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The World Bank

FOR OFFICIAL USE ONLY

Report No.: 19757

IMPLEMENTATION COMPLETION REPORT

BOSNIA AND HERZEGOVINA

EMERGENCY DISTRICT HEATING RECONSTRUCTION PROJECT

TRUST FUND CREDIT NO. 024034

October 6, 1999

Energy Sector UnitEurope and Central Asia Region

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

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CURRENCY EQUIVALENTS(as of August 6, 1999)

Currency Unit Konvertible Marka (KM)IKM US$0.55US$1 KMI.80

AVERAGE EXCHANGE RATES

(Not applicable, new currency introduced in 1998)

WEIGHTS AND MEASURES(Metric System)

kV KilovoltkW KilowattMW Megawatt = (1,000 kilowatts)kWh Kilowatt hoursGWh Gigawatt hour= Imillion kWhMVA Megavolt amperes - 1,000 volt amperes

ABBREVIATIONS AND ACRONYMS

BiH Bosnia and HerzegovinaDH District HeatEC,EU European Commission, European UnionHOB Heat Only BoilerICR Implementation Completion ReportPIU Project Implementation UnitPSA Project Start-Up AdvancePPF Project Preparation FacilityRS Republika SrpskaSDR Special Drawing RightsTF Trust Fund

BOSNIA AND HERZEGOVINA FISCAL YEARJanuary 1 to December 31

Vice President : Johannes F. LinnCountry Director Christiaan J. PoortmanSector Director Hossein RazaviSector Manager Henk BuszProgram Team Leader Richard Hamilton

FOR OFFICLiL USE ONLYIMPLEMENTATION COMPLETION REPORT



TRUST FUND CREDIT NO. 024034

CONTENTS

PREFACE ....................................................... i

EVALUATION SUMMARY ........................................................ ii

Part I. PROJECT IMPLEMENTATION ASSESSMENT .......................................... 1A. Statement and Evaluation of Objectives ......................................................... 1B. Achievement of Objectives ........................................................ 2C. Major Factors Affecting The Project ......................................................... 8D. Project Sustainability ......................................................... 9E. Bank Performance ........................................................ 9F. Beneficiary Performance ....................................................... 10G. Assessment of the Outcome ........................................................ 10H. Future Operations ........................................................ 10I. Key Lessons Learned ........................................................ 11

Part II STATISTICAL TABLES ........................................................ 12Table 1: Summary of Assessments ........................................................ 13Table 2: Related Bank Loans/Credits ....................................................... 14Table 3: Project Timetable ....................................................... 14Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual ..................................... 15Table 5: Key Indicators for Project Implementation ....................................................... 15Table 6: Key Indicators for Project Operation ....................................................... 16Table 7: Studies Included in Project ....................................................... 16Table 8A Project Costs ........................................................ 17Table 8B Project Financing ....................................................... 18Table 9: Economic Costs and Benefits ....................................................... 19Table 10: Status of Legal Covenants ....................................................... 20Table 11: Compliance with Operational Manual Statements ........................................................ 21Table 12: Bank Resources: Staff Inputs ....................................................... 21Table 13: Bank Resources: Missions ....................................................... 22

ANNEXES:Annex A. Borrower's Contribution to the ICRAnnex B. Future Operations PlanAnnex C. ICR Mission Aide Memoire

MapIBRD 27772 - Bosnia and Herzegovina: Emergency District Heating Reconstruction Project

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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(TRUST FUND CREDIT No. 024034)'

Preface

This is the Implementation Completion Report (ICR) for the Emergency District HeatingReconstruction Project in Bosnia and Herzegovina, for which Trust Fund Credit 024034 in the amount ofUS$20 million was approved on May 14, 1996 and made effective on July 18, 1996. The credit was lent toBosnia and Herzegovina (BiH) on standard IDA terms and on-lent to the Toplane-Sarajevo and Toplana-Banja Luka District Heating Enterprises with a 20-year maturity, including a five-year grace period, and atthe standard IDA service charge.

Due to the emergency nature of the projects in BiH following the war, funds had to be mobilized veryquickly. As a result, Regional Management decided to create Project Start-up Advances (PSAs). The PSAspermitted funds to be made available to three emergency energy projects before Board approval andeffectiveness. One PSA (US$5.3 million) was created for the District Heating Project itself, to bereimbursed once Trust Fund Credit 024034 became effective. PSAs for the Emergency Power Project(US$3.8 million) and the Emergency Natural Gas Project (US$5 million) were included in Trust FundCredit 024034, allowing disbursements to be made for power and gas expenditures as soon as Trust FundCredit 024034 became effective. Arrangements were made to allow the District Heating Project towithdraw amounts equal to these PSAs from the Emergency Power Project (Cr. 2903) and the EmergencyNatural Gas Project (Cr. 3029), respectively, after these became effective.

The Trust Fund Credit was closed on March 31, 1999, one year later than the original closing date ofMarch 31, 1998. The closing date extension was due to delays in the availability ofcofinancing and, to alesser extent, disbursement-related complications with the PSAs. Financing of the project will continueunder Dutch Trust Funds administered by the Bank and financing from the Govemment of Finland and theEU.

The ICR was prepared by Marie-Theres Schurrer (Energy Consultant responsible for day-to-dayproject supervision), Anna Bjerde (Financial Analyst) and Richard Hamilton (Program Team Leader),Energy Sector Unit, Europe and Central Asia Region. The ICR was reviewed by Henk Busz, SectorManager, Energy Sector Unit, Europe and Central Asia Region, Baelhadj Merghoub (Consultant) Bosniaand Herzegovina Country Department, and cleared by Christiaan Poortman, Country Director, Bosnia andHerzegovina.

Preparation of the ICR began during the Bank's final supervision/completion mission in May 1999.It is based on continuous supervision in the field by Ms. Schurrer, mission findings, material in theproject file, and information and comments provided by the principal Beneficiary, Toplane-Sarajevo.Toplane-Sarajevo contributed to the preparation of the ICR by furnishing its own assessment of theproject's performance.

I World Bank support for the reconstruction of BiH following the war came primarily from a World Bank TrustFund in the amount of USS 150 million, of which USS 125 million was provided on IDA tenns. The Trust Fund Credit024034 in the amount of USS20 million was one of several emergency projects funded from the Trust Fund.

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IMPLEMENTATION COMPLETION REPORTBOSNIA AND HERZEGOVINA

EMERGENCY DISTRICT HEATING RECONSTRUCTION PROJECT(TRUST FUND CREDIT No. 024034)

EVALUATION SUMMARY

Introduction

1. From 1991-1995, Bosnia and Herzegovina (BiH) experienced one of Europe'smost destructive wars since World War II. Direct war damage to district heating systems inBiHstarted in 1991 and was followed by indirect damage caused by the absence of maintenance andnon-operation of the district heating systems for the entire duration of the war. Following theDayton Peace Agreement in December 1995, IDA took a lead role in establishing areconstruction program for the energy sector. One of the projects it prepared was the US$40million Emergency District Heating Reconstruction Project. A special World Bank Trust Fundprovided US$19.5 million for the reconstruction of the district heating system inSarajevo, andUS$0.5 million for the preparation of a reconstruction project in Banja Luka. Co-financing wasprovided by the Governments of the Netherlands, Denmark and Finland, and by the EU.

Project Objectives

2. The project objectives were to: (i) restore district heating services inSarajevo assoon as possible by reconstructing both the district heat supply system as well as building intemalinstallations; (ii) enable BiH to potentially reduce its gas consumption through fuel switching byToplane-Sarajevo from gas to fuel oil, which would enhance the country's strategically importantsecurity of energy supply; (iii) strengthen Toplane-Sarajevo's institutional capacity; and (iv)initiate network improvements.

3. The project included the following components: (a) in Sarajevo: (i) technicalassistance for project management, including an engineering survey and staff training, masterplan and tariff studies; and (ii) critically needed investments for the reconstruction of all parts ofthe district heating network, including building internal installations; and (b) in Banja Luka,technical assistance for project preparation (engineering and assessment) only.

4. Two key indicators were selected to evaluate the achievement of projectobjectives. These were: (i) the number of flats reconnected to the district heating system; and (ii)Toplane-Sarajevo's revenue collected as a percentage of total annual operating costs.

Implementation Experience and Results

5. At the time of the Trust Fund Credit closing (March 31, 1999), someexpenditures to be funded by cofinanciers had not been completed. Additional investments in therehabilitation of boilers, substations, internal installations and the remote monitoring and controlsystem totaling US$4.4 million will be undertaken during 1999 and in the first half of 2000 tofurther improve the district heating system.

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6. A project financing gap of US$3.5 million remained uncovered at the time of theTrust Fund Credit closing. The project components affected by this lack of funding are heatmeters in individual apartments and equipment related to the remote monitoring and controlsystem. The proposed US$18 million in donor contributions to Toplane-Sarajevo to cover fuelcosts in 1996-1998 were never pledged by donors.

7. The Sarajevo project was designed around two phases to meet its physicalobjectives. The immediate "fast track" repair phase, focused on engineering surveys andassessments and the restoration of heating services to as many consumers as possible for the firstheating season (1996/97). The 2-year "reconstruction" phase focused on fuller rehabilitation andimprovement to the district heating network system as well as institutional strengthening ofToplane-Sarajevo. By March 1997, 18,000 flats had been reconnected and by March 1999,29,000. The physical aspects of both phases are rated as satisfactory, although delays inobtaining cofinancing for the reconstruction phase has delayed the completion of certaincomponents until June 2000.

8. The objective of strengthening Toplane-Sarajevo's institutional capacity waspartially achieved. With assistance from the Government of Finland, a strong PIU wasestablished and a billing and collection system was reintroduced in December 1996. In addition,studies related to district heating development, tariffs, billing and collections and networkinterconnection as well as training in financial and commercial management, engineering andproject management were undertaken.

9. The institution-building component of the project is rated as marginallysatisfactory, because actual cost recovery from collection of heating bills remained problematicthroughout the project period. While it should be noted that Toplane-Sarajevo faces severalchallenges, including an economically weaker consumer base (often refugees) than, for example,the gas utility, lack of qualified staff and inadequate internal controls caused its financialperformance to deteriorate over time. While bill collections from consumers steadily increasedduring the project (from 0% of total billings in 1996 to 55% of total billings to date in 1999), totalcollections (including subsidies) did not improve at the pace anticipated. Revenue collected as apercentage of total operating expenses was 18% in 1996, 73% in 1997 and 60% in 1998compared to the agreed targets of 15%, 50% and 75%, respectively. Furthermore, it had beenplanned that Toplane-Sarajevo would recover the investments in building internal installationsthrough a special surcharge to the building owners over a period of five years, starting in 1997.This special surcharge has not yet been introduced, although it is under discussion now.

10. Under the Toplana-Banja Luka (TBL) component, DM 558,239 (US$310,132equivalent) were fraudulently withdrawn from the Credit Account through bypassing both theSarajevo Resident Mission staff and Headquarters Operations staff. Investigations by the localpolice and the Bank's Auditor General established the fraudulent withdrawal by an unauthorizedperson using a falsified signature. IDA has requested the Government of Bosnia andHerzegovina to refund the DM 558,239. The Banja Luka component was not completed and israted as unsatisfactory.

Major Factors Affecting the Project

11. Five major factors that affected the project were: (i) simplified and acceleratedproject processing; (ii) streamlined procurement procedures; (iii) consultant support to the PIU;(iv) having Bank staff responsible for day-to-day supervision in the field; and (v) a delay in

project implementation due to delayed cofinancing and difficulties relating to the administrationof PSAs.

Bank and Beneficiary Performance

12. Bank performance is rated as satisfactory. The Bank responded very quickly tothe emergency reconstruction needs; took the lead role among donors in designing the project andin seeking additional cofinancing; and provided critical assistance to the start-up phase of theproject.

13. Toplane-Sarajevo's overall performance is rated as satisfactory throughout thepreparation and implementation of the project's physical components. However, Toplane-Sarajevo was less successful in achieving the institutional objectives of the project due to lack ofadequate staffing and insufficient revenue collection. Toplana-Banj a Luka's performance is ratedas unsatisfactory as a result of improper withdrawal of funds from the Credit Account.

Project Sustainability

14. It is likely that the achievements generated by the project will be sustained.There is strong commitment by Toplane-Sarajevo to maintain the quality of the reconstructedsystem and to continue to develop the district heating network. However, the long term viabilityof the enterprise is contingent on an improvement in cost recovery and on further improvementsin staffing.

Assessment of the Outcome

15. The outcome of the project is satisfactory. The project met nearly all of itsphysical objectives and made progress towards the financial and institutional objectives. Theeconomic rate of return is 19%, which is well above BiH's cost of capital (around 15%).

Future Operations and Key Lessons Learned'

16. Toplane-Sarajevo's future operations plan is satisfactory and includes actionsteps to improve cost recovery and overall management of the enterprise.

17. The key lessons learned are the following:

(a) The project demonstrated that emergency operations require flexibility in projectdesign and intensive Bank supervision, especially in the start-up phase, but also strongcoordination within the Bank, particularly in the disbursement area.

(b) A strong PIU within the beneficiary is required for successful projectimplementation. Factors contributing to the effectiveness of the PIU were: (i) adequate quality,quantity and continuity of staff, (ii) support by foreign experts; (iii) sufficient autonomy; and (iv)adequate enterprise autonomy.

(c) Even though the flexible approach followed by IDA in financing items in whichother donors were not interested allowed the project to quickly respond to the emergency needs of

I Recommendations regarding the Toplana-Banja Luka component can be found in the reviewundertaken by the Bank's Internal Auditing Department (Report No. IBRD FY99-78; June 29, 1999).

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the sector, difficulties in securing donor financing caused major delays in the implementation ofthe second (reconstruction) phase of the project. The lack of available financing also delayed thedisbursements of the Trust Fund Credit, since the latter had to be used to finance civil worksrelated to equipment financed by cofinanciers. When a project needs to go ahead without firmnlycommitted cofinancing, as was the case here, the Bank components should be as independent aspossible and viable on their own if timely closing of the Credit is considered an importantobjective of an emergency project.

(d) While the Project Start-up Advances made it possible to procure some goods andequipment before Board approval of the project, a number of difficulties arose whendisbursements were made concerning the handling of transfers and adjustments between theprojects with PSAs. While advance funding for future emergency projects is critical, amechanism to avoid problems referred to above needs to be designed. As an example, it might beuseful to consider the use of extended Project Preparation Facilities (PPFs), thereby avoiding thedifficulties entailed in inter-project transfers of funds.

IMPLEMENTATION COMPLETION REPORTBOSNIA AND HERZEGOVINA

EMERGENCY DISTRICT HEATING RECONSTRUCTION PROJECT(TRUST FUND CREDIT No. 024034)

PART I. Project Implementation Assessment

A. Statement and Evaluation of Objectives

Introduction

1. From 1991-1995, Bosnia and Herzegovina (BiH) experienced one of Europe'smost destructive wars since World War II. During the war, damages and gas shortages drasticallyreduced the operation of the Sarajevo district heating system. At the end of the war, only 16,000flats were connected to the Toplane-Sarajevo district heating system, compared to 48,300 flats(which housed 40% of the city's population) before the war. During the war, unsuppliedcOnsumers resorted to making, unsafe, improvised connections to the gas network.

2. Following the signing of the Dayton Peace Agreement in December 1995, theBank quickly established a lead role in reconstructing the energy sector in post-war Bosnia andHerzegovina. The Emergency District Heating Reconstruction Project was the first post-warBank operation in the energy sector. The project became effective on July 18, 1996. A ProjectStart-up Advance (PSA), Trust Fund 024028, provided for expenditures to be made prior to theproject becoming effective.

3. Designed as a US$40 million operation (costs later increased to US$44.5 millionwhen more accurate estimates became available), the project was financed through a Trust FundCredit in the amount of US$20 million on IDA terms and US$21 million in contributions fromother donors. These donors included the Governments of the Netherlands (US$9.3 million),Finland (US$8.4 million) and Denmark (US$1.4 million), and the European Union (US$1.9million). A financing gap of US$ 3.5 million currently remains uncovered.

Project Objectives

4. The project objectives were to: (i) restore district heating services in Sarajevo assoon as possible by reconstructing both the district heat supply system as well as building intemalinstallations; (ii) enable BiH to potentially reduce its gas consumption through fuel switching byToplane-Sarajevo from gas to fuel oil, which would enhance the country's strategically importantsecurity of energy supply; (iii) strengthen Toplane-Sarajevo's institutional capacity; and (iv)initiate network improvements.

5. Before the war, the Sarajevo district heating system consisted of 130 individualheat only boilers (HOBs) with a total installed capacity of 515 MW, a peak load of 387 MW(75% of capacity) and a network with a total length of 62 kilometers. The system was dividedinto two parts with entirely different technologies: (i) 43 independent area networks, supplied bymedium to large sized individual boilers; and (ii) 87 separate buildings, supplied by one smallrooftop boiler each.

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6. At the end of the war, only 60 out of the 130 HOBs were operative (200 MWequivalent), parts of the 62 kilometer network required repairs, most of the 120 substationssuffered from direct damage or lack of maintenance, all the remote control equipment wasdestroyed, only 30% of the building internal installations were operative and all heat meteringwas out of order due to lack of maintenance.

7. Project implementation followed a two-phased approach to meet both the needfor rapid restoration of basic heat supply and the requirements of longer term, sustainable,reconstruction of the district heating network: (i) the first, fast-track repair phase, focusing onengineering surveys and assessments of the war damage and the reconnection of as manyconsumers as possible to basic heat supply in time for the first post-war winter; and (ii) thesecond, two-year reconstruction phase, focusing on restoring full heat supply, rehabilitate andimprove the district heating system, and improve the institutional capacity of Toplane-Sarajevo.

8. The objectives were consistent with IDA' s Country Assistance Strategy datedMarch 5, 1996, which included a series of emergency rehabilitation projects to support priorityneeds, such as transportation, water supply, district heating, power and war victims rehabilitation.The restoration of district heating services was critical to serve the basic need for heating in thecountry's capital. In parallel, the Emergency Natural Gas System Reconstruction Project (Cr.3029-BOS) aimed at regularizing the city's gas connections, including the disconnection ofillegal gas connections made by district heating consumers. These two reconstruction projectswere well received and supported by the Government of BiH and by the donor community.

B. Achievement of Objectives

Project Costs and Financing

9. At the time of appraisal, the project was estimated to cost US$40 millionequivalent, of which US$20 million were to be financed by the Trust Fund Credit. During thefast track phase of the project, more accurate cost estimates were made based on an assessment ofactual damage to the district heating system. This assessment found the project costs to exceedthe estimated costs by about 11%. Thus, the cost of the project increased to US$44.5 million,comprising local costs of US$18.6 million (compared with the appraisal estimate of US$14.7million) and foreign costs of US$25.9 million (compared with the appraisal estimate of US$25.3million). External financing covered all foreign and local costs, and taxes and import duties werewaived for the project.

10. The PSA for the District Heating Project closed on July 18, 1996, when the TrustFund Credit became effective. The Emergency Power and the Emergency Natural Gas Projects,including their district heating components in compensation for PSA allocations within theDistrict Heating Project to these two projects, closed on December 31, 1998 and July 31, 1999,respectively. Furthermore, the Bank-administered Dutch Trust Funds 020874 (US$0.3 million)and 024771 (US$5.5 million) closed on December 31, 1998 and July 31, 1999, respectively.Cofinancing from the Government of Denmark (US$1.4 million) was completed and closed in1998.

11. Remaining financing for the project includes cofinancing from the Governmentof Finland (US$0.3 million) and the EU (US$0.6 million). Both are expected to close at the endof 1999. In addition, the Government of the Netherlands has provided a Trust Fund (021192) inthe amount of US$3.125 million to be managed by the Bank. This Trust Fund was declaredeffective only on August 23, 1999. In early 1999, at the Government's request, the money

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originally allocated for this fund was reduced by US$0.375 million to finance another Bankmanaged project in BiH. To compensate for this transfer, a new Dutch Trust Fund in the amountof US$0.375 million is expected to be arranged. These two Dutch Trust Funds are expected toclose on June 30, 2000. The total amount remaining to be disbursed under the above cofinancingarrangements is US$4.4 million.

12. The project suffered substantial delays due to: (i) delay in the effectiveness of theEmergency Natural Gas Credit (Cr. 3029-BOS) until April 1998, thereby postponing Toplane-Sarajevo's access to the district heating component of this Credit (to offset the Gas PSA); (ii)delays in the effectiveness of Dutch Trust Fund 024771 by six months until December 1997 and021192 by nine months until August 1999. This was due to these trust funds being part of larger"umbrella" Dutch Trust Funds for BiH, whereby all trust funds under the umbrella had to beready for effectiveness before individual trust funds within the umbrella could be declaredeffective; (iii) delay in the internal clearance process of Dutch Trust Fund 021192; and (iv) a twoyear delay (until April 1999) and a significantly smaller amount of EU cofinancing than hadoriginally been expected (US$1.9 million instead of US$6 million). These delays caused a delayin the closing of the Trust Fund Credit since funds from the Credit were required to finance thelocal costs associated with the Finnish, Danish and EU funding.

13. There was greater spending on the rehabilitation of boilers and technicalassistance than expected at the time of appraisal. Total costs for boiler rehabilitation areestimated at US$20.5 million compared to the appraisal estimate of US$11.4 million. The reasonfor this increase in boiler costs is that at the time of appraisal only very preliminary costsestimates could be made. It was only during the implementation of the first phase of the projectthat more accurate cost estimates were possible based on detailed surveys of actual damage to thesystem. The increase in costs for technical assistance was due to the fact that it became necessaryto keep the foreign experts in place to assist the PIU since project implementation was delayeddue to the cofinancing constraints. Also, auditing of project and entity accounts had to bepartially financed by the Trust Fund Credit as Toplane-Sarajevo remained short of cash. Projectcosts were less than expected for distribution networks (US$2.9 million rather than US$9.0million) and substations (US$1.1 million rather than US$3.6 million) since there turned out to beless damage to these parts of the district heating system than anticipated. No spending turned outto be required for construction site preparation, as the project only focused on reconstructing theexisting plants.

14. At the time of the closing of the Trust Fund Credit, a financing gap of US$3.5million remained uncovered. The project components affected by the lack of funding are heatmeters (US$1.8 million) in individual apartments and components related to the remotemonitoring and control system (US$1.7 million). Although heat metering is important toencourage energy savings and the remote monitoring and control system will need to becompleted eventually, these two components were considered the least important in achieving theoverall project objectives.

15. In addition to the project costs, US$18 million in donor contributions toToplane-Sarajevo required to cover fuel costs during 1996-1998 were requested from donors at the time ofproject appraisal. These contributions did not come forward during project implementation.Instead, Toplane-Sarajevo relied on subsidies from the Sarajevo Canton Government to pay forits fuel supplies. However, these subsidies did not cover all of Toplane-Sarajevo's fuel costs,contributing to its substantial operating losses each year.

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Physical Components

16. The fast track repair phase successfully achieved its objectives. During August1996-March 1997, 18,000 flats were reconnected to the district heating system, resulting in a totalof 34,000 flats connected to district heating by the end of the first heating season. This phaseincluded initial repair work on most parts of the network. Fuller rehabilitation was carried outduring the reconstruction phase. Initial repair measures included:

(a) Carrying out emergency repairs in 27 boiler plants;(b) Installing 9 new and repairing most of the 120 old substations;(c) Repairing internal installations in more than 20,000 flats;(d) Reconstructing 3 kilometers of pipeline in the distribution network.

17. In parallel with the emergency repairs, large boilers, with a capacity to provide62% of the heat load, were converted to allow for dual-firing (fuel oil or gas). This provedcritical, since gas supply to Sarajevo was completely cut off during the 1996/97 heating season,allowing Toplane-Sarajevo to use fuel oil to supply heating services.

18. During the fast-track phase of the project, an engineering survey of the systemwas carried out jointly by local experts and the consultants team provided by the Govemment ofFinland. The survey produced a full overview of the damage caused by direct war impact, lack ofmaintenance and the fact that the system did not operate for five-years. A database of buildinginternal installations and consumers (many of them new) was established, serving both as a basisfor reconstruction and as a basis for billing and collection. In addition, an engineeringassessment, including a network interconnection study, was undertaken by the Finnish experts toidentify the least cost option for rehabilitation of the district heating system. The options assessedwere: (i) reconstruction to pre-war configuration; and (ii) interconnection of several of the 44separate sub-systems in order to eliminate inefficient boiler plants and shift heat production tomore efficient boiler units. The assessment showed that the costs of option (ii) would haveexceeded the funds available under the project and that the costs of interconnection would not beoffset by the elimination of inefficient boiler units. Consequently, the system was reconstructedto its pre-war configuration with improvements to individual components.

19. Substantial achievements were also made under the reconstruction phase, althoughimplementation of components has been substantially delayed due to delays in, and lack of,cofinancing. At the time of project closing almost 45,000 flats were connected to the Toplane-Sarajevo district heating system and the following work had been undertaken:

(a) Comprehensive repair work on 120 consumer substations had been completed (includingfurnishing 50 of them with metering) and 9 new substations had been installed;

(b) A total of 25 boiler plants had been reconstructed and 18 had undergone repair work;

(c) 45,000 building internal installations had been repaired;

(c) 9 kilometers of the distribution network had been reconstructed.

20. Another 300 flats are expected to be reconnected by the end of 1999, bringing thetotal number of connected flats to the Toplane-Sarajevo district heating system to about 45,300.This is somewhat less than the 48,300 connected before the war because some apartments were

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too destroyed to be reconnected to the district heating system, some flats (600) remain in Serbcontrolled territory, and some consumers have switched to gas.

21. Under the Toplana-Banja Luka (TBL) component, a local engineering firm wascontracted by TBL without the prior approval of the Bank. It was only after the first payment ofDM 138,320 (US$76,844 equivalent) had been made to the consultant that Bank Operations staffwere alerted to this contract. After the investigation of the selection procedure used by TBL andthe qualifications of the consultant, IDA notified TBL to terminate this contract. Because ofgenuine misunderstanding of IDA's procurement procedures by TBL due to the extremedifficulty of communicating with Banja Luka in late 1996/early 1997, IDA accepted to let thefirst payment stand. However, despite such notification, an additional DM 558,239 weresubsequently fraudulently withdrawn from the Credit Account through bypassing both theSarajevo Resident Mission staff as well as Headquarters Operations staff. The resultinginvestigations by the Banja Luka police and the Bank's Auditor General established thefraudulent withdrawal by an unauthorized person using a falsified signature. IDA requestedBosnia and Herzegovina to immediately refund the DM 558,239. The matter is still pendingresolution by Govemment.

Technical Assistance

22. Training was provided in the areas of: (i) project management; (ii) billing andcollection; (iii) cost recovery, cost analysis, tariff setting, international accounting standards andbasic business planning; and (iv) preventive maintenance of the newly reconstructed system. Inaddition, studies were undertaken in the following areas: district heating development, billingand collection, tariffs and network interconnection.

23. Assistance in project management has been provided to the PIU by Finnishconsultants throughout project implementation and will be completed by the end of 1999. Itincludes day-to-day support in planning, procurement, contract monitoring, disbursementmonitoring, supervision, and reporting. The Finnish consultant also assistedToplane-Sarajevo inre-introducing billing and collection systems and procedures. This included implementation of amodernized billing and collection system, re-creation of a consumer database and reporting.Although significant progress has been made to re-establish the systems for billing and collection,actual bill collection performance remains below expectations (para. 28).

24. In order to address the weaknesses in financial and commercial operations andmanagement, a Danish consultant provided training to several departments of the enterprise. Thetraining aimed at educating staff in the basic financial and commercial practices of a marketoriented enterprise. Through interactive training courses with key staff, intemational accountingstandards were reviewed, the cost structure of the enterprise analyzed, the principles of costrecovery and tariff setting were discussed, and the principles of business planning were presented.Although these training courses made a contribution to the transition, additional training andpossibly hiring of highly qualified key staff are required to tum Toplane-Sarajevo into acommercially operated and managed company.

25. Training of technical staff in the operation of newly installed equipment wasprovided throughout project implementation. To ensure proper handling and adequate operationof new equipment, suppliers were obliged to provide training during the installation of technicallycomplex equipment.

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26. The four studies made a significant contribution to the project. The districtheating development plan and the network interconnection studies helped decide on the mostcost-effective reconstruction of the district heating system. The billing and collection study wasused to decide upon the design and implementation of the billing and collection system andprocedures; and the tariff study helped analyze tariff requirements and provided the analyticalbasis required to achieve the 1999 tariff increase of 17%.

Financial Aspects

27. During the war, Toplane-Sarajevo was forced to continue to operate its remainingfacilities without billing or collection. As a consequence, Toplane-Sarajevo had accumulatedsignificant cash deficits and a large debt to its gas supplier, Sarajevogas, by the end of the war.

28. The key problem facing Toplane-Sarajevo is the lack of revenue collected.Although direct payments from consumers themselves have improved (from 0% of total billingsin 1996' to 36% in 1997, 43% in 1998 and 55% for the first six months in 1999), total collections(including subsidies from the Canton Government) did not improve at the pace anticipated.Revenue collected from annual billings increased from 50% in 1996 to 80% in 1997 and droppedto 70% in 1998. Revenue collected for the first six months in 1999 was 77%. The drop in 1998compared to 1997 is due to a lower than anticipated increase in direct payments from consumersand an overall reduction in Canton Govemment assistance and elimination of voucher paymentschemes for soldiers.

29. It had been planned that Toplane-Sarajevo would recover the investments inbuilding internal installations through a special surcharge to the building owners over a period offive years, starting in 1997. This special surcharge has not yet been introduced for socio-economic reasons, since the consumers' ability to pay was until recently deemed inadequate.However, options for recovering these investments are currently under discussion with theCanton Govemment.

30. Key reasons for the overall less than satisfactory collection performance are thefollowing: (i) lack of qualified staff in the finance and commercial departments; (ii) the billingand collection procedures are still fraught with weaknesses, including a consumer database basedon official owners of apartments rather than current occupants; invoicing made in advance for thefive months to come, with collection due every month (consumers tend forget paying bills afterthe first month); and a general difficulty in generating billing and collection data, including theinability to include arrears on the current bills; (iii) a significant percentage of district heatingconsumers are among the poorest segment of the population (often refugees); (iv) mostconsumers cannot be individually disconnected; in order to disconnect a non-paying consumer,the entire apartment building would have to be disconnected; and (v) a decrease in CantonGovernment subsidies to Toplane-Sarajevo and the consumers.

31. To improve its collection perforrnance, Toplane-Sarajevo has introduced anumber of measures, including aggressive legal action, increasing the number of payment pointsand disconnecting where technically possible. It is also working with the Finnish consultants tosubstantially improve the billing and collection system, allowing for monthly invoicing andincluding arrears on each month's bill. The Finance Department has also been strengthenedthrough the hiring of a well-qualified billing and collection expert.

Toplane-Sarajevo resumed billing in December 1996.

7

32. At the time of project appraisal it was recognized that Toplane-Sarajevo wouldonly gradually be able to achieve full cost recovery. A financial covenant measuring revenuecollected as a percentage of total annual operating expenses was agreed to in order to trackprogress towards cost recovery. Toplane-Sarajevo complied with the revenue collection covenantin 1996 and 1997 but was unable to meet the 1998 covenant.

1996 1997 1998

Target (%) 15 50 75

Actual (%) 18 73 60

33. An important step towards improved cost recovery was taken in March 1999,when tariffs were increased by 17%. This increase resulted in a residential tariff of I KM/m2 anda commercial tariff of 3 KM/m2. However, further measures need to be taken to reduce operatingcosts, particularly the cost of natural gas, which is inordinately high and accounts for a majorportion of Toplane-Sarajevo's cash operating costs.

34. Toplane-Sarajevo complied with the financial covenant to have the projectaccounts audited each fiscal year. Although not required under the Trust Fund Credit Agreement,Toplane-Sarajevo also had its 1998 company accounts audited by an international audit companyin the spring of 1999. In its Management Letter, the auditors stressed that the key weakness inToplane-Sarajevo is the poor record keeping of trade receivables and lack of coordinationbetween the Accounting and Collection Departments to reconcile the balance of uncollectedheating bills at the end of the year.

35. The institutional component is rated as marginally satisfactory. It should benoted, however, that Toplane-Sarajevo faced (and continues to face) many challenges after thewar period, including: (i) an influx of many refugees who are unable to pay for heating; and (ii)the fact that individual units cannot easily be disconnected without disconnecting the entireapartment-building, including paying consumers.

Economic Rate of Return

36. The economic rate of return was recalculated using the same method as atappraisal. The costs included: the project cost (except for the Banja Luka component); naturalgas (the current financial cost is equal to the economic cost, according to the tariff study preparedunder the project); other energy (fuel oil); and operations and maintenance. Taxes and importduties were excluded. The benefits included district heat revenue; consumer's surplus (one-thirdof revenue as at appraisal); and heat savings from valve control (10% as at appraisal). Theeconomic rate of return was estimated to be 19%, compared to 22.9% at appraisal. The reductionis due to the exclusion of the benefits to consumers of rehabilitating building internals. Theintention at appraisal was to charge consumers for the cost of this rehabilitation. This charge wasnever introduced (para. 30). If it is assumed that consumers value this rehabilitation by at least asmuch as the cost, the economic rate of return would rise to 27%.

8

37. There were other more or less offsetting differences between the updatedcalculation and the one done at appraisal. The natural gas cost was more than twice as highbecause of: more consumption per household (1,320 m3 per year versus 785 m3); someconsumption by commercial users (about 4% of the total in terms of space to be heated); and ahigher gas price (US$167 per thousand m3 versus $140). Operations and maintenance costs werealso greater. The higher costs were roughly offset by higher revenue than estimated at appraisal,and a correspondingly higher consumers' surplus.

C. Major Factors Affecting the Project

38. There are five key factors that affected the project:

(a). Simplified and accelerated project processing. Due to the emergency nature of theproject, the project design, financing and procurement plan had to be prepared quickly and, due tothe loss of records and absence of a detailed survey, on the basis of rough estimates andpreliminary assessments. Bank management allowed the project to go ahead with a looselydefined financing plan, which was primarily based on pledges made at a conference of donors forthe reconstruction program for all sectors. The flexibility that resulted from the simplified andaccelerated project processing helped start reconstruction of the district heating system almostimmediately and was therefore a critical element in the Bank's responsiveness to the post-warconflict.

(b). Streamlined procurement procedures. The project's procurement plan at appraisalreflected the requirements of accelerated project processing and the limited amount of dataavailable under emergency reconstruction operations. It was decided up-front that the plan wouldhave to be adjusted in the course of reconstruction to match actual requirements as they surfaced,as well as the terms and conditions of cofinancing. The adjustments to the procurement plan thatbecame necessary during project implementation originated mainly from the fact that the planned,large tum key contracts proved not to be suitable for emergency reconstruction of this districtheating network and particularly not for the building intemal installations. Most of the largecontracts for works and equipment had to be broken down into smaller packages because of: (i)the need to do some very quick initial work on part of the system under the fast-track repairphase; (ii) the fact that the actual quality and quantity of damage could be determined only asreconstruction progressed; (iii) small, flexible packages were necessary to cover changing needs;and (iv) the Govemments of Finland and Denmark were only willing to supply equipment. Thishad to be complemented by having the Trust Fund Credit and the Dutch Trust Funds financeassociated materials and installation works. In addition, works contracts had to be smaller thananticipated in order to: (i) perform work as quickly as possible once a package of materialsarrived; and (ii) perform work immediately after the scope of work had been identified for asystem component.

(c). Joint local and international staffing of the PIU. Toplane-Sarajevo was a first timeborrower of World Bank funds. As such, it had very limited experience with the implementationof large scale investment programs and under initially chaotic conditions to boot. Teaming thelocal PIU staff up with international experts in project management, implementation andprocurement proved very successful. The international experts ensured that the project met itsimplementation schedule based on available financing. The delays in project implementation areprimarily due to lack of timely available financing and not the PIU. For funding that is yet to bedisbursed (e.g. Dutch TF 021192), the PIU has already carried out most of the procurementpreparations.

9

(d). Placement of staff in the field. Given that Toplane-Sarajevo was a first time borrowerand the need for intense Bank supervision, it was decided that the project would benefit fromhaving a Bank staff member responsible for the day-to-day supervision of the project based in theBank's Resident Mission. This helped the project get off the ground and allowed for the projectto be implemented as quickly as donor funding became available.

(e). Delays in the availability of funds and difficulty in disbursements of the PSAs. Theimplementation of the second (reconstruction) phase suffered from the lack of timely andavailable financing. The lack of timely funding from the EU caused a major delay in theimplementation schedule and was later partly compensated for by additional contributions fromthe Dutch Government. Dutch funding was made available in the form of "umbrella" trust fundsto Bosnia and Herzegovina. Therefore, the district heating project could only access the Dutchfunding when the trust funds for BiH as a whole were declared effective. The TF 024771 wasonly declared effective in the end of 1997, and TF 021192 only became effective on August 23,1999. Also, the use of PSAs led to a number of difficulties when disbursements where madeconcerning the handling of "transfers" and adjustments between the District Heating, Power andGas Projects and this in itself repeatedly caused temporary shortages of funds. In addition, thedelay in the effectiveness of the Emergency Natural Gas Project prevented the District HeatingProject from accessing the district heating component of the Gas Project (sum equivalent to theGas Project's PSA) until it became effective in April 1998, as opposed to mid-1997 as originallyplanned.

D. Project Sustainability

39. It is likely that the achievements generated by the project will be sustained.Toplane-Sarajevo has demonstrated the technical ability to rehabilitate, upgrade and operate thedistrict heating system by successfully implementing the project. With proper maintenance andoperating practice, the rehabilitated facilities will be productive for many years. Furtherinvestments will be needed to enforce energy savings, introduce automation and enhance overallefficiency. However, a key requirement for the viability of Toplane-Sarajevo is an improvementin cost recovery, a reduction in operating expenses (notably by securing fuel supply at morecompetitive prices, e.g. natural gas) and strengthening of key positions in the enterprise. A GasDevelopment Study is currently being undertaken under the Emergency Natural Gas SystemReconstruction Project (Cr. 3029-BOS) which will identify options for decreasing the cost ofnatural gas to Bosnia and Herzegovina. These measures are required to ensure Toplane-Sarajevohas the funds and capability required to maintain the rehabilitated system. The management ofthe enterprise has recognized that both the technical and financial areas are critical for the futureoperation of the system and address this in the future operations plan attached in Annex B.

E. Bank Performance

40. Bank performance is rated as satisfactory. The Bank responded very quickly tothe Borrower's request for emergency reconstruction and took the lead role among donors in therehabilitation of district heating in BiH during a difficult and confusing period of time. Bankinvolvement in the project served as a catalyst for financing by other donors.

41. Concerning implementation of the Banja Luka component, a special review of internalBank controls by the Auditor General identified deficiencies in communication betweendepartments (e.g. the failure of the Loan Department to check with the Resident Mission staff orOperations staff at headquarters prior to making disbursements, and the omission of Operationsstaff to inform the Regional Procurement Advisor of TBL's violation of the procurement rules) as

10

possible reasons for the failure to prevent disbursements after Toplana Banja Luka had beeninformed to terminate its contract with a consultant. Hence, the Bank's performance in thisspecific area was less than satisfactory.

F. Beneficiary Performance

42. The performance of Toplane-Sarajevo is rated as satisfactory throughoutpreparation and implementation of the project's physical components. Project management,cooperation with foreign experts, and coordination with the Bank were undertaken in a competentand reliable manner by the Toplane-Sarajevo PIU. Toplane-Sarajevo's performance with regardto the institutional aspects of the project is rated as marginally satisfactory as a result ofinadequate staffing in certain key areas throughout the project implementation period andinsufficient revenue collection. Clearly, however, Toplane-Sarajevo started from an exceedinglydifficult base.

43. The performance of Toplana Banja Luka is rated unsatisfactory due to improperwithdrawal of funds from the Credit Account and the consequent failure to prepare a properrehabilitation investment program.

G. Assessment of the Outcome

44. The overall outcome of the project is satisfactory. Despite delays in projectimplementation, the project met nearly all of its physical objectives and there was progresstowards the financial and institutional objectives under difficult post-war circumstances. Allfacilities rehabilitated under the project are operating satisfactorily and progress continues to bemade on the institutional front. The economic rate of return is 19%, which is well aboveBiH'scost of capital (around 15%).

H. Future Operations

45. A future operations plan for the enterprise has been developed by Toplane-Sarajevo and agreed with the Bank. The plan aims at ensuring the sustainability of projectinvestments while addressing the enterprise's primary weaknesses in management, operationalefficiency, staffing and cost recovery by: (i) establishing energy metering, initially by installingrneters at the building level and completing the second and third phases of the remote control andmonitoring system; (ii) strengthening the organizational performance by reorganization of theutility's structure and planning process and introducing a modernized information system; (iii)establishing an advanced maintenance program which will ensure the reliability and full lifetimeusage of equipment as well as reducing costs caused by system failure and emergency repairs;(iv) improving cost recovery and financial management by establishing consumer centers tofacilitate bill payment, introducing International Accounting Standards, improving financialplanning and seeking lower gas purchase prices; and (v) ensuring adequate staffing by hiring newstaff to the financial, commercial and marketing departments, training and improving humanresource management practices. In the longer term, Toplane-Sarajevo will also seek to undertakeinvestments to install individual heat meters and combined cycle heat-and power production.

46. The following key monitoring indicators have been agreed to: (i) number ofapartments and business premises connected to the district heating system; (ii) number ofconsumers receiving heat who are both the official and actual tenants of the premises; (iii) heatgenerated and ratio between gas and oil consumption; (iv) revenue collection performance andtotal revenue collected relative to operating costs; and (v) net income.

I1

I. Key Lessons Learned

47. The key lessons learned are the following2:

(a) The project demonstrated that emergency operations require flexibility in projectdesign and intensive Bank supervision, especially in the start-up phase, but also strongcoordination within the Bank, particularly in the disbursement area.

(b) A strong PIU within the beneficiary is required for successful projectimplementation. Factors contributing to the effectiveness of the PIU were: (i) adequate quality,quantity and continuity of staff; (ii) support by foreign experts; (iii) sufficient autonomy; and (iv)adequate enterprise autonomy.

(c) Even though the flexible approach followed by IDA in financing items in whichother donors were not interested allowed the project to quickly respond to the emergency needs ofthe sector, difficulties in securing donor financing caused major delays in the implementation ofthe second (reconstruction) phase of the project. The lack of available financing also delayed thedisbursements of the Trust Fund Credit, since the latter had to be used to finance civil worksrelated to equipment financed by cofinanciers. When a project needs to go ahead without firrnlycommitted cofinancing, as was the case here, the Bank components should be as independent aspossible and viable on their own if timely closing of the Credit is considered an importantobjective of an emergency project.

(d) While the Project Start-up Advances made it possible to procure some goods andequipment before Board approval of the project, a number of difficulties arose whendisbursements were made concerning the handling of transfers and adjustments between theprojects with PSAs. While advance funding for future emergency projects is critical, amechanism to avoid problems referred to above needs to be designed. As an example, it might beuseful to consider the use of extended Project Preparation Facilities (PPFs), thereby avoiding thedifficulties entailed in inter-project transfers of funds.

2 Recommendations regarding the Toplana Banja Luka component can be found in the reviewundertaken by the Bank's Internal Auditing Department (Report No. IBRD FY99-78; June 29, 1999).

12

Part II: STATISTICAL TABLES

Table 1: Summary of AssessmentsTable 2: Related Bank Loans/CreditsTable 3: Project TimetableTable 4: Loan/Credit Disbursements: Cumulative Estimated and ActualTable 5: Key Indicators for Project ImplementationTable 6: Key Indicators for Project OperationTable 7: Studies Included in ProjectTable 8A: Project CostsTable 8B: Project FinancingTable 9: Economic Costs and BenefitsTable 10: Status of Legal CovenantsTable 11: Compliance with Operation Manual StatementsTable 12: Bank Resources: Staff InputsTable 13: Bank Resources: Missions

13

Table 1: Summary of Assessments

A. Achievement of Objectives Substantial Partial Negligible Not applicable

Macro Policies _ .

Sector Policies _

Financial Objectives 0Z

Institutional Development _ Q

Physical Objectives E _ -

Poverty Reduction _ - -- 0

Gender Issues E _

Other Social Objectives _- 0Environmental Objectives _ 0Public Sector Management _ _ 0Private Sector Development _ _ 0Other (specify) - - 0

B. Project Sustainability Likely Unlikely Uncertain

0

C. Bank Performance satisfactory Satisfactory Deficient(I) (I) (Z)

Identification _0 E

Preparation Assistance 0

Appraisal -: 0

Supervision 0

D. Borrower Performnance satisfactory Satisfactory Deficient(:) (I) (Z)

Preparation 0

Implementation 0

Covenant Compliance El

Operation (if applicable) 2, 0

Highly HighlyE. Assessment of Outcome satisfactory Satisfactory Unsatisfactory unsatisfactory

(. 0 )( ) -)

.. z :

14

Table 2: Related Bank Loans/Credits

Loan/credit title Purpose Year of approval Status

Following operations

1. Emergency Electric To restore electricity 1996 Closed 12/31/1998Power Reconstruction service to acceptableProject levels in major cities and

BA-PE-44395 ~~for vital industries in theBA-PE-44395 Federation.

2 Emergency Natural To restore safe and 1997 Closed 07/31/1999Gas System reliable gas supply toReconstruction Project BiH, in particular to

BA-PE-44391 Sarajevo.

3. Second Electric To continue the 1998 Under implementationPower Reconstruction restoration of safe Closing on 06/30/2000Project electricity service to

BA-PE-45483 acceptable levels in BiH.

Table 3: Project Timetable

Steps in Project Cycle Date Planned Date Actual/Latest Estimate

Identification (Executive Project Summary) N.A. N.A.

Preparation N.A. N.A.

Appraisal N.A. 01/09/1996*,**

Negotiations N.A. 04/30/1996**

Board Presentation N.A. 05/02/1996**

Signing N.A. 05/20/1996***

Effectiveness N.A. 07/18/1996***

Trust Fund Credit Closing N.A. 03/31/1999***

* First World Bank mission.** Based on Memorandum and Recommendation of the President dated 04/30/96.*** Based on database of Loan Department.

15

Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual(US$Millions)

FY96 FY97 FY98 FY99

Appraisal estimate 2.3 19.3 20.0 -

Actual 2.96 9.7 14.9 20.0

Actual as % of estimate 128.6 50.2 74.5 100

Date of final disbursement April 27

* Based on Memorandum and Recommendation of the President dated 04/30/96.** Based on actual disbursements provided by Loan Departnent.

Table 5: Key Indicators for Project Implementation

Estimated ActualCompletion Completion

I. Key implementation indicators in PAD (Technical Annex)

1. Full engineering survey of the Sarajevo DH system 1996 1996

2. Assessment of system re-design measures and efficiency improvements 1996 1996

3. Reconstruction of boiler plants* 1996 2000

4. Replacement of distribution network piping 1996 1998

5. Reconstruction of substations* 1996 2000

6. Reconstruction of consumers to the DH system* 1996 2000

7. Rehabilitation of building internal installations* 1996 2000

8. Installation of dual gas/oil fuelling capacity in large boilers 1996 1997

9. Installation of heat meters in boiler plants and substations 1996 1998

1 0. Introduction of preventive maintenance 1997 1998

11. Establishment of consumer database 1996 1997

12. Re-introduction of billing and collection systems and procedures 1996 1997

13. Technical assistance in project and financial/commercial 1998 1999

14. Preparation of a DH project in Banja Luka 1996 Not implemented

* Rehabilitation of these components under cofmancing is expected to continue through June 2000.

16

Table 6: Key Indicators for Project Operation

Estimated Actual

I. Key operating indicators inPAD (Technical Annex)

1. Reconnection of consumers to Re-connect as many 45,000 out of 48,300the DH system consumers as possible and as apartments connected prior to

quickly as possible. the war to the Toplane-Sarajevo DH system werereconstructed by Trust FundCredit closing.

2. Institute billing and collection Bill collection.of at least 15%, 18% in 1996, 73% in 1997, andsystem 50% and 75% of total annual 60% in 1998.

operating expenses for 1996,1997 and 1998.

Table 7: Studies Included in Project

Study Purpose as defined at Status Impact of studyappraisal/redefined

1. District Heating For identification of preferred Completed Used to identifyDevelopment Plan system improvement options investments for

reconstruction phase

2.Tariff Study For adjustments of district Completed Used to assess tariffheating tariffs increase requirements

3. Billing and Collection For re-establishment of Completed Used to design andSystem billing and collections implement billing and

collection system

4. Interconnection Study For assessment of DH Completed Used to determineinterconnection option cost/benefit of

interconnection

5. Project Preparation Study For preparation of future Not Not Applicablefor Banja Luka investment program Completed

17

Table 8A: Project Costs*

Appraisal estimate Actual/latest estimates(USS million) (US$ million)

Item Local Foreign Total Local Foreign Totalcosts costs costs costs

A. Toplane-Sarajevo Component

1. Boilers 3.8 7.6 11.4 8.3 12.2 20.5

2. Distribution Networks 4.0 5.0 9.0 1.8 1.1 2.9

3. Substations 0.6 3.0 3.6 0.4 0.7 1.1

4. Intemal Installations 4.4 3.6 8.0 4.5 4.2 8.7

5. Meters 0.1 1.4 1.6 0.4 1.4 1.8

6. Other Equipment** 1.1 0.6 1.7 2.7 0.2 3.0

7. Construction Site Preparation 0.4 0.1 0.5 0 0 0

8. Technical Assistance 0.1 3.6 3.7 0.3 5.7 6.0

B. Banja Luka Component

1. Project Preparation 0.2 0.3 0.5 0.2 0.3 0.5

Total 14.7 25.3 40.0 18.6 25.9 44.5

* xAppraisal estimates include labor, spare parts and 20% contingencies. Taxes and duties were waived underthe project.

** Includes remote monitoring and control equipment

18

Table 8B: Project Financing

Appraisal estimate Current Estimate(US$ million) (US$ million)

Item Local Foreign Total Local Foreign Totalcosts costs costs costs

World Bank Trust Fund Credit 20.0 10.9 9.1 20.0

Of which:

Compensation for PSA to Cr. 3029 2.0 3.0 5.0

Compensation for PSA to Cr. 2903 0.8 3.0 3.8

Netherlands 5.8 5.18 4.12 9.3

Of which:

TF 20876 0.3 0.0 0.3

TF 24771 2.4 3.1 5.5

TF 21192 2.0 1.1 3.1

TF to be determined 0.3 0.1 0.4

Finland 12 0.0 8.4 8.4

Other donors unidentified at appraisal 2.2

EU 0.8 1.1 1.9

Denmark 0.0 1.4 1.4

Financing Gap

Total 40.0 1.7 1.8 3.5

18.6 25.9 44.5

Notes:* Neither the technical Annex nor the MOP include a breakdown of the project financing plan based on local

and foreign costs, due to the impossibility of making such a distinction.* 100% of the total costs were covered by extemal financiers.* The actual project costs increased by 11% to US$44.5 million in the course as project implementation as

more accurate estimates were made. Actual costs can only be established once other ongoing cofinancingis terminated.

* Project costs do not include the proposed allocation by donors of US$18 million to fund Toplane-Sarajevo's fuel expenses.

19

Table 9: Economic Costs and Benefits

Economic Rate of Return Calculation(US$million)

Costs BenefitsProject Natural Other Other District Consumer Heat Radiator Benefits

Year Cost Gas Energy O&M Heat Rev. Surplus Savings Revenue Net

1996 2.7 0.1 0.5 0.5 1 0.1 -1.71997 10.6 1.7 3.1 3.1 7.7 1.5 0.8 -8.51998 11 6.9 2.2 4.1 11.3 2.2 1.3 -9.41999 12.3 8.9 4.8 14 4.7 1.4 -5.92000 3.4 8.9 4.8 15.1 5.1 1.4 4.52001 8.9 4.8 15.1 5.1 1.4 7.92002 8.9 4.8 15.1 5.1 1.4 7.92003 8.9 4.8 15.1 5.1 1.4 7.92004 8.9 4.8 15.1 5.1 1.4 7.92005 8.9 4.8 15.1 5.1 1.4 7.92006 8.9 4.8 15.1 5.1 1.4 7.92007 8.9 4.8 15.1 5.1 1.4 7.92008 8.9 4.8 15.1 5.1 1.4 7.92009 8.9 4.8 15.1 5.1 1.4 7.92010 8.9 4.8 15.1 5.1 1.4 7.9

IRR= 19%

All data are in 1996 prices.The project costs were converted to 1996 prices and exclude US$504,000 for Banja Luka.Gas costs were taken from the financiai statements; costs after 1999 were assumed to remain at the 1999 level.Other energy costs were taken from the financial statements.O&M costs were taken from the financial statements. Costs from 2000 are assumed to be at the 1999 level.District heat revenue was taken from the financial statements. It includes a small amount of non-householdrevenue (11% of total). The higher revenue from 2000 takes account of a 17% tariff increase in mid-1999.The consumer surplus was estimated at 1/3 of district heat revenue, the same as at appraisal.Heat savings were estimated at 10% of the heat consumed in the absence of valves (as at appraisal) and valuedat the costs of gas plus other energy plus O&M.Radiator revenue is put at zero in the absence of any arrangement for charging consumers for rehabilitation ofbuilding internals.

20

Table 10: Status of Legal Covenants

Covenant Present Original Revised Description of Covenant CommentsAgreement Section Type Status Fulfillment Fulfillment

Date DateCredit 2.02(b) j C Borrower to open and maintain a Done

special account in a commercialbank.

3.03 10 C 12/31/96 Undertake a tariff study. Done

4.01(a) I C Maintain records in accordance Donewith sound accounting practices.

4,01(b) I C Have project accounts including DoneSpecial Account audited annuallyby an Independent Auditor.

Project 4.02 5 C Toplane-Sarajevo to establish and Done(Toplane- maintain a PIU until completion ofSarajevo) the project.

4.03 2 PC Toplane-Sarajevo to comply with Complied in 1996 & 1997,the targets for revenue collections not in 1998as a percentage of operatingexpenses.

4.05 10 C 06/30/97 Develop a District Heating Master Formulated a DevelopmentPlan. Plan

4.09(a) I C Toplane-Sarajevo to maintain Donerecords and accounts.

4.09(b) I C Toplane-Sarajevo to have records Doneand accounts for each fiscal yearaudited.

4.11 10 C 09/30/99 06i02/l999 Toplane-Sarajevo to furnish to DoneIDA, no later than 6 months afterthe closing date, a futureoperations plan.

Project 4.02 10 NC 11/30/96 TBL to carry out the engineering Component terminated due(Toplana survey. to fraudulent withdrawalsBanja-Luka)

4.05(a) I NC TBL to maintain records and Not Applicableaccounts.

4.05(b) I NC TBL to have records, accounts and Not Applicablefinancial statements for each fiscalyear audited.

4.06 10 NYD 09/30/99 TBL to furnish to IDA, no later Not Applicablethan 6 months after the closingdate, a future operations plan.

Covenant types: Present Status:

I. = Accounts/audits 8. Indigenous people C = covenant complied with2. Financial perfornance/revenue generation from 9. = Monitoring, review, and reporting CD = complied with after delay

beneficiaries I10. = Project implementation not covered CP = complied with partially3. Flow and utilization of project funds by categories 1-9 NC = not complied with4. Counterpart funding 11. = Sectoral or cross-sectoral budgetary or5. Management aspects of the project or executing other resource allocation

agency 12. = Sectoral or cross-sectoral policy/6. = Environmental covenants regulatory/institutional action7. = Involuntary resettlement 13. = Other

21

Table 11: Compliance with Operational Manual Statements

Statement number and title Describe and comment on lack of compliance

1. All OM statements complied with

2.

3.

Etc.

Table 12: Bank Resources: Staff Inputs

Planned Revised Actual

Stage of project cycle Weeks US$ Weeks US$ Weeks US$(000) (000) (000)

Preparation to Appraisal N.A. N.A. 14.3 79.8

For Appraisal N.A. N.A. 35.7 91.6

Negotiations through Board N.A. N.A. N.A. 0.9approval

Supervision** 24.1 53.4* 83.6 198.6

Completion N.A. N.A. 7.0 15.0

Total 24.1 53.4 130.5 371.8m COS reports dated 08/05/99.

** Project supervised on continuous basis by staff based in the field.

22

Table 13: Bank Resources: Missions

Performance Rating' Types ofStage of project cycle Month/ No. of Days in Specialization' Implem. Developm. Pb] 3

Year Persons Field status objectivesThrough Appraisal

Appraisal through Boardapproval

Supervision 1 06/96 3 8 TM, Ec, E S S F, I, CoF

Supervision 2 09/96 3 112* TM, Ec, E S S I, CoF, F

Supervision 3 04/97 1 10 TM S S P, 1, CoF, F

Supervision 4 11/98 2 8 TM, FA S S 1, Cof, F, P

Completion** 06/99 3 14 TM, FA, Ec

Total

I - Key to Specialized staff skills: 2 - Key to Performance Ratings: 3 - Key to Types of Problems:TM-Task Manager S-Satisfactory F-FinancialEc-Economist I-InstitutionalE-Engineer P-ProcurementFA-Financial Analyst CoF-Cofinancing

* Project supervised on a continuous basis by staff based in the field.** PSR was not completed for completion mission.

ANNEX A

K. J. K. P TOPLANE-SARAJEVO Project Implementing UnitSemira Fraste 22 Tel. + 387 71 543 26671000 Sarajevo, Bosnia and Herzegovina Fax. + 387 71 667 287



EMERGENCY DISTRICT HEATING RECONSTRUCTION PROJECTin SARAJEVO

CREDIT WBTF 24034-BOS (3029-BOS Part D, 2903-BOS Part H)

APPENDIX B

BORROWER'S CONTRIBUTION TO THE ICR

JULY, 1999

K.J.K.P TOPLANE-SARAJEVO 2Project Implementing Unit

A. PRE-WAR SITUATION

I. The district heating (DH) system of Sarajevo started operations in 1968. A municipal heatingentity, J. K. P. Toplane-Sarajevo was operating the system and provided heat, by the end of1991, approximately 40% of the population (about 180 000 inhabitants) and part of the publicsector in all communities of the city.

2. The DH system consisted of 130 individual heat-only boilers (HOB) with a total installedcapacity of 515 MW, a peak load of 387 MW (75% of capacity), and network with a totallength of 62 km. The system is divided into two parts of different technologies: (i) 43independent area networks, supplied by one boiler plant each, provide hot water for heatingonly; and (ii) 87 separate buildings, supplied by one small roof-top boiler plant each. Thenumber and size of boilers varies in the boiler plant depending on the heat load of the networkparts and buildings. 120 substations are located in the supply areas of big boiler plants and arelocated either in the boiler plant itself or in the basement of apartment building they supply.

3. The average number of the radiators per flat at the end users' premises was calculated to be 4,5meaning in total 225 000 radiators in 48.300 flats connected to the district heating system inSarajevo. 90% of flats were property of commercial entities, while 10% belonged to themunicipal housing company SARAJEVOSTAN. Radiators and connecting internal network(Internal Installations) were part of the property.

B. PRE-PROJECT SITUATION

4. During the war gas shortages and direct impact damages reduced the system to operation oflow-pressure gas lines only. Unsupplied consumers were initially using alternative energysources such as coal, wood and paper heating their flats individually. As the war continued andthose sources of fuel were depleted, more and more consumers resorted to make illegal gasconnections to the gas network modifying internal heating installations into gas distributionnetwork. As a result only 16 000 (32%) of the 50 000 flats originally connected to the districtheating network were heated by Toplane dropping heat demand from 387 MW to 141 MW(36%).

5. Out of the 130 boilers only about 60 were operative representing in total 200 MW or 60% of thetotal pre-war installed capacity.

6. Distribution network did not appear to have major war damages but due corrosion, freezing andinsulation damages the need of repairs was estimated to be about 15% of the total length of 62km.

7. Most substations were affected by lack of maintenance due to lack of spare parts and wear andtear. For those substations that were out of operation and without water for about 4 yearscorrosion, freezing and insulation problems were expected to be pervasive.


8. The remote control center, which served 105 boilers including all 87 rooftop boilers and 18 of44 boiler plants as well as 40% of distribution substations, was totally destroyed during the war.Only part of the wiring, local interface equipment and parts of the original building were left.

9. Based on the average pre-war number of radiators per flat, i.e. 4,5 per flat, 50 000 flats withtotal of 226 000 radiators were connected to the district heating system of Toplane-Sarajevo.After the war only 30 % (65 000) of all radiators was in operative condition. The reasons werecorrosion, clogging and leaking of radiator, valves and internal pipelines, and on the other handthe use of internal heating installations for individual gas heating by connecting them directly tothe gas network.

10. Metering of heat consumption was partly done in rooftop boiler houses with one pipe systemand in part of substations. Due to the lack of maintenance during the war almost all of meterswere out of order and/or disconnected.

11. Institutional activities as maintenance, billing and collecting, financial planning were more orless neglected during the war either due to lack of tools and spare parts or damages to thepremises.

C. THE PROJECT OBJECTIVES AND EVALUATION

12. The objectives of the project were to:

(i) restore district heating service in Sarajevo as soon as possible by reconstructing both thedistrict heat supply system as well as by reconstructing building internal heatinginstallations;

(ii) enable BiH to potentially reduce its gas consumption through fuel switching by Toplane-Sarajevo from gas to fuel oil, which would enhance the country's strategically importantsecurity of energy supply;

(iii) strengthen Toplane-Sarajevo's institutional capacity; and

(iv) include system improvements in the reconstruction process to the extent feasible.

The project would enhance energy efficiency and energy conservation and reduceenvironmental pollution by enabling disconnection of about 34 000 flats in Sarajevo from self-made gas connections.

The importance of the project's second main objective has been abundantly demonstratedduring the war. The total dependence of Sarajevo on natural gas imported from Russia andtransiting through Serbia means that Sarajevo's energy supply is not secure. The DH system'sability in principle to use dual firing and, hence, the option of using light fuel oil for districtheating rather than gas would enhance Bosnia's security of energy supply. The capability touse this dual firing option will be fully rebuilt under the proposed project.


The project start was in March 1996 and the completion is estimated to be at the end of March2000. The credit now in question was planned to form the financing in the beginning phase ofthe project meanwhile searching the additional financing sources for the rest part of the project.

The most urgent needs covering material supplies were financed through the credit granted bythe Government of Finland.

13. The project complied with both the emergency situation and the complexity of the Sarajevodistrict heating system in a two-phase reconstruction approach:

(i) a fast track repair program through the ongoing construction season to re-supply as manyconsumers as possible with district heat; and

(ii) a reconstruction program for full rehabilitation and improvement of the entire districtA heating system through September 1997.

14. FAST TRACK REPAIR PROGRAM (Emergency Program)

* About 30 000 flats were heated through District Heating Network by the end of 1996. By theend of the first heating season after the war, 1996-1997, about 34 000 flats were heated(April 1997).

* The repair works were carried out in about 20 000 flats including installations of newradiators of different types, new radiator valves and connectors, pipework with insulationand cleaning of internal networks in the buildings.

* About 3 kilometers of damaged and worn-out network segments reconstructed in thenumerous most critical areas.

* 9 pieces of new Compact Consumer Substations installed and existing substations wererepaired by replacing damaged components to cover the heat supply to the flats.

* Emergency repairs in Boiler Plants to fulfill the heat demands of the flat to be heated.* Billing and Collecting System operative in December 1996.* Toplane's business premises reconstructed and repaired for housing the personnel of

Toplane's management and Project PIU Team.

15. MAIN RECONSTRUCTION PROGRAM

* By the start of the heating season 1999-2000 totally about 45 000 flats will be heatedcovering all the flats which were heated before the war except very badly damaged onesneeding additional civil works repairs, and those left to the Serbian side. The figure includes7 000 flats repaired by EU funding.

* About 9 kilometers of network repaired according to the plan.* Comprehensive repair works of consumer substations completed; 50 of them provided with

heat meters.* 25 total or partial reconstruction of boiler plants completed including additional 8 total

rooftop boiler plant construction.


* In 18 other boiler plants minor/major repair works were carried out to increase reliability inheat production at least to the level as prevailed before the war.

* Final Report of Development Plan was issued. The Master Plan Study and System Planningwere modified to cover only a shorter term "Development Plan".

16. By the end of July, 1999, which is the closing date of the part of the project financed throughcredits WBTF 24034-BOS (closing date March 31, 1999), credit 3029-BOS Part D (closing dateJuly 31, 1999) , and credit 2903-BOS Part H (closing date December 31, 1998) the contractedgoods and works are well within the project plan. However the project implementation schedulehas been revised three times since 1997 and corresponding extentions have needed to the credit.

17. Due to the financial gap of about USD 3,5 millions following tasks will be left uncompleted:* Establishing the energy metering system with test laboratory for meter calibration* Implement II and III phase of Remote Control and Monitoring System* Complete the reconstruction of the facilities of the second priority

Phase I of Remote Control and Monitoring System includes mainly monitoring function in 66of 87 Rooftop Boiler Plants, 9 of 43 Major Boiler Plants and 9 of 120 substations.

D. IMPLEMENTATION ARRANGEMENTS

18. Within Toplane-Sarajevo the Project Implementing Unit (PIU) was established. PIU wassupported by the Finnish experts from the company Ekono Energy Ltd. giving TechnicalAssistance in the following areas:(i) project management (general, project management, scheduling, procurement and cost

control);

(ii) engineering;

(iii) financial and commercial management; and

(iv) system planning.

Each of these tasks has included a significant staff-training component.

The amount of the PIU's personnel has varied from 40 in the beginning to 25 at the moment sothat the amount of the Finnish staff has decreased according to the possibility to transfer thetasks to be performed by the Bosnian personnel.

PIU carried out all tasks in the project supported by the Toplane personnel which in their partparticipated in the selection of main equipment, contractors and in site supervision as well ascommissioning.

One of the biggest tasks was preparing of Technical Specifications for the procurement of theGoods and Works.

K. J.K. P TOPLANE-SARAJEVO 6Project Implementing Unit

The main part of equipment and materials for the reconstruction was procured throughinternational shopping (IS) while major part of the works was carried out by Bosnianenterprises and entities as turnkey basis.

During the work it became apparent that the comprehensiveness and the complexity of theprogram is essentially bigger than originally estimated and the plans were changed in severalphases. This caused PIU to work under the continuous pressure.

E. OPERATION EXPERIENCE

19. The total project costs based in the known financing possibility will be total USD 41 million,from which the credit now reported is USD 20 millions. Other credits and donations coveringthe rest of the costs are from the governments of Finland and Denmark, European Union, andtwo Dutch Trust Funds managed by the World Bank.

20. A Part of the credit of USD 20 millions was given to Banja Luka District Heating Project (500000 USD), a part to Elektroprivreda (3 800 000 USD) and a part to the Gas Project (5 000000 USD, which caused financial problems before getting the given parts back to the SarajevoEmergency District Heating reconstruction Project. Due to the delays in starting of newcontracts project time schedules and plans were revised continuously.However, the World Bank was capable to arrange co-financing with the Government of theNetherlands as a form of the Dutch Trust Fund, USD 5,5 millions in 1998 and USD 3,5 millionsin 1999 through which the original implementation plan was realized.

21. The planned objectives in the Fast Track Repair program were all achieved and those in MainReconstruction Program as far as the funding was available although in the latter programalmost two years later than estimated in the Project Document.

22. The involvement of different donor-countries and organizations, and vain expectations for newcredits caused during the whole project much additional work and frustration to PIU personnelparticularly, when the resources were too small compared with the extensiveness of the Project.European Union was planned to participate in the project funding already in the autumn 1996 asindicated in all plans, but finally the only contract was signed in February, 1999, including onlyminor part of preliminary planned components.

F. BANK PERFORMANCE

23. The project was started fast and particularly the preparation phase and start-up of the projectwas carried-out in a satisfactory way.


Some difficulties occurred in finding out new donors for participating in project financing afterthe basic bank credit was allocated. Particularly this came-up in the components, which wereplanned to be financed through European Union.As a total, however, taking into consideration the all factors the World Bank managed well.Furthermnore it has to be stated that the bank's actions in prolonging the credits' availabilityhave been excellent.

G. PERFORMANCE OF THE BORROWER AND BENEFICIARY

24. The perfornance of the Government of BiH and different ministries have been satisfactoryalthough in some cases delays have occurred in settling of formalities in reallocation of creditsand releasing new credits to the project.

The management of Toplane-Sarajevo has given all necessary support to the project. Specialattention is to be given to the human resources in participation of site supervision.

H. KEY LESSONS LEARNED

24. The main and most important lesson learned during the implementation is that the projectplanning shall be done by professionals and in proper way. In the case of the project thestructuring of the project was done in insufficiently without taking into consideration thecomplexity of the district heating system and the different technical level of the systemcomponents. Furthermore the estimation of needed resources and time for design andengineering was wrong just due to the lack of proper project structuring. The amount ofprocurement packages was totally wrongly estimated as well as the content of the packages. Itwas very idealistic in the beginning of the project to estimate that with the available informationbig turnkey packages could have been specified.

However, the implementation by the using of the local contractors to the works where the sizeof the contract was suitable for the National Competitive Bidding procedure has proved to bevery useful.

Despite of the problems in the project realization the extensions of the project schedule have notincreased the project costs except in case of PIU. It can be verified that the proper TechnicalSpecification and good competition in contracting have saved more than PIU costs haveincreased.

Finally it can be emphasized that although there were some difficulties and problems the resultscan be considered good and Toplane has received, what was expected when starting the projectup to the credit availability. However, the missing financing should be found and uncompletedtasks implemented, after which Toplane can start its normal operations on the good basis.

ANNEX B

KJKP TOPLANE-SARAJEVO DISTRICT HEATING SYSTEM

Sarajevo, Semira Fra{te 22

Tel/fax.: 450-030, 450-047


BOSNIA AND HERZEGOVINAEmergency District Heating Reconstruction ProjectCredit NO. TF 024034

OPERATIONAL PLAN

PLANNED ACTIONS TO ENSURE PROJECT SUSTAINABILITY

+ Maintain increased operational availability and reliability of heat productionand distribution

* Improve heat production and supply by continuing the reconstruction of theproduction plants, distribution networks and transmission substations

* Support the institutional improvements and strengthen Toplane'sinstitutional capacity

+ Improve operational performance and increase system efficiency* Upgrade the existing norm system on energy consumption in all aspects

( gas consumption, oil consumption, electricity consumption )* Establish a new program of undertaking measures for energy saving and

rational and effective energy use

1. Complete all unfinished tasks

* Establish energy metering system ( first phase: meters in front of allbuildings) together with energy metering test laboratory

* Continue II and IlIl phase of remote control and monitoring system* Complete reconstruction of all facilities to needed extent

2. Organization improvement

* Develop and realize basic plan of organization improvement* Develop and realize reengineering (reorganization) of the company

based on the most modern knowledge• Establish a certification quality assurance system according to

requirements of standard ISO 9002* Make a realistic medium-term strategic plan for the period 1999-2004* Make a realistic long-term strategic plan for the 1999-2015* Establish a modern and functional information system as a link of all

separate parts of company, ( integration of all parts of information

ANNEX B

system into one united information system, and carrying out allmissed software's)

For all items mentioned above ( 1 - 2 ) planned budget is as follows:

Measurement 3,455 mil US$Remote control system 1,700 mil US$Completion of reconstruction 5,678 mil US$Organization improvement 0,600 mil US$

TOTAL COSTS 11,433 mil USs

Note: Financial gap within Emergency District Heating Reconstruction Project is3.5 mil US$ (estimation cost of the Project 44.5 mil US$, available funds 41.0mil US$). During the realization of the Project has been learned that real costshave been more than estimated ( 52,433 mil US$ instead of 44.5 mil US$estirpated).

MAINTENANCE OF REHABILITATED FACILITIES

* Establish and organize an new effective maintenance system based onalready created preventive maintenance software in all segments in thecompany ( preventive planning, follow up, reporting, analysis... ) which willmeet operation and maintenance costs, and ensure a stabile, effective andtimely, mostly preventive maintenance

* Define and specify measuring methods and devices for surveying anddefining conditions of different components in the system, and providenecessary devices and tools as well

* Fill up preventive maintenance software with all data regarding all importantequipment based on the recommendations of the equipment manufactures,operational instructions, internal regulation and technical practice

* Provide all necessary spar parts* Continue and strengthen education in this area for all level of staff in the

company in order to provide qualified personnel* Strengthen responsibility on all staff level

INSTITUTIONAL BUILDING AND FINANCIAL IMPROVEMENT

Completion of relevant law regulations

* Establish a sufficient number of modern and operative Centers forconsumers (by areas), and undertake appropriate measures to enable atransparent process, safe and economic operation of all parts of Toplane'ssystem

* Develop accounting procedures towards the International AccountingStandard, which would enable the management to use financial data forright and up-to-date decisions

* Develop permanently financial planning in order to foresee the problems andopportunities in order to be able to react timely and in advance

* Improve the cooperation with related companies and institutions, andespecially with Canton of Sarajevo, and establish cooperation on apermanent basis

ANNEX B

* Engage on establishment of a new tariff system for gas price ( big andother consumers), and try to improve existing tariff system for heating bychanging the collection system for 12 months to 7 months, so that tariff isdesigned to the cost structure

* Strengthen the Billing and Collection Department* Engagement of new staff ,especially in the financial, commercial and

marketing area* Improve the existing billing and collection software in accordance with

actual needs, specific requirements of tariff system and law regulation* Organize training for all management levels, encompassing organization

modernization, investment optimization, operational cost control andmonitoring

* Introduce a modern management practice which must reducemisunderstanding, de-motivation, delays etc.

* Increase the collection rate* Undertake measures and monitoring for reducing all costs* Define all necessary procedures and links between particular organization

units and completely direct their circulation ( for ex, billing and collectiondepartment and Service of internal installations, ...)

+ Organize a totally new service - Marketing that must initiate consumer careactivities, perform a permanent market analysis, and enable a transparentmutual relation Toplane - consumer.

+ In order to use high level of knowledge and experiences learned through therealization and implementation of Emergency District HeatingReconstruction Project, keep the key Project Implementation Unit staff, andput them on adequate positions

MONITORING INDICATORS FOR IMPROVEMENT OF FUTURE OPERATION

The following indicators will be used to measure the operational performance:

+ Number and surface of apartments connected to the system* Number and surface of connected business premises+ Total surface of connected consumers* Unsatisfied demand (number of apartments, total surface* Unofficial consumers ( in some cases illegal consumers) number of

apartments, total surface )* Owners of unofficial consumers* Canton subsidies* Heat generation ( MWh+ Gas consumption ( Nm3 )* Oil consumption ( kg, I )+ Electricity consumption ( kWh* Net income* Revenue collection relative to the amount billed+ Revenue collection relative to the cash operating costs

General Manager

Hazim ZezevicSarajevo, 2 June, 1999

ANNEX C

BOSNIA and HERZEGOVINA

Emergency District Heating Reconstruction Project(TF024034, TF024027, TF024026, NETH TF024771, NETH TF021192)

Supervision Mission May 24 - June 4, 1999

Aide Memoire

Introduction

1. A World Bank mission visited Bosnia and Herzegovina from May 24 to June 4,1999 to carry out a final supervision and Implementation Completion Report (ICR)mission of the Emergency District Heating Reconstruction Project (TF024034,TF024027, TF024026, NETH TF024771 and NETH TF021192). The mission helddiscussions with officials of the Toplane-Sarajevo District Heatirig Company and theCanton Government of Sarajevo. The Bank team included Richard Hamilton (ProgramTeam Leader), Marie-Theres Schurrer (Energy Consultant) and Anna Bjerde (FinancialAnalyst). This Aide Memoire summarizes the findings and conclusions of the mission,and is subject to confirmation by World Bank management. The mission expresses itsappreciation for the co-operation and hospitality received.

Project Implementation Status

2. Project Completion. The IDA Credit was closed on March 31, 1999. By thatdate, all the funds under the Credit had been disbursed, with the exception of US$1million under the Emergency Natural Gas System Reconstruction Project. These fundsare available to the District Heating Project in compensation for a project start-upadvance, provided from the District Heating Credit to the Gas Project in 1996, which willclose on July 31, 1999. Project components under IDA managed Trust Funds andparallel financing from the Netherlands, Denmark, Finland and the EU are expected to becompleted by February 2000 and end-1999, respectively.

3. Procurement.

(i). IDA Financed Components. The IDA-financed contracts under the Project, witha total value of US$20 million, are 94% complete. The remaining disbursements are forcontracts for measuring instruments and monitoring-and-control equipment, at a value ofUS$1 million, (see para 2) and will be completed by July 1999 before closing of Credit3029. IDA funds were used in a ratio of 53% for goods and 47 % for works and services.Most of the installation works for donor-financed equipment had to be financed by IDA

2

and Bank-administered funds. Thus, the implementation of donor funds and Bank fundswas closely linked. The resulting overall status of implementation is as follows':

(a) Boiler plant reconstruction: Out of a total of 42 boiler plants and 85 roof-topboilers in the Sarajevo district heating system, 59 destroyed boilers have beenfully rehabilitated to-date and 8 are still under reconstruction, using Bank-administered Trust Funds. Completion of the component is expected by end-1999. The two largest contracts for boiler equipment, the majority of locallyprocured auxiliary equipment, and most contracts for installation and civil worksat the boiler plants were funded by IDA for a total amount of US$10.4 million.

(b) Substations: Out of a total of 106 substations, all damaged substationsunderwent repair, resulting in full reconstruction of 49 destroyed substations to-date. An additional 33 are still under reconstruction, using Bank-administeredTrust Funds, with completion expected by February 2000. IDA funds were usedfor civil and installation works and for equipment at a total value of US$0.3million.

(c) Distribution Network: Out of a total of 60 km of network piping, 17 km wereheavily destroyed and were replaced under the Project. US$1.6 million of IDAfunds were used for this component, financing primarily the installation ofdonated piping material. The component is completed.

(d) Building Internal Installations: Out of a total of 48,000 internal heatinginstallations in 48,000 apartments, 41,000 have been rehabilitated under theProject to-date. Installations in 7,000 apartments are still to be reconstructed withEC-funding, with completion expected before winter 1999. IDA funds were usedfor locally procured equipment and for the entire installation works at a total valueof US$4.9 million.

(e) Technical Assistance: Technical assistance was provided with Finnish andDanish funding in the areas of finance, billing and collection, preventivemaintenance, and project management. As a result, a new billing and collectionsystem was procured, staff received training in international accounting standardsand business planning, a preventive maintenance program has been introduced,and assistance to the PIU in project management is being provided until end-1999.In addition, a basic Masterplan for the district heating system was developed.IDA funds of US$0.2 million were used to undertake an engineering survey of theentire system, and to cover 50% of the costs of the financial audit of the enterprisefor the year of 1998. Operating costs and overtime payment for the PIU were

A detailed overview and accurate status of the achievements and financing arrangements under theproject will be presented in the forthcoming ICR.

3

covered by IDA under a declining support scheme throughout projectimplementation.

(f) Other Items: The rehabilitation of Toplane-Sarajevo's office-, service- andworkshop facilities at a cost of US$0.6 million was funded by IDA and completedin 1997.

(ii). IDA-managed Trust Fund Components. The above-mentioned Projectcomponents are co-financed by the two Bank-administered Dutch Trust Funds, whichhave a total value of US$9.3 million. The Trust Funds were provided to the Project underrules and provisions similar to those for IDA proceeds. Implementation is expected to becompleted by February 2000. Forty-five percent of the Funds have been disbursed to-date. One-third of the Trust Fund proceeds are being used for works and services, andtwo-thirds for goods of mostly local origin.

(iii). Parallel Financing by Other Donors. Parallel financing to the Project wasprovided by the Governments of Finland and Denmark, and the EU. The tied Finnishcontribution of US$8.6 million was used for equipment and technical assistance. Thephysical contribution was successfully completed in spring 1999, while technicalassistance will continue through 1999. The tied Danish contribution of US$1.4 millionwas used for network equipment and technical assistance, and achieved its objectives in1998. The EU contribution of US$2.1 million is dedicated exclusively to therehabilitation of building internal installations in areas where refugees are returning toSarajevo. Implementation started only in April 1999, and completion is expected by end-1999.

Project Financing and Disbursement.

4. The financing plan and status of disbursements as of May 30, 1999 are as follows:

Financier Project Funds Disbursed to-date Closing DateUS$ million

IDA 20.0 100 % closedNetherlands 9.3 60 % Feb-2000Finland 8.6 100 % Dec- 1999EU 2.1 Advance Payment Nov-1999Denmark 1.4 100 % closedFinancing Gap 3.1TOTAL 44.5

The financing gap of US$3.1 million remains uncovered. The project componentaffected by the lack of funding is primarily the heat metering in individual apartments.

4

This component was considered to have the lowest priorities towards achieving theProject's emergency reconstruction objectives.

Revised Project Cost

5. The initial Project cost of US$40.0 million was based on first estimates of damageto the complex and heavily destroyed district heating system. When more accurateestimates were made in the course of reconstruction, the Project cost increased byapproximately 11% to US$44.5 million. With the financing gap of US$3.1 millionremaining uncovered, however, Project cost is now estimated to be US$41.4 million.This represents an increase of 3.5% over the initial Project cost.

Institutional and Financial Aspects

6. Management and Staffing. The mission was pleased to note that a new GeneralManager has now been appointed to Toplane, following a long period in which thecompany was headed by an acting General Manager. In addition, a well-qualified billingand collection expert has been hired to strengthen the Finance Department. The missionemphasized that further strengthening of the Financial (particularly Accounting),Commercial and Technical Departments is still required.

7. Audit. The mission met with PricewaterhouseCoopers, who have carried out anaudit of Toplane's 1998 company accounts. While the auditors did not express anopinion on the income and cash flow statements as at December 31, 1998, it is theiropinion that the Balance Sheet represents fairly the financial position of Toplane as atDecember 31, 1998. In its Management Letter, the auditors stressed that the keyweaknesses in Toplane are the poor record keeping and system for trade receivables andpayables, and the lack of cooperation between the Accounting and CollectionDepartments; which in turn is resulting in a lack of readily available and reliable data forday-to-day decision making. The mission stressed the critical importance of keepingproper and reliable records to the new General Manager.

8. Financial Performance. The mission reviewed the 1999 revenue collectionperformance and found that this still remains a very problematic area for Toplane. Themission was particularly disappointed by the March and April collections of 64% and58% of billings, respectively, following the outstanding collection of 90% in February.Toplane provided the following reasons for the deterioration in collection performance:(i) a general lack of affordability among many of its consumers; (ii) collections droppingas a result of the rise in temperature since consumers are less concerned about beingwithout heating at this time of the year; and (iii) inability to process invoices andreminders in March and April due to computer problems. The mission was informed thatimprovements to the capacity and functionality of the billing and collection software arebeing undertaken with assistance from the Finnish consultants.

5

9. The new General Manager pointed to the following actions to improve thecollection performance during 1999 and beyond: (i) establish consumer service centers toprocess payments and handle complaints; (ii) upgrade the billing and collection system toallow for automatic and monthly processing of bills; (iii) send out specialized collectionteams to consumers' homes; (iv) establish telephone lines to handle consumer queries andcomplaints; (v) and carry out a consumer awareness campaign on the need for consumersto pay for heating services. The mission expressed its support for these measures andsuggested that Toplane should work closely with the Canton in these efforts, particularlythe awareness campaign. In a meeting with the Canton Government, the mission wasinformed that the new Canton Prime Minister would take initiative to launch mediacampaigns for the payment of utility bills, to resolve the issue of disputed ownership overrefugee-occupied apartments, and to lower what appears to be an inordinately high pricefor natural gas, both at the city gate to Sarajevo, and, in particular, the gas retail price toToph7ne.

10. Based on the audited 1998 results, the mission reviewed compliance with the keyfinancial covenant (revenue collected as a percentage of annual expenses) and found thatToplane did not comply with the 1998 covenant. Revenue collected as a percentage oftotal annual operating expenses reached 60%, compared to the 1998 covenant of 75%.Toplane did comply with the 1996 and 1997 covenants.

11. New tariff rates were introduced as of March 1, 1999. There is an overall increaseof 17% resulting in rates of 1 KM/m2 for residential consumers and 3 KM/m2 forcommercial and public sector users. These rates allow Toplane to cover all productioncosts, depreciation and interest, but do not allow for any provision for bad debts andprofit. The mission prepared financial projections for 1999 that show that, with the newtariffs and a collection rate of about 70%, Toplane would incur a cash deficit of at leastKM 3.8 million (US$ 2 million) in 1999. If the collection performance was improved toabout 90%, Toplane would be in a position to meet all of its cash flow requirements.

Preparation of the Implementation Completion Report (ICR).

12. The mission discussed the requirements for completing an ICR for the project.Toplane will prepare its own evaluation report on the project's execution and operation,cost and benefits, the Bank and the Project Beneficiary's perfornance of their respectiveobligations under the Credit Agreement, and the extent to which the purposes of theCredit were achieved.

13. During the mission, Toplane prepared a future operations plan for the projectwhich will be included in the ICR (also attached to this Aide Memoire). This planincludes the actions that will be undertaken by Toplane to ensure that the project willcontinue to yield benefits, including indicators to monitor and evaluate future operations.The mission finds the plan satisfactory.

6

14. The following schedule was agreed with Toplane for the preparation of the ICR:

June 30, 1999 Draft contribution to the ICR to be sent by Toplane to theBank.

August 15, 1999 Draft ICR to be sent by the Bank to Toplane for comments.

August 30, 1999 Toplane to forward its comments, if any, on the Draft ICRto the Bank.

September 30, 1999 The ICR will be finalized and printed by the Bank. Copieswill be forwarded to the relevant government agencies ofBosnia and Herzegovina and Toplane.

Future World Bank Support to the District Heating Sector.

15. The mission discussed future district heating investment requirements with theEnergy Sector Task Force, the General Manager of Toplane and the Canton Government.The Task Force raised the need for investments in various district heating systems aroundthe country. Toplane requested that the Bank continue its support to improve theSarajevo district heating system and stressed the need for additional investments in thefollowing areas: (i) computerized operating- and management systems; (ii) remotemonitoring and control; (iii) individual heat metering; and, in the longer term, (iv)combined cycle heat-and power production. The mission emphasized that any futureassistance by the Bank to Toplane would require a substantial improvement in costrecovery, both by improving bill collection performance and increasing net revenues (e.g.by lowering operating expenses, such as gas), to ensure the future financial viability ofcompany.

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world bank document...assistance for project management, including an engineering survey and staff...

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