Document of

The World Bank

Report No: ICR00002478

IMPLEMENTATION COMPLETION AND RESULTS REPORT

(IDA-41970)

ON A

CREDIT

IN THE AMOUNT OF SDR 25.1 MILLION

(US$ 36 MILLION EQUIVALENT)

TO

BOSNIA AND HERZEGOVINA

IN SUPPORT OF THE THIRD PHASE OF THE US$ l,000 MILLION

ENERGY COMMUNITY OF SOUTH EAST EUROPE (APL) PROGRAM

April 16, 2013

Sustainable Development Department

South East Europe Country Unit

Europe and Central Asia Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective on March 31, 2013)

Currency Unit = KM

KM 1.00 = US$ 0.66

US$ 1.00 = KM 1.51

KM 1 = 100 Pfenings

FISCAL YEAR

January 1 to December 31

ABBREVIATIONS AND ACRONYMS

APL Adaptable Program Loan

BiH Bosnia Herzegovina

CAS Country Assistance Strategy

EBRD European Bank for Reconstruction and Development

ECSEE Energy Community of South Eastern Europe

EC Energy Community

EIB European Investment Bank

EPs Elektroprivredas

EPBiH Elektroprivereda Bosnia and Herzegovina

EPHZHB Elektroprivereda of the Croatian Community of Herzeg-Bosnia

EPRS Elektroprivereda Republika Srpska

EU European Union

FMIS Financial and Management Information System

HPP Hydropower plant

IDA International Development Association

ISO Independent System Operator

KfW Kreditanstalt für Wiederaufbau

PIU Project Implementation Unit

SCADA Supervisory control and data acquisition

SERC State Electricity Regulatory Commission

TPP Thermal power plant

Vice President: Philippe H. Le Houerou

Country Director: Ellen A. Goldstein

Sector Manager: Ranjit Lamech ECSSD

Project Team Leader: Mohinder Gulati ECSSD

ICR Team Leader: Mohinder Gulati ECSSD

BOSNIA AND HEREZEGOVINA

Energy Community of South East Europe (ECSEE) APL3-Bosnia and

Herzegovina Project

CONTENTS Data Sheet

A. Basic Information

B. Key Dates

C. Ratings Summary

D. Sector and Theme Codes

E. Bank Staff

F. Results Framework Analysis

G. Ratings of Project Performance in ISRs

H. Restructuring

I. Disbursement Graph

1. Project Context, Development Objectives and Design ............................................... 1

2. Key Factors Affecting Implementation and Outcomes……………………………...8

3. Assessment of Outcomes .......................................................................................... 15

4. Assessment of Risk to Development Outcome ......................................................... 19

5. Assessment of Bank and Borrower Performance ..................................................... 20

6. Lessons Learned ....................................................................................................... 21

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners .......... 21

Annex 1. Project Costs and Financing ...................................................................... 23

Annex 2. Outputs by Component .............................................................................. 26

Annex 3. Economic and Financial Analysis .............................................................. 29

Annex 4. Bank Lending and Implementation Support/Supervision Processes ..... 36

Annex 5. Beneficiary Survey Results ........................................................................ 37

Annex 6. Stakeholder Workshop Report and Results ............................................. 38

Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ............. 39

Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ............... 41

Annex 9. List of Supporting Documents ................................................................... 42

Annex 10. Status of Components Financed by EBRD, EIB and KfW……………..43

MAP 46

A. Basic Information

Country: Bosnia and

Herzegovina Project Name:

Energy Community of

South East Europe

(ECSEE) APL3-Bosnia

and Herzegovina

Project

Project ID: P090666 L/C/TF Number(s): IDA-41970

ICR Date: 12/11/2012 ICR Type: Core ICR

Lending Instrument: APL Borrower: BOSNIA AND

HERZEGOVINA

Original Total

Commitment: XDR 25.10M Disbursed Amount: XDR 24.95M

Revised Amount: XDR 25.10M

Environmental Category: B

Implementing Agencies:

EPHZHB

EPRS

EPBiH

Co-financiers and Other External Partners: KfW European Bank for Reconstruction and Development (EBRD)

European Investment Bank (EIB)

B. Key Dates

Process Date Process Original Date Revised / Actual

Date(s)

Concept Review: 11/30/2005 Effectiveness: 04/13/2007 04/13/2007

Appraisal: 04/04/2006 Restructuring(s): 11/23/2010

02/07/2011

Approval: 06/16/2006 Mid-term Review: 11/03/2009

Closing: 12/31/2010 06/30/2012

C. Ratings Summary

C.1 Performance Rating by ICR

Outcomes: Moderately Satisfactory

Risk to Development Outcome: Moderate

Bank Performance: Satisfactory

Borrower Performance: Satisfactory

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

Bank Ratings Borrower Ratings

Quality at Entry: Satisfactory Government: Satisfactory

Quality of Supervision: Satisfactory Implementing

Agency/Agencies: Satisfactory

Overall Bank

Performance: Satisfactory

Overall Borrower

Performance: Satisfactory

C.3 Quality at Entry and Implementation Performance Indicators

Implementation

Performance Indicators

QAG Assessments

(if any) Rating

Potential Problem Project

at any time (Yes/No): No

Quality at Entry

(QEA): None

Problem Project at any

time (Yes/No): Yes

Quality of

Supervision (QSA): None

DO rating before

Closing/Inactive status:

Moderately

Satisfactory

D. Sector and Theme Codes

Original Actual

Sector Code (as % of total Bank financing)

Hydropower 30 30

Thermal Power Generation 25 25

Transmission and Distribution of Electricity 45 45

Theme Code (as % of total Bank financing)

Pollution management and environmental health 25 25

Regional integration 50 50

Regulation and competition policy 25 25

E. Bank Staff

Positions At ICR At Approval

Vice President: Philippe H. Le Houerou Shigeo Katsu

Country Director: Ellen A. Goldstein Orsalia Kalantzopoulos

Sector Manager: Ranjit J. Lamech Peter D. Thomson

Project Team Leader: Mohinder P. Gulati Iftikhar Khalil

ICR Team Leader: Mohinder P. Gulati

ICR Primary Author: Venkataraman Krishnaswamy

F. Results Framework Analysis

Project Development Objectives The countries of South East Europe, including Bosnia and Herzegovina, and the

European Commission are cooperating to develop a regional energy market, the Energy

Community of South East Europe (ECSEE) and integrate it into the internal energy

market of the European Union.

The objective of the project is to facilitate BiH's participation in ECSEE through

investments to: (i) improve dam safety; (ii) reduce adverse environmental impacts at

thermal power stations; (iii) replace ageing existing facilities and equipment at

hydropower and thermal power stations; (iv) rehabilitate distribution systems and

introduce distribution Supervisory Control and Data Acquisition (SCADA) systems, (v)

establish a market operation system, (vi) provide hardware and software to improve the

financial management information systems of the Elektroprivredas; and through technical

assistance to facilitate project implementation, and determine the best way to reduce

sulfur dioxide and nitrogen oxide emissions at a power plant.

Revised Project Development Objectives

No revision.

(a) PDO Indicator(s)

Indicator Baseline Value

Original Target

Values (from

approval

documents)

Formally

Revised

Target

Values

Actual Value

Achieved at

Completion or

Target Years

Indicator 1 :

Electricity market in South-East Europe is liberalized in accordance with the EC

Treaty (including derogations and subsequent modifications, if any) and a

regional electricity market is functioning.

Value

quantitative or

Qualitative)

Zero in most countries

All non-residential

consumers to be

liberalized by

07/01/2008 and all

consumers by

01/01/2015

All non-residential

consumers have

been liberalized on

target by BiH

Date achieved 01/01/2007 07/01/2008 &

01/01/2015 07/01/2008

Comments

(incl. %

achievement)

Achievement 100% in BiH. In 2011, share of non-residential consumers

(liberalized since July 2008) was 59% of total consumption. Such liberalization

has taken place in varying degrees in other SEE countries (ECS Annual Report

2012)

Indicator 2 : Electricity generation is maintained at or above base levels in corresponding

hydrological conditions

Value

quantitative or

Qualitative)

12800 GWh Equal or greater

than 12800 GWh

Achieved in all

years except 2007

Date achieved 12/31/2005 Every year from

2007 12/31/2011

Comments

(incl. %

achievement)

Achieved 100%. Target was achieved and notably exceeded in every year except

2007, when generation was 12,175 GWh owing to exceptionally adverse

hydrological conditions

Indicator 3 : Environmental Compliance is improved at:

1. Kakanj TPP; 2. Tuzla TPP; 3. Ugljevik TPP; and 4. Gacko TPP.

Value

quantitative or

Qualitative)

No, at all four power

plants

Yes, at all four

power plants

Yes, compliance at

the four power

plants has improved

as designed.

Date achieved 12/31/2005 06/30/2010 06/30/2012

Comments

(incl. %

achievement)

Achieved 100% Compliance improved as designed in respect of particulates

emission (Kakanj), safe ash and slag storage (Kakanj), reduction in water use and

pollution load of effluents (Gacko, Ugljevik,and Tuzla), cleaner coal handling

(Tuzla). See details at Section 2.4 of the ICR

Indicator 4 : Dam safety is improved at: 1. Grabovica HPP; 2. Salakovac HPP; 3. Jablanica

HPP; 4. Rama HPP; 5. Trebinje I1 HPP; 6. Visegrad HPP; and 7. Bocac HPP

Value

quantitative or

Qualitative)

No, in all seven dams Yes, in all seven

dams

Partly improved at

Jablanica,

Grabovic, and

Salakovac through

installation of dam

safety monitoring

systems. Water leak

in Rama reduced.

Other ongoing

works would be

completed mostly

in 2013 and partly

in 2014.

Date achieved 12/31/2005 06/30/2010 06/30/2012

Comments

(incl. %

achievement)

Achievement is about 40%. Likely to be 85 to 90% by mid-2013 and 100% by

early 2014. IDA funded TA helped to identify the remedial measures for dam

safety. Measures are being implemented through EIB funding and internal

resources of the utilities.

Indicator 5 : ISO has functional market operation system

Value

quantitative or

Qualitative)

No Yes

Partly yes by the

target date and also

IDA credit closing

date

Date achieved 12/31/2005 06/30/2009 06/30/2012

Comments

(incl. %

achievement)

Achievement is about 40%. Segmented markets (regulated and competitive)

coexist. State owned utilities dominate. ISO performs settlement function, but its

own governing arrangements have not yet been agreed among stake holders.

Appears unlikely to be resolved in the near future

(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target

Values (from

approval

documents)

Formally

Revised

Target Values

Actual Value

Achieved at

Completion or

Target Years

Indicator 1 : Progress in implementation of components

Value

(quantitative

or Qualitative)

Disbursement

0%

Disbursement

100% 100% 99.4%

Date achieved 01/01/2007 06/30/2010 06/30/2012 06/30/2012

Comments

(incl. %

achievement)

Achievement is 99.4%, though somewhat delayed. Delays caused by the delay

in credit effectiveness and delay in certain procurement activities led to the

extension of closing date of IDA credit.

G. Ratings of Project Performance in ISRs

No. Date ISR

Archived DO IP

Actual

Disbursements

(USD millions)

1 03/14/2007 Satisfactory Satisfactory 0.00

2 04/03/2008 Satisfactory Moderately Satisfactory 0.00

3 01/05/2009 Satisfactory Moderately

Unsatisfactory 0.18

4 12/01/2009 Satisfactory Satisfactory 2.88

5 04/19/2010 Satisfactory Moderately Satisfactory 4.42

6 01/06/2011 Satisfactory Satisfactory 18.32

7 10/11/2011 Satisfactory Satisfactory 24.56

8 06/26/2012 Moderately Satisfactory Moderately Satisfactory 32.02

H. Restructuring (if any)

Restructuring

Date(s)

Board

Approved

PDO Change

ISR Ratings at

Restructuring

Amount

Disbursed at

Restructuring

in USD

millions

Reason for Restructuring &

Key Changes Made DO IP

11/23/2010 S MS 15.59

Reallocation of proceeds,

extension of closing date,

revised implementation

schedule

02/07/2011 S S 18.80 Adding a small activity of solar

energy study

I. Disbursement Profile

1

1. Project Context, Development Objectives and Design

1.1 Context at Appraisal

Recognizing the benefits of a regional, rather than national, approach to energy issues,

nations and territories1 in South East Europe signed in Athens the Treaty Establishing the

Energy Community of South East Europe (ECSEE)2 in October 2005, to enable the

creation of a regional energy market linked to the European market. The signatories

included Albania, Bulgaria, Bosnia and Herzegovina, Croatia, Greece, Kosovo (UNMIK),

FYR Macedonia, Romania, Serbia and Montenegro, and Turkey. Electricity shortages

were already developing in the region, and were expected to increase without significant

investments. The establishment of a well-functioning regional electricity market with

consistent market rules and appropriate regulatory oversight was considered critical to

overcome the fragmentation of energy supply and to encourage the new investment

needed to meet these emerging demand-supply gaps on the basis of a regionally

optimized least cost options. And without such a regional framework even investments of

significant magnitude might leave gaps between supply and demand.

In addition to improving efficiency, a uniform region-wide institutional framework for

electricity trading largely based on the EU energy directives was expected to expand the

region’s generation mix, improve overall energy conservation and efficiency, reduce an

excessively high energy intensity of production compared to international norms, and

strengthen national institutions and adapt legislation and regulations to EU standards.

Also, the EC Treaty provided a mechanism to eventually bring energy related regional

environmental standards to a point consistent with the EU acquis communautaire,

including the application of EU directives to new generation plants. Recognizing the

importance of this EU sponsored program for the promotion of the regional electricity

market in South East Europe, the Bank supported it by approving in January 2005, a $1.0

billion horizontal APL facility to finance projects, which will facilitate the emergence of

the regional electricity market among these countries. By March 2006, six loans/credits

totaling $373 million had been approved under the Program for six countries. The IDA

credit of $36 million to Bosnia Herzegovina (BiH) was the seventh operation under the

Program.

The Dayton Peace Agreement following the 1992-95 Balkan conflicts established Bosnia

and Herzegovina as a state comprising two Entities, each with a high degree of

autonomy: the Republika Srpska (RS) and the Federation (FBiH). There were thus three

levels of executive power in BiH: the State level Council of Ministers and the two Entity

Governments. The State level Council of Ministers (through the Ministry of Foreign

Trade and Economic Relations) represented BiH in the Energy Community (EC) forums.

1 Kosovo is no longer a territory and has since become a country.

2 Subsequent to the effectiveness of the Athens Treaty in mid-2006 ECSEE was simply referred to as the

Energy Community (EC)

2

The power sector in BiH, which was originally part of the former Yugoslavian system,

was heavily damaged during the Balkans conflicts of 1992-95. The damaged generation,

transmission, distribution and dispatch facilities as well as the coal mines providing fuel

to the thermal power stations suffered from insufficient maintenance. At the beginning of

1996, more than half of the generating capacity had been put out of operation because of

direct damages, destroyed transmission lines or lack of coal. The 400 kV and 220 kV

transmission systems which interconnected BiH with other countries in the region were

almost completely out of operation. Emergency repairs in the power stations and coal

mines financed by donors including the Bank enabled production to recover to 7,340

GWh in 1996, compared to 12,613 GWh before the war in 1990. Further rehabilitation

enabled production to reach 10,429 GWh in 2000 (83% of the 1990 level). Production

varied during 2000-2005, largely based on hydrological variations, and was 12,826 GWh

in 2005.

The 220 kV and 400 kV transmission systems were rehabilitated partly under the Bank’s

Third Electric Power Reconstruction Project, and the whole of BiH was resynchronized

with the Union for Co-ordination of Transmission of Electricity in Europe (UCTE)3 on

October 10, 2004. Since several important regional transmission lines pass through BiH,

this development fulfilled an important precondition for establishing the regional market.

Priority investments for rehabilitation of part of the distribution systems were made to

respond to the population resettlement that occurred after the war. There were still some

damaged power system facilities remaining to be rehabilitated and there were continuing

large investment needs because of aging facilities.

In 2005 BiH was one of the few countries in the region with net export of 1,410 GWh of

electricity. Since the war, the power system in Bosnia and Herzegovina (BiH) had been

operated by three companies, EPBiH (Elektroprivreda Bosnia and Herzegovina),

EPHZHB (Elektroprivreda of the Croatian Community of Herzeg-Bosnia) and EPRS

(Elektroprivreda Republika Srpska), each primarily serving separate ethnic communities.

EPBiH and EPHZHB are under the jurisdiction of the Federation Government and EPRS

is under the jurisdiction of the RS Government. These companies were technically

competent and had also improved their financial performance substantially by 2006.

However, their operation as three small vertically integrated monopolies in three separate

irregularly shaped geographical areas gave rise to inefficiencies. The BiH power sector

was being restructured to reduce these inefficiencies and to comply with the provisions of

the EC Directive 2003/54 (electricity), which promotes competition in the electricity

sector. The restructuring was based on Action Plans for restructuring of the Electricity

Sector adopted by and coordinated between the Federation and Republika Srpska (RS)

Governments, with the State level Council of Ministers enacting related legislation for

aspects within its jurisdiction. In accordance with these Action Plans, three Electricity

Regulatory Commissions had been established (one at the State level to regulate

3 UCTE has since been absorbed into the much wider ENTSO-E of the EU.

3

transmission, and one in each Entity to regulate generation and distribution). An

Independent System Operator (ISO) and a National Transmission Company that owns

and operates all transmission facilities in BiH had been established and licensed by the

State Electricity Regulatory Commission (SERC). Under the Action Plans, the

Elektroprivredas (EPs) were to be further unbundled and reorganized, with separate

companies to be created for generation and distribution. BiH was thus in the process of

sector restructuring to fulfill its commitments under the EC Treaty.

During the period 1996-2001 the Bank had provided three IDA credits to BiH totaling

$95.6 million and mobilized considerable co-financing to finance projects with total costs

of $583.17 million aimed at rehabilitating generation, transmission and distribution

segments of the power sector as well as the related coal mines. Based on the experience

of the implementation of these three projects, the APL-3 project was put together for

further rehabilitation of hydro and thermal power projects, transmission and distribution

systems and carrying out environmental upgrades- all designed to improve system

security, safety, and environmental soundness and to facilitate regional power trade.

The key elements of the rationale for the Bank’s participation were: (a) to support the EC

program of facilitating the emergence of a regional electricity market; (b) to help BiH in

its investments needed for its participation in the market; and (c) mobilize considerable

amount of multilateral and bilateral co-financing needed for the related BiH projects. The

higher level objectives of the project were promotion of regional cooperation and

fostering of regional markets among the countries previously at war to ensure peace,

economic development and stability envisaged under the Stability Pact and EC treaty.

The project was also consistent with the Country Assistance Strategy (CAS) of October

2004 which accorded high priority for targeted investments in key social and economic

infrastructure, especially supporting the above mentioned higher level objectives.

1.2 Original Project Development Objectives (PDO) and Key Indicators

The countries of South East Europe, including Bosnia and Herzegovina, and the

European Commission are cooperating to develop a regional energy market, the Energy

Community (EC) and integrate it into the internal energy market of the European Union.

The objective of the project is to facilitate BiH’s participation in EC through investments

to: (i) improve dam safety; (ii) reduce adverse environmental impacts at thermal power

stations; (iii) replace ageing existing facilities and equipment at hydropower and thermal

power stations; (iv) rehabilitate distribution systems and introduce distribution

Supervisory Control and Data Acquisition (SCADA) systems, (v) establish a market

operation system, (vi) provide hardware and software to improve the financial

management information systems of the Elektroprivredas (EPs); and (vii) through

technical assistance to facilitate project implementation, and determine the best way to

reduce sulfur dioxide and nitrogen oxide emissions at a power plant.

The key indicators given in the PAD are: (a) the liberalization of the electricity markets

in South East Europe in accordance with the Energy Community Treaty (indicator under

4

the ECSEE APL Program of January 2005); (b) maintenance of annual electricity

generation by BiH at or above base levels (12,800 GWh) in every year in corresponding

hydrological conditions and assuming the avoidance of significant shutdowns of

equipment not covered by the project; (c) improved environmental compliance at the

Kakanj, Tuzla, Ugljevik and Gacko TPPs; (d) improved dam safety at the Grabovica,

Salakovac, Jablanica, Rama, Trebinje II, Visegrad and Bocac HPPs; and (e) the ISO

having a functional market operation system.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators,

and reasons/justification

There were no revisions of the PDOs or key indicators.

1.4 Main Beneficiaries

The PAD does not explicitly identify beneficiary groups. Reliable electric supply and

enhanced energy security enabled by the project and the program were expected to

benefit all the electricity consumers. Dam safety improvements of HPPs and

environmental upgrades of TPPs reducing pollution of air and water were also expected

to benefit the population living nearby.

1.5 Original Components

The Project consisted of four parts, of which Parts A, B and C were for financing by IDA

and Part D was for financing by co-financiers (EBRD, EIB and KfW) through parallel

financing arrangements (Annex 1).

Part A: EPBiH

1. Environmental Upgrades

Investment in environmental upgrades: (a) TPP Kakanj – reconstruction of the

electrostatic precipitator for Unit 5, reconstruction of facilities for waste water treatment,

cultivation of the slag and ash waste dump, and rehabilitation of the equipment for

environmental monitoring; and (b) TPP Tuzla – replacement of the slag and ash

depositing system, and replacement of the coal deposit system and extension of water

treatment.

2. Financial Management Information System

Provision of hardware and software to improve the financial management information

system of EPBiH and assistance in implementation

3. Technical Assistance for Implementation of IDA-financed Components

Provision of technical assistance to the staff of the EPBiH PIU for implementation

activities related to the IDA-financed components, assistance in procurement and

supervision, and procurement training; and studies to develop the design for reduction of

sulfur dioxide and nitrogen oxide emissions at TPP Kakanj.

5

4. Technical Assistance for Dam Safety Components

Provision of technical assistance to the staff of the EPBiH PIU for: (i) studies to confirm

the design of the rehabilitation measures, help the PIU prepare the bidding documents for

the dam safety components, assist in the procurement process and evaluation of bids, and

monitor Project implementation; and (ii) the review and evaluation of dam operation and

maintenance procedures, including a review of existing dam safety plans, and assistance

in upgrading these as may be necessary.

Part B: EPHZHB

1. Financial Management Information System

Provision of hardware and software to improve the financial management information

system of EPHZHB, and assistance in implementation

2. Technical Assistance for Dam Safety Components

Provision of technical assistance to the staff of the EPHZHB PIU for: (i) studies to

confirm the design of the rehabilitation measures, help the PIU prepare the bidding

documents for the dam safety components, assist in the procurement process and

evaluation of bids, and monitor Project implementation; (ii) the review and evaluation of

dam operation and maintenance procedures, including a review of existing dam safety

plans, and assistance in upgrading these as may be necessary; and (iii) procurement

training.

Part C: EPRS

1. Environmental Upgrades

Investment in environmental upgrades: (i) TPP Ugljevik – rehabilitation of the waste

water treatment system, and rehabilitation of the air and water monitoring system; and (ii)

TPP Gacko – rehabilitation of the waste water treatment system; and replacement of the

ash and slag transportation system.

2. Equipment Upgrades

Investment in equipment upgrades: (i) TPP Ugljevik – replacement of monitoring and

automatic control system with digital control system; replacement of water cooling

system; and replacement of the 0.4 kV and 6 kV plant for its own electricity

consumption; and (ii) TPP Gacko – reconstruction of the 0.4 kV plant.

3. Financial Management Information System

Provision of hardware and software to improve the financial management information

system of EPRS, and assistance in implementation

4. Technical Assistance for Implementation of IDA-financed Components

Provision of technical assistance to the staff of the EPRS PIU for implementation

activities related to the IDA-financed components, assistance in procurement and

supervision, and procurement training.

6

5. Technical Assistance for Dam Safety Components

Provision of technical assistance to the staff of the EPRS PIU for: (i) studies to confirm

the design of the rehabilitation measures, help the PIU prepare the bidding documents for

the dam safety components, assist in the procurement process and evaluation of bids, and

monitor Project implementation; and (ii) the review and evaluation of dam operation and

maintenance procedures, including a review of existing dam safety plans, and assistance

in upgrading these as may be necessary.

Part D: Project Activities Financed by Co-financiers (EBRD, EIB, and KfW)

1. HPP Supporting Equipment

(a) HPP Supporting Equipment (EPBiH)

Investment in rehabilitation, replacement or enlargement of supporting equipment: (i)

HPP Grabovica – reconstruction of 220 kV switchgear; reconstruction of 35 kV facilities;

rehabilitation and modernization of dam monitoring systems; (ii) HPP Salakovac –

reconstruction of 220 kV switchgear; reconstruction of 35 kV facilities; rehabilitation and

modernization of dam monitoring systems; and (iii) HPP Jablanica – replacement of

primary equipment for the 35/0.4 Brana transformer station and the 35/0.4 entry building

transformer station.

(b) HPP Supporting Equipment (EPHZHB)

Investment in rehabilitation, replacement or enlargement of supporting equipment: (i)

HPP Capljina – 35 kV switchgear replacement; replacement of 220 kV voltage measuring

and current measuring transformers and surge arresters; replacement of 220 kV oil

cables; and excitation system replacement; and (ii) HPP Rama – 220 kV transmission

substation enlargement; and rehabilitation of one turbine, generator and block

transformer unit.

(c) HPP Supporting Equipment (EPRS)

Investment in rehabilitation, replacement or enlargement of supporting equipment: (i)

HPP Visegrad – replacement of 400 kV voltage measuring and current measuring

transformers; oil regulation system rehabilitation; and introduction of monitoring,

automatization and remote control systems for three 105 MW generating sets and other

high voltage equipment; (ii) HPP Bocac – reconstruction and rehabilitation of the 110 kV

plant; and replacement of Uninterrupted Power Supply, excitation systems, turbine

regulation for the 2x55 MW generating sets, water cooling system and the plant control

system.

2. HPP Works

(a) HPP Works (EPBiH)

Financing of civil works: (i) HPP Grabovica – repairs to address dam leakages; (ii) HPP

Salakovac - repairs to address dam leakages; and (iii) HPP Jablanica – installation of

monitoring system and rehabilitation of the “Kukovi” landslide.

(b) HPP Works (EPHZHB)

7

Financing of civil works at HPP Rama, consisting of rehabilitation of dam reinforced

concrete facing and dam grout curtain.

(c) HPP Works (EP RS)

Financing of civil works: (i) HPP Trebinje – repairs to address dam leakages; (ii) HPP

Visegrad – repairs to address dam leakages; and (iii) HPP Bocac – augmenting of

spillway capacity.

3. Distribution Systems (EPBiH, EPHZHB and EPRS)

Rehabilitation and construction of distribution lines, transformers and substations,

purchase of meters and equipment for installation.

4. Distribution SCADA (EPBiH, EPHZHB and EPRS)

Supply and installation of distribution Supervisory Control and Data Acquisition systems

(SCADAs), including the design and installation of the corresponding software and

hardware for each SCADA system, and the installation of all necessary additional

telecommunication facilities required for the operation of the distribution system

components of the SCADA.

5. Independent System Operator

Establishment of a market operation system for the Independent System Operator,

including the purchase and installation of related hardware and software

6. Other Technical Assistance

Provision of technical assistance required for the implementation of Project activities

under Part D of the Project, with the exception only of technical assistance related to dam

safety under Parts A.4, B.2 and C.5.

The project will enhance the ability of BiH to effectively participate in the regional

market through investments in safety, environmental and equipment upgrades at critical

power plants. Metering and other investments will enhance revenue realization and

communication capabilities associated with the distribution networks; and the installation

of a system for electricity market operation will upgrade the capability of the Independent

System Operator.

The components for IDA financing were to facilitate BiH’s participation in EC by low

cost investments that will maintain energy generation in the region, reduce the negative

impact of these power stations on the environment, and bring the financial systems of the

EPs up to the commercial standards needed for participation in EC.

1.6 Revised Components

In the context of delay in the loans and credits becoming effective and in the context of

higher costs encountered at the time bidding, some components have been fully financed

by the EPs themselves. A Solar Energy study was added as a new minor component for

8

EPHZHB, but was not pursued later. These are discussed in some detail in sections

1.7and 2.1 and mentioned in other sections also. Further details are also in Annex 1.

1.7 Other significant changes

The project was restructured twice (with Board approval) once in November 2010 and

the second time in February 2011. The first restructuring extended the closing date of the

Credit from December 31, 2010 to June 30, 2012, revised the implementation schedule

accordingly and reallocated the proceeds from the Credit among the various components

based on the results of procurement which had been completed to the extent of greater

than 93%. The extension of the closing date was necessitated by a delay of nearly 27

months in the credit becoming effective and in executing the Subsidiary Credit

Agreements (SCA) as a condition of disbursement. The delay in effectiveness was due to

the time needed for the re-constitution of the Parliament and the formation of new

governments following the elections held in October 2006 (three months after Credit

approval), and the need to secure parliamentary approval of the external borrowing. The

delay in executing SCA (relating to EPBiH and EPHZHB) was due to the time needed for

the Federation Parliament to approve them. This restructuring also took note of the desire

of EPBiH to review the technical designs of the reconstruction of the waste water

treatment plant at Kakanj thermal power plant to take advantage of the technological

advances since appraisal and apply a part of the allocations from the credit for carrying

out a new design and feasibility study and carry out the reconstruction with its own

resources. The remaining allocation for this component was reallocated for the

reconstruction of the Electrostatic Precipitator for unit 5 at Kakanj TPP.

The second restructuring authorized the use of a saving of about SDR 110,000 from the

Credit proceeds for carrying out a Solar Energy Potential Study as desired by EPHZHB.

This was handled separately as the request came too late to be accommodated in the first

restructuring. In the event the time between the restructuring and the revised closing date

of the Credit proved inadequate for finalizing the exact scope of the study and other

details needed for contracting and the EP decided to pursue a more elaborate study at a

later date.

One other change worth taking note of is the transfer of ownership of the coal/lignite

mines supplying fuel to EPBiH to EPBiH as a wholly owned subsidiary. This change has

adverse implications to EPBiH in terms of management, finances and labor issues, but

the EP seems to be coping with the situation.

The small allocation for procurement training was not used for this purpose as the staff of

the PIUs benefited from other regional training sessions organized by the Bank on

procurement and several other related topics.

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry

9

The project was designed as a part of the APL supporting EU sponsored EC initiative

resulting in the ability for the project to secure additional allocation of IDA credit from

Regional IDA funds and extensive co-financing from EBRD, EIB and KfW. EBRD loan

of Euro 55 million for (distribution components) and EIB loan of Euro 103 million (for

rehabilitation of hydropower and thermal power plants, market operation, and

Distribution components) were signed on February 1, 2006 and December 22, 2006

respectively and became effective thereafter. However KfW assistance came in two

phases. In the first phase, loan and grant assistance totaling Euro 17 million (for HPP

Rama rehabilitation) was signed on June 23, 2008. In the second phase loan and grant

assistance totaling Euro 17 million (for distribution SCADA systems for EPs) was signed

in end October 2011 and had not yet become effective. Thus work on SCADA systems

had not commenced by the time IDA credit reached its extended closing date in June

2012.

Project components were selected following the priorities of the three EPs in relation to

system reliability, supply security, safety and environmental soundness to serve the

objectives of the EC Treaty. Adequate consulting support was provided for project

implementation and associated studies.

Appraisal appears to have been carried out on the basis of preliminary cost estimates

before preparing the level of designs normally needed for bidding and costing. Thus

when designs were developed and bidding carried out some of the components (such as

the Electrostatic precipitator at Kakanj TPP and Coal handling improvements at Tuzla

TPP) faced notable cost increases. Also, on account of the long delays in the credit

becoming effective and in the execution of the subsidiary credit agreements some of the

components (such as the improvements to ash and slag transportation system in Tuzla

TPP) were carried out by the EP using its own funds. EPBiH also decided to finance the

waste water treatment component as well as the all the auxiliary coal handling equipment

in the Tuzla TPP from its own funds because of the cost overrun in the coal handling

component. Similar events occurred in respect of some components under EIB financing

also.

Based on the lessons learnt from the earlier three power projects financed by IDA in BiH,

the number of co-financiers was kept low and the mode of parallel financing was adopted.

There were no cross default and cross effectiveness conditions in Credit agreements.

This was done to avoid problems facing one co-financier affecting the progress in the

components financed by others. The successful arrangement (under the earlier

operations) of using PIUs with highly qualified, experienced and competent staff and

their reporting directly to the General Director was continued. Adequate attention was

paid to plan the procurement packages for parallel financing (both for the investment and

technical assistance components) to make the process efficient, speedy and effective.

Adequate funds for supervision were planned.

The ownership of, and the commitment towards, the implementation of the project on the

part of the governments and three EPs were generally satisfactory throughout. Whenever

costs increased, the power companies and their respective governments readily agreed to

10

cover those with their own funds. Similarly they adopted with enthusiasm the use of

FMIS in all their units at their own expense, even though the project had a limited scope.

During appraisal three risks for the development objectives and one risk for the

component were identified and classified as modest or negligible.

The first identified risk of failure to secure adequate financing materialized to some

extent since there were delays in securing KfW financing for the SCADA component, but

the project’s parallel financing design was such that this did not adversely affect the

implementation of the other components financed by IDA, EIB and EBRD. Cost overrun

in relation to IDA financed components was managed by the power companies agreeing

to finance some of the components with their own funds.

The second identified risk of adverse impact on project implementation of the

administrative complexities and ethnic friction in BiH did not materialize to any

significant extent. The administrative complexity made the contracting for Dam safety

Study difficult, but it was managed well and the Study was carried out.

The third risk of the case filed in the constitutional court over the constitutionality of the

Law relating to the transmission company did not affect the formation, registering,

licensing and functioning of the national transmission company and ISO and their

independent operation. The companies carry out the daily transmission and system

operation functions, facilitating internal and external trade in electricity. However, the EC

Secretariat in its 2011 annual review report of implementation of Energy Community has

observed “the board of management of the transmission company is still not functional.

This long-standing situation indicates existence of permanent administrative obstacles

preventing or delaying the implementation of long-term network development planning

and of immediate major investments in infrastructure potentially required for compliance

with provisions for third-party access and connection to the transmission system.” The

EC Secretariat is following up on this. 4

The fourth identified risk of FMIS not being adopted fully in all the units of the three

power companies did not materialize at all. Based on the experience of introducing FMIS

on a pilot basis in certain units, all three companies showed a great deal of interest in

adopting the FMIS in all their units meeting the significant additional costs from their

own funds.

2.2 Implementation

The project was never classified as “a project at risk”, though it was classified as a

problem project once in its early days.

4 The Annual Review of Implementation 2011 of the EC Secretariat

11

Except for the initial delay of 27 months in the loan becoming effective, the project

implementation was smooth and some of the lost time was made up. In Kakanj TPP the

reconstruction of the electrostatic precipitator for Unit 5 had been completed successfully

reducing the particulates concentration from about 350mg/nm3 to about 20 mg/nm

3 well

below the national and EU norms5. Based on this EPBiH is installing a similar equipment

in Unit 6 as well using its own funds. The new design study for the wastewater treatment

at Kakanj TPP had been completed and bid documents based on these designs are being

issued for rehabilitation under its own financing. In Kakanj, Tuzla, Gacko, and Uglijevic

TPPs all works under IDA financing had been completed and items under the power

companies’ own financing are also making substantial progress. Environmental

monitoring systems have been upgraded for full transparency and have been made tamper

proof. The real time details are on public display round the clock. Supervision visits by

Bank environmental staff showed that the Bank approved environmental management

plans for the various components were fully implemented by the power companies and

their contractors.

As mentioned earlier the FMIS component in all three power companies was

implemented smoothly. Dam safety study was carried out by the three EPs recruiting the

consulting firm through joint procurement action and separate contracting with each EP.

The results of the study are being implemented under EIB financing and the same

consulting firm has been retained by the power companies to assist them during the

implementation phase. The study for the designs for the reduction of SOx and NOx in

Kakanj TPP had been completed and its recommendations would help EPBiH to pursue

further action in this respect. Brief details of the status and outputs of the IDA financed

components are given in Annex 2.

The distribution rehabilitation components financed by EBRD have been fully completed

and the distribution components financed by EIB have been mostly completed and they

have led to reduced system losses and increased sales and reliability of supply. On

account of the delay in funding, the implementation of the component relating to the

distribution SCADA systems (financed by KfW) commenced towards the end of 2012

and would perhaps take 24 to 30 months to complete.

Hydropower equipment rehabilitation components financed by EIB have been mostly

completed and led to increased and more reliable generation. However the rehabilitation

of the equipment at HPP Rama by KfW is still ongoing. In respect of the Dam safety

components financed by EIB, the works have been partially completed and full

completion is expected mostly in mid-2013 and partly in early 2014.

Brief details of the status of the components financed by EBRD, EIB, and KfW are

indicated in Annex 10.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization

5 In the guarantee tests results as low as 20 mg/nm

3 were achieved.

12

The EC Program is being monitored by the Ministerial Council, Permanent High Level

Group, Task Forces and forums of the EC, ably and effectively supported by the EC

secretariat. The secretariat periodically evaluates country performance in relation to its

obligations under the EC treaty against agreed benchmarks and reports to the above

bodies. Implementation of the project was monitored by all four financiers through

quarterly progress reports, and audited Project Expenditure Reports of the three power

companies. These reports covered the components financed by IDA, as well as those

financed by EBRD, EIB and KfW. The financial performance of the three power

companies was monitored through the external audit reports by independent auditors

acceptable to IDA on the Annual Financial Statements of these utilities. Several

supervision missions and a Mid-Term review mission, as well as environment,

disbursement and procurement reviews helped to monitor and evaluate progress and

make adjustments through restructuring and through other types of corrective action.

While supervision missions were carried out by each financier according to their

preferred schedule, the Mid-Term review was carried out jointly.

The appraisal document included a Results Framework and Monitoring which contained

outcome indicators for the PDOs as well as intermediate and final results for the output

indicators. However except for the market liberalization level and annual power

generation level base line values were not indicated in quantitative terms. The base line

value for particulate concentration in the TPPs was indicated as 300 to 350 mg/m3 in the

body of the appraisal document in some other context.

2.4 Safeguard and Fiduciary Compliance

Environment

The Project triggered OP 4.01 on Environmental Assessment and OP 4.37 on Safety of

Dams and was assigned a Category B. Prior to the appraisal of the Project, Environmental

Management Plans (EMP) were prepared by each of the three power companies for their

respective activities, after full disclosure and public consultations. The EMPs were made

a part of the bidding documents and contractual documents, and the contractors for all

works have implemented fully and satisfactorily all provisions of the EMPs.

The main environmental impacts anticipated in the EMPs included noise from machine

operations, electric field impacts on workers, possible fires, dust from old equipment,

suspended matter in water, slag and slagging water, rock wool waste, packaging and

metal waste, old oil and removal of vegetation. For the operational phase environmental

issues identified included mud from waste water treatment, poor values of pH, sulfates

and suspended matter in waterways, reservoirs and mud disposal sites and leakage of ash.

The overall environmental impact of the project was positive as it helped implement the

EU-compatible environmental legislation and improve environmental performance of the

four thermal power plants in the country. The EMPs of the hydropower projects dealt

mainly with minor impacts associated with reconstruction works, while the scope of the

investments and therefore environmental impacts were more significant for the four TPPs.

13

Periodic reports were provided by the power companies on environmental performance

and EMP implementation. EPBiH also shared its Annual Environmental Reports with the

Bank team. A designated environmental specialist or team was appointed in each of the

TPPs as well as in the head office of the power companies. No complaints or unforeseen

issues arose during project implementation, in relation to EMP implementation or general

environmental impacts.

The specific investments in the four thermal power plants have helped improve

environmental performance through a decrease in air emissions (TPP Kakanj), have led

towards improvements in the efficiency of wastewater treatment (TPP Gacko, Ugljevik

and Kakanj), have decreased the quantities of water used for cooling (TPP Ugljevik) and

have improved transport of ash and slag (TPP Gacko) while improving the use of land

and better management of wastes (ash and slag disposal site in TPP Kakanj), enhancing

environmental monitoring or air emissions (TPP Kakanj) and better coal handling which

shall indirectly help improve environmental performance through improved combustion

of a more homogenous coal mix (TPP Tuzla).

The overall positive environmental impacts of the APL-3 project in Bosnia and

Herzegovina are multiple and cut across a number of environmental segments. For

example, wastewater collection and treatment is an issue that was tackled across three

Thermal Power Plants – Gacko, Ugljevik and to some extent Kakanj. In Gacko and

Ugljevik the existing systems were rehabilitated and modernized in order to improve

working efficiency, including water recirculation where possible, and the effluent. In

Ugljevik TPP the pollution load of the effluent as measured by population equivalent6 has

fallen by seven times from 33,668 in 2007 to 4,684 in 2012. In Gacko TPP the effluent is

now compliant with national regulations. Equally importantly the annual water

consumption by the plant has been reduced by 700,000 tons (or 700 million liters).

Reduction in water intake also correspondingly reduced discharge of pollutants in the

river.

The issue of waste generation from power production – specifically the ash and slag

represents one of the biggest footprints of thermal power plants on the environment. The

substantial quantities of ash and slag produced during combustion call for proper storage

at proper landfills. The APL3 project has financed the first phase of re-cultivation of an

ash and slag depot in TPP Kakanj that has been active now for almost 60 years. This

depot roughly stored some 6.0 million m3 of ash and slag. With the re-cultivation works

ash and slag is used as construction material to create level terraces (to prevent landslides

and to stabilize the mass) and then to plant vegetation on top. This activity will also

improve management of the depot and will enable it to remain active as an organized,

engineered and maintained disposal site for another 14.5 million m3 (sufficient for

another 40 years of operation) of waste that would have, otherwise, been taken to a new

depot location.

6 Under this measurement system the pollution load in the effluent of any plant is expressed in terms of

households/people producing effluents of equal pollution load.

14

The new ash and slag transport system at Gacko TPP has resulted in the elimination of

stoppage of the plant due to mal-operation of the system and has resulted in the power

plant producing 10 GWh more annually. This also represents a corresponding reduction

of the volume of effluent released into the river downstream.

The new environmental monitoring system that was financed in Kakanj provides tamper-

proof data of the air-borne emissions from the TPP for each block, and for the TPP as a

whole. The digital display of this data in the center of the town of Kakanj is active and

represents an outreach to keeping the local community informed of the environmental

impacts of the TPP.

The new hybrid filter at TPP Kakanj is the first of its kind in the Balkans. It combines an

electrostatic precipitator with a bag-house filter, and with this dual control of air

emissions the emissions of particulate matter has decreased from the previous high levels

(in the range of 350 to 500 mg/nm3

) to 21 mg/nm3

(compared to the Bosnian legal

standard of 100, and EU threshold of 50 mg/nm3).

Procurement

Procurement activities were carried out efficiently in accordance with agreed

arrangements generally conforming to the original or amended schedule. Certain

contracts had to be tendered again for lack of competition, but, on the whole, no major

delays or disagreements between the Bank and the borrower arose. The small allocation

in the credit for procurement training was not used, as the three EPs had procurement

staff that had adequate knowledge of the Bank procedures under the earlier three

operations and also benefited from regional training events organized by the Bank.

Procurement for the components financed by others, were carried out as per the

guidelines of the relevant financiers.

Financial Management and Disbursement

Financial Management and internal controls of the three utilities were found to be

satisfactory. External audits by independent auditors were carried out and the audited

annual financial statements and audited project accounts were submitted regularly by the

three utilities and were found acceptable to the Bank.

2.5 Post-completion Operation/Next Phase

Post-completion operation of the project facilities will be handled by the three EPs as a

part of their normal activities. Dam safety related investments as well as SCADA related

investments will be pursued by them using EIB/KfW funds and their own. They have

qualified and experienced technical, financial and commercial staff, as well as systems

and procedures appropriate to the trade. Legislative framework and independent

regulatory arrangements in place would enable them to function efficiently and

economically.

15

FMIS, introduced with enthusiasm in all parts of the three companies, is helping them to

improve their performance even more. The EPs have stated that “implementation of the

SAP system has brought the biggest changes in processes that cover the area of company

management – finance, accounting, investments and procurement. By introducing the

SAP it has become possible to get the business status of the company at any moment. The

unique ledger at the company level has been set up, and from 2012, the comprehensive

financial reports on the company business (balance sheet, income statement, cash flow

statement and statement of changes in equity) could be obtained directly from the

system.”

The lingering problem relates to the national transmission company and the ISO, the

governance arrangements of which still need to be agreed upon by the parties. Market

operations still lack adequate competition and this is being pursued in all the EC

countries by the EC secretariat and its governing bodies.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation

The objectives of the program and the project continue to be highly relevant. Creating a

regional energy market and integrating it with the internal energy market of the EU is an

on-going process in the region, in which considerable regional energy trade is already

taking place. The project objectives of dam safety improvement, environmental

mitigation of thermal plant performance, rehabilitation of generation assets and

distribution network, market operation, and introduction of FMIS continue to be highly

relevant for the improved and reliable performance of the sector. The operation remains

important to the country as well as to the EC, and is consistent with the Bank’s focus in

its current Country Partnership Strategy (2012-2015) in environment sustainability, and

competitiveness and working together with EU. Flexibility of approach to design and

implementation through PIUs underpinned by adequate consulting support were

appropriate to achieve the objectives.

3.2 Achievement of Project Development Objectives

The emergence of a regional electricity market in South East Europe and its integration

with the EU energy market is a long term process and the achievement of the

development objectives under the APL-3 project would clearly support the overall

objective of facilitating the above process. Under the EC treaty all non-residential

consumers were to be liberalized (that is given the right to choose their electricity

supplier) by July 1, 2008 and all consumers were to be liberalized by Jan 1, 2015. BiH

has fully achieved the liberalization of all the non-residential consumers by the target

date. Such consumers accounted for about 59 percent of the total consumption in the

country in 2011. However, only two of the largest industrial consumers (accounting for

about 10 percent of the total consumption in 2010) and only the largest consumer

(accounting for about 8 percent of the total consumption in 2011) exercised their choice

and bought in the competitive wholesale market.

16

The objective of improving dam safety was to be achieved based on IDA TA funded

consultant reviewing the status and recommending measures to improve dam safety, and

related works being carried out under EIB funding. Consultant studies have been carried

out with a time lag and are being implemented. After the closing of IDA credit consultant

costs are being met by the EPs from their own funds. The completion of the installation

of improved dam monitoring systems and sophisticated equipment has enabled

continuous and efficient real time monitoring and early detection of any development that

could seriously affect dam safety at Jablanica, Grabovica, and Salakovac HPPs. Similar

results have been achieved in respect of Kukovi landslide threat. Repair of grout curtain

in Rama HPP had been completed and it has reduced water leaks to some extent. Work

relating to prevention of water leaks at Grabovica and Salakovac HPPs based on Dam

safety consultant’s recommendations is in progress and is expected to be completed in

April 2013. Repairs to the upstream RCC facing of the dam at Rama HPP, water leakage

works at Visegrad and Trebinje II HPPs are in progress and are expected to be completed

mostly in early 2013 and partly in early 2014. Construction of additional spillway

(including the tunnel, spillway and entryway) at Bocac HPP has made substantial

progress and is expected to be completed in April 2013. Thus while the objective had

been greatly facilitated by the IDA TA funded dam safety studies, it has been achieved to

the extent of about 40 percent by June 2012. The percentage of achievement is likely to

reach 85-90 percent by mid-2013 and 100 percent by early 2014.

The objective of reducing adverse environmental impact at the four major thermal power

stations has been achieved as designed. Except for the wastewater treatment

reconstruction work at TPP Kakanj (which is being pursued under EPBiH’s own

financing), all the environment related works funded under IDA credit and those

transferred to own funding by the EPs have been successfully completed and have

resulted in reducing particulate emission to Bosnian and EU standards (and even lower),

and reducing water pollution from the power plants to the Bosnian standards, and thus

achieve an enhanced level of environmental compliance by the country’s four major

TPPs at Kakanj, Tuzla, Ugljevik and Gacko. At Kakanj particulate emission was reduced

from 500 mg/NM3 to 21 mg/NM

3 and safe ash and slag storage was created for another

forty years. At Gacko water usage had been reduced by 700,000 million liters per year

and effluents conform to national standards. At Ugljevik pollution load of effluent (as

measured by population equivalent) has fallen by seven times from 33688 (2007) to

4,684 (2012). At Tuzla reconstruction of the coal handling system, use of ash and slag

transport through recirculation of water, and improvement of waste water treatment

facilities have significantly enhanced the environmental performance of the plant

(Relevant details of improvements are indicated in Annex 2 and also discussed in section

2.4).The study for the reduction of SOx and NOx at TPP Kakanj has been completed and

recommendations are being pursued by EPBiH.

The objective of replacement of the aging existing facilities and equipment at the HPPs

and TPPs has been substantially achieved as of June 2012. All thermal plant related work

(all under IDA funding) have been completed. The HPP equipment rehabilitation or

replacement at Grabovic, Salakovac, Jablanica, and Caplijna has been completed. Similar

17

work at Bocac and Visegrad had been partially completed and the balance is expected to

be completed in early 2013 (all funded by EIB and the EPs). The major equipment

replacement work at HPP Rama (funded by KfW) is ongoing. The various items of work

completed along with other items of work pursued by the EPs have led to increases in

production of electricity from 12,743 GWh in 2005 to 16,068 GWh in 2010. In 2011 it

fell slightly to 14,050 on account variations in the water flow in the rivers.

The objective of rehabilitating distribution systems has also been substantially achieved.

The level of rehabilitation achieved under the project (financed entirely by EBRD and

EIB) has led to notable reduction in distribution losses, and a notable improvement in

terms of reliability of supply, billing and collection as shown separately for each EP in

Annex 3. The installation of distribution SCADA systems, however, has been delayed

and implementation of this component is about to commence only now (October 2012).

The objective of establishing a market operation system is estimated to have been

achieved to the extent of about 40 percent by the target date of June 30, 2009. A trading

system (of sellers and buyers including several energy traders) operated by ISO exists.

All customers (except the residential consumers) with a share of 58.69 percent of total

consumption have become “eligible customers”, who can choose their supplier. However,

only one large customer (the aluminum smelter Aluminij accounting for about 8 percent

of total consumption) has exercised this choice in 2011.7 Though a competitive market

for eligible customers and regulated market for captive customers (tariff customers)

coexist, the competitive market has not gotten off the ground, since the state owned EPs

completely dominate the market and since the regulated tariffs are substantially lower

than the regional market prices. Despite the existence of independent regulatory bodies,

the tariffs barely cover the operational expenses (Further details in Annex 3). The

generation and distribution functions within the three EPs have not yet been unbundled.

Energy trades consist largely of trade among the three EPs and partly of export and

import trades.

It is worth noting that the wholesale market trade (that is trade among the three EPs and

other traders as well as cross border trades of surplus energy after meeting the needs of

tariff customers), is based on bilateral contracts which is influenced by supply and

demand variations and regional trade price variations. The only component in the project

with direct causal relevance to this objective, “installing a market operating system”

under EIB financing could not be implemented so far, as originally envisaged. The

governance arrangements for the National Transmission Company and the ISO could not

be fully agreed upon among the stakeholders. Disagreement among them appears

unlikely to be resolved soon.

The objective of providing hardware and software to improve the financial management

information system of the EPs has been fully achieved. The SAP system had been

7 The Annual Report of State Electricity Regulatory Commission, 2011

18

introduced by all three EPs in all their subsidiary companies, often meeting a major part

of the costs from their own funds, and they have now, or will very soon have, a well-

integrated FMIS operating smoothly enhancing the efficiency of their operations and

accountability.

3.3 Efficiency

The PAD noted that the project consisted of a large number of small investments and that

benefits were not quantifiable in respect of components relating to environmental

improvements, the market operation system, FMIS, and the Study for reduction of SOx

and NOx. Thus all the components funded under IDA credit (except the two components,

monitoring and automatic control system and replacement of the auxiliary power plant

and associated 0.4 kV and 6kV equipment at Ugljevik TPP) were not covered by the

quantitative analysis. Calculation of the EIRRs of the two components adopting current

estimates of capital costs (based on the actual costs incurred for all equipment and

facilities and a small provision for their installation during the next shut down of the

plant), same percentages of O&M costs and levels of reduction in generation losses as at

appraisal as well as the current export prices of electricity shows that the IRRs continue

to be robust at 58% and 24% compared to 54% and 21% at appraisal.

Some of the components financed by KfW and EIB are still being implemented. EBRD,

EIB and KfW do not appear to have re-estimated the EIRRs of their completed

components.

The main justification for such investments is their technical necessity and the least cost

manner in which the equipments were chosen, procured and installed. Cumulatively these

and a range of other investments and factors lead to increased generation. Many

components of the project have been completed and the rest are likely to be completed

soon. Cumulatively they are moving the country distinctly towards increased generation,

more reliable supply, and more efficient and environmentally sound operation. Thus

generation has increased, losses have come down, and billing and collection have reached

modern utility standards. The three EPs had been able to comply with the IDA covenants

relating to self financing ratio and debt service ratio in most of years and remain

financially stable. A detailed financial evaluation of the three EPs is given in Annex 3.

3.4 Justification of Overall Outcome Rating

Rating: Moderately satisfactory.

The overall objective of facilitating BiH’s participation in EC continues to be highly

relevant. The APL Program objective of market liberalization has been achieved in BiH

fully and on target. Of the six PDOs, two (environment and FMIS) have been achieved

fully, one has not yet been fully achieved (market operation), and the rest have been

mostly (distribution, rehabilitation of generation assets) or partly (dam safety) achieved.

Efficiency cannot be quantitatively estimated for most components, but is qualitatively

satisfactory. For the two components for which efficiency could be assessed

19

quantitatively, the ex-post internal rates of return remain as robust as the IRRs estimated

during appraisal. Under these circumstances an overall outcome rating of “moderately

satisfactory” is considered appropriate, if somewhat conservative.

3.5 Overarching Themes, Other Outcomes and Impacts

(a) Poverty Impacts, Gender Aspects, and Social Development Increased generation and reliable and environmentally sound power supply will have an

overall favorable indirect impact on poverty reduction and social development in the

country. In addition people living in the areas close to the four major TPPs will have less

air and water pollution from these plants, with direct impacts on their health and welfare.

(b) Institutional Change/Strengthening

The effect of the introduction of SAP in all three EPs and their subsidiaries is already

being felt. The technical, financial, commercial and economic data flows within the

company and to the management has enhanced better coordination among these functions,

and the availability of real time integrated information will further improve performance

and management efficiency.

The inability of the EPs and the two entity governments to arrive at a consensus on the

governing arrangements for the national transmission company and the ISO is a major

problem which remains to be resolved.

The vertical integration of the mining company supplying coal with EPBIH is the only

other institutional change to be taken note of during the period of implementation of this

project. EPRS had similar arrangements even earlier. EPHZHB is an all-hydro utility and

has no coal supplier.

(c) Other Unintended Outcomes and Impacts (positive or negative)

None

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops

There were no Beneficiary Surveys

4. Assessment of Risk to Development Outcome

Rating: Moderate.

Sustainable institutional arrangements are in place to complete the remaining works, and

carry out the O&M efficiently. The risk relating to the market operation component is

political, but is likely to be resolved based on economic imperatives of the neighborhood.

Taking this and dam safety element (which depends on the vagaries of the nature) into

account the risk to the Development Outcome is judged as moderate.

20

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance

(a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory

Based on the experience gained in the earlier three operations, the Bank put together a

large project package to support the EU initiative relating to the EC, and mobilized

considerable cofinancing. While most of components were well investigated, preliminary

cost estimates had to be used in the context of the need to show support to the EC in a

timely manner. Better cost estimates of individual components emerged during the

procurement phase and the project was restructured. However, the results framework

could have been made clearer and could have included more of baseline data and

verifiable quantitative targets for all indicators.

(b) Quality of Supervision (including of fiduciary and safeguards policies)

Rating: Satisfactory

The frequency and comprehensiveness of supervision missions were adequate. The

staffing of missions included appropriate specialists in environment, procurement,

financial management, and hydropower dams. The mission documentation (such as Aide

Memoires) was comprehensive, indicating identified problems and approaches to solve

them. The problem solving approach and expert counseling were much appreciated by

the PIUs and the EPs. The Bank missions were sympathetic to the request of EPs for

adjusting the financing of the components, as the situation evolved, and carried out the

midterm restructuring to facilitate such changes. Cofinanciers carried out their own

supervision missions according to their preferred schedule focusing on their components.

The Mid Term review mission was jointly carried by all cofinanciers.

(c) Justification of Rating for Overall Bank Performance Rating: Satisfactory

5.2 Borrower Performance

(a) Government Performance Rating: Satisfactory

The state and the two entity governments provided the needed political, administrative

and financial support for the implementation of the project. They showed a high degree

of ownership of the project objectives and overarching goal of regional market and its

eventual integration with the EU market. They could not however resolve the issue of

governance of the national transmission company and the ISO.

(b) Implementing Agency or Agencies Performance Rating: Satisfactory

The three EPs showed a high degree of ownership of the project and its objectives,

established PIUs staffed with competent and experienced personnel, mostly reporting

21

directly to the General Director of the EP. They carried out the project with due care and

diligence, made the best use of the consulting support provided, and more than made up

for the delays caused initially due to factors beyond their control. In the context of such

initial delays and when the costs became higher after bidding in certain cases, they

voluntarily transferred some components for their own financing. They provided their

audited annual financial statements and audited project accounts generally in a timely

manner. They introduced FMIS with great deal of enthusiasm and benefited by it.

(c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory

6. Lessons Learned

The key lessons learned include:

In projects with multiple co-financiers, parallel co-financing arrangements as

against joint co-financing work better since delays in implementation of

components of any financer do not adversely affect implementation of

components financed by others.

In respect of such projects with parallel co-financing, the PDOs and key result

indicators should be specific and relatable only to the WBG financed components

and should not include the outcomes of components financed from other parallel

sources.

Parallel co-financing arrangements should not include any cross-effectiveness

and cross-default clauses.

Even intractable problems such as electricity theft, poor billing and collection can

be solved if the power utility management pays sustained attention, sets clearly

understood targets and enforces them with sanctions and rewards. In such a

situation, involvement of external financiers can help address political economy

constraints.

Implementation schedules for generation rehabilitation projects should take into

account the constraints in shutting down large generation units in relatively small

systems for a long duration to carry out the rehabilitation. They should be made of

discrete packages capable of being done during the regular planned shut down for

maintenance (normally about 3 to 4 weeks). Even then delays could occur, as it

did in EPRS, when the planned maintenance of thermal plants is postponed or

curtailed due to poor hydrological conditions.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners

(a) Borrower/implementing agencies

No special issue has been raised

(b) Co-financiers

None

(c) Other partners and stakeholders

22

(e.g. NGOs/private sector/civil society)

None

23

Annex 1. Project Costs and Financing

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

Cost

During

Appraisal

($m)

Cost as

completed

or latest

estimates

($m)

Percentage

of

Appraisal

estimate

A. IDA Financed Components

EPBiH Kakanj TPP

ESP unit 5 3.17 5.18 163.4

Waste water treatment 1.24 0.08 6.5

Cultivate Ash and Slag Waste dump 1.56 1.31 84.0

Environmental Monitoring Equipment 0.62 0.78 125.8

Study for Reduction of SOx and NOx 0.62 0.32 51.6

EPBiH Tuzla TPP

Ash and slag transportation system 12.18 13.29 109.1

Coal handling and waste water treatment 7.29 13.56 186.0

EPBiH Financial Management Information System (FMIS) 1.00 1.56 156.0

EPBiH TA for implementation of IDA financed components 0.40 0.06 15.0

EPHZHB FMIS 1.00 0.53 53.0

EPRS Ugljevik TPP

Monitoring and automatic control system 3.04 4.04 132.9

wastewater treatment and monitoring systems 0.74 4.41 595.9

Water cooling system 1.05 2.57 244.8

Power plant for own electricity consumption 4.17 5.79 138.8

EPRS Gacko TPP

Waste water treatment system 2.86 5.51 192.7

Ash and slag transportation system 1.36 3.28 241.2

0.4 kV auxiliary services system 3.48 3.35 96.3

EPRS FMIS 1.00 1.32 132.0

EPRS TA for Implementation of IDA financed items 0.50 0.58 116.0

Dam Safety Components consulting for all 3 EPs 1.00 1.51 151.0

Procurement training 0.06 0 0.0

Base cost for IDA financed components 48.34 69.03 142.8

B. EBRD Financed Components

EPBiH Selected facilities of Distribution 19.43 26.73 137.6

EPHZHB Selected facilities of Distribution 19.43 24.7 127.1

EPRS Selected facilities of Distribution 17.03 21.48 126.1

Support for Implementation to all 3 EPs 2.00 0.22 11.0

Base cost for EBRD Financed components 57.89 73.13 126.3

C. KfW Financed Components

EPHZHB HPP Rama

24

Enlarge 220 kV switchgear 2.68 5.92 220.9

Replace Turbine, Generator and Bulk Transformer 19.34 27.67 143.1

Distribution SCADA systems for all 3 EPs 18.01 27.75 154.1

Implementation of KfW financed Components 1.30 0.31 23.8

Base Cost for KfW financed Components 41.33 61.65 149.2

D. EIB Financed Components.

EPBiH

HPP Grabovica:

220 kV Switchgear and 35 kV facilities 1.08 0.66 61.1

HPP Salakovac:

220 kV switchgear and 35 kV swichgear 2.01 2.53 125.9

HPP Jablanica:

Rehabilitate Monitoring for Kukovi Landslide 0.73 0.33 45.2

Reconstruct Brana &Entry building 35/0.4 kV TS 0.69 0.53 76.8

HPP Jablanica, Grabovica and Salakovac

Rehabilitate Dam monitoring systems 0.63 3.88 615.9

HPP Grabovica and Salakovac: Water leaks 0.47 3.33 708.5

Selected facilities of distribution 26.18 36.26 138.5

EPHZHB

HPP Capljina: Replace certain electrical equipment 3.08 4.12 133.8

HPP Rama: RCC facing and grout curtain 5.69 3.58 62.9

Selected Distribution facilities 10.47 14.05 134.2

EPRS

HPP Trebinje II : Repair of water leak 1.14 1.61 141.2

HPP Visegrad Repair of water leak 11.18 11.75 105.1

Repair 400 kV GIS switchgear, oil regulation and monitoring

systems for 3 generating sets 2.06 1.15 55.8

HPP Bocac

Augment spillway capacity 4.06 5.48 135.0

Reconstruct 110 kV plant, UPS, excitation system and

generating sets regulation 2.48 4.19 169.0

Selected Distribution facilities 23.22 22.43 96.6

ISO: Install Market operating system 6.09 0.0 0.0

Implementation of EIB financed components for all 3 EPs 2.60 0.05 1.9

Base cost for EIB financed Components 103.86 115.93 111.6

Total Base cost for all components 251.42 319.74 127.2

Physical contingencies 21.59 0 0.0

Price Contingencies 13.56 0 0.0

Total project costs 286.57 319.74 111.57

25

(b) Financing

Source of Funds Type of

Cofinancing

Appraisal

Estimate

(USD

millions)

Actual/Latest

Estimate

(USD

millions)

Percentage of

Appraisal

Borrower/Power Utilities .. 8.64 59.45 687.5

European Bank for Reconstruction

and Development Parallel 66.98 70.97 106.0

European Investment Bank Parallel 115.90 106.48 91.9

International Development

Association (IDA) Parallel 36.00 38.53 107.3

Germany: Kreditanstalt fur

Wiederaufbau (KfW) Parallel 44.89 44.20 98.5

Financing Gap 14.16 0 0

Note: Latest costs and funding have been calculated using the exchange rate

Euro 1 = $1.30

26

Annex 2. Outputs by Component (for IDA Financed Components) Component Output (for completed items)/

Status (for others)

Remarks (for ongoing

items) & other remarks

EPBiH

TPP Kakanj – reconstruction of the

electrostatic precipitator for Unit 5

Particulate matter emissions have been

reduced from the pre-project levels of 350

to 500 mg.NM3 to 20 mg/Nm

3 well below

national and EU standards

Similar improvements

were carried out at Unit

6 also using the

Utility’s own funds.

TPP Kakanj- reconstruction of

waste water plant

Instead of this, a new study was carried

out to identify technologically more

advanced solutions. Reconstruction based

on the new study using a water

recirculating system is being pursued

using utility’s own funds

This will substantially

reduce water pollution

from the power plant

and would also reduce

water consumption.

The experimental phase

has been completed

TPP Kakanj- re-cultivation of the

slag and ash waste dump

The slope of the ash dump has been

stabilized from uncontrolled slipping.

Enabled management and minimization of

pollution of downstream river, during

rains. Works (on the ash and slag depot

which stores already 6.0 million cubic

meters) have helped to improve disposal

practices and have enabled disposal of

additional 14.9 million cubic meters of

ash and slag thus allowing the site to be

used safely for another 40 years of

operation.

Improved

environmental

management of the coal

fired TPP

TPP Kakanj- rehabilitation of the

equipment for environmental

monitoring

Improved system ensures better quality of

data transfer, as well as continuous,

precise monitoring and analysis of all the

data for individual units as well as the

entire plant, in accordance with national

legislation, EU Directive for large

combustion plants (LCP Directive

2001/80/EC), and other standards in the

field of emissions.

The real time air

quality data is also on

display for the public to

see.

TPP Tuzla- Replacement of ash

and slag transportation system

Ash and slag transport system based on

recirculation of waste water has reduced

significantly the volume of water

consumption for this purpose.

Has been carried out

using utility’s own

funds

TPP Tuzla - Reconstruction of the

Coal handling system

Modernization of coal handling has led to

the better utilization of coal storage

capacities, improved the homogenization

of various types of coal, and reduced

internal transport costs. It has also

improved the quality of boiler operation in

units 3, 4 and 5, increasing energy

efficiency, reducing emission of harmful

products in flue gases, and reducing of

dust and noise.

TPP Tuzla – waste water treatment

system related to the above

This has become a part of the waste water

re-circulating system covering ash and

slag transport . This will ultimately lead to

a saving of 1000 to 1500 cubic meters of

water per day

It is being rehabilitated

using utility’s own

funds.

27

EP BiH –Financial and

Management Information System

It has helped in the overall improvement

of the operational and management

efficiency and effectiveness of the utility.

Based on the results of

the pilot introduction in

two business units the

utility is introducing it

in all business units

using its own funds

(about $6.3 million)

EPBiH Technical assistance for

reducing SOx and NOx in TPP

Kakanj

The recommendations for de-sulfurization

of units 6 and 7 in TPP Kakanj and the

proposed scenarios and economic

arguments will be helpful in determining

of future directions for the operation of

these plants in accordance with standards

of BiH and EU.

EP BiH- Dam Safety Study The consultant has recommended dam

safety measures for HPPs at Jablanica,

Grabovica and Salakovac. Engagement of

Consultants has contributed to a better

readiness and faster and more efficient

implementation of the dam safety

projects.

The investment phase is

being financed partly

by EIB and partly by

the utility.

EPHBHZ

Financial Management Information

System

Successful introduction in all business

units has helped in the overall

improvement of the operational and

management efficiency and effectiveness

of the utility.

Dam Safety Study Recommendations for HPP Rama are

being implemented under EIB financing

EPRS

Ugljevik TPP: Monitoring and

automatic control system

Equipment to be placed in the fields had

been installed. Equipment for process

control and monitoring is stored and

would be installed during the plant

shutdown in 2013 (second quarter).

When completed will

modernize and digitize

automatic plant control

system, improve plant

reliability and reduce

generation losses.

Ugljevik TPP: Rehabilitate

wastewater treatment and

monitoring systems

Under functional testing. Enables

treatment of waste water from the plant,

associated coal mine and the

desulphurization unit. Also enables

monitoring at all discharge points and thus

compliance with water pollution

regulations.

Measured in terms of

Population Equivalent

(PE), these works have

reduced the pollution

levels by about seven

times from 33,668 PE

in 2007 to 4684 PE in

2012.8

Ugljevik TPP: Reconstruction of

Water cooling system

Restored the temperature differential to

the original design value of 9.4oC and the

design efficiency of cooling. Cooling

tower became reliable even for winter

operation.

8 Under this measure pollution from the effluents of any plant is expressed as the number of

households/people that will produce an equivalent level of pollution.

28

Ugljevik TPP: Replacement of the

auxiliary power plant and

associated 0.4 kV and 6kV

equipment.

Improved the reliability of the main power

station and reduced generation losses.

Gacko TPP: Replacement of waste

water treatment systems

The effluent now conforms to the national

standards. Also resulted in a saving of 700

million liters of water per year and a

corresponding reduction in the effluent

discharge into the river downstream.

Gacko TPP: Replacement of Ash

and slag transportation system

Reduced particulate emission levels to

some extent and made handling of ash and

slag much more efficient. Since the new

system has eliminated stoppages due to

the old system additional generation of 10

GWh per year became possible.

Projected parameters

are reported to have

been met

Gacko TPP: Reconstruction of the

0.4 kV auxiliary system

Reduced TPP interruptions and made

generation more reliable.

EPRS Financial Management

Information System

It has helped in the overall improvement

of the operational and management

efficiency and effectiveness of the utility.

Based on the results of

the pilot introduction in

two business units in

this project, the utility

is introducing it in all

business units using its

own funds (of

about$ 11.7 million).

EPRS Dam Safety study Recommendations of the consultants are

being implemented partly under EIB

financing and partly under self-financing

to improve dam safety of Trebinje II,

Visegrad, and Bocac HPPs.

29

Annex 3. Economic and Financial Analysis

Economic Analysis

The PAD noted that the project consisted of a large number of small investments and that

benefits were not quantifiable in respect of components relating to environmental

improvements, the market operation system, FMIS, and the Study for reduction of SOx

and NOx. Thus all the components funded under IDA credit (except two) were not

covered by the quantitative analysis. These exceptions were (i) monitoring and automatic

control system; and (ii) replacement of the auxiliary power plant and associated 0.4 kV

and 6kV equipment, both at Ugljevik TPP. The first component has largely been

completed, but will become operational some time in 2013, after the installation of the

stored equipment when the plant is shut down for planned maintenance. The second one

has become operational and is providing excellent support for the plant reliability.

In the PAD the EIRR had been calculated for these two components based on the then

estimated capital costs, annual O&M costs, benefits in terms reduction in generation

losses caused by the two components and valuing the benefit at the export price of

electricity prevailing in 2006 as shown below:

Table A3.1: Summary of economic analysis in the PAD Component Capital

Cost in

$ m

Annual O&M

Cost in $ m

Annual Reduction

in Generation

Losses in GWh

2006 Price of

exported electricity

US Cents/kWh

EIRR

1 3.3935 0.0304 (about

0.09% of capital

cost)

59.346 4.8 54%

2 4.6470 0.0042 (about

0.009% of

capital cost

24.729 4.8 21%

The EIRRs have been re-estimated based on the current capital cost data9, annual O&M

expenses and reduction levels in generation losses following the same rates as in the

appraisal. The benefits have been valued at the export of electricity in mid-2012 as shown

below:

Table A3.2: Summary of economic analysis for the ICR Component Capital

Cost in

$ m

Annual O&M

Cost in $ m

Annual Reduction

in Generation

Losses in GWh

2006 Price of

exported electricity

US Cents/kWh

EIRR

1 4.04 0.03636 59.346 7.38 58%

2 5.79 0.005211 24.729 7.38 24%

9 These are actual costs incurred plus a small provision for the installation of the equipment already

procured and stored

30

It may be seen that based on the methodology adopted in the PAD, the IRRs of these two

components continue to be robust at 58% and 24% compared to 54% and 21% at

appraisal. Sensitivity analysis for capital cost and O&M cost increases by 10%, benefit

(GWh) reduction by 10%, and export price reduction by 10% indicate that even under a

combination of these factors EIRR remains at or above 48% for Component 1 and 20%

for component 2. Technically also, investments such as these, improving the reliability of

generation and reducing generation losses are imperative to the utility performance for

providing reliable supply.

Financial Performance of the three EPs

The financial performance of the EPs is influenced by the variations in their generation

mix, variations in their sales mix, price volatility in the wholesale market, and the level of

regulated tariffs for tariff consumers. Other factors influencing their performance include:

the levels of distribution system loss, and efficiency of billing and collection.

The hydrological conditions had been good in 2006, 2009 and 2010 and difficult in the

other years. The best year was 2010 and the worst year was 2011.

Table A3.3: Total and hydropower generation in BiH Item 2006 2007 2008 2009 2010 2011

Total generation in GWh 13,675 12,195 13,784 14,562 16,068 14,050

Share of Hydro (%) 43 33 34.6 42 49.5 30.8

EPHZHB has an all hydro system with no thermal generation, while EPBiH produces

about 65% and EPRS about 35% of the total thermal power generation in the country.

The latter two are affected by this factor directly through their higher generation costs.

EPHZHB is a net importer and is therefore indirectly affected by this factor.

The revenue from sales to tariff customers is fairly orderly, stable and predictable.

However, regulated tariffs have registered only a very modest increase over the period

with no cushion to withstand the effects of the above key variables. For example the

average revenue/kWh for tariff consumers in EPBiH moved from Pf 12.4 in 2006 to Pf

13 in 2011.

However sales of surplus electricity from each EP (after meeting the demands of tariff

consumers under the public supply obligations) in the wholesale market to other EPs,

traders and for export are based on bilateral contracts through negotiations or public

tendering. Volume of sales in the wholesale market varies as a function of hydrological

variations, as well as the demand in the domestic and regional market. The prices in the

market are greatly influenced by the regional market prices. During 2006-2011 regional

market prices per MWh have varied from Euro 60 in 2006 to a high of Euro 90 in mid-

2008 before declining to a low of Euro 40 in most of 2010. In 2011 prices moved

gradually to a range of Euro 50 to 55 during most of the year and reached Euro 60

31

towards the end of that year. Such volatility affects the revenues of EPBiH most and to a

lower extent EPRS.

Distribution system loss in the country has declined from a high of 14.23% in 2009 to

12.89% in 2011 which is the lowest level reached during the post-war years. Collection

ratios have attained industry standards of 98 to 99 percent of bills and are being

maintained at that level.

At the time of appraisal, tariffs were inadequate to cover the full amount of depreciation.

Nevertheless, all three EPs had been able to generate sufficient cash from their operations

to meet the two covenanted financial obligations associated with the IDA credits: i) a

self-financing ratio of no less than 40%; and ii) a debt service coverage ratio (DSCR) of

no less than 1.5 times.

EPBiH

A summary of EPBiH’s key financial and technical indicators and its historical financial

statements in the period 2006-11 are provided in Table A3.4 below. At appraisal, EPBiH

was in compliance with covenants relating to self-financing and debt service coverage.

In the period 2006-11, the company remained in compliance with the agreed financial

covenants except in 2010 when its cash receipts from operations fell well below Earnings

before interest, depreciation and amortization (EBIDA) due to changes in the working

capital.

Table A3.4: A summary of key financial and technical indicators of EPBiH

No Item 2006 2007 2008 2009 2010 2011

1 Generation Total (GWh) 6,401 6,593 7,340 6,993 7,290 7,352

2 Share of Hydropower (%) 24 19 22 25 31 17

3 Share of Thermal power (%) 76 81 78 75 69 83

4 Total sales in GWh 5,781 6,176 6,762 6,607 7,042 7,041

5 Share of Sales to Tariff consumers in

GWh (%) 67 66 63 61 60 61

6 Share of Sales to the Wholesale market

including export in GWh in total sales

(%) 33 34 37 39 40 39

7 Average revenue/kWh from sales to

Tariff consumers (Pf/kWh) 12.4 12.4 12.8 13.1 13 13.75

8 Average revenue/kWh from sales in the

wholesale market (Pf/kWh) 6.9 9.4 11.5 12.4 8.8 10

9 Profit after tax KM million -28 11 47 66 -22 1

10 System loss (%)

9.1 10.3 11.8 9.69 9.49

11 Collection to Billings Ratio (%) 100 99.5 100 99.4 99.3 100

12 Accounts Receivable in Days' Sales

(days) 50 44 43 49 39 50

13 Operating Ratio 1.07 1.00 0.95 0.94 1.04 1,01

14 Current Ratio 5.26 5.00 5.52 5.19 4.38 3.69

32

15 Debt Service Ratio (times) (1.5 times

or greater) 2.68 8.11 8.78 9.11 1.73 8.18

16 Self Financing Ratio (%) (40% or

greater) 80 107 102 130 9 76

17 Debt/ Equity Ratio 0.12 0.12 0.14 0.15 0.16 0.17

18 Return on equity (%) -ve 0.41 1.64 2.24 -ve 0.05 Memo Item *

Quantity of electricity purchased in GWh na na 21.6 15.127 72.856 29.444

Average purchase price Pf/kWh na na 6.81 11.67 5.83 13.54

* Short-term purchase (Intercompany purchase inside B&H, i.e. purchase between EPBiH and EPRS and EPHZHB) is not included.

EPBiH’s operating performance had improved notably during 2006-09. The company

became operationally profitable for the first time in many years during 2008-09 before

taking a downturn in 2010. Factors which contributed to the improvement include: (i)

higher prices received for sales in the wholesale market; ( ii) gradual tariff increase

among tariff customers; and iii) adequate coal supply to satisfy both domestic and

regional power demand. In 2010, the downturn in the company’s financial performance

was primarily due to a sharp fall in the wholesale market prices. EP BiH’s financial

performance is highly sensitive to changes in the wholesale prices among its non-tariff

customers. Several factors have contributed to this situation. They include:

High volatility in the wholesale market prices. The average regulated tariff/kWh grew

at a moderate rate of 1.2% annually from 12.4 Pf to 13.0 Pf during 2006-10, while the

wholesale price/kWh to non-tariff customers shot up by nearly 80% during 2006-09

from 6.9 Pf to 12.4 Pf before taking a 30% dive in 2010. The high volatility of the

wholesale market prices is due to the changing forces of supply and demand. In 2010

extremely favorable weather conditions led to record high outputs from the

hydropower plants. However, the worldwide economic recession led to a slowdown

in the domestic and regional consumption. Thus a large influx of low-cost

hydropower generation and a reduction in regional demand effectively drove down

the prices in the wholesale market. EP BiH, a net exporter, saw its bottom line suffer

as a result.

Growing percentage of its sales subject to market forces: the weight of sales to the

wholesale market as percentage of EP BiH’s total electricity sales had been growing

steadily over time, from 33% in 2006 to 40% in 2010.

Higher cost of generation due to a thermal-heavy generation mix: About 70% to 83%

of EPBiH’s generation mix is from thermal power plants and such thermal power is

more than twice as costly as the hydropower. Relative to EPHZHB and EPRS, it has a

higher cost of generation and 40 percent of its sales are subject to market forces. EP

BiH is therefore more vulnerable to downward swings in wholesale prices.

EPHZHB

33

A summary of key financial and technical indicators of EPHZHB during2006-11 is

provided in Table A3.5. At appraisal, EPHZHB was in compliance with the covenants

relating to self-financing and debt service coverage. The company remained in

compliance with both financial covenants since then, except in 2007 when its generation

output fell sharply due to highly unfavorable weather. In that year, EPHZHB’s operating

margin fell to a negative 18%. By the year end, it had a net cash loss of KM 2 million

from operations. For the year it recorded a total loss of KM 59 million. As a result, the

company was in breach with both financial covenants.

EPHZHB's own electricity production comes exclusively from hydropower. While this

has benefits in terms of lower operating expenses for hydropower generation, it also

subjects the company to the effects of variability in the hydraulic conditions. A net

importer, EP HZHB also needs to make up any shortfalls in its own generation with

purchases from the wholesale market at higher costs. The cost of purchased power is a

major component of the operational expenses of EPHZHB. Depending on the volume of

hydropower generation in the year, annual purchased power cost as a percentage of total

annual operational expenses ranged from 33 to 51 percent in most years while it shot up

to 61 percent in 2007. The situation in 2011 is somewhat similar and it made operational

loss. Thus, EP HBHZ’s financial performance closely mirrors the movement in the

outputs from its own hydropower plants.

Another factor affecting EPHZHB’s financial performance is the amount of sales to large

customers, such as Aluminij which could choose to remain as a tariff customer or buy

from suppliers of choice in the wholesale market. When they unexpectedly choose to

remain as tariff customers, EPHZHB is often forced to buy electricity in the wholesale

market often at higher prices. The regulatory agency is trying to ameliorate this problem

through some notice procedures.

Table A3.5: A summary of key financial and technical indicators of EP HZHB

No Item 2006 2007 2008 2009 2010 2011

1 Generation Total (GWh) 1,885 1,124 1,356 1,940 2,605 1,402

2 Share of Hydropower (%) 100 100 100 100 100 100

3 Share of Thermal power (%) 0 0 0 0 0 0

4 Total sales in GWh 3999.8 2928.7 2248.7 2324 3313.5 2785.5

5 Share of Sales to Tariff consumers

in GWh in total sales (%) 76.87 87.1 92.3 80.1 63.37 89.8

6

Share of Sales to the Wholesale

market including export in GWh

in total sales (%) 23.13 12.9 7.7 19.9 36.63 10.2

7 Average revenue/kWh from sales

to Tariff consumers (Pf/kWh) 9.46 10.71 12.99 13.24 12.67 12.11

8 Average revenue/kWh from sales

in the wholesale market (Pf/kWh) 7.14 8.03 0.17 9.84 9.42 9.33

9 Profit after tax KM million 1.00 -59 7.00 20 41 -15

10 System loss (%)

18.7 17.7 17.2 16.2 14.4

11 Collection to Billings Ratio (%) 98.2 99.7 98.3 98.7 98.7 98.2

34

12 Accounts Receivable in Days'

Sales (days) 84 85 79 71 67 84

13 Operating Ratio 1.00 1.18 0.97 0.93 0.89 1.03

14 Current Ratio 3.15 1.45 1.67 2.3 2.38 1.81

15 Debt Service Ratio (times) (1.5

times or greater) 9.34 0.05 4.78 6.39 8.69 4.03

16 Self Financing Ratio (%) (40% or

greater) 105 14 44 77 149 85

17 Debt/ Equity Ratio 0.19 0.25 0.28 0.32 0.33 0.35

18 Return on Equity (%) 0.10 -ve 0.76 2.20 4.34 -ve

EPRS A summary of key financial and technical indicators and details of historical financial

statements of EPRS during 2006-11 is provided in Tables A3.6. At appraisal, EP RS was

in compliance with the covenants relating to the self-financing and debt service coverage

ratios. The company has remained in compliance with both financial covenants since

then except in 2009 when its cash receipts from operations fell well below EBIDA due to

changes in the working capital. As a result, the company failed to comply with the self-

financing ratio covenant.

Compared with the other two power producers in the country, EPRS has a more favorable

generation mix with 34 to 53 percent coming from hydropower units. With more

hydropower in its generation mix and with about 40% of total sales for the wholesale

market and export, EPRS is less vulnerable to wholesale market price changes than

EPBiH. For example, when wholesale market prices took a dive in 2010, EPRS

remained operationally profitable.

The largest hydropower producer in the country, EPRS’s financial performance is also

closely linked to the weather conditions influencing hydropower output. In the period of

2006-2011, the correlation between the operating margin of the company and the overall

hydraulic condition was about 0.58. In the three years (2006, 2007 and 2011) when the

hydraulic conditions were the least favorable, EPRS registered operating losses.

Table A3.6: A summary of key financial and technical indicators of EPRS

No. Item 2006 2007 2008 2009 2010 2011

1 Generation Total (GWh) 5,390 4,454 5,084 5,623 6,165 5,295

2 Share of Hydropower (%) 48 40 38 46 53 34

3 Share of Thermal power (%) 52 60 62 54 47 66

4 Total sales in GWh 4,596 3,754 4,495 4,984 5,520 4,719

5 Share of Sales to Tariff consumers in

GWh in total sales (%) 57.07 72.54 64.18 59.75 55.25 65.78

6

Share of Sales to the Wholesale market

including export in GWh in total sales

(%)

42.93 27.46 35.82 40.25 44.75 34.22

35

7 Average revenue/kWh from sales to

Tariff consumers (Pf/kWh) 10.64 10.53 11.67 11.63 12.23 12.11

8 Average revenue/kWh from sales in the

wholesale market (Pf/kWh) 6.96 9.65 11.61 7.99 6.93 8.40

9 Profit after tax KM million 0 -16 33 36 36 6

10 System loss (%) 17.4 17.3 16.1 16.5 16.2

11 Collection to Billings Ratio (%) 103.3 100.7 101.4 100.5 99.28

12 Accounts Receivable in Days' Sales

(days) 85 79 71 67 84

13 Operating Ratio 1.04 1.08 0.97 0.98 0.98 1.03

14 Current Ratio 3.44 2.88 3.55 3.96 4.5 4.87

15 Debt Service Ratio (times) (1.5 times or

greater) 2.78 4.28 5.57 2.44 6.5 7.04

16 Self Financing Ratio (%) (40% or

greater) 128 113 94 24 94 104

17 Debt/ Equity Ratio 0.09 0.09 0.10 0.11 0.12 0.12

18 Return on equity (%) 0 -ve 0.90 0.97 0.95 0.16

GENERAL

Overall, the three utilities are doing well operationally in terms of increasing generation,

reducing system loss, improving collections and in reducing the level of accounts

receivable, though the performance varies somewhat among the various distribution

subsidiaries they own. Also they all have very low levels of long term debt in their capital

structure and low debt service liabilities. The debt equity ratios in the above tables have

been computed by dividing the total liabilities by the total equity. When only long term

debt is used the ratios will indicate even lower levels of leverage. Despite this major

advantage and a reasonably high level of operational efficiency, they are unable earn

even a modest return on their equity. They are managing to remain barely solvent through

export sales.

All of these developments highlight the need for the regulators to allow the tariffs to rise

to enable the utilities to earn at least some modest returns on the equity and to withstand

weather dependent major variations in hydropower outputs.

36

Annex 4. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members

Names Title Unit Responsibility/

Specialty

Lending

Supervision/ICR

Bernard Baratz Consultant EASCS

Angelica A. Fernandes Consultant ECSO2

Vesna Francic Senior Operations Officer ECSS6

Sergio Augusto Gonzalez

Coltrinari Sr Power Engineer ECSS2

Mohinder P. Gulati Sector Leader ECSSD

Esma Kreso Environmental Specialist ECSS3

Ramon Lopez-Rivera Consultant ECSS2

Lamija Marijanovic Financial Management Specialist ECSO3

Kishore Nadkarni Consultant ECSS2

Shinya Nishimura Senior Energy Specialist ECSS2

Kjell Erik Gustaf Porle Consultant EASCS

Ireneusz M. Smolewski Senior Procurement Specialist ECSO2

Goran Tinjic Senior Operations Officer ECCBM

Natasa Vetma Senior Operations Officer ECSS3

(b) Staff Time and Cost

Stage of Project Cycle

Staff Time and Cost (Bank Budget Only)

No. of staff weeks USD Thousands (including

travel and consultant costs)

Lending

FY05 14.32

FY06 226.34

FY07 0.54

FY08 0.00

Total: 241.20

Supervision/ICR

FY05 0.00

FY06 0.00

FY07 70.19

FY08 94.65

FY09 115.79

FY10 177.94

FY11 108.29

FY12 114.08

Total: 680.94

37

Annex 5. Beneficiary Survey Results (if any)

None

38

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

None

39

Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR

The ICRs provided by the three EPs gave details of implementation, actual costs incurred,

and results achieved. They provided details of the environmental improvements achieved

and their improved ability to comply with national and EU environmental regulations and

describe how the various rehabilitation components relating to hydro and thermal power

plants have led to increased generation capability and greater reliability of supply and

safety. They have described at some length the favorable impacts the distribution

rehabilitation components had on the reliability of the distribution systems and reduction

of system losses. They have also spoken highly of the efficacy of the introduction of the

SAP based FMIS in their utilities. They consider the Bank performance very satisfactory

stating, “The Bank has provided significant contribution in defining of priorities,

preparation and evaluation of projects, monitoring and supervision of individual contracts

and entire project as well as expert counseling during project realization. Through timely

and expert counseling, the Bank has helped in resolution of all issues that arose, and led

towards faster and more efficient project implementation. During the project

implementation, the Bank has organized training for PIU personnel in the areas of

procurement, environmental and social protection and financial management of World

Bank projects, with the aim of familiarizing them with the updated procurement

guidelines, environmental and social protection standards and procedures for

management of loan funds.”

They believe that the project objectives have been achieved and state that overall, the

goals established for each project component have been realized within planned and

approved budget. Components for mitigation of negative environmental effects of

thermal power plants have improved compliance with state and EU legislation relating to

environmental protection. Other components led to the improvement of technical

characteristics of the rehabilitated facilities. They also led to increased safety, reliability

and quality of supply of electricity to the customers. Losses within the distribution sector

have been decreased, and perhaps most significantly, integration of business processes

has been achieved through introduction of financial management information system. In

addition, the completion of projects for the control of seepage of water under the

hydropower dams will increase the safety of dams, and thus the overall readiness of

hydro power plants in the energy system.

Their list of lessons learnt from the project includes:

Acceptance of new technological solutions in the areas of environmental protection

has led to achievement of better ecological, production and financial results, as well

as fulfillment of requirements of international standards. Engagement professional consulting assistance is necessary for the preparation

and implementation of the projects of this type.

Implementation of SAP in some parts of the Company has proven a good business

practice as it contributed to better scoping of business processes within the company

and training of company personnel. This facilitated the introduction of SAP in the

other parts of the Company using the personnel trained earlier

40

Within the project, different types of contracts were used in accordance with the

policies and procedures of different financial institutions. This enabled new

employees within the company to acquaint themselves with procurement procedures

of different financial institutions, which reflect different prioritization of quality and

cost as compared to procurements done from company’s own funds, in accordance

with local procurement guidelines. The project has also enabled the company

personnel to acquire international experiences in project management and to come

across best available technologies. Finally, the company personnel have familiarized

themselves with new practices in financial management of complex, international

contracts.

41

Annex 8. Comments of Co-financiers and Other Partners/Stakeholders

No comments were received from EIB and KfW. EBRD wondered whether the

government performance could be rated as satisfactory. Given the complexity of the

political and administrative structures specific to BiH, and the prevailing historical

circumstances, we believe, that in relation to this project, the governmental performance

was reasonable except in relation to the governance arrangements for the National

Transmission Company and ISO.

42

Annex 9. List of Supporting Documents

ICR from EPBIH

ICR from EPRS

ICR related information from all three EPs

Audited financial statements for all three EPs for 2007-2011

Audited Project Expenditure statements for 2007-2011

Report on the experience in BiH in reduction of system losses and increase in collections

Quarterly progress and disbursement reports by the three EPs

Consultant Reports on Dam safety and in SOx and NOx reduction

Annual Reports of EPBiH, EPHZHB and EPRS available at their websites

Annual Reports of SERC available in its website

Reports relating to BiH available in the website of EC

43

Annex 10. Status of Components Financed by EBRD, EIB and KfW

No. Component Status Output/Remarks

A. Components Financed by EBRD

1 Distribution segment for

EPBiH: loan $24.7m.

Disbursements $24.58m

Completed by June

2011. Loan closed

Reduction in

Distribution Losses,

increase in sales, billing

and collection,

Improvement of

reliability of supply

through reduced

frequency and duration

of supply outages.

2 Distribution segment for EP

HZHB: Loan $24.7m Fully

disbursed

Completed by June

2011 Loan Closed

3 Distribution segment for

EPRS: Loan $22.1 m

Disbursements $ 21.628 m by

June 30, 2011.

Completed by June

2011 Loan Closed

B. Components Financed by EIB

1 Distribution and HPP

Rehabilitation for EPBiH :

EIB Loan $42.77m

Disbursed $30.11m

Of this $35.23 m is for distribution and

$7.54 m is for Hydro dam safety works.

1a: Distribution for EPBiH:

funding $35.23m

Disbursement $26.26 m

Substantially

completed; Full

completion by

September 2013

Same as for the EBRD

distribution

components

1b: HPP Grabovica: 220 kV

and 35 kV facilities

reconstruction EPBIH Own

funding

Completed

Increased generation

plant availability

1c: HPP Salakovac: 220 kV

and 35 kV facilities

reconstruction EPBiH own

funding

Completed

Increased generation

plant availability

1d: HPP Jablanica:

Reconstruct Brana and Entry

Building 35/0.4 kV TS EPBiH

funding

Completed

Increased generation

plant availability

1e: HPP Jablanica:

Rehabilitate Monitoring

System of Kukovi Landslide

EPBiH Own funding

Completed

Improved dam safety

1f: HPP Grabovica and

Salakovac Reduction of water

leakage

In Progress.

Completion by April

2013

Increased generation

and dam safety

1g: HPP Grabovica, Salakovac

and Jablanica: Continuous dam

monitoring system

Increased dam safety

44

2 Distribution, Rehabilitation of

HPP Capljina and Rama in EP

HZHB Total Funding $25.87m

See Status below for individual items

2a: Distribution for EPHZHB:

Disbursed about $13.94 m by

Sept 2011

Completed Same as for EBRD

funded Distribution

components

2b: HPP Rama RCC facing

and Grout Curtain

Grout Curtain work at

$3.762 m was

completed in end 2011.

Concrete facing work

was being tendered in

Sept 2011 ($3.6m).

However there was a

decision to retender the

contract in May 2012.

Completion date not

clear.

Grout Curtain repair

reduced a part of the

dam leakage.

2c: HPP Caplijina

Replacement of certain minor

equipment Disbursed $4.1m

Completed Increased reliability

and availability of

generation plant

3 Distribution for EPRS : EIB

loan $24.57m Disbursements

$22.49m as of June 30, 2012

(closing date Dec 31, 2013)

Completed Same as for EBRD

funded distribution

components

4 EPRS HPP Rehab and Dam

safety: EIB loan $30.81m

(including contingency)

Disbursement $19.5 m as of

June 30, 2012

Partially completed; Status: see below

4 a: Additional Spillway at

HPP Bocac

Contracting in June

2012; completion by

April, 2013

Increased dam safety

4 b: Plant control system at

HPP Bocac

Tendering in June

2012; Completion by

Oct, 2013

Increased Plant

reliability and

availability

4 c: Cooling system for

Generators at HPP Bocac

Nearing completion in

June 2012

Same as above

4 d: Uninterruptable Power

Supply System (UPS),

Generators Excitation Systems

and Turbines Governing

Systems and reconstruction of

110 kV switchgear at HPP

Bocac

Completed all but the

last item in 2010

The last item was

completed in early

2012

Increased Plant

reliability and

availability and actual

increased generation.

4 e: To reduce water leakage

beneath the dam of HPP

Contract negotiations in

June 2012 and

Will reduce water

leakage and improve

45

Visegrad from 15 to 4

m3/second

completion by March

2014

dam safety

4 f: Turbine regulation and

monitoring of generators at

HPP Visegrad

Contracting in progress

in June 2012.

Completion by October

2013

For improved plant

reliability and load

following

4 g: To control water seepage

under the Gorica Dam Gorica

(HPP Trebinje II)

Tender documents were

being finalized in June

2012. Completion by

end 2013

Will reduce water

leakage and improve

dam safety

C. Components Financed by KfW

1 HPP Rama in EPHZHB:

Funding $22.1m for Plant

rehabilitation covering:

Rehab of two generators

Replace two transformers

Procure an additional

runner

Extension of 220kV

switchgear

All contracts were

awarded by June 2011.

Works are in progress

and completion date not

reported. Will result in increased

generation.

2 Distribution SCADA for

EPBiH funding $9.52m. No

Disbursement yet.

The assistance was

approved in late 2012.

Work has not started.

Completion in about 24

to 30 months.

Will make distribution

operations more

efficient

3 Distribution SCADA for

EPHZHB Funding

Implementation has not

commenced yet

4 Distribution SCADA system

for EPRS: loan/grant of

$5.94m; No disbursement till

the end of 2012

The loan was becoming

effective in the third

quarter of 2012 and

implementation was

expected to start in the

last quarter of 2012:

Completion by end

2014

Adriat ic

Sea ALB

AN

IA

REPUBLIKA SRPSKA

REPUBLIKASRPSKA

FEDERATION OF BOSNIAAND HERZEGOVINA

Brcko Districtˇ

TE Gacko

HE GrabovicaHE Jablanica

HE Bocacˇ

TETuzla

TE Kakanj

HE Rama

TE Ugljevik

PHECapljina

HE Trebinje II

HE Visegradˇ

HE Salakovac

BOSNIA AND HERZEGOVINA

ENERGY COMMUNITY OFSOUTHEAST EUROPE (ECSEE)

APL3–BiH PROJECT

GSDPMMap Design Unit

OPERATIONAL AREAS OF PUBLIC UTILITIES:

ELEKTROPRIVREDA BiH

ELEKTROPRIVREDA RS

ELEKTROPRIVREDA HZHB

KOMUNALNO BRCKO

EXISTING PROJECT TRANSMISSION LINES:

400 kV

220 kV

110 kV

HYDRO POWER PLANTS

THERMAL POWER PLANTS

SUBSTATIONS

RIVERS

NATIONAL CAPITAL

INTER-ENTITY BOUNDARIES

INTERNATIONAL BOUNDARIES

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

DECEMBER 2012

BOSNIA andHERZEGOVINA