- feasibility study, the City and water company proposed to construct additional capacity at the Makis water treatment plant and complete a partially built water main. No further details were presented. The banking team is to be commended for responding quickly, even if the project details had yet to be fully defined.

1 In 2006 Montenegro became an independent country and a separate Bank country of operations.

1.2 International cooperation

The project components were funded by the EBRD in the context of the Stability Pact for South Eastern Europe. Signed by 40 countries and organisations (including the EBRD) in 1999, this was an attempt by the international community to implement a long-term conflict prevention strategy in south-eastern Europe through the creation of a secure environment, the promotion of sustainable democratic systems and the promotion of economic and social well-being. With no independent financial resources or implementing structures, the stability pact aims to harmonise the participants’ political strategies and coordinate existing and new initiatives in the region thereby avoiding unnecessary duplication of work.

Serbia and Montenegro was admitted in October 2000. At donor meetings in December 2000 and June 2001 pledges of just over €1.5 billion were made. The EBRD pledged €241 million for seven sectors: • promotion of growth • private sector development • financial sector development • energy • transport • environment • water/waste.

This mirrored the priorities identified in the EBRD’s Yugoslav action plan. The EBRD’s investment and TC assistance for the Belgrade MIRP was therefore only a part of the total investment and support to Belgrade from the international community.

1.3 The investment operation

At the time of evaluation the public transport component was fully disbursed and repaying. The district heating component was approximately 33 per cent disbursed but had already started repaying because of delays to the disbursement schedule. The water component had disbursed only around €2 million and construction had not yet started.

1.3.1 The transport component

In the 1990s the public transport company (GSP) had around 1,200 buses. By 2001 its stock had fallen to around 300 and the impossibility of obtaining spare parts was threatening the viability of the remaining fleet. A bus drivers’ strike left a vacuum that was quickly filled by countless numbers of unregulated private operators.

The EBRD loan was originally directed to the purchase of 100 articulated and 50 solo buses (€15 million), tram track renewal (€2 million) and maintenance equipment and tools (€3 million). In parallel, Japan donated 90 buses, increasing the public operator’s available fleet by around 250 buses. Switzerland also donated used but fully refurbished trams.

Some of the EBRD’s funding was redirected within the overall total: the final expenditure figures break down as follows: • 74 articulated buses plus spare parts and tools (€10.8 million) • 35 smaller buses plus spare parts and tools (€5.1 million) • 20 semi-low floor buses plus spare parts and tools (€1.9 million – total €17.9 million on buses)

2 • feeder cable and poles, tools and equipment for workshops and refurbishment of two depots (€2.2 million).

The €2 million originally intended for work on tram tracks was transferred to bus purchases when the City obtained a separate loan of €50 million from the European Investment Bank (EIB).

The transport component was the fastest-disbursing operation the municipal and environmental infrastructure (MEI) team been involved in. In October 2002 a series of waivers was requested to extend deadlines for certain covenants. This was necessary because the loan had disbursed faster than was foreseen.

The purchase of the buses and equipment was fully implemented at the time of the evaluation. Cost recovery through fare increases progressed ahead of schedule until 2005 when costs were affected by the higher oil price and fare increases were held back by the municipal elections in late 2004. Cost recovery has reached 41 per cent as against a target of 50 per cent.

1.3.2 The district heating component

The district heating component focused on the distribution network and replacement of substations. The network was inefficient, with heat losses up to double and water losses nearly 20 times as high as industry standards. The investment operation involved: • the replacement of 17.8 km of the heat transmission and distribution network with pre-insulated pipes • the replacement of substations with new ones that would be able to measure the amount of heat delivered to individual buildings • new heat exchanges and regulation equipment • demand-side measures (devices to enable customers to regulate heat consumption) • a modern MIS and other consultancy assistance.

At the time of evaluation this component was only about 33 per cent disbursed, though it was already repaying. Physical implementation had been delayed by approximately two years due to time required to complete the full feasibility study, delays in signing the grant agreement between a development cooperation agency and the Serbian government and changes requested by the City to the investment programme.2

After the initial delay, it was making reasonable progress. Tariffs had been raised regularly but full cost recovery had not been achieved, partly owing to increased fuel costs. The company was still posting a net loss. In addition, political differences were a major cause of the on-going delays.3

1.3.3 The water component

The main problems facing the water company were: • the aged and deteriorated supply network, resulting in losses of potable (drinking) water of over 30 per cent in the distribution system • the excessive number of illegal connections and inadequate metering of water consumption

2 Effectiveness of that grant was a condition for the EBRD loan. 3 A change of senior management took place after the local elections in 2004. This caused clear disruption as it coincided with the operation. Political reshuffling of managers in municipal utility companies is unfortunately the rule in Serbia. 3

• the uneven development of the overall system resulting in an over-exploited aquifer, several improperly sized purification facilities and an undersized distribution system.

The proposed solution saw the EBRD finance the completion of an additional facility at the existing Makis water treatment plant site, where infrastructure for greater capacity had been put in place during construction of the first phase of the site. While a new water treatment plant would help address the supply issues, it did not tackle the systemic problems throughout the distribution system.

The operation immediately ran into difficulties. The ownership of the land, which belonged to the federal government and not the City, took a year to be resolved.4 A government permit was required to cut down a forest on the site. Debates with the federal government over environmental standards cost another 18 months to be resolved.

Further problems arose over the division of responsibility between the water company and the contractor on the first contract, signed in November 2003, which covered design, equipment supply and supervision. In the end a lender’s supervisor was recruited, in part to try to work out the division between the supervision exercised by the consultant and that exercised by the water company.

By the time of evaluation, only €1.8 million had been disbursed for the water component and the main contract, for civil works, had not yet been signed. Nevertheless, progress had been made on tariffs and creditworthiness: subsidies were fully abolished in 2002 and the company was expected to achieve a small profit for the first time in 2005.

Eventually, the evaluation team was informed that the issue of land ownership had been resolved: while the national government remained the owner of the land, it would transfer ownership to the City for this project. This proved to be an important issue and may continue to adversely affect other MEI projects in Serbia (see section 7 “Key issues and lessons learned”).

1.4 The scope of the study

The present OPER covers the following eight TC commitments totalling €598,188 (the emission reduction study, costing a further €70,000, did not go ahead):

Project TC Commitment Amount Type/subject component No number (€)

Public 1 NLT-2002-03-01 3,760 Environmental due transport diligence 2 HOL-2001-07-07 180,000 Project preparation and institutional framework

4 Land ownership regulations in Serbia are very complicated and unique in that they distinguish between legal ownership and economic ownership, that is, the right of use. According to the Constitution, all municipal land is legally owned by the state. In this case, however, the economic ownership (which is what matters) was with the municipality of Cukarica (one of the 16 constituent municipalities of the City of Belgrade) where Makis 2 is located. The problem was that the land was not formally registered in the land registry. Making matters worse was the fact that the land comprised 70 register units, each of which requiring a complex registration procedure. Hence, the registration process took nearly one year. This could not have been easily foreseen, particularly given that the operation was signed at a time of great confusion about the legal situation in Serbia. Still today most of the land in Belgrade is not registered in the cadastre.

4 3 HOL-2002-05-05 55,351 Project preparation and institutional framework – extension District 4 GERK-2001-05-04 28,563 Feasibility study heating 5 GERK-2001-06-05 10,000 Restatement of accounts 6 LUX-2003-08-01 70,000 Emission reduction study (cancelled) Water 7 HOL-2001-12- 29,500 Environmental impact 11PS/06 assessment 8 CANSE-2003-04-01 191,514 Public participation and awareness campaign 9 UKF-2004-02-02 99,500 Lenders’ supervisor

In addition, significant TC support has been provided by several bilateral donors and by the European Agency for Reconstruction (EAR). TC and other consultancy components of the project not falling within the scope of this study include:

City of Belgrade

• EAR-funded project management support provided by a Danish consultant (ongoing) • Creditworthiness enhancement programme conducted and financed from the loan proceeds

Transport

• French-funded institutional study (covering also other modes of transport apart from buses)

District heating

• Swedish-funded feasibility study conducted • Swedish-funded project implementation unit (PIU) support and corporate development programme (ongoing)

Water

• German-funded tariff study • Austrian-funded billing and collection study • PIU support provided and funded by the City of Belgrade (ongoing)

It can be seen that most of the principal TC support for the programme has come from other sources. TC support provided through the EBRD, which forms the subject of this study, covers certain discrete assignments scattered across the project, complementing the main assignments. They do not by themselves form a coherent whole.

2. Project rationale

Subsequent to the 1999 war in and the fall of the Milošević government, Serbia and Montenegro were left with a damaged infrastructure and a weak economy. The international community responded via the Stability Pact for South Eastern Europe. Addressing core public utilities of water supply, waste-water treatment, solid waste management, urban transport and 5

district heating was considered a high priority. TC assistance was considered a critical contribution to the success of projects in these areas, although, as noted above, other donors were active and it was important that the EBRD’s TC be seen as part of a larger package.

The EBRD’s specific contribution was to offer loan funding for municipal projects that complemented grant funding offered under the Stability Pact. Also, the EBRD was able to offer specialised TC that would support its investment projects and complement direct donor technical assistance (TA). The challenge was to coordinate our TC with direct donor TA.

The team could have taken a different approach. However, at the time, this project was a deliberate risk taken by the Bank since quick action from the international community was of paramount importance to support the new leadership of Serbia in a politically still extremely fragile post- Milošević situation. In hindsight, this appears to have been the right thing to do. The Bank earned goodwill and created an excellent platform to pursue its policy dialogue.

As a result the Bank was able to build a follow-up pipeline based on more thorough studies – one outcome was a waste-water project currently being developed by the MEI team in Belgrade. Thus, getting a good start with a country that has just come out of a huge crisis far outweighed the limited economic consequences for the Bank in selecting projects without detailed and potentially sub- optimal designs.

3. Achievement of objectives

3.1 Public transport component

3.1.1 TC1: Environmental due diligence

It was a requirement of the loan agreement that the City produce an environmental action plan (EAP) within 180 days of first disbursement. The EBRD provided expert support to the City in accomplishing this requirement.

With Official Co-financing Unit (OCU) approval, TC funds were diverted from an un-used portion of a TC originally intended for the environmental appraisal of municipal infrastructure reconstruction projects in Kragujevac and Subotica. The consultant who had previously conducted an environmental appraisal for the public transport company prepared an EAP. The objective was “Fully Achieved”.

3.1.2 TC2: Project preparation and institutional framework

The main TC (HOL-2001-07-07), provided by the Netherlands, was intended to • provide a final and detailed priority investment programme (PIP) • assist GSP Beograd with the preparation of technical specifications and tender documents • advise on project implementation arrangements • advise the City on the future institutional and regulatory framework for the public transport sector in Belgrade within the context of restructuring the sector and defining the role of the public and private sector.

Task A was to develop the PIP and assist the City with the preparation of detailed specifications, draft a procurement plan and prepare a project implementation schedule. The preparation of technical specifications and tender documents took significantly longer than originally expected. The assignment had to be extended by €59,590 (over 30 per cent of the original commitment) and

6 by more than three years (including the extension, HOL-2002-05-05) to allow this component to be finalised. This task therefore can only be regarded as “Partly Achieved”.

Task B was to provide advice on restructuring the public transport sector and establishing an appropriate institutional and regulatory framework. This task was intended to develop a way of regulating the private sector competition that had developed in the absence of adequate public services.

This objective was “Fully Achieved” and well received. The consultant produced a detailed analysis of the project. When this did not appear to be leading to action on the part of the City, the consultant responded to the EBRD’s request to produce a policy paper which the City Council could adopt as a first stage towards implementing the plan.

At the time of evaluation the proposed policy had been implemented to the extent that the City had held an open tender to select private companies to operate buses on certain routes. The contracts specified standards including health and safety, vehicle quality and environmental standards. The private sector had been integrated completely into the regular fare structure in May 2004 – including concessionary fares – and the tendered contracts had been signed with five operating companies in 2005.

3.1.3 TC3: Project preparation and institutional framework - extension

The extension was necessitated by delays in producing specifications. It also extended the involvement of the consultant to provide ongoing assistance throughout the tendering process. It too was extended by nearly two years beyond the expected completion date. However, it was eventually “Fully Achieved”, with delays, to the general satisfaction of the client.

Some minor problems remained outstanding: cameras and bus lifts at the maintenance depots were unsuitable or could not be installed, and work was still ongoing on one of the depots at the time of evaluation. Nevertheless, the project as a whole went ahead satisfactorily. New, high-quality buses quickly appeared on the streets of Belgrade and were a very visible sign of investment by the City in infrastructure.

3.2 District heating component

Most of the support to the district heating component, including the full feasibility study and the ongoing PIU support and corporate development programme, was bilaterally funded by a development cooperation agency outside the EBRD’s TCFP therefore falling outside the scope of this study.

3.2.1 TC4: Feasibility study

An initial feasibility study was conducted before approval of the project. The purpose of the feasibility study was to assist the EBRD in preparing the investment programme, reviewing the municipality’s existing PIP and assisting the EBRD to gather and evaluate the data needed to prepare and present the project. The investment operation was approved and signed in July 2001 according to schedule.

Effectively a pre-feasibility study, the consultants’ final report was used by consultants preparing a more in-depth follow-on study funded by a development cooperation agency. The consultants regarded the earlier study as brief but accurate, identifying the key issues which needed further 7

elaboration in preparing a working programme for improvement. To this extent, the TC’s limited objectives can be regarded as “Fully Achieved”.

3.2.2 TC5: Restatement of accounts

Similarly to TC1, this assignment benefited the EBRD in preparing the investment operation. Again, the Operational Leader (OL) had left the EBRD and the consultants’ final report was not available. The assignment achieved its objectives insofar as it led to a loan being signed and can thereforebe regarded as “Fully Achieved”.

3.2.3 TC6: Emission reduction study

This commitment was approved but never implemented. Hence, the objective of assisting Beogradske Elektrane in trading in greenhouse gas emission reductions (to be generated from the partial modernisation of the district heating network) was “Not Achieved”. The reason for this was a disagreement between several entities regarding the scope of their respective responsibilities.

At a much later stage it was suggested to the OL that the TC be revived. The OL was not convinced that differences had been settled to the extent that the TC could be implemented quickly and felt that the project had moved on to a new phase. He therefore decided not to take up the suggestion.

3.3 Water rehabilitation component

3.3.1 TC7: EIA for water treatment plant Makis 2

The objectives of this TC were to:

• assist the Belgrade Water Company (BWC) to carry out an EIA in accordance with EU and Serbian national standards (task 1)

• assist BWC to obtain any environmental approvals required for the construction of Makis 2 (task 2)

• recommend to BWC measures to ensure compliance with national and existing EU environmental standards (EAP) (task 3).

The EIA was completed in June 2004. The EIA and the EAP met the client’s and the Bank’s expectations and served their regulatory purpose. Delays that occurred were related to land tenure issues. The construction of Makis 2 was part of the long-term planning objectives of the water company. The City’s primary supply comes from injection wells adjacent to the Sava River. The quality of this groundwater is inadequate.

The new plant will allow for expanded use of surface water and full treatment. The EIA proved useful in that it expanded the scope of the project by €13 million to unify all three water treatment plants. This objective was “Fully Achieved” and well received.

3.3.2 TC8: Public participation and awareness campaign

The project presented for approval was budgeted at €400,000. It sought to assist the water companies in Belgrade and other Serbian cities (Kragujevac, Nis and Novi Sad) in planning and conducting an outreach campaign, including a media campaign. The commitment was approved but

8 with certain reservations, including limiting the assignment to a maximum of €200,000 with the remainder to be provided by local authorities. This reduction was achieved by removing the execution of a local media campaign from the terms of reference (TOR). The following outcomes were desired.

• It was hoped that, first, a measurable attitudinal improvement in the willingness to pay among water users in the selected cities would be registered.

• Secondly, it was hoped that, in the intermediate term, other municipalities would adapt this public awareness campaign for water or other areas of local government service. To this end a specialised public awareness department would be established with the Yugoslav Waterworks Association.

These objectives were “Partly Achieved”. A lengthy selection process by the client delayed the start of the assignment. Implementation was further delayed by local elections in the autumn of 2004, leading to changes of water company managers and in some cases public relations (PR) directors in every municipality except Belgrade. There was more delay in the release and reduction of funding for the production and distribution of campaign materials.

These were ultimately produced for Belgrade and Novi Sad only. Following these delays, the campaign restricted itself to the issue of water conservation. Nonetheless, a Department for Public Affairs Management (DPAM) was established at the Serbia and Montenegro Waterworks Association (SMWA). The DPAM set up new call centres in the four cities and conducted a reduced campaign under the supervision and training of the consultants.

Detailed plans were drawn up for further campaigns on the other priority issues identified in the TOR: changing attitudes towards the quality of drinking water, the need for tariff increases and willingness to pay. These plans have not been implemented through lack of finance. No further TC funds were available and members of the individual water companies of various municipalities have not provided the funds. A good start was made in the establishment and training of the DPAM but lack of funding prevented the achievement of the main objective.

3.3.3 TC9: Lenders’ supervisor

The objective was to “assist the Bank in monitoring the construction of the Bank financed new water treatment plant, Makis 2, in Belgrade. The consultant shall help ensure that the implementation proceeds according to plan and loan and project documentation, provide independent reporting to the Bank, confirm completion and, if needed, help with troubleshooting.”

As described in section 3.3.1 above, the construction of Makis 2 was delayed and has still not started. The recruitment of a lenders’ supervisor was intended to remedy this. The consultant has reviewed tender documents and reported on progress as required but there has not been any great progress in construction. The assignment is still ongoing and it is too early to rate the achievement of objectives.

3.4 Overall achievement of objectives

In terms of the specific TC commitments under consideration, overall achievement of objectives is “Good”. The cancelled emission reduction study was the only TC that failed to achieve its objectives. The project preparation and institutional framework TCs for the transport project ran late and over budget but eventually achieved the objectives.

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The introduction of a system of tendering for private bus companies was perhaps the most successful aspect of the project. The public participation and awareness campaign with the water companies was completed with a reduced scope. The other TCs achieved their objectives within time and budget.

4. Overall assessment

The Bank’s TC operation, overall, is rated “Successful”. Despite delays to the completion of the investment programme, the TC itself has on the whole been satisfactorily completed and achieved its transition and other objectives. The Bank’s additionality is “Verified in all respects”. Transition impact is rated “Good”. Environmental impact is rated “Good”.

Fulfilment of TC objectives is rated as “Good”. The project’s financial performance is not rated as this is an evaluation of the TC only. Bank handling is rated “Satisfactory”. Lastly, the project is in full compliance with the MEI policy, the Bank’s environmental policy and the country strategy.

5. Transition impact and additionality

5.1 Overall transition impact

Overall, the TC’s transition impact is rated “Good”. While delays in project implementation have hindered effective transition impact of the overall investment operation, the individual TCs have generally achieved the intended impact. The more detailed comments below concentrate on those TCs that had direct transition impact objectives. Due diligence TCs, which only had enabling objectives and were not in themselves intended to achieve transition impact, are not considered in detail.

It is important to note that a TC funded by a development cooperation agency (corporate development support and assistance to prepare a service agreement) was part of a package deal that supported the Bank’s transition objective, and should be regarded as such. The development cooperation agency and the Bank also cooperated systematically during the implementation and monitoring phase through half-yearly joint evaluation meetings with the company and the City and the coordination of discussions on policy reform.

5.2 The public transport component

The institutional and regulatory framework TC contributed substantially to the promotion of a private sector model through the establishment of a city directorate for the regulation of public transport and the implementation of a system for open tendering for private bus companies. All the existing unregulated private bus companies were obliged to tender for a contract if they wished to continue trading.

Towards the end of 2005 five successful private bus companies signed service contracts with the City and each took over specific routes while the remaining unsuccessful companies were forced to cease operating. The contracts are comprehensive, covering vehicle quality, logistics, company structure, tests for new drivers, tax and national insurance for drivers.

The tariff system has been fully integrated. The City pays the company a fixed subsidy per vehicle- km and recovers all the revenue from fares. Approximately 30 per cent of the buses in Belgrade are

10 privately owned. Private companies complain that there is no equal competition because the public bus company is provided with vehicles by the city and has subsidised fuel.

A combination of real progress on privatisation, competition from the five private bus companies and the infusion of new equipment has also helped to revitalise the municipal transport company. The general public’s impression of the city transportation sector is positive.

There has not yet been much replication of the Belgrade model elsewhere. An attempt to introduce private buses in Kragujevac failed due to public pressure.

5.3 The district heating component

As previously noted, the TCs in this study have not played a significant part in the district heating component of the project and have not had any significant transition impact. Two minor due diligence TCs were completed. Their transition impact is limited to their enabling contribution to the investment project, the impact of which has not been entirely satisfactory.

Through complementary German TC funding, there have been a few small demonstration projects of installing meters and thermostat controls at the user end, mostly in new properties. However, the main part of the City still has district heating that cannot be controlled by the user although the new substations allow usage to be measured at the building level. Therefore, although tariffs have risen they are still not connected to usage.

5.4 The water component

The TC for the public participation and awareness campaign led to the establishment of a department for public affairs management at the SMWA and PR departments in several city water companies. The PR manager of Belgrade Water Company commented that “we are doing groundbreaking work, never before has the water company been allowed to initiate, plan and carry out an information campaign”. Feedback following the campaign showed an increased awareness of water conservation issues. However, the impact was limited by the lack of follow-on funds.

5.5 Environmental impact

Water Water supply is already on meters and billed according to usage. The design of the water treatment plant was altered significantly as a result of the EIA. The public participation TC raised awareness of water-saving measures. Drinking water is of reasonable quality but the system lacks capacity and their groundwater source is deteriorating.

An important opportunity was missed to deal with waste-water problems. These have now risen to a high priority level, with over 30 sewage outfalls discharging directly into the river. The failure to replace pipes and reduce leakage represents another missed opportunity. The company had assistance for this but much more remains to be done.5

5 During the donor conference for Serbia and Montenegro in December 2000, it was agreed that a German financial institution would deal with leak reductions and installation of water meters, while the EBRD would finance the new Makis 2. This was a logical division of roles minimising overlaps. In addition to the German input, the water company, with the assistance of a French TC, has prepared a network model for the water supply system. This was essential before any major investments in the network could be made (use of illegal water connections had become a major problem during the Milošević era).

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The EIA implicitly bought into the City’s investment programme – Makis 2 – although it is unclear that this was the priority. The EIA, which focused only on the water treatment plant, missed an opportunity to propose an alternative approach. However, once constructed, the new plant, like the new buses, might provide the morale booster to help the water company.

The OPER team and the banking team differed on the importance of a potential waste-water project at the time of approval. The banking team brought forward two main arguments: First, the City had expressed a clear priority to deal first with the water supply problem, which at the time of approval was most pressing. Only then did it intend to deal with the waste-water problems. It had not been politically wise to enter into a debate at that point as time was of the essence.

Secondly,almost immediately after signing the first loan on 30 November 2001, the Bank concept cleared a waste-water project. This was an ambitious project involving the private sector in the Yugoslav water business. The EAR funded the preparations for the project. However, because of political resistance, the public-private partnership (PPP) never materialised. Instead, it led to a new MEI waste-water project, which is currently being prepared.

Therefore, it is important to acknowledge that the Bank is moving forward with a waste-water treatment plant project.

District heating The district heating component provided insulated pipes and greater control at the generation point. The new substations can measure energy use per building. However, there is no sign that the district heating company plans to introduce billing based on usage.

Public transport The new buses meet Euro III standards. The same standards have been applied to the private bus companies and a great number of old, heavily polluting vehicles were removed from service. The contracts with the private companies include standards for maintenance of the buses. The company has established a new administrative unit to deal with environmental issues.

Improvements have been made on working conditions. Automatic doors have been installed in the maintenance buildings to save heating costs in winter and machinery has been installed to extract fumes from the working area. New bus-washing facilities also have higher environmental standards.

Environmental performance and change The project’s environmental performance, or impact, is rated “Good” as the EIA resulted in constructive changes, new Euro III buses are running, and there have been improvements to district heating. As this is a TC evaluation, environmental change is not rated.

5.6 Country strategy and sector policies

The MIRP was listed as a “priority project” in the 2001 Yugoslav action plan. The Belgrade project was the first MIRP operation to be signed. Other projects have followed in other Serbian cities including Niš, Kragujevac and Novi Sad. The sector strategy of 1998 emphasised corporatisation and ultimately privatisation of municipal services.

5.7 Additionality

As described, the grants and loans were set against the background of donor conferences aimed at obtaining funds for the development of Serbia and Montenegro. In that sense, the EBRD was not 12 the sole source of funds available but formed part of an emergency assistance package. At the time alternative long-term finance was not available for municipalities.

Furthermore, the EBRD’s involvement enabled a sub-sovereign structure for the loans. At the beginning of the project the municipality was not in a position to finance the consultancy assignments funded through TC funds. Since 2001, the City’s finances have immensely improved, and it has financed some later consultancy work itself.

6. Bank handling

Initially, the project suffered from similar problems as other Bank projects introduced in “emergency” situations. A political decision was made to assist in the municipal reconstruction of Belgrade and other Serbian cities. Money was made available before a detailed plan had been worked out for spending it.

The Board document reveals varying degrees of detail on the different components. This approach meant that projects were developed to fit the budget rather than funding being provided for work that had been identified as necessary. It may be that a different approach would have led to more efficient use of funds. In particular, the choice of project for the water component may not have been the best one.

This is especially pertinent with regards to the opportunity to reduce waste through leakage and improved water conservation as well as the need for waste-water treatment. A longer period of preparation and due diligence at the start of the project may have identified and dealt with some of the problems which delayed the water component.

The implementation of the project, involving many different agencies working on separate but complementary tasks, required a high level of coordination between donors and lenders. The EBRD’s OL performed this task. Representatives of other agencies commented on how well this vital role was performed. They remarked that the OL’s role extended to acting as a “mentor” for newly appointed representatives of other agencies, introducing them to key players and to the complexity of the project.

Although some components of the project met obstacles that have delayed their fulfilment, there was no lack of coordination between agencies. The excellent degree of coordination has ensured that the donors and lenders spoke with one voice and worked towards the same aims in an organised fashion. This function also led the OL to become the first port of call and general problem-solver for the city management.

The City has been the main instigator of reform throughout, pushing the individual companies to implement the changes intended by the project. The good relationship between the City and the OL has led to a high level of discussions with the City on reforms.

7. Key issues and lessons learned

7.1 Selection and due diligence in “emergency” project financing

When the decision was taken to assist in the municipal reconstruction of Belgrade and other Serbian municipalities, the approach comprised: • setting the budget for the programme 13

• dividing the budget equally between three sectors identified as important • soliciting an action plan from the City and the companies.

In the case of district heating and public transport, it was fairly clear which areas needed funding. The companies already had a detailed set of priorities for funding once it became available. This is reflected in the level of detail in the documentation. In the case of water, there were several options: improved waste-water treatment facilities, water conservation through reducing leakages and improving public awareness and an increase in the capacity for water treatment.

From these options the water company chose to revive a plan for a new water treatment works on a site already under development. They took the opportunity offered by the availability of a substantial lump sum to spend it on a large, discrete project. More detailed due diligence up front may have identified other works as more urgent and cost-effective.

Better due diligence might also have identified some of the issues that substantially delayed the project, particularly the question of land ownership and the division of responsibility between the municipality, the Serbian government and the federal government.

Lessons learned

Emergency situations may not lead to the best design. The Bank responded to a crisis situation by budgeting funds without adequate due diligence yet committing funds to specific line items. In such situations the Bank runs the risk of taking on what maybe “white-elephant” projects (pet projects of the existing municipal service companies) rather than focusing on projects that will maximise transitions while meeting the Bank’s sound banking and additionality criteria.

While such situations call for quick action, and the banking team is to be commended for responding quickly, in situations like this, the banking team would be advised to put greater emphasis on due diligence activities and continuing investigations even during the implementation stage after Board approval.

7.2 Coordination of complex, multi-donor projects

This was an unusual operation in that the TC assistance from the EBRD was only a part of the project. The EBRD provided the loan to the City and some TC support. However, much of the TC assistance, including key assignments such as management support to the City and PIU support for the district heating and water components, was funded from other sources.

The Bank could and did play a constructive role in coordinating the many city and donor agencies involved in this project. Such coordination by the OL was critical to minimising misunderstanding and therefore to reducing bureaucratic delays, particularly for municipal projects. Timely input by all donors involved in a project is critical to success.

Lessons learned

The EBRD’s OL can play an important coordinating role among project stakeholders. In this case, the OL contributed to the success of the project by acting as a “mentor” to other donor agencies and to City officials. He served as a point of “institutional memory” for the project and kept all players focused on the critical decisions. Although this was an exceptional situation in that the EBRD normally uses TC which is more directly related to the preparation or implementation of its projects, the role played by the EBRD’s OL was an important success factor in this case.

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7.3 Political issues and division of decision-making power

City municipal governments can be driven by political in-fighting. This in turn can adversely impact the success of EBRD projects. Belgrade’s city government is in opposition to the national government but must, at the same time, incorporate key officials from the national government party into its structure. This can result in political in-fighting, which in turn can stall projects.

Such “political risk” is difficult to address but the EBRD should include loan covenants with critical dates. This would force the project’s success regardless of party motivations. There is a risk, however, that such covenants could provide political opponents a handy weapon to undo the aims of the ruling party.

Lessons learned

The EBRD’s loan documents need to address political risks at the municipal level. Political risk factors can seriously delay projects. These need to be anticipated in project design and addressed in the covenants so as to minimise their impacts on project completion. For instance, political risk can be mitigated if loan covenants with critical dates are introduced to force the project’s progress regardless of party motivations.

7.4 Loan to company not to city

The Belgrade project was one of the earliest public transport projects undertaken by the Bank. Its structure required the loan to be made to the municipality rather than the bus company. Serbian law prohibits municipalities from giving guarantees, and without a municipal guarantee the operation would not have met the Bank’s requirements for sound banking.

Parallel to the loan agreement, the Bank entered into project implementation agreements with each of the companies. These served in all but name as loan agreements. In addition, the direct beneficiaries of all TCs were the companies. The companies were the Bank’s first port of call for all project-related issues, including procurement, conditionalities and financial matters.

In practice, it proved that having the City as the borrower provided a great added advantage. When the team encountered problems that it could not resolve with the companies (and there were many instances), it involved the City, which after all is the owner, regulator (including tariff setter) and ultimately responsible for how the companies conduct their business. This tripartite cooperation was a key to the success.

In more recent projects the Bank has been able to ensure that the beneficiary is also the borrower. Nevertheless, it is worth stating the lesson and explaining the reasoning behind it. In effect, the municipality bought the buses and gave them to the bus company. This was reminiscent of the past when the company would simply ask the municipality for new buses and they would be provided. It did not promote any change of business practice at the bus company or encourage it to regard the buses as expensive assets worth taking care of.

Lesson learned

Design of the TC should support the commercialisation of public utilities. The EBRD’s project approach should support the commercialisation of public utilities, as a step towards privatisation. A TC could have been designed to improve the transfer of the buses from the municipality to the operating company. Where possible, the EBRD should design TC operations that work directly with 15

public utilities. This effectively happened in this operation, though the formal structure caused obstruction in the City. Dealing directly with the utilities enhances instructional development and helps the companies transform from “budget-based” companies to fully commercialised operations.

7.5 Land ownership may be a critical issue

In many countries of operation, land registration and transfer of ownership remains a major unresolved transition issue. In Serbia, under Milošević, public lands were transferred from municipalities to the national government. In the context of this project, this meant that the water supply project could not go forward because neither the City nor the utility owned the land. This is also a potential problem in the Sava Bridge project. Further, the EIA failed to identify this as an issue.

Lesson learned

TC allocations to due diligence should address land ownership. The EBRD’s investigations into the soundness of investments regarding municipal projects should always ensure that the city has ownership rights over the land of proposed construction sites. Further, land ownership is an issue which should be addressed in the context of the EIA. Apart from the direct effect on the EBRD’s own investment and TC projects, the EBRD has a more general duty to give guidance and help government officials where problematic issues of this kind are identified.

16 APPENDIX 1

OPERATION PERFORMANCE RATINGS

BELGRADE MUNICIPAL INFRASTRUCTURE RECONSTRUCTION PROJECT, SERBIA

Performance Indicator Rating

OVERALL TRANSITION IMPACT (Analysis in Appendix 3): (Excellent, Good, Satisfactory, Marginal, Unsatisfactory, Negative) Good

ENVIRONMENTAL PERFORMANCE OF THE PROJECT AND SPONSOR: Good (Ratings: Excellent, Good, Satisfactory, Marginal, Unsatisfactory, Highly Unsatisfactory)

EXTENT OF ENVIRONMENTAL CHANGE: (Ratings: Outstanding, Substantial, Some, None/Negative) N/A

ADDITIONALITY: Verified in All (Ratings: Verified in all respects, Verified at large, Verified only in part, Not verified) Respects

PROJECT FINANCIAL PERFORMANCE: (Ratings: Excellent, Good, Satisfactory, Marginal, Unsatisfactory, Highly Unsatisfactory) N/A

COMPANY FINANCIAL PERFORMANCE: (Ratings: Excellent, Good, Satisfactory, Marginal, Unsatisfactory, Highly Unsatisfactory) N/A

FULFILMENT OF PROJECT OBJECTIVES: (Ratings: Excellent, Good, Satisfactory, Marginal, Unsatisfactory, Highly Unsatisfactory) Good

BANK HANDLING: (Ratings: Excellent, Good, Satisfactory, Marginal, Unsatisfactory, Highly Unsatisfactory) Satisfactory

BANK’s INVESTMENT PERFORMANCE: (Ratings: Excellent, Good, Satisfactory, Marginal, Unsatisfactory, Highly Unsatisfactory) N/A

OVERALL PERFORMANCE: (Ratings: Highly Successful, Successful, Partly Successful, Unsuccessful) Successful

APPENDIX 2

TRANSITION IMPACT ANALYSIS

Belgrade Municipal Infrastructure Reconstruction Programme, Serbia Short-term Longer- Risk to TI checklist STEPS OF RATING TRANSITION IMPACT verified Term transition potential categories EX POST impact impact potential TI

STEP I: CHANGE BY THE PROJECT AT 1 2 3 Rating Rating Rating CORPORATE LEVEL

Private ownership N.A. N.A. N.A. 3

5 Skill transfers N.A. N.A. N.A.

Demonstration effects N.A. N.A. N.A. 6

New standards for business conduct N.A. N.A. N.A. 7

STEP II: TRANSITION IMPACT AT THE LEVEL OF Rating Rating Rating THE INDUSTRY AND THE ECONOMY AS A WHOLE

1 Competition The transport sector has made excellent progress, with standardised pricing and competition between private and public sector companies. All companies in the market are Satisfactory Good High obliged to achieve the same standards, though the private companies complain that the public bus company still has hidden subsidies. Similar progress has not yet been seen in the other sectors

2 Market expansion As these were municipal public sector projects, there was Marginal Marginal Medium limited scope for market expansion, except via demonstration to other municipalities.

3 Private ownership Private sector involvement has expanded significantly in the transport sector. Approximately 30% of Belgrade buses are privately owned. Associated TC from other sources has led to Good Good Medium improved tariff and collection rates in the water sector, brining the water company to the verge of financial sustainability, though privatisation is not yet on the agenda.

4 Frameworks for markets A transport directorate was established at the City to oversee the tendering of the bus contracts. The open tendering has set a good framework for this sector, with contracts covering vehicle Satisfactory Satisfactory Medium quality, logistics, company structure, tests for new drivers, tax and national insurance. Similar progress has not been achieved in the other sectors.

1 This range is: Excellent/Good/Satisfactory/Marginal/Unsatisfactory/Negative. 2 This range is: Excellent/Good/Satisfactory/Marginal/Unsatisfactory/Negative. 3 This range is: Low/Medium/High/Excessive. APPENDIX 2

5 Skills transfers TC assistance to the PIUs of the three companies and to the City administration have improved skills in financial management and tendering at all the companies. Staff from the PIU at the district heating company have moved to other jobs in the Excellent Excellent Low country and, after training, the manager of the financial department at the City was head-hunted by a major commercial bank. The City administration has benefited particularly from ongoing guidance and contacts with EBRD and consultants.

6 Demonstration effects The Public Participation and Awareness Campaign resulted in the establishment of a Department for Public Affairs Management at the Serbia and Montenegro Waterworks Association and in several city water companies. Satisfactory Good High

The Bank is undertaking similar municipal projects in several Serbian cities. However, the striking success story of the project, the tendering of private bus services, has only been replicated in one other city.

7 New standards for business conduct Perhaps the most important new standard setting is the Good Good Medium concession contracts to private bus companies. The Water Company’s water saving campaign was also innovative.

SUMMARY OF VERIFIED, POTENTIAL AND RISK Good Good Medium RATINGS

4 OVERALL TRANSITION IMPACT RATING: Good

4 This range is: Excellent/Good/Satisfactory/Marginal/Unsatisfactory/Negative.