public disclosure authorized...quarterly production from thermal power unit kostolac a2 (in gwh) to...

Document of The World Bank

Report No:ICR0000361

IMPLEMENTATION COMPLETION AND RESULTS REPORT (WBTF-29870 AND SIDA-29887 )

ON A

GRANT

IN THE AMOUNT OF US$ 6.0 MILLION EQUIVALENT

and

SEK 16.0 MILLION

TO THE

REPUBLIC OF SERBIA (formally called the Federal Republic of Yugoslavia)

FOR AN

ELECTRIC POWER EMERGENCY RECONSTRUCTION PROJECT

June 22, 2007

Sustainable Development Department South East Europe Country Unit Europe and Central Asia Region

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CURRENCY EQUIVALENTS

Exchange Rate Effective as of May 21, 2007

Currency Unit = Republic of Serbia Dinar

US$ 1.00 = 60.07 Republic of Serbia Dinars

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

CAS Country Assistance Strategy EMS Electric Transmission Company of Serbia EPS Electric Power Company of Serbia ERTP Electric Power Emergency Reconstruction Project FMR Financial Management Report FMS Financial Management System FRY Federal Republic of Yugoslavia GoS Government of Serbia IAS International Accounting Standards ICAS Integrated Computerized Accounting System ICR Implementation Completion Report IDA International Development Association NGO Non-governmental Organization PAD Project Appraisal Document PDO Project Development Objective PIU Project Implementation Unit SaM Serbia and Montenegro SEK Swedish Crown SIDA Swedish International Development Agency TSS Transitional Support Strategy

Vice President: Shigeo Katsu

Country Director: Orsalia Kalantzopoulos Sector Manager: Charles M. Feinstein

Project Team Leader: Bjorn Hamso ICR Team Leader: Miroslav Frick

Republic of Serbia (formally called the Federal Republic of Yugoslavia) Electric Power Emergency Reconstruction Project

CONTENTS

Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph

1. Project Context, Development Objectives and Design............................................... 12. Key Factors Affecting Implementation and Outcomes .............................................. 63. Assessment of Outcomes .......................................................................................... 114. Assessment of Risk to Development Outcome......................................................... 175. Assessment of Bank and Borrower Performance ..................................................... 186. Lessons Learned ....................................................................................................... 217. Comments on Issues Raised by Borrower/Implementing Agencies/Partners .......... 21Annex 1. Project Costs and Financing.......................................................................... 23Annex 2. Outputs by Component ................................................................................. 24Annex 3. Economic and Financial Analysis................................................................. 28Annex 5. Beneficiary Survey Results ........................................................................... 30Annex 6. Stakeholder Workshop Report and Results................................................... 31Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders....................... 34Annex 9. List of Supporting Documents ...................................................................... 35

MAP

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A. Basic Information Country: Serbia Project Name:

Electric Power Emergency Reconstruction Project

Project ID: P074136 L/C/TF Number(s): SIDA-29887,WBTF-29870

ICR Date: 06/22/2007 ICR Type: Core ICR

Lending Instrument: ERL Borrower: FEDERAL REPUBLIC OF YUGOSLAVIA

Original Total Commitment:

USD 6.0M Disbursed Amount: USD 5.8M

Environmental Category: B Implementing Agencies: Electric Power Industry of Serbia Cofinanciers and Other External Partners: Swedish International Development Programme B. Key Dates

Process Date Process Original Date Revised / Actual Date(s)

Concept Review: 03/27/2001 Effectiveness: 11/08/2001 11/08/2001 Appraisal: 05/10/2001 Restructuring(s): Approval: 07/02/2001 Mid-term Review: Closing: 06/30/2003 12/31/2004 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Satisfactory Risk to Development Outcome: Moderate Bank Performance: Satisfactory Borrower Performance: Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Satisfactory Government: Satisfactory

Quality of Supervision: Moderately Satisfactory Implementing Agency/Agencies: Moderately Satisfactory

Overall Bank Performance: Satisfactory Overall Borrower

Performance: Satisfactory

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C.3 Quality at Entry and Implementation Performance Indicators Implementation

Performance Indicators QAG Assessments (if any) Rating

Potential Problem Project at any time (Yes/No):

Yes Quality at Entry (QEA):

None

Problem Project at any time (Yes/No):

No Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:

D. Sector and Theme Codes

Original Actual Sector Code (as % of total Bank financing) Central government administration 2 2 Power 98 98

Theme Code (Primary/Secondary) Conflict prevention and post-conflict reconstruction Primary Primary Infrastructure services for private sector development Primary Primary Legal institutions for a market economy Secondary Secondary Public expenditure, financial management and procurement

Primary Primary

E. Bank Staff

Positions At ICR At Approval Vice President: Shigeo Katsu Johannes F. Linn Country Director: Orsalia Kalantzopoulos Christiaan J. Poortman Sector Manager: Charles M. Feinstein Hinderikus Busz Project Team Leader: Bjorn Hamso Dejan R. Ostojic ICR Team Leader: Miroslav Frick ICR Primary Author: Miroslav Frick F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The Project Development Objectives were: 1. To help restore reliable electricity supply in Serbia through urgent repairs of power facilities affected by lack of maintenance and damage during the Kosovo conflict. In particular:

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- support to increase available generating capacity through repair of the 210 MW unit in thermal power plant, Kostolac A; and - improve reliability of transmission network through reinforcement of transmission substation Sremska Mitrovica. 2. To improve the financial management system of the Electric Power Company of Serbia (EPS). 3. To support the Serbian Ministry of Mining and Energy in preparing an Energy Policy Statement and drafting a new Energy Law. Revised Project Development Objectives (as approved by original approving authority) The Project Development Objectives were not revised. (a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Quarterly production from thermal power unit Kostolac A2 (in GWh) to reach 250 GWh by Q2 2002.

Value quantitative or Qualitative)

0 GWh 250 GWh 174 GWh

Date achieved 03/01/2000 04/01/2002 10/01/2002

Comments (incl. % achievement)

The lower that planned target production of Kostolac A2 unit in Q2 2002 is justified by: 1. the plant was out of service at the time due to a scheduled maintenance 2. the EPS had import contracts and enough energy supply in its system

Indicator 2 : Reduction of technical losses in transmission from 4.5% in 2001, to 4% or less in 2002 and thereafter.


4.5% 4% 2.9%

Date achieved 06/01/2001 06/01/2002 06/01/2003 Comments (incl. % achievement)

100%

Indicator 3 : Average deviation of bus voltage at 220 kV and 400 kV substations maintained within 5% limit in 2003.


Voltage deviation of 100 kV to 120 kV 5%

5% (voltage deviation of 5 kV to 6 kV)

Date achieved 06/01/2001 12/15/2003 12/15/2003 Comments 100%

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(incl. % achievement)

Indicator 4 : Electric Power Company of Serbia (EPS) to install hardware and software for the financial management system (FMS).


No computerized FM system exists.

FMS hardware and software installed in EPS.

Computerized FM system not yet fully rolled out.

Date achieved 06/25/2001 12/31/2004 06/30/2006

Comments (incl. % achievement)

The introduction of a computerized FM system was co-financed by the Swedish International Development Agency (SIDA). The component was not fully implemented at the time of this ICR. EPS has team and budgetary resources in place to complete the project.

Indicator 5 : Issuance of an Energy Policy Statement by the Government of Serbia


Energy Policy Statement to be prepared by the Ministry of Mining and Energy

Energy Policy Statement prepared by the Ministry of Mining and Energy

Date achieved 06/01/2002 04/30/2003 Comments (incl. % achievement)

100%

Indicator 6 : Preparation of a draft Energy Law


Draft Energy Law to be prepared by the Ministry of Mining and Energy

Draft Energy Law prepared by the Ministry of Mining and Energy

Date achieved 09/01/2002 07/23/2004 Comments (incl. % achievement)

100%

(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised

Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Information: This emergency project (to be implemented over a relatively short period) had no defined Intermediate Outcome Indicators

Value (quantitative or Qualitative)

Date achieved Comments (incl. %

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achievement)

G. Ratings of Project Performance in ISRs

No. Date ISR Archived DO IP

Actual Disbursements (USD millions)

1 11/05/2001 Satisfactory Satisfactory 0.00 2 02/22/2002 Satisfactory Satisfactory 0.70 3 12/02/2002 Satisfactory Satisfactory 2.70 4 06/03/2003 Satisfactory Satisfactory 3.30 5 12/29/2003 Satisfactory Satisfactory 4.52 6 06/24/2004 Satisfactory Satisfactory 5.70 7 12/22/2004 Satisfactory Satisfactory 5.85 8 05/25/2005 Satisfactory Satisfactory 5.82 9 06/30/2005 Satisfactory Satisfactory 5.82

H. Restructuring (if any) Not Applicable

I. Disbursement Profile

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1. Project Context, Development Objectives and Design (this section is descriptive, taken from other documents, e.g., PAD/ISR, not evaluative)

1.1 Context at Appraisal (brief summary of country and sector background, rationale for Bank assistance) Country background: The Federal Republic of Yugoslavia (FRY, later Serbia and Montenegro) succeeded to the membership of the former Socialist Federal Republic of Yugoslavia in the World Bank in May 2001. The Bank’s initial support to FRY was governed by a two-phase Transitional Support Strategy (TSS). In the first (pre-membership) phase a US$ 30 million trust fund was established by the Bank to finance emergency economic recovery and transition program in FRY (established by the Board of Directors on March 13, 2001). Five projects were financed out of this trust fund, one of which was the Electric Power Emergency Reconstruction Project (US$ 6 million). The second phase provided a broader program of support for the Economic Reconstruction and Transition Program (ERTP) financed under a three-year exceptional International Development Association (IDA) allocation of up to US$ 540 million. The first full Country Assistance Strategy (CAS) for Serbia and Montenegro, covering FY05-07, was discussed by the Executive Directors in December 2004. Following the dissolution of the State Union of Serbia and Montenegro in May 2006, the first full Country Assistance Strategy for the Republic of Serbia, covering FY08-10, is currently being developed. The Republic of Serbia Electric Power Emergency Reconstruction Project (the Project) was of an emergency nature and aimed to help restore reliable electricity supply in Serbia through urgent repairs of power facilities affected by lack of maintenance and damage caused during the Kosovo conflict. Additional objectives were to improve the financial management system of the Electric Power Company of Serbia (EPS) and to support the Serbian Ministry of Mining and Energy in preparing an Energy Policy Statement and drafting a new Energy Law. The project has provided support for increasing available generating capacity through repair of a 210 MW unit in the thermal power plant Kostolac A (representing 60 percent of capacity out of operation at the time of the Project preparation) and for improving reliability of the transmission network through reinforcement of the transmission substation Sremska Mitrovica, which is key for the import of electricity and a reliable operation of the high voltage power grid. The 210 MW unit in Kostolac A had been out of operation since March 2000 when its boiler's super-heater collapsed due to accumulated fatigue of the supporting structure. The 300 MVA substation in Sremska Mitrovica became a bottleneck in the transmission system after the break of the 400 kV tie line between Serbia and Croatia in 1991. The load growth during the 1990s and the weakening of the transmission network due to damage caused by the Kosovo conflict caused an overloading (up to 130 percent) of transmission lines connected to the Sremska Mitrovica substation. Sector background and rationale for Bank assistance: The Electric Power Emergency Reconstruction Project supported one of the goals of the Transitional Support Strategy of

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coordinating with other donors and raising urgently needed funding that would complement a larger program to help restore electricity generation and transmission capacity before the winter season of 2001. The Project also supported the pre-membership objective of laying the foundation for sectoral reforms through the introduction of a sound financial management system in EPS and the provision of technical assistance to the Serbian Ministry of Mining and Energy for the development of a new Energy Policy Statement and drafting of a new Energy Law. The electric power sector of Serbia suffered considerable damage during the 1999 Kosovo conflict, with its generation stations, transmission lines and substations being specific targets of NATO bombing. Subsequently, the stability of the power system was maintained only by imposing rolling blackouts in parts of the system and importing substantial quantities of electricity from neighboring countries (a total of 3.5 TWh was imported in 2000, i.e. more than 10 percent of demand). It was estimated that in 2001, even assuming a doubling of electricity prices and a commensurate demand response, an additional 2.5 TWh of electricity imports would have been required to meet demand due to the need to take domestic generating units out of operation for critical repairs. As a result, the priority needs for the near-term included continued donor support for electricity imports, emergency repair of generation plants, and reinforcement of key substations and transmission lines to ensure a stable supply of electricity and, in particular, of imports. The electric power system of Serbia was operating at the very edge of safety and with increasing outage times of its main equipment, which necessitated load shedding and rolling blackouts throughout the country. The Government undertook a major effort with the help of donor resources to prevent a widespread energy crisis, which would endanger basic electricity service provided to industry and commerce, households, public transportation, schools and hospitals. Nevertheless, the accumulated problems in the power sector required time and very large resources to resolve. The most important ingredient of a sustainable solution was a steady support from the Government for the sector reforms that included an increase of tariffs, the commercialization of the power industry, and the gradual shift of responsibilities for the social protection of the poor from power companies (through the subsidized price of electricity) to the Government. The rationale for the Project's geographic and technical focus was based on a strategic choice to assist in repairing the largest thermal power unit, at the time out of operation, (Kostolac A2) and reinforcing the critical 300 MVA Sremska Mitrovica transmission substation, which is key for the stable operation of the power grid. This choice ensured that Bank funding would have the largest possible impact both in the short term and the long term. During the 1990s the sector was to a considerable extent decapitalized: energy prices plummeted during the period of hyperinflation (1993-1994), rose sharply during 1995-1997, but were thereafter not allowed to keep pace with inflation or international fuel prices. Although as recently as 1997 the electricity price was still 3.7 US cents/kWh, by October 31, 2000, the price was merely 0.9 US cent/kWh, or about one fifth of the estimated economic cost of supply. Similarly, the October 31, 2000, price for district

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heating in Belgrade for households, schools and hospitals (5.0 US cents/m2/month) was only one eighth of the economic cost-recovery level. Because this was an emergency project there was no policy conditionality on electricity pricing attached to this Grant. However, as a result of the dialogue between the Government of Serbia and the Bank, which started in December 2000, the Government of Serbia decided to implement major electricity tariff increases; developments in this field were monitored both during implementation of this Project as well as under the Bank's adjustment lending to the Federal Republic of Yugoslavia/Serbia and Montenegro (Structural Adjustment Credit 1 and Structural Adjustment Credit 2). The electric power industry of Serbia (excluding Kosovo) is the responsibility of EPS, a vertically integrated, state-owned utility, and EMS, the state-owned power transmission and dispatch company. EPS comprises 11 economic associations (enterprises for coal production, power generation and power distribution) The power sector is regulated by the Ministry of Mining and Energy of the Republic of Serbia, and electricity tariffs are approved by the Government of Serbia.

1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) The Project Development Objectives were: 1. To help restore reliable electricity supply in Serbia through urgent repairs of power facilities affected by lack of maintenance and damage during the Kosovo conflict. In particular: - support to increase available generating capacity through repair of the 210 MW unit in thermal power plant, Kostolac A, and - improve reliability of transmission network through reinforcement of the transmission substation Sremska Mitrovica. 2. To improve the financial management system of the Electric Power Company of Serbia (EPS). 3. To support the Serbian Ministry of Mining and Energy in preparing an Energy Policy Statement and drafting a new Energy Law. The Project Key Performance Indicators, as approved, were: 1. Power plant Kostolac A2 is in operational condition (by November 15, 2001) 2. Complete installation of 400 MVA transformers in substation Sremska Mitrovica

(by December 15, 2001) 3. Government of Serbia issues an Energy Policy Statement (by June 1, 2002)

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4. Ministry of Mining and Energy prepares a draft Energy Law (by September 1, 2002)

5. Financial management system established in EPS (by December 15, 2002).

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification The Project Development Objectives were not revised.

1.4 Main Beneficiaries, (original and revised, briefly describe the "primary target group" identified in the PAD and as captured in the PDO, as well as any other individuals and organizations expected to benefit from the project) The Electric Power Emergency Reconstruction Project had a direct impact on improved reliability and quality of electricity supply with consequent reduction of blackouts and brownouts and the associated costs to consumers. By reducing shortages of electricity supply, a broad segment of the population benefited from an economic, welfare, health, safety, and environmental point of view. By connecting the Kostolac thermal power plant A2 unit to the district heating system, the residents of Kostolac and Pozarevac benefited from a health, comfort and environmental point of view. The Government of Serbia and EPS recorded savings in the operation and maintenance of power plants and transmission substations and reduced the need for larger imports of electricity.

1.5 Original Components (as approved)

The project consisted of the following components: Component A. Repair of Unit A2 (210 MW) in the Kostolac A thermal power plant. The repair included:

• Boiler and turbine overhaul • Connection to the district heating system • Thermal insulation • Unit control system • Refurbishment of auxiliary systems.

The total estimated cost of Component A was US$ 12.3 million, of which US$ 3.0 million was to be financed by the Bank. Component B. Reinforcement of Sremska Mitrovica transmission substation. The reinforcement included:

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• Civil works • 400 kV transformer bay • 400 kV transmission connection.

The total estimated cost of Component B was US$ 5.0 million, US$ 2.0 million of which was to be financed by the Bank.

Component C. Institutional development including:

• Technical assistance • Financial management system.

The total estimated cost of Component C was US$ 2.5 million, of which US$ 1.0 million was to be financed by the Bank. In addition to the Bank’s US$ 6.0 million grant, the Swedish International Development Agency (SIDA) was to finance SEK 16 million (US$ 1.6 mill.) and EPS was to finance US$ 2.2 million of the US$ 20.0 million project total financing requirements. The Bank has managed SIDA’s co-financing component. A Russian suppliers' credit for equipment necessary for Kostolac Unit A2 rehabilitation and a Chinese suppliers' credit for the reinforcement of Sremska Mitrovica transmission substation were to finance US$ 10.3 million of the project estimated costs. The above components were carefully designed to achieve the Project Objectives and they took into account the existing deteriorating condition of the power sector in Serbia and its priority needs at the time of the project. Components A and B provided support for increasing available generating capacity through repair of a 210 MW unit in the Kostolac A thermal (coal-fired) power plant and for improving reliability of the transmission network through reinforcement of the Sremska Mitrovica transmission substation and interconnecting it to the 400 kV transmission system. This interconnection is key for the country's import of electricity and reliable operation of the transmission system as well as for integrating the Serbian power system into the developing regional market.

1.6 Revised Components All contracts for the repair of the Kostolac Unit A2 were completed at a combined value of US$ 2.7 million resulting in a cost saving of US$ 0.3 million. Similarly, due to strong competition between local construction firms, the reinforcement of the Sremska Mitrovica transmission substation was also completed with significant cost savings of about US$ 1.0 million. As a result, the Bank agreed to finance from the project surplus funds the following two new components: Component D. Purchase and installation of commercial meters to replace existing obsolete meters in EPS’ transmission system. The cost of the 670 purchased meters was US$ 593,928.

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Component E. Purchase of equipment necessary for refurbishing the 6 kV auxiliary system at the Kostolac A thermal power plant. The cost of the equipment was US$ 369,137. The Bank approved the purchase and replacement of commercial meters in EPS’ transmission system (Component D) because the existing meters were obsolete and unable to meet regional standards for commercial metering. Furthermore, manual reading of these outdated meters and incomplete metering at the transmission system borders had been major obstacles for reduction of losses in the transmission system and the integration of the Serbian power system into the regional power market. The Bank approved the purchase of equipment necessary for refurbishing the outdated 6 kV auxiliary system at the Kostolac A thermal power plant to further improve the reliability of the plant.

1.7 Other significant changes (in design, scope and scale, implementation arrangements and schedule, and funding allocations) The initial Project closing date of June 30, 2003, was extended once until December 31, 2004. The grant closing date for the SIDA co-financing was extended two times, initially to February 28, 2006, and than to June 30, 2006 so as to finalize the activities related to the introduction and operationalization of the financial management system in EPS (completion of which was further delayed after closing of the SIDA grant, as elaborated in Sections 2.2 and 3.2 below). There were no other major changes in design, scope, scale or implementation arrangements and schedule over the course of the Project.

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry (including whether lessons of earlier operations were taken into account, risks and their mitigations identified, and adequacy of participatory processes, as applicable) The Bank experience in other transition economies and post-conflict countries has shown that, while quick response to a crisis is imperative, it is equally important to identify underlying problems and determine how to resolve them in ways that result in long-term sustainable solutions. From this point of view, the Electric Power Emergency Reconstruction Project was designed in such a manner as to support urgent repairs that were immediately needed at most affected power production and transmission facilities in order to ensure reliable and high quality electricity supply to consumers and to mitigate the risk of any further major electricity shortages or blackouts.

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Also, the project aimed at helping to improve EPS procurement and project implementation capacity by establishing a Project Implementation Unit with highly competent local staff. With a reservation for the Financial Management System sub-component (commented further below), the project had an overall simple design. The Project Objectives focused on addressing some of the most urgent issues that were affecting the power sector industry as well as the broad population of Serbia. In this respect, particular attention was paid to:

• Ensure simple and transparent project design • Adopt realistic implementation and disbursement schedules • Prepare a detailed procurement plan • Ensure full support of the Government

Through its prior sectoral work and in the process of project preparation, the Bank was instrumental in convincing the Government of Serbia of the need for increasing the price of electricity in order to safeguard the financial and technical viability of the sector. Although simplicity of project design was at the core, it was a project with limited resources that aimed at the high goals of (i) reconstruction of major physical infrastructure; (ii) restructuring of a non-transparent vertically integrated monopoly (EPS); and (iii) adoption of a new legal and regulatory framework to enable energy sector reform. Good progress could not be attributed to this project alone, but, as described later, it was important in all areas, and helped facilitate the Bank’s dialogue with the Government and the sector. The Project was prepared in close collaboration with the Government and EPS as well as with leading environmental NGO representatives (during the Annual Conference of the Yugoslav Energy Association on May 15-17, 2001). International donors involved in other segments of the Serbia power system reconstruction and rehabilitation were also closely consulted. The project has assisted EPS in introducing a sound financial management system, but this subcomponent is still under implementation. The sub-component could not be considered of emergency nature in the same way as notably the power system repair works, and therefore the question could be raised whether its inclusion in this operation was warranted. Comprehensive financial management systems are notoriously difficult to implement, and the original time schedule was probably not realistic. It is also noted from the Project Appraisal Document that the scope of the FMS would be defined by a consultant to be hired during project implementation to prepare technical specifications and bidding documents for the FMS. This subcomponent is further commented upon in Sections 2.2 and 3.2 below, as well as in Section 5.1 where quality at entry is rated.

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2.2 Implementation (including any project changes/restructuring, mid-term review, Project at Risk status, and actions taken, as applicable) The project was not restructured; there were no major changes made to the design, and the project was never characterized as a Problem Project although it was flagged that it potentially could become one. In FY02 Serbia was a post-conflict country because of the war. Therefore, based on a recommendation in the Bank’s Annual Report on Portfolio Performance for FY02, some fine-tuning was done to the FY02 portfolio by retrofitting country flags for post-conflict countries, impacting the risk assessment of this Project. A mid-term review was held in May 2002 (albeit early to deserve the label) when a set of measures that would ensure efficient completion of the project were discussed and agreed upon between the Bank and EPS (Aide Memoire in the files; but no Implementation Status Report filed at that occasion). Overall, the project implementation was satisfactory. EPS’ ownership over the entire project was strong and the team implementing it was fully qualified and well equipped with technical knowledge. However, delays were experienced under the SIDA co-financed sub-component for introduction of a financial management system in EPS, and the component is not yet fully implemented at the time of this ICR. The full rollout of the integrated computerized accounting system was extended beyond the original closing date of both the Bank and SIDA grants due to manifold reasons. Following a long delay caused by the lack of agreement on a two-stage tender procedure to select the system supplier, further delay was encountered by the initial weak buy-in of the new integrated computerized accounting system concept by the senior management at the five pilot sites, which represented over 50 percent of the entire EPS organizational structure (list of pilot sites can be found in Section 3.2). After a great deal of time lost, the matter was resolved by holding a number of workshops on general concepts of financial management for the managers at the pilot sites (convened by the system supplier and designer) and by having the EPS’ Project Implementation Unit work on a continued basis with the chief accountants and senior IT staff at the pilot sites. Progress was also achieved by having the pilot site managers, IT managers, and chief accountants from each of the pilot sites attend bid clarification meetings (held during the first-stage evaluation process). These meetings were very well attended, and detailed presentations by each of the bidders were effective in explaining to the EPS officials how the new integrated computerized accounting system would benefit the organization. Following the full buy-in of a new accounting concept by EPS, further problems were encountered in terms of supplier performance. The lack of full understanding of EPS’ current business practices as well as poor communication with the project managers, caused delays. On numerous occasions, the Client pointed out that lack of permanent local presence of the experts implementing the roll-out of the new system was affecting the successful completion of this project component. The communication between EPS and the supplier was much based on e-mail exchanges and rare visits by the experts. In addition, EPS had problems in persuading the supplier that all five pilot site representatives be present at joint meetings when their visits occur. As a consequence, the

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full roll-out of the integrated computerized accounting system did not happen as planned on January 1, 2007, and the various modules were not implemented at the five pilot sites at that time (billing, payroll, investment and maintenance and, cash-flow modules). EPS was also dissatisfied by the quality of training provided by the supplier since it did not comprehensively address their queries on how the current accounting system in EPS would transfer and correspond to the new SAP platform under the integrated computerized accounting system. The hardware has been procured but is not yet in use. All software licenses have been obtained as well. At the moment, a number of draft business process blueprints have been developed and the final version is under discussion between EPS and the supplier. Both parties are now eager to finalize the project, and the supplier has strengthened its team, also locally, to ensure successful completion of the contract. Although the parties currently work according to a schedule that finalizes the financial management system implementation by end June 2007, it would not be unexpected if the remainder of 2007 would be needed. Introduction of new financial management systems on a new software platform (SAP) is complex and notorious for delays. That the “pilot” project ultimately would be designed to cover more than 50 percent of EPS’ activity is beyond expectations at the outset and positively indicative of senior management buy-in to the project, also knowing that alternative, new financial management and information systems have not been allowed to flourish in the other companies within EPS, pending a full roll-out of the chosen system.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization The overall Project implementation, monitoring and evaluation have been performed by EPS and the Ministry of Mining and Energy of the Republic of Serbia. During Negotiations agreement was reached that Quarterly Project Management Reports should be prepared by EPS to facilitate project monitoring. These reports spelled out actual sources and applications of funds for the Project, both cumulatively and for the period covered by the report, and projected sources and applications of funds for the subsequent three-month period. EPS also prepared a mid-term report which integrated results of the monitoring and evaluation activities on the progress achieved in carrying out the Project so far. The report (submitted to the Bank in early 2002) set out the measures recommended to ensure the efficient completion of the Project and the achievement of its objectives.

2.4 Safeguard and Fiduciary Compliance (focusing on issues and their resolution, as applicable)

In accordance with OP/BP/GP 4.01 (Environmental Assessment) the Project was rated Environmental Category B. The reason for this rating is that the physical component of this Project was reconstruction and restoration, and there was no construction of new facilities, except a connection (1.8km) between substation Sremska Mitrovica and the existing 400kV transmission line which passes by the substation. Other environmental issues concerned the disposal of used equipment and materials, noise (during construction) and public safety. During the Project preparation the environmental impact was duly assessed in accordance with the World Bank Operational Directive 4.01 and

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environmental procedures of the Republic of Serbia. An Environmental Management Plan was prepared, reviewed and agreed upon. Its implementation was monitored as part of the normal Project reporting and the Project implementation did not cause any substantial negative environmental impact.

The procurement under the Project was compliant with relevant World Bank procurement procedures. Although certain procurement procedures were considered to be time consuming and difficult for the Client to apply, these did not inhibit the overall Project progress. At the time of the Project preparation, the Project Implementation Unit’s procurement capacity was assessed as a high risk. Therefore, EPS procurement staff were provided with a number of extensive training sessions in procurement under IBRD Loans and IDA Credits. In addition a technical consultant was hired by EPS for preparation of bidding documents and evaluation of bids. A deficiency in procurement was a large work load that on occasions led to delays, and notably caused delays for the Financial Management System subcomponent.

Financial management was satisfactory and acceptable. The financial management function for the Project was adequately staffed by a qualified and experienced specialist. Financial Management Reports and audit reports were submitted in a timely and acceptable manner1. Annual audits performed by the independent auditor expressed clean opinions on the Project’s financial statements.

2.5 Post-completion Operation/Next Phase (including transition arrangement to post-completion operation of investments financed by present operation, Operation & Maintenance arrangements, sustaining reforms and institutional capacity, and next phase/follow-up operation, if applicable) The investment components under Kostolac thermal power plant unit A2 and Sremska Mitrovica substation are incorporated in the regular operations of the power sector and therefore no special transition arrangements are required. The institutional capacity development in the Ministry of Mining and Energy proved sustainable as the power sector of Serbia has undergone a significant transformation. However, further implementation of a set of sector reform packages will be necessary in order to achieve some of the major goals set by the Government’s comprehensive agenda, mainly further restructuring of the Electric Power Company, development of a strategy for private sector participation in power generation and improving operational efficiency of the Company and the implementation of the National Gasification Strategy. The Bank will continue to monitor the progress made under the roll-out of the integrated computerized financial management system in EPS and will do so until the project component has been completed.

1 Counterpart co-financing of less than $20,000 was not audited, as it should have been. Our financial management department is handling this issue (there is no complaint known to the Bank about any non-payment by the vendor in question).

11

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation (to current country and global priorities, and Bank assistance strategy) The objective of restoring electricity supply in Serbia (Objective (1)) should be assessed in the context of the deteriorated conditions of the power sector at the time when this project was prepared and implemented. The power sector suffered considerable damage during the 1999 Kosovo conflict with its generation stations, transmission lines and substations being specific targets of bombing. Subsequently the stability of the power system was maintained only by imposing rolling blackouts in parts of the system and importing substantial quantities of electricity from neighboring countries (a total of 3.5 TWh was imported in 2000). As a result of this situation, the priority needs of the power sector in 2000 and 2001 included continued donor support to electricity imports and emergency repairs of generation and transmission facilities to ensure a stable and reliable supply of electricity. This Project Objective of restoring reliable electricity supply in Serbia was timely and crucial for the country to meet its power sector priority needs at that time. Furthermore, this objective was achievable since major equipment necessary for facility rehabilitations had already been funded and supplied by other donors. The Bank’s assistance program for FY02 was outlined in the Transitional Support Strategy (TSS) for the Federal Republic of Yugoslavia, and the Project’s objectives were in accordance with the TSS. TSS included pre-EU-membership assistance, and the Project’s Component C (Institutional Development) supported the pre-membership objective of laying the foundation for sectoral reforms through the introduction of a sound financial management system in EPS and the provision of technical assistance to the Serbian Ministry of Mining and Energy for the development of a new Energy Policy Statement.

3.2 Achievement of Project Development Objectives (including brief discussion of causal linkages between outputs and outcomes, with details on outputs in Annex 2) The Project successfully achieved the Development Objective of restoring the reliability of electricity supply in Serbia through the urgent repair of generation and transmission facilities affected by lack of maintenance and damages during the Kosovo conflict. This Project Objective was achieved by the implementation of the Project's original Components A and B, and was further enhanced by the addition of the two new Components D and E which were financed by the project cost savings. The outcomes of restoring the reliability of the electricity supply in Serbia have been significantly positive and are considered highly satisfactory. 1. Return Kostolac unit A2 to operational condition Due to the reduced maintenance of boiler tubes and due to the accumulated fatigue in the structure supporting the boiler’s super-heater, a major failure of the unit occurred on March 2, 2000. The proceeds of the Electric Power Emergency Reconstruction Project focused on critical repairs in the thermal power plant which included boiler and turbine

12

overhaul, unit thermal insulation, boiler acid cleaning, replacement of all boiler tubes and refurbishment of the boiler supporting structure. The unit control system and the station supply transformer were also refurbished and replaced. All of the repairs were completed on time and the Kostolac A2 210 MW unit returned to full operation on September 10, 2001. During the winter season 2001-2002, the unit operated on average 560 hours per month and produced 473.3 GWh of electricity, helping to reduce the cost of imports by $ 14.2 million in that period (PAD estimated an increase in electricity generation by about 300 GWh per year). The unit availability was at about 80 percent while the number of boiler outages was reduced to 4 as compared to an average of 20 in earlier years. In addition, the EPS, using its own funds, reconstructed the turbine at Kostolac A2 unit to provide heat for district heating systems to two cities, Kostolac and Pozarevac, whereas the new system derived steam directly from the outlet of the medium pressure turbine. Up to that point the district heating system was supplied from an inefficient (uncontrolled) derivation of heat from the plant’s self-consumption steam collector. The highly satisfactory achievement of this Project Objective attributed to the timely and well designed project components, efficient procurement and implementation and a Project Implementation Unit with highly competent local staff. Despite a minor delay in the implementation of the Kostolac unit A2 connection to the district heating system due to the cancellation of a Russian contract to supply equipment, EPS procured the equipment from its own resources and Kostolac Unit A2’s new connection to the district heating system was completed in May 2004. 2. Complete installation of 400 MVA transformer in the Sremska Mitrovica transmission substation The reinforcement of the transmission substation Sremska Mitrovica was completed ahead of schedule and the new 400 kV transformer bay was put in operation on September 30, 2002. The connection of Sremska Mitrovica substation to the 400 kV network significantly improved reliability and quality of power supply in northern Serbia and enhanced the network stability. The significant improvement in quality of supplied electric power to consumers in northern Serbia is illustrated in the voltage fluctuation diagram below:

13

90.00

100.00

110.00

120.00

130.00

12/15

/2003

12/16

/2003

17.12

.03

18.12

.03

19.12

.03

20.12

.03

21.12

.03

22.12

.03

23.12

.03

24.12

.03

25.12

.03

26.12

.03

27.12

.03

28.12

.03

29.12

.03

30.12

.03

31.12

.03

01.01

.04

02.01

.04

03.01

.04

04.01

.04

05.01

.04

06.01

.04

07.01

.04

08.01

.04

09.01

.04

10.01

.04

11.01

.04

12.01

.04

13.01

.04

14.01

.04

15.01

.04

2001/2002 without transformer 2003/2004 with transformer

kV

400/220/110 kV SREMSKA MITROVICA 2 substation

The measured voltage levels before and after the investment (which included the construction of one 400 kV transformer bay, installation of a 400 MVA transformer and associated switchgear at 400 kV and 220 kV voltage levels and construction of a 1.8 km long connection line) show significant reductions in voltage deviations to about 5-6 kV (as opposed to the pre-investment fluctuations from 100 kV to 120 kV). The impact of the installation of the 400 MVA transformer on the transmission system losses was also significant. In 2001 and 2002 the transmission system losses were 3.47 percent and 3.44 percent while in 2003 they amounted to 2.91 percent. The network improvements in Sremska Mitrovica were particularly important for the reconnection of Serbian and Croatian power systems with the transmission line Sremska Mitrovica-Ernestinovo, which is also the main link between the Southeast European power grid and the Western European power grid (UCTE). 3. Introduction of a modern financial management system in EPS This component of the project was jointly financed by SIDA and EPS. The accounting records of EPS were maintained in accordance with the Serbian Accounting Standards which differed materially from International Accounting Standards (IAS). EPS’ financial statements did not, for example, reflect the true financial position of the company or the real operational results. Therefore, the project provided funding for the establishment of an integrated financial management system (integrated computerized accounting system) for EPS that is capable of keeping accounts in line with local regulations and also in IAS format. The introduction of a new system was divided into two phases.

(i) Implementation of an integrated financial management system at five pilot sites representing over 50 percent of the entire EPS organizational structure:

14

• EPS Headquarter in Belgrade • Transmission Company “Elektroistok” in Belgrade (now Serbian

Transmission System and Market Operator (EMS)) • Distribution Company “Elektrovojvodina” in Novi Sad • Thermal power plant “Nikola Tesla” in Obrenovac • Coal mine “Kolubara” in Lazeravac (ii) Roll-out of the integrated financial management system to all operating units

of EPS. Under this component, the Project supported:

• introduction of International Accounting Standards (IAS) in EPS; • introduction of a consistent system of accounting throughout EPS; • a common and integrated basis to support EPS’s financial management and

reporting; • standardization and introduction of consistency in finance and accounting

practices throughout EPS; and • timely access of senior management of EPS to consistent and reliable financial

information. While considerable progress has been made, the financial management system is not yet operational. The reasons for this are manifold and are discussed under Section 2.2. EPS is committed to the successful implementation of the system, and has allocated staff and budgetary resources to that effect (see EPS comments in Annex 7). 4. Technical assistance.

The project provided significant technical assistance for institutional capacity development in the Ministry of Mining and Energy. Advisory services were provided in order to formulate and develop the following:

1. Foundation of Serbian Energy Policy (Energy Statement Serbia) - The main objective of this study was to develop and elaborate possible foundations of a Serbian energy policy as an input to the Serbian Energy Statement, a political statement that set the stage for the decision makers on deciding and developing an appropriate energy strategy for the country. The report elaborated on general strategies for the future development of the Serbian energy system laying out a number of variants and options. Ways to meet the main goals and specific objectives of Serbian society related to the energy system development were explored, such as the urgent adjustment of the energy demand sectors with the capabilities of the present energy supply sub-sectors, as well as a better management of the demand in the near future and the improvement of end-use energy efficiency.

15

2. Energy Law – Represents the basis for the reorganization of Serbia’s entire energy sector and its full integration in the European community. One of the important activities arising from this law is Serbia’s full participation in the regional energy market, i.e. the Energy Community of South East Europe. The law also laid the foundation for a regulatory agency, the Energy Agency of the Republic of Serbia established in 2005.

3. Energy Sector Development Strategy by 2015 – Represents a vision of the

roadmap that would ensure a transformation of the current situation in the overall energy system of Serbia (both energy production and energy consumption sectors) into a qualitatively new situation for energy activity performance and energy sector development. The Strategy proposes a time-schedule for the adoption of appropriate instruments to realize substantial and overall changes in energy activities in accordance with the corresponding political, socio-economic, energy, and environmental commitments of the country.

In addition to the aforementioned, further technical assistance provided to the Ministry of Mining and Energy included advisory services for the restructuring of the Electric Power Industry, assistance in the preparation of an upstream Oil and Gas Law as well as a Gasification Strategy. In Annex 2, specific outputs and achievements by each of the Project's components are reviewed.

3.3 Efficiency (Net Present Value/Economic Rate of Return, cost effectiveness, e.g., unit rate norms, least cost, and comparisons; and Financial Rate of Return) A simplified economic analysis was undertaken since the Electric Power Emergency Reconstruction Project was of an emergency nature, rather than new long-term investments. As an emergency project, the benefits were estimated to be unusually high, reflecting the considerable disequilibrium of the power sector. Therefore a simplified analysis in which only part of the benefits were quantified was deemed to be sufficient to demonstrate the robustness of the project. The repairs to the Kostolac A2 unit increased electricity supply by about 300 GWh per year. This enabled EPS to decrease supply disruptions and reduce electricity imports. At the time, the value of increased supply was the equivalent of the price of imported electricity. Decreasing electricity imports by 300 GWh per year has therefore decreased EPS' costs by about $10 million per year, resulting in a simple payback period of 14 months. The reinforcement of the Sremska Mitrovica substation has reduced transmission losses by 29 GWA per year, reduced outages due to transmission failure and increased the life of other assets by reducing overloading of equipment. The benefits associated with avoiding transmission system collapse were difficult to assess as it was not predicable when such a collapse would happen without the proposed investment. An estimate of the lower bound of the proposed component was made by valuing the benefits associated

16

with decreased losses at import prices. This has resulted in annual savings of $1 million to EPS, giving a lower limit on the EIRR of 18 percent. 3.4 Justification of Overall Outcome Rating (combining relevance, achievement of PDOs, and efficiency) Rating: Satisfactory The Satisfactory outcome rating is justifiable through the overall high importance and efficiency of the investments in restoring reliable and stable electricity supply. Support to the Government’s policy development was also timely and important. The component addressing the FMS system in EPS is much delayed, which deducts from the otherwise excellent execution of the Project. The Bank notes, though, that this component, important as it is, may be considered less important within the framework of an emergency project. Further, the Bank team is satisfied with the ongoing efforts of both EPS and the supplier to fulfill a full implementation of this component by the end of 2007. The Project Objectives and design were aligned fully towards the country objectives and the Bank’s country strategy, and the Project has paved the road towards a more comprehensive and in-depth restructuring of the overall sector (e.g. electricity pricing, tariff system development, Energy Law, Gasification Strategy).

3.5 Overarching Themes, Other Outcomes and Impacts (if any, where not previously covered or to amplify discussion above) (a) Poverty Impacts, Gender Aspects, and Social Development The Project had measurable positive social impacts as a result of the restoration of reliable electricity supply to households, public transportation and buildings (e.g. schools, hospitals), and water supply and wastewater treatment facilities. (b) Institutional Change/Strengthening (particularly with reference to impacts on longer-term capacity and institutional development) The Project will result in a substantial institutional change and strengthening of EPS primarily through the implementation of an integrated computerized accounting system throughout the company. The Ministry of Mining and Energy has developed a strong institutional capacity that enables the Government of Serbia to implement a long-term energy sector transformation and development. (c) Other Unintended Outcomes and Impacts (positive or negative) No unintended impacts or outcomes of the Project were observed.

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops (Optional for Core ICR, required for ILI, details in annexes) N/A

17

4. Assessment of Risk to Development Outcome Rating: Moderate At the time of the project preparation risks taken into account were of political and implementation capacity nature, and were: (i) Insufficient counterpart funding (ii) Inefficient coordination between different agencies involve, and (iii) Changes in the Government and/or EPS management. In addition to the above critical risks, there were three main risks to the successful implementation of the proposed project: (i) Possible use of funds for less than optimal expenditures - this risk was addressed through a careful selection and design of all Project components. The Project covered activities which were the most urgent and effective in alleviating the electricity shortages at the time of project development. (ii) Delay in project implementation - this risk was reduced by EPS' and the Bank's joint effort to adopt straightforward solutions to project design and procurement and disbursement methods, and by the establishment of a PIU. In addition, a detailed implementation plan was jointly developed and agreed upon during project negotiations. Delays under the SIDA co-financed component for introduction of a financial management system in EPS, which is not yet fully implemented at the time of this ICR, are mitigated through a detailed action plan agreed upon by the supplier and EPS and through a firm commitment expressed by EPS to complete this project component during 2007 (please refer to Annex 7). In addition, the Bank team will continue to monitor the progress made under the roll-out of the FMS system until this project component has been completed (agreed between the Bank team and EPS management). (iii) Large number of other similar activities which EPS will have to implement in parallel with this project - this risk was mitigated through effective coordination provided by the PIU, close cooperation of the PIU with the Bank and with other donors and project supervision by the Government and the Bank. More importantly, the investments made into the reconstruction of the production and transmission facilities significantly improved the service availability, reliability and reduced technical losses. Those outcomes are likely to sustain into future. The introduction of an integrated computerized accounting system and its full roll-out in EPS represents the major risk to development. The continued delays in the realization of this component have caused its continuation beyond the closing date of the project. However, due to its importance and large scale buy-in, the EPS has committed to full ownership and has allocated own funds in order to complete this component.

18

5. Assessment of Bank and Borrower Performance (relating to design, implementation and outcome issues)

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry (i.e., performance through lending phase) Rating: Satisfactory Except for the Financial Management Component (as commented on further below), Bank performance during the identification, preparation and appraisal of the project was satisfactory. The project was prepared in an optimal period in order to respond in a timely manner to the urgently needed assistance which helped restore reliable electricity generation and transmission capacity. Further, the quality at entry was satisfactory for the emergency components following reasons: (i) the Project Objectives were a priority for the Government of Serbia and the EPS; (ii) the project design was appropriate in its simplicity and reflection of the capacity of the Recipient; and (iii) all safeguards and risks were adequately considered. The Government of Serbia and the bank both viewed the Project as a priority. It also strongly supported the Transitional Support Strategy goal of raising urgently needed funding that would complement a larger program that would help restore electricity generation and transmission capacity. The Project was also designed in such a manner as to support the Federal Republic of Yugoslavia’s pre-membership objective of laying the foundation for substantial sectoral reforms. The extensive collaboration and consultation with all beneficiaries and other affected groups ensured adequate identification of needs, priorities and necessary interventions, and secured strong country ownership from the preparation stage. The Financial Management System (FMS) sub-component (part of the Institutional Development Component) was less well prepared in the sense that definition of the component was largely pushed into the project supervision phase. As long as the sub-component was brought into an emergency project that required quick delivery, the project team probably had no other options. Although the FMS sub-component might have been better served by being implemented within the framework of another type project, one should not underestimate the overall project design’s value as a platform for the sector policy dialogue between the Bank and the Government and with EPS, a dialogue and process that had very positive outcomes, notably the establishment of energy sector policy directions and energy sector legislation for which the analysis and preparation was financed by the project’s TA component. Part of that agenda was increased transparency of sector operations and a transition to International Accounting Standards, which the FMS sub-component would support. Based on the above, the ICR team did not find that the implementation problems later faced by the FMS sub-component were sufficient grounds to modify the overall Satisfactory rating for Quality at Entry.

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(b) Quality of Supervision (including of fiduciary and safeguards policies) Rating: Moderately Satisfactory Bank team performance during project supervision is rated Moderately Satisfactory. Performance relating to the pure emergency components (physical installations to improve power supply) as well as for the TA component for urgent energy policy development deserve a Satisfactory rating, but implementation delays for the FMS sub-component moderate the overall picture. Despite three changes of task team leaders over the life of the Project, the regular supervision of the implementation was maintained. Problems, mainly related to procurement processes, were flagged and addressed immediately while remedial actions were proposed in a direct and timely communication between the Bank team and the Client (with exception commented on further below). The supervision of the Project was continuous and consisted of:

(i) formal supervision mission twice every fiscal year; (ii) regular interaction between the task team leader and the Project

Implementation Unit; (iii) regular interaction between the Bank and the co-financier; (iv) regular interaction between the Country Office project and procurement

assigned staff with the Project Implementation Unit; and (v) regular project progress reports.

The budget and staff resources allocated for the regular project supervision were sufficient. However, one of the reasons for long delays in the implementation of the Financial Management System sub-component was issues related to procurement – issues that the ICR team believes should have solved in a timelier manner. Without dwelling on the details of the procurement dispute and the lack of progress for this component for other reasons, the ICR team found it reasonable to modestly downgrade the performance of the Bank’s supervision effort (as well as that of the Implementing Agency) because of the Financial Management System sub-component. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory The combined assessment of Bank performance for quality at entry and for supervision led to an overall Satisfactory rating as good planning and execution by the Bank helped make the project successful and caused major improvements in energy supply and sector policy.

20

5.2 Borrower Performance (a) Government Performance Rating: Satisfactory The Government performance during the design and implementation of the project is rated satisfactory. The Ministry of Mining and Energy showed the necessary level of commitment and utmost level of ownership under the institutional capacity development component which has resulted in a number of technical and legislative outputs, namely the Energy Policy Statement, Energy Law and Energy Sector Development Strategy by 2015. (b) Implementing Agency or Agencies Performance Electric Power Company - EPS Rating: Moderately Satisfactory The performance of the implementing agency is rated Moderately Satisfactory. The Project Implementation Unit has managed very well the overall implementation of the emergency component of the project. The financial management and procurement aspects were fully in line with the requirements of the Bank. Coordination and facilitation of activities among different stakeholders was very good. All activities performed have complied fully with the provisions of the World Bank Grant Agreement and the SIDA Administrative Agreement. Regular audits did not reveal any material deficiencies in the financial reports. In respect of the above, the implementing agency would deserve a Satisfactory rating. However, major delays were experienced under the SIDA co-financed component for the introduction of a financial management system in EPS, and as a consequence this component is not yet fully implemented at the time of this ICR. The full rollout of the integrated computerized accounting system was extended beyond the original closing date of both the Bank and SIDA grants due to manifold reasons (as discussed under point 2.2). This component is the sole reason for the modest downgrading in the implementing agency’s rating, in the same way as for the Bank’s supervision performance. The Bank’s team continues the dialogue with EPS beyond the Project’s closing date and is assured of EPS’ full commitment to completing the FMS component of the project during 2007. (c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory The combined assessment of Borrower (grant receiver) and implementing agency performance led to an overall Satisfactory rating as overall good planning and execution by the Government and EPS made the project successful and caused major improvements in energy supply and sector policy.

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6. Lessons Learned (both project-specific and of wide general application) The following are the main lessons learned: • Rehabilitation of critical transmission and generation facilities (Sremska Mitrovica substation and Kostolac Unit A2) is key to restoration of the reliability of electricity supply in post-conflict countries, such as Serbia, and can result in long-term sustainability that will facilitate the integration of such countries in the regional market. • Well-designed project components combined with efficient procurement and implementation of the project can have significant positive impact on Project outcomes and may even result in cost savings that can be used for financing of additional project components (in accordance with procedures for approving reallocations). • Introduction of complex IT solutions in big organizations such as EPS are notorious for delays and require much upfront attention to ensure effective implementation. Implementation schedules for this type component must be realistic and take height for unforeseen events. It may not be appropriate to include complex financial management system

components in emergency projects.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies Implementing agency EPS has expressed its satisfaction with the implementation of the emergency repair components of the Project; see EPS’ letter in Annex 7. The enlargement of the Sremska Mitrovica substation caused reduction in energy losses, stabilized the voltage in the system; and the installation of the 400 MW transformer and the connection to the Croatian system again allowed Serbia to be connected to the European power system. The modernization of a block of the Kostolac A thermal power plant proved to be good; production from it increased by 50 percent on the previous year and its availability had a noticeable impact on blackouts (in the first six months reduced to four compared to typically twenty in earlier years). In the same letter in Annex 7, EPS recognizes delays in the implementation of the financial management system sub-component, and describes some of the implementation issues that have been addressed. EPS reconfirms its commitment to finish the project and plans to roll out the system in the entire company in a subsequent project phase. EPS has carefully selected a project team to ensure implementation and has set aside budget funds for the project’s completion.

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(b) Cofinanciers See letter from cofinancier SIDA in Annex 8. SIDA comments that it is of course of concern to SIDA that the financial management system (FMS) component has not yet been completed, in particular in view of its perceived benefits with regard to increased transparency and effectiveness in state utilities. SIDA is pleased to recognize the commitment made by the Bank to follow the FMS system development to an end and provide SIDA with a completion report for the component, including lessons learned. As a positive effect of the project, SIDA would like to recognize the dialogue performed by the Bank on increasing the electricity tariffs. Far-below-cost electricity tariffs has led to an over-utilization of direct use of electricity for heating purposes, where the preferred solution from an economic point of view would be increased use of co-generation in combination with efficient district heating, something SIDA has tried to demonstrate in its Belgrade District Heating Project. (c) Other partners and stakeholders (e.g. NGOs/private sector/civil society)

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Annex 1. Project Costs and Financing

(a) Project Cost by Component (in USD Million equivalent)

Components Appraisal Estimate (USD millions)

Actual/Latest Estimate (USD

millions)

Percentage of Appraisal

Total Baseline Cost 18.0 20.0 111

Physical Contingencies 1.5 0.0 Price Contingencies 0.5 0.0

Total Project Costs 20.0 20.0 100 Project Preparation Fund 0.0 0.0 Front-end fee IBRD 0.0 0.0

Total Financing Required 20.0 20.0 100

(b) Financing

Source of Funds Type of Co-financing

Appraisal Estimate

(USD millions)

Actual/Latest Estimate

(USD millions)

Percentage of Appraisal

Borrower 2.2 12.5 568 FOREIGN SOURCES (UNIDENTIFIED) 10.3 0.0 0

SWEDEN: Swedish Intl. Dev. Cooperation Agency (SIDA) 1.5 1.5 100

Special Financing 6.0 5.8 96.6

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Annex 2. Outputs by Component

Component A: Repair of Unit A2 (210 MW) in Kostolac A Thermal Power Plant The repair of Kostolac Unit A2 was highly satisfactory as it has significantly increased the unit quarterly production outputs, as illustrated in Table 1. The high satisfactory rating of this component is still justified despite the quarterly production outputs for Q1/2002 and Q2/2002 were below the targets specified in the PAD for this component’s key performance indicator. According to the plant's managers, during these two quarters the plant was out of service for one month of scheduled maintenance and, at the same time, EPS had import contracts and enough energy supply in its system. Therefore, this availability of other energy supplies in the system during these two quarters did not require the dispatch of Unit A2 to higher levels. Nevertheless, records of the quarterly production of Unit A2 in subsequent quarters show that the unit outputs have been much higher, and in the range of 175 GWh to 276 GWh (except in quarters during which Unit A2 was out of service in maintenance for a period of one month). Furthermore, the rehabilitation of Kostolac Unit A2 has significantly increased the efficiency of the plant operation by improving the plant's availability as illustrated in Table 2. The table shows that the plant's availability has increased from 26 percent in 2001 to 73 percent in 2003.

Table 1: Kostolac Unit A2 Quarterly Outputs

Year/Quarter Net Output Production (GWh)

2001 Quarter 4 282

2002 Quarter 1 157 Quarter 2 46 Quarter 3 175 Quarter 4 174 Total 2002 552



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Table 2 : Kostolac Unit A2 Availability Year Maximum Possible

Production Possible (Available)

Production Percent Availability

2001 1673160 MWh 445030 MWh 26.6 % 2002 1673160 MWh 715486 MWh 42.8% 2003 1673160 MWh 1228512 MWh 73.4 %

Component B: Reinforcement of Sremska Mitrovica Transmission Substation The installation of the 400 MVA transformer at the Sremska Mitrovica transmission substation has not only significantly improved the voltage performance of the 220 kV and 110 kV local transmission systems and reduced the losses in the Serbian transmission system, but equally important, it was also necessary for the reconnection of the Serbian and Croatian transmission grids through the Sremska Mitrovica transmission substation. The reinforcement of this Serbian – Croatian transmission link was crucial for the reconnection and resynchronization of the power system of South East Europe (UCTE zone 2) with UCTE Zone 1 that occurred in November 1, 2004 after 13 years of split as a result of the war events in the Former Yugoslavia. Therefore, the implementation of this component is considered highly satisfactory. The impact of the installation of the 400 MVA transformer on the transmission system losses is illustrated in Table 3. The table shows that in 2001, 2002 and 2003 the transmission system losses were 3.47 percent, 3.44 percent and 2.91 percent, respectively. EPS attributes the 0.5 percent reduction in the system losses in 2003 mainly to the installation of the 400 MVA transformer at the Sremska Mitrovica transmission substation, since no other significant upgrades or additions were made to the EPS transmission system during that period.

Table 3: Losses in the Serbian Transmission System Year Losses 2001 3.47% 2002 3.44% 2003 2.91%

Table 4 shows that the installation of the 400 MVA transformer has also significantly improved the voltages at the 220 kV and 110 kV transmission substations in the region surrounding Sremska Mitrovica. The table shows that during the winter 2004 peak demand period the voltages at the local 220 kV and 110 kV transmission systems were within their normal operating limits due to the installation of the 400 MVA transformer. The improvement of the system voltage performance has had significant positive impact on the quality of the power supply to electricity consumers in the area surrounding Sremska Mitrovica.

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Table 4: Substation Voltages

Substation

Voltage level without 400MVA

transformer at Sremska Mitrovica

2

(kV)

Voltage level with 400MVA

transformer at Sremska Mitrovica

2

(kV)

Improvement in the voltage

level

(KV) Sremska Mitrovica 2 220kV 210 225 15 Srbobran 220kV 214 217 3 Sremska Mitrovica 2 110kV 117 121 4 Srbobran 110kV 108 113 5 Sombor 110kV 99 104 5 Apatin 110kV 99 104 5

Component D: Purchase and Installation of Commercial Meters The implementation of Component D was a "Value added component" of the project, which was financed by the project surplus funds (cost savings). The purchase and installation of the commercial meters has been highly satisfactory. EPS purchased 670 commercial meters and as of December 2004, 274 meters were installed at boundary substations as illustrated in Table 5. Additional 105 meters were installed during January-February of 2005. EPS has also installed the remaining 291 meters at boundary substations on as needed basis during 2005. The installation of the commercial meters across EPS transmission system will reduce the non-technical energy losses in the transmission system and will facilitate the integration of Serbia with the developing regional market.

Table 5: Commercial Measuring Meters Type of Substation Number of Meters Installed

TPP/HPP 34 Distribution 187 Transmission 140 Direct Customers 18 Boundary substations 291 Total Installed 670

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Component E: Purchase of Equipment Necessary for Refurbishment of 6 kV Auxiliary System at Kostolac A plant

Component E was another "value added component" of the project, which was also financed by the project surplus funds (cost savings). The equipment necessary for the refurbishment was contracted, purchased and complete testing of the equipment was successfully executed in June 2004. EPS has installed the equipment in Kostolac A substation at the time of the scheduled overall plant maintenance period during May-July 2005. Therefore, the purchase of the equipment necessary for refurbishment of the 6 kV auxiliary system at Kostolac A plant is considered satisfactory.

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Annex 3. Economic and Financial Analysis (including assumptions in the analysis) Please refer to Section 3.3.

29

Annex 4. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members

Names Title Unit Responsibility/ Specialty

Lending Dejan Ostojic Team Leader/Power Engineer ECSSD Team Leader

Bernard Baratz Environmental Specialist ECSSD Environmental Specialist

Gennady Pilch Legal Counsel LEGEC Legal Counsel

Joseph Paul Formoso Senior Disbursement Specialist LOAG1 Senior Disbursement Specialist

Hiran Herat Financial Management Specialist ECSPS Financial Management Specialist

Snezana Mitrovic Procurement Specialist OPCDM Procurement Specialist Marina Lysiakova Team Assistant ECSSD Team Assistant

Supervision/ICR Bjorn Hamso (since Feb. 06) Sr. Energy Economist ECSSD Team Leader David Kennedy Economist ECSSD Team Leader Miroslav Frick Operations Analyst ECSSD ICR Author Plamen Stoyanov Kirov Procurement Specialist ECSPS Procurement Specialist

Aleksandar Crnomarkovic Financial Management Analyst ECSPS Financial Management Analyst

(b) Staff Time and Cost Staff Time and Cost (Bank Budget Only)

Stage of Project Cycle No. of staff weeks USD Thousands (including

travel and consultant costs)Lending

FY01 58.67 FY02 16.29 FY03 0.20 FY04 0.00 FY05 0.00 FY06 0.00 FY07 0.00

Total: 75.16 Supervision/ICR

FY01 0.00 FY02 81.16 FY03 62.81 FY04 89.14 FY05 84.39 FY06 30.71 FY07 5.80

Total: 354.01

30

Annex 5. Beneficiary Survey Results (if any) N.A.

31

Annex 6. Stakeholder Workshop Report and Results (if any) N.A.

32

Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR Letter from the General Manager of the Electric Power Company of Serbia

34

Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders

35

Annex 9. List of Supporting Documents

1. Aide Memoires, Back-to-Office Reports 2. Project Status Reports 3. Project Appraisal Document, dated June 25, 2001 (Report No: 22303-YU) 4. Foundation of Serbian Energy Policy (Energy Statement Serbia) 5. Energy Law of the Republic of Serbia 6. Energy Sector Development Strategy by 2015 7. Gasification Strategy of the Republic of Serbia