Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15177 IMPLEMENTATION COMPLETION REPORT YUGOSLAVIA ENERGY CONSERVATION AND SUBSTITUTION PROJECT (LOAN 2790-YU) DECEMBER 1, 1995 Energy, Environment, and Transport Division Central Europe Department Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS All estimates are given in US dollars WEIGHTS AND MEASURES 1 Megawatt (MW) - 1,000 kilowatts (kW) 1 Gigawatt hour (GWh) - 1,000,000 kilowatt hours (kWh) 1 kilogram (kg) - 2.2 pounds (lb) 1 ton (metric)(t) - 1,000 kg = 2,205 pounds 1 meter (m) - 3,281 feet (ft) 1 kilocalorie (kcal) - 3,968 British Thermal Units 1 Joule (J) - .000239 kcal ABBREVIATIONS AND ACRONYMS EBRD - European Bank for Reconstruction and Development EFSAL - Enterprise and Financial Sector Adjustment Loan IRR - Internal Rate of Return LBdd - Ljubljanska banka, d.d. LBS - Ljubljanska Banka System Ljubljanska banka - The borrower: Ljubljanska banka Associated Bank to June 4, 1991, Ljubljanska banka, d.d. to July 27, 1994, then Nova Ljubljanska banka d.d.' SIT - Slovenian tolars FISCAL YEAR OF BORROWER January 1 - December 31 1/The Loan and Guarantee Agreements were amended on May 20, 1991 to change the borrower from Ljubljanska banka - Associated Bank to Ljubljanska banka, d.d., Ljubljana. By letter dated August 1, 1995 the Bank acknowledged that pursuant to a change in the constitutional law of Slovenia, Nova Ljubljanska banka., Ljubljana assumed the obligations of the Slovene sub-borrowers under the loan and that Ljubljanska banka d.d, Ljubljana retained the obligations of the non-Slovenian sub-borrowers located in Croatia and Macedonia. FOR OFFICIAL USE ONLY Table of Contents Preface Evaluation Summary Part I Project Implementation Assessment Part II Statistical Annexes Appendices: A. Ljubljanska banka, Final Evaluation Report B. Result Estimation of Investments into Rehabilitation Programme to Eliminate the Consequences of Damage After the Floods in November 1990. C. Report of Visits to Implemented Subprojects D. Summary of Subprojects Not Visited Map This report was prepared by Richard Hamilton (Senior Energy Economist) and John Mulckhuyse (Consultant) based on a mission to Slovenia from November 7-18, 1994. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed wiihout World Bank authorization. IMPLEMENTATION COMPLETION REPORT YUGOSLAVIA ENERGY CONSERVATION AND SUBSTITUTION PROJECT (Loan 2790-YU) Preface This is the Implementation Completion Report (ICR) for the Energy Conservation and Substitution Project in Slovenia (formerly Yugoslavia), for which Loan 2790-YU in the amount of US$90 million equivalent was approved on March 31, 1987 and made effective on January 4, 1988. Following the establishment of the Republic of Slovenia, three separate loans were distinguished, Loan 2790-0 covering repayments prior to June 30, 1993, Loan 2790-7 covering the amount outstanding with respect to a subborrower in Macedonia, Loan 2790-8 covering the amount outstanding on subloans in Slovenia, and Loan 2790-9 covering the amount outstanding on a subloan in Croatia. The loan was closed on June 30, 1994, compared with the original closing date of December 31, 1992. Final disbursement took place on July 7, 1994. The remaining balance of US$2,009,965.64 equivalent was cancelled on July 26, 1994. The ICR was prepared by Mr. Richard Hamilton, Energy, Environment, Transport and Telecommunications Division, Central Europe Department, and John Mulckhuyse, Consultant, and reviewed by Mr. William Hayden of this division and Ms. Jane Loos, Project Adviser, Central Europe Department. The Borrower's contribution is in Annexes A and B. Preparation of this ICR is based on material in the project file and the Bank's completion mission from October 31 to November 4, 1994. EVALUATION SUMMARY Objectives 1. The original main objectives of the project were to: (a) promote energy efficiency in industry, primarily in Slovenia, through subloans for energy conservation and substitution; and (b) support the development of technical capabilities for energy audit work. The project was later amended to include two new objectives to: (c) promote environmental conservation and improvement (added by amendment of 6/12190; and (d) restore infrastructure damaged by flooding which occurred in November 1990 (added by amendment of 5/20/91). 2. The fall in the international crude oil price from $27 per barrel at the time of appraisal in mid 1985 to $12 per barrel in December 1986 created the risk of a smaller demand for subloans than was originally foreseen. Bank staff accepted the risk on the basis of estimates that the subprojects under consideration had satisfactory economic rates of return when evaluated with the $12 oil price. Ultimately only 61 % of the loan was used for energy conservation and substitution projects. The shortfall was due not only to low oil prices, but also to withdrawal of several loan applications due to deteriorating financial conditions in the companies and the overall Yugoslav economy and to political uncertainty. Later Ljubljanska banka and the Bank responded effectively by broadening the loan to include objectives (c) and (d). By project closing the loan had been nearly fully utilized. Achievement of Objectives 3. One of the subloans was used for investment in energy savings equipment production. The remaining 17 energy conservation and substitution subloans were used for process changes intended, among other things, to yield reductions of at least 10% in per unit energy consumption. There were no subprojects intended solely for energy conservation or substitution, nor were there any subprojects for investment in local energy resources. The energy conservation subprojects were nearly all successful in improving energy use and increasing efficiency. An unexpected benefit consisted of improvements in product quality, which allowed some subborrowers to compete in export markets. Economic rates of return could be calculated for only some of the subloans and some of the estimates are misleading, partly because of heavy financial losses incurred by the subborrowers during the breakup of former Yugoslavia and establishment of independent Slovenia. - ii - 4. The objective of developing a technical capability for energy audit work in Slovenia was not achieved, partly because separate energy audits were not required for the types of subprojects that the subborrowers chose. 5. With respect to institutional development within Ljubljanska banka, additional engineers and economists were employed, but a separate supervision division originally agreed to was not established. Ljubljanska bank credits the project with enabling it to strengthen its capabilities in project appraisal, procurement, monitoring, disbursement and repayment procedures and loan supervision. 6. The environmental subprojects achieved their goals, although one subborrower experienced severe difficulties with its chosen technology. 7. The flood repair subprojects achieved their goals. 8. Ljubljanska banka has experienced financial difficulties caused largely by the political breakup of former Yugoslavia and the breakdown of the former Yugoslav economic system. It was unable to meet some of the financial covenants and is currently being restructured with assistance under the Enterprise and Financial Sector Adjustment Loan (Loan 36360-SLO). 9. Apart from the borrower's financial difficulties, the project successfully survived the separation of Slovenia from the rest of former Yugoslavia (declaration of independence was on June 25, 1991). Agreements were reached under which the Governments of Croatia and Macedonia accepted responsibility for the debt service for subloans to enterprises in those countries. The Republic of Slovenia guaranteed repayment of the portion of the loan used in Slovenia. Project Sustainability 10. Given Slovenia's large exposure to international trade, its good macroeconomic policy and active environmental programs, there are good prospects for sustainability of the energy conservation and environmental objectives. 11. The flood repair projects not only repaired damages but in many cases improved protection against future floods, and in other cases the Ministry of Environment and Regional Planning is continuing the program using its own funds. Sustainability is therefore likely. Bank Performance 12. Bank performance was satisfactory except that there were no visits to subborrowers during the critical implementation period. - iii - Borrower Performance 13. Borrower performance was generally satisfactory. However, as noted in paragraph 8, some financial covenants were not met. Future Operation 14. The borrower's normal monitoring procedures focusing on financial performance of its subborrowers will be continued until the subloans are repaid. These procedures are acceptable in lieu of a future operation plan. Key Lessons Learned 15. The loan succeeded because of the commitment of the borrower to succeeding in its function as a commercial bank of making and monitoring loans to industrial borrowers. Another reason for success, which may not have been fully appreciated during project preparation, was that subprojects involving process changes serving other goals than just energy conservation or environmental improvements were made eligible for subloans. It turned out that nearly all subprojects (other than for flood repair) were of this type. Moreover some of these process change investments enabled the subborrowers to survive the breakup of former Yugoslavia and compete in export markets. 16. A credit-line project to meet narrow objectives such as energy conservation or environmental improvements, with a commercial bank as implementing agency, would benefit from support from specialized agencies to handle technical evaluation, technical supervision and related matters, but may bring about targeted improvements in subborrower performance without this support. However, if the objectives are narrowly defined, there is a risk of failure to fully disburse the loan. 17. The loan was not a satisfactory instrument for financial strengthening of the borrower, partly because of its focus on unrelated technical objectives, and partly because it was disbursed during a period of major political and economic restructuring. Assessment of Outcome 18. The project's overall outcome is rated satisfactory. PART I PROJECT IMPLEMENTATION ASSESSMENT A. Statement/Evaluation of Objectives 1. The original main objectives of the project were to: (a) promote energy efficiency in industry, primarily in Slovenia, by reducing energy consumption through conservation and lowering the cost of energy consumed through substitution by lower-cost energy sources; and (b) support the development of technical capabilities for energy audit work in Slovenia, thus providing examples of viable energy-saving investment in manufacturing industry, and strengthen the financial and institutional aspects of the borrowing bank. The project was later amended to include two new objectives to: (c) promote environmental conservation and improvement (added by amendment of 6/12/90); and (d) restore infrastructure damaged in flooding which occurred in November 1990 (added by amendment of 5/20/91). 2. The project was adequately justified at the time of appraisal for contributing to two of Yugoslavia's economic priorities, exports and energy efficiency, as set out in the Republic's Long-Term Program for Economic Stabilization, which the Bank's country assistance strategy supported. As the SAR showed, Yugoslavia's per unit energy consumption levels were high compared to an efficient industrialized country such as Germany. Under Yugoslavia's unique economic system based on socially-owned means of production, there was limited incentive to conserve energy and, at the time of loan preparation, no properly staffed agencies existed at the central or republic government levels to promote energy conservation. In these circumstances, a Bank-supported project was an appropriate initiative to draw attention to the profitability of energy efficiency gains and enable companies to invest to realize these gains. The high share of energy used in industry and the relatively large amounts of industry and exports accounted for by Slovenia relative to the total former Yugoslavia justify the focus of the project on industry in Slovenia. However, the primary focus on Slovenia was not originally intended, and occurred as a result of additional potential borrowers in Macedonia and Bosnia- Herzegovina deciding not to participate in the project. The subsequent inclusion -2- of environmental subprojects was appropriate given the high priority assigned by the Republic of Slovenia and the Bank to environmental protection and given the need for a number of Slovenian companies to meet Western European environmental standards in order to maintain access for their products to Western European markets. While the subprojects to repair flood damage were unrelated to the original project objectives, their inclusion under the project was acceptable since they enabled Slovenia to respond quickly to a natural disaster. 3. The energy conservation, energy audit, environmental and flood damage repair objectives were all clearly defined and given sufficiently precise selection criteria to permit satisfactory determination of the eligibility of candidate subprojects. 4. The fall in the international crude oil price from $27 per barrel at the time of appraisal in mid 1985 to $12 per barrel in December 1986 created the risk of a smaller demand for subloans than was originally foreseen. This risk was recognized prior to conclusion of negotiations of the project in February 1987, but Bank staff accepted the risk on the basis of estimates that the subprojects under consideration had satisfactory economic rates of return when evaluated with the $12 oil price. Indeed, the loan amount was increased from an earlier figure of $70 million to $90 million. Ultimately only 61 % of the loan was used for energy conservation and substitution subprojects. The shortfall was due not only to low oil prices, but also to withdrawal of several loan applications due to deteriorating financial conditions in the companies and the overall Yugoslav economy, and to political uncertainty. Later Ljubljanska banka and the Bank responded effectively to the shortfall by broadening the project to include subloans for environmental improvements and to repair flood damages. 5. The project required Ljubljanska banka to find subborrowers wishing to carry out the eligible activities under the project, to evaluate and monitor the technical aspects of candidate subprojects to determine their eligibility and ensure their successful implementation, and to acquire expertise on the Bank's procurement and disbursement procedures. While Ljubljanska banka had experience in evaluating feasibility studies for investments undertaken by large borrowers, the number of appraisal staff was insufficient at the time the present project was appraised and special measures were agreed to increase the number of technical specialists. It was hoped that the technical enterprise SMELT (a large company with international as well as domestic activities largely in construction) would develop the capability for carrying out energy audits, and provision was made under the project for technical assistance for this purpose. Since neither Ljubljanska banka nor SMELT had an intrinsic interest in energy conservation, it would have been desirable during project preparation to provide additional institutional arrangements, for example by involving the Slovenian government. An appropriate government entity could have taken over the tasks -3- of promoting energy audits, helping identify potential subborrowers and carrying out the technical evaluation and supervision of the energy conservation subprojects. These tasks had been successfully carried out by a government agency in Hungary for two Bank credit-line industrial/energy conservation projects (HU-2317 and HU-2709). 6. The contracting of all but two of the subloans to borrowers in Slovenia turned out to be an advantage which permitted smooth continuation of the project after the breakup of former Yugoslavia. B. Achievement of Objectives 7. Subloans for energy conservation or substitution were available for four categories of investments. These categories, with the number and total value of subloans disbursed under each shown in brackets, are as follows: (a) energy conservation and substitution investment subprojects, for which energy savings benefits should not be less than 55 % of total benefits (0 subloans); (b) energy savings equipment investment subprojects, for investments in energy saving equipment or materials (1 subloan, $1.8 million); (c) local energy resources investment subprojects, for substitution of non-local energy resources with local energy resources (0 subloans); and (d) other energy related investments, for reductions of not less than 10% in per unit energy consumption (17 sub-loans, $52.7 million). 8. A technical evaluation shows that the energy conservation subprojects in Slovenia were nearly all successful in improving energy use and increasing efficiency (Annex C). An unexpected benefit consisted of improvements in product quality, which allowed some subborrowers to compete in export markets. 9. It is difficult to give a quantitative evaluation of the performance of the energy conservation subprojects. Reasons are that four subprojects had not yet been fully implemented as of late 1994, five subprojects started up either in the second part of 1993 or in 1994, and some subprojects were adversely affected by external difficulties. In particular, most of the subborrowers are only now recovering from heavy financial losses incurred from 1989-92. Some subborrowers could not provide economic rate of return estimates because of difficulties in separating the effects of the subproject investments from the effects of other investments made at the same time. The energy savings and economic -4- rates of return for subprojects for which estimates could be made are shown in Table 9. These estimates are compared with estimates made at the time of subproject application. 10. The objective of developing a technical capability for energy audit work in Slovenia was not achieved by the project. After project appraisal SMELT made some valuable contributions through feasibility studies for subborrowers, including some elementary energy auditing. However, the enterprise did not follow up on this work and did not use funds available under the loan for training for energy auditing. A likely reason is that separate energy audits were not required for Category (b) and (d) subprojects, which accounted for all of the energy conservation subprojects. Although the project did not develop an energy audit capability, in 1990 the Slovene Ministry of Energy introduced an energy conservation program which included financial support for energy audits. 11. With respect to institutional development within Ljubljanska banka, additional engineers and economists were employed, but a separate supervision division, which had been agreed to at the time of project negotiations, was not established. Ljubljanska banka credits the project with enabling it to strengthen its capabilities in project appraisal, procurement monitoring, disbursement and repayment procedures, and loan supervision (Annex A). 12. Subloans were available for five categories of environmental investment projects. The categories, with the number of subloans and total disbursements in brackets are as follows: (a) pollution control or waste treatment investment subprojects, for add-on equipment or systems (0 subloans); (b) production line upgrading or replacement investment subprojects, for process changes (3 subloans; $3.3 million); (c) pollution or noise control materials and equipment investment subprojects, for investments in local production of materials or equipment used in local production of pollution control systems (0 subloans); (d) solid waste disposal site investment subprojects (1 subloan, $0.2 million); and (e) noise control investment subprojects (0 subloans). 13. The environmental subprojects achieved their goals, although one subborrower (Titan Kamnik) experienced severe difficulties with the chosen -5- technology. These difficulties might have been avoided if the company had carried out sufficient trial runs with its product in an installation that operated with this technology. The evaluations for the individual environmental subprojects are given in Annex C. 14. The loan provided $30 million for partial financing of 232 flood repair subprojects. They were mostly small, and included repairs of river embankments, damaged road sections, damaged or destroyed bridges, repair or replacement of pipelines (mainly sewer and water), and repair of water treatment facilities. The mission to prepare the ICR visited two of the more important subprojects, and found that they had been successfully implemented (Annex D provides detailed evaluations). Annex B contains a detailed description of the subprojects financed and the work done. Most but not all of the damages caused by the 1990 flood were repaired, with remaining works being carried out using domestic resources. This annex was prepared by the Ministry of the Environment and Regional Planning, which was responsible for proposing the flood repair program and supervising its execution. The full involvement of the Ministry avoided a defect in the handling of the energy conservation and environmental subprojects, namely the need to involve Ljubljanska banka in technical evaluation and supervision activities which fall outside the normal functions of a commercial bank (see para 5). 15. The objectives of financial strengthening of the borrower began to be achieved only towards the end of the implementation period, and progress was due to special initiatives (unrelated to the project) designed to deal with a crisis situation. During the early years of implementation the borrower experienced increasingly serious financial difficulties associated with malfunctioning of the system of social ownership and the subsequent breakup of former Yugoslavia. Despite restructuring in 1990-91 Ljubljanska banka was technically insolvent in 1992. A rehabilitation process was begun at the end of 1992 and supported by a Bank loan for an Enterprise and Financial Sector Adjustment Credit (see paras 18-20). C. Major Factors Affecting the Project 16. The impact of the oil price fall is discussed in paragraph 4. As noted there, it was only one of several causes of the limited demand for energy conservation subloans, which led to amendments of the loan agreement to provide for subprojects for environmental investment and to repair damages caused by a flood. 17. The project successfully survived the separation of Slovenia from the rest of former Yugoslavia. Agreements were concluded under which the Governments of Croatia and Macedonia accepted responsibility for the debt service for subloans -6- to enterprises in those countries. The Republic of Slovenia guaranteed repayment of subloans given to entities in Slovenia. 18. The economic changes following the establishment of Slovenia as a sovereign nation affected the project in two ways. First, the loan turned out for a brief period to be among the few sources of foreign financing available to Slovenian industries. This partly accounts for the demand for subloans for process changes having positive environmental effects. From early 1992 the loan was fully committed. However, second, many enterprises, including applicants for subloans, were in process of being restructured and uncertain of their future. This led to cancellation of several subprojects after they had been approved and in a few cases when procurement was far advanced. The need to put new subprojects in their place led to delays which were the main cause of extension of the closing date from December 31, 1992 to June 30, 1994. The uncertainty faced by enterprises and the resulting cancellation of subloans late in the implementation stage of the project also accounts for the 2% shortfall in disbursements. 19. In 1990 the banking sector in Slovenia began to be transformed from the prior system of socially-owned associated and basic banks. The Ljubljanska Banka System (LBS) was created in 1991 consisting of Ljubljanska banka dd (Lbdd) and 12 smaller, largely autonomous, member banks. All of these entities became joint-stock companies. LBS accounted for 82% of total assets of the banking sector. In 1991 Lbdd was formed from the merger of Ljubljanska banka and Gospodarska banka. A majority of its shares were owned by shareholder- enterprises. These changes were not, however, sufficient to rescue Lbdd from serious financial difficulties. The bank had many problem loans on its books to enterprises weakened by the loss of traditional markets and maladapted to compete in new markets. It also had unsettled claims against the National Bank of Yugoslavia for foreign currency deposits belonging to Slovenian households. In 1992 Lbdd was technically insolvent. 20. In late 1992 the Republic began a rehabilitation process for Slovenia's troubled banks, including Lbdd. It wrote off a portion of the losses of Lbdd; the newly-established Bank Rehabilitation Agency (BRA) acquired Lbdd's net worth in exchange for conversion of the equity stake of previous owners into a subordinated debt of this agency; and some potential losses were exchanged for BRA bonds guaranteed by the State. Plans were adopted for Lbdd to achieve a 4% capital adequacy ratio and a positive operating cash flow. A Board was to be appointed by the BRA, and performance indicators and recovery targets were to be adopted. Plans to strengthen credit and financial risk managment and systems of control and management were to be implemented. The Government provided bonds to enable Lbdd to repay or compensate depositors for frozen foreign currency deposits in the National Bank of Yugoslavia. It designed actions -7- to reorganize LBS so that no institution would hold more than 40% of the system's total deposits. The Bank supported these reforms through an Enterprise and Financial Sector Adjustment Loan (Loan 36360-SLO). 21. By the time of closing of the Energy Conservation and Substitution Loan steady progress had been made in restructuring Lbdd. By end-1993 the BRA had completed carving out DM 1.0 billion of LBdd's problem assets. Lbdd substantially reduced its operating and net income losses and made a small net operating profit in October-November 1993. It had a positive cash flow and a capital adequacy ratio of +5.4% if problem assets in its branches in Zagreb and Sarajevo are not taken into account, but a ratio of -2.5% if these assets are taken into account. Lbdd had been recently reorganized and was actively implementing an institutional development program with assistance from abroad. A privatization plan had been approved for Lbdd. On July 27, 1994, Nova Ljubljanska banka d.d. was established by legislative act of the National Assembly of the Republic of Slovenia. The assets, liabilities and operations of Lbdd were transferred to the new bank with the exception of certain liabilities and guarantees incurred during the existence of former Yugoslavia on behalf of or relating to entities located within former Yugoslavia outside the territorial boundaries of the new Slovenia. D. Project Sustainability 22. Sustainability under the project would require that the subprojects continue to meet their respective energy conservation, environmental and flood damage repair objectives throughout their lifetimes, that the capability established under the project for carrying out energy audits continues, and that Ljubljanska banka's financial performance continues to be satisfactory. 23. Given Slovenia's large exposure to international trade, its good macroeconomic policy and active environmental programs, there are good prospects for sustainability of the energy conservation and environmental objectives. While many of the subborrowers experienced financial difficulties following the breakup of former Yugoslavia, the fact that nearly all of these companies survived the transition is a sign of Ljubljanska banka's good choice of clients. Some of the subloans contributed to financial recovery through product quality improvements and cost reductions leading to enhanced competitiveness in export markets, and most of the subborowers visited are now enjoying financial improvements. Sustainability is therefore likely. 24. The flood damage repair subprojects not only repaired damages but in many cases improved protection against future floods. The $30 million lent by the Bank was insufficient to complete all the needed works, but the program is -8- being continued by the Ministry of Environment and Regional Planning. Sustainability is therefore likely. 25. The objective of establishing an energy audit capability was not achieved by the project (para. 10). However, the Ministry of Energy, now merged into the Ministry of Economic Affairs, has been financing energy audits since 1990 and is preparing a new national energy conservation policy with funding from the EBRD and European Union (PHARE). The financial reform program stands a good chance of ensuring the long-run financial viability of Ljubljanska banka. E. Bank Performance 26. Bank performance was satisfactory at the identification stage. The energy conservation and substitution objectives were appropriate, as discussed in paragraphs 2 - 5, particularly since at the time of identification international energy prices were expected to remain high. Unfortunately, efforts to include borrowers from Macedonia and Bosnia-Herzegovina as well as Slovenia prolonged project preparation and turned out to be unsuccessful. 27. Bank performance was satisfactory at the preparation stage, particularly for arranging the energy audits that were carried out prior to appraisal. However, Ljubljanska banka feels that loan utilization would have been faster if more detailed assistance on the Bank's procurement and disbursement procedures had been given to the borrower at this stage (Annex A). 28. Bank performance was partly satisfactory at the appraisal stage. Assurance of adequate interest rates on subloans provided an incentive to reinforce Ljubljanska Banka's commitment to the project. However, more attention should have been given to invo!ving a specialized energy conservation institution to handle technical aspects of the project after effectiveness. Admittedly, if a national Yugoslav agency had been created for this purpose, this arrangement would have ended prematurely with the breakup of former Yugoslavia. At the time of appraisal it would have seemed logical to involve a national agency since the loan was intended to serve other republics as well as Slovenia. In view of the large fall which occurred in international energy prices at this stage, some attention might have been given to developing a fall-back strategy for dealing with a possible shortfall in demand for energy conservation subloans, e.g., by broadening the definition of allowable subprojects. 29. Bank performance was satisfactory at the supervision stage in some respects. The Bank dealt promptly with procurement, disbursement and other requests. Bank performance was unsatisfactory in one respect, namely that supervision teams did not visit subborrowers during the critical implementation stage. Supervision missions were also too few and of too short duration, which -9- is only partly explained by the difficulty of visiting Slovenia at the time of the breakup of former Yugoslavia. F. Borrower Performance 30. The loan was first negotiated from June 9-17, 1986, but disagreements over interest rate levels on energy loans to be made by Ljubljanska banka from domestic resources and over the program for writing off foreign exchange losses were not resolved until February 1987. A delay between loan signing on June 3, 1987 and effectiveness on January 4, 1988 was accounted for by the need to obtain approval from the National Assembly of Yugoslavia. 31. Despite limited demand for subloans for energy conservation and substitution, and major political and economic changes in Slovenia during the loan implementation period, the borrower managed to achieve almost full utilization of the loan amount as a result of implementation of its proposal to broaden the loan to include environmental and flood damage repair subprojects. 32. The borrower's onlending procedures were satisfactory. The interest rate on subloans is the rate on the IBRD loan plus 2 percentage points. The repayment period is 8 years for all subloans and the grace period was 2 years for all subloans except one for which the grace period was 1.5 years. The subloans were in foreign currencies defined in each subloan contract on the basis of the countries from which goods were procured in accordance with IBRD procurement procedures. Energy subloans made from domestic resources had interest rates adjusted periodically to achieve positive real rates. Eight subloans, including the subloan to the Ministry of Environment for flood repair, were made directly by Ljubljanska banka to the subborrowers. Fifteen subloan agreements were signed between the borrower (parent bank) and subsidiary basic banks. While some of the former basic banks are no longer subsidiaries of Ljubljanska banka, the subloan agreements are still in force. The basic banks in turn arranged onlending agreements with subborrower companies. 33. The subloan applications sent to the Bank by the borrower were generally satisfactory. Handling of procurement by the borrower and subborrowers was also satisfactory. Progress reports were provided on time, but were confined to progress on procurement. Disbursements and loan accounting were handled carefully. Supervision of subborrowers covered only financial matters, omitting the technical aspects relating to energy conservation and environment. This omission is understandable, given that these technical tasks are not within the normal functions of a commercial bank. The financial supervision has been carried out by Ljubljanska banka for the eight subloans made directly by Ljubljanska banka and has consisted of analysing annual and semi-annual balance -10- sheets and income statements with occasional field visits. Supervision of the other subloans has been performed by the basic banks and their legal successors. 34. Some financial covenants were not met for the reasons given in paragraphs 20 and 21. 35. Overall the borrower's performance was satisfactory. G. Assessment of Outcome 36. The loan was almost fully utilized and the subprojects have largely achieved their energy conservation, environment and flood damage repair objectives as of November 1994 (paras 8, 9, 13 and 14). There are good prospects for sustainability of subproject performance (paras 23 and 24). 37. The project was not successful in establishing a capability for carrying out energy audits (para 10). 38. Ljubljanska banka has experienced financial difficulties caused largely by the political breakup of former Yugoslavia and the breakdown of the former Yugoslav economic system. It was unable to meet some of the financial covenants and is currently being restructured with assistance under the Enterprise and Financial Sector Adjustment Loan (paras 19 and 20). 39. Overall the project's outcome is rated satisfactory. H. Future Operation 40. Ljubljanska banka's normal monitoring procedures (para 33) focusing on financial performance of its subborrowers will be continued until the subloans are repaid. These procedures are acceptable in lieu of a future operation plan. I. Key Lessons Learned 41. The loan was successful in financing subprojects for the purposes set out in the loan agreement relating to energy conservation, environmental improvement and flood damage repair. It was successful mainly because of the commitment of the borrower to succeeding at its inherent specialty of making and monitoring loans to industrial borrowers. Giving eligibility to process change subprojects as well as those limited solely to energy conservation, substitution or environmental improvements also contributed greatly to the project's success. -11- 42. As a commercial bank, the borrower had the adaptability to adjust readily to making subloans for environmental improvements and flood repairs after the demand for energy conservation loans fell. 43. A credit-line project to meet narrow objectives such as energy conservation or environmental improvements, with a commercial bank as implementing agency, would benefit from support from specialized agencies to handle technical evaluation, technical supervision and related matters, but may bring about targeted improvements in subborrower performance without this support. However, if the objectives are narrowly defined, there is a risk of failure to fully disburse the loan. 44. The loan was not a satisfactory instrument for financial strengthening of the borrower, partly because of its focus on unrelated technical objectives, and partly because it was disbursed during a period of major political and economic reform. The ongoing EFSAL is likely to be more appropriate, since it focusses on financial reform issues. -12- Table 1: Summary of Assessments [A. Achievement of Objectives [_Substantial _IPartial Negligible | Not Applicable Macroeconomic policies X Sector policies X Financial objectives X Institutional development X Physical objectives X Poverty reduction X Gender concerns X Other social objectives X Environmental objectives X Public sector management X Private sector development X Other (specify) X B. Project Sustainability Likely Unlikely Uncertain _____I X___11 C. Bank Performance | Highly Satisfactory | Deficient l Satisfactory l l Identification X Preparation assistance X Appraisal X Supervision X -13- Table 1: Summary of Assessments (continued) [ D. Borrower Performance J Highly Satisfactory j Deficient l Satisfactory lll Preparation X Implementation X Covenant Compliance X Operation (if applicable) E. Assessment of Highly Satisfactory | Unsatisfactory Highly Outcome Satisfactory | Unsatisfactory _ _ _ _ .! _ _ _ X - 14 - Table 2: Related Bank Loans/Credits Loan/Credit Title Purpose | Years of Approval I Status Preceding Operations Following Operations 1. Enterprise and Enterprise and 1993 Second tranche Financial Sector Financial Sector release expected in Adjustment Restructuring 1995. Credit - 15 - Table 3: Project Timetable Item Planned Date Actual Date Initiating Project Brief 08/21/1984 Identification Mission 1984 11/15/1984 Appraisal 07/24/1985 07/24/1985 Completion of Negotiations 06/14/1986 02/09/1987 Board Approval 03/31/1987 03/31/1987 Effectiveness 01/04/1988 Project Completion 06/30/1992 Not yet completed/a Loan Closing Date 12/31/1992 Extended to 06/30/1994 /a While disbursements were completed, installation was not yet finished in four subprojects as of November 1994. - 16 - Table 4: Loan Disbursements: Cumulative Estimated and Actual (US$ million) Date SAR Estimate Total Disbursement | 12/31/87 10.8 06/30/88 22.5 12/31/88 35.1 7.0 06/30/89 48.6 14.5 12/31/89 60.3 17.1 06/30/90 69.3 22.7 12/31/90 76.5 26.6 06/30/91 81.9 38.3 12/31/91 85.5 49.0 06/30/92 88.2 61.2 12/31/92 90.2 82.4 06/30/93 86.5 12/31/93 88.1 06/30/94 88.5 12/31/94 88.0 Table 5: Loan Disbsursements by Subborrowers Cat.# | Description | Loan 2790-0 2790-7 | 2790-8 2790-9 | Total __________J ____________________________ J Amount (FYR) | (Macedonia) | (Slovenia) (Croatia) Disbursed MATERIALS AND EQUIPMENT Materials/Equipment 79,450,000.00 0 l .b Perutnina Ptuj 2,269,159.44 3,817,469.21 6,086,628.65 I.c WO Mineral Lbhljana 280,723.50 467,872.50 748,596.00 1 .d Lepenka Prevalle 340,894.47 593,522.94 934,417.41 I.g Gorenska Predilnca 625,120.46 1,041,867.66 1,666,988.12 I .h Steklarna Haastnik 1,614,680.61 2,691,134.25 4,305,814.86 l.i WO Elektroelement Bo 471,171.42 730,571.39 1,201,742.81 lIj WO Iskra Power Tools 369,617.67 1,601,676.65 1,971,294.32 1.k Iskra Kondensatoren Semic 96,142.23 1,730,560.19 1,826,702.42 L.m Iskra Autoeletrika 468,469.19 1,406,372.49 1,874,841.68 L.n Niko Po Zelezniki 189,146.07 819,633.04 1,008,779.11 1.o IMPOL 15,000,030.01 15,000,030.01 L.p Varazdinka Varazdin 1,303,485.64 1,303,485.64 I .q Komunaino Podjecte Hrastnik 179,018.87 179,018.87 I .s Meblo Iverka 699,648.34 699,648.34 L.t Titan Kamnik 358,919.23 358,919.23 1.u Zdravellace Rogaska Statina 1,394,927.93 1,394,927.93 1.v Mercator Kz Crnomeij 602,909.46 602,909.46 1.w HP Agrl. Coop. Gabrov 758,999.16 758,999.16 Cat.# | Description | Loan | 2790-0 | 2790-7 | 2790-8 1 2790-9 1 Total Amount (FYR) (Macedonia) (Slovenia) (Croatia) Disbursed l.y Slovenijavino Ljubij 513,109.36 513,109.36 l .z Steklarna Boris Kidr 3,852,583.88 3,852,583.88 1.AA Tekstilna Tovarna PR 4,061,478.32 4,061,478.32 1.AB Javor Pivka 568,106.61 568,106.61 1 .AD Alpos Sentjur 2,345,996.12 2,345,996.12 I.AG Ferralit Zalec 0 l.FRIP Materials Equpiment 4,682,982.43 4,682,982.43 2 Materials Equipment 10,000,000.00 0 2.a Ohis Skopje 1,769,711.11 2,961,537.13 4,731.248.24 3 Equipment for Borrower 300,000.00 0 4 Consultants Services, equip. 0 Training for Tech. Enterprises 250,000.00 0 6 Civii Works 25,310,786.38 0 Special Fund (3,641.17) 0 Total 90,000,000.00 8,494,836.17 2,961,537.13 75,230,176.42 1,303,485.64 87,990,034.36 Amouncelled j______________2,009,965.64 _ _ I _ I I - 19 - Table 6: Allocation of Loan Proceeds Category Estimated Actual Amount Amount (US$ million) Subproject financing 89.4 88.0 of which: Slovenia 79.4 82.0 Other Republics and Autonomous Provinces 10.0 6.0 Subproject financing by type of project: Energy conservation and substitution 89.4 48.5 Environment 0 3.5 Flood damage repair 0 30.0 Technical assistance of which: LBL, Slovenia 0.3 0 SMELT, Slovenia 0.2 0 Total 90.0 | 88.0 Table 7: Status of Legal Covenants Agreement Section Covenant Present Original Revised Description of Covenant | Comments Type Status Fulfillment Fulfillment Date Date l Loan 2.02(c) Disbursement C 06/13/88 Maintain special account. conditionsl Loan 2.03(a)(b) Subloan 12/31/89 02/13/92 Furnish subloan applications to thel procedures Bank in satisfactory form.l Loan 2.03(a)(b) Subloan criteria C * Eligible investment subprojects and except for flood damage repair, Sched.4 should have at least a 12% ERR and an FRR equal to LBdd's borrowing rate plus an acceptable commission; * Furnish energy audits for energy conservation and substitution l investment subprojects and other energy related subprojects; I * Justify local energy resource investment projects as the least-cost alternative substitute, and as needed to improve the borrowing Republic's energy balance; * Justify pollution control investments in terms allowing the beneficiary to meet republic, federal and World Bank environment standards; * Justify flood rehabilitation investment projects on the basis of reports by republic and municipal commissions for the Republic of Slovenia Emergency Committee; * Provide an acceptable appraisal report for each subloan (except for free-limit subloans). Agreement Section Covenant Present Original Revised | Description of Covenant Comments Type Status Fulfillment Fulfillment Date Date l Loan 3.03(a) and Subloan CP The Borrower should supervise the Financial supervision only. Sched. procedures operation of the subprojects and the 4.C.6 energy audits. Loan 3.03(a) and Environmental CP Install anti-pollution equipment in Sched. accordance with the environmental 4.C.6(g) standards of Slovenia, federal Yugoslavia and the World Bank. Loan Subloan criteria CP Limit Bank financing to US$6 million 2 exceptions approved by per subproject and enterprise. Bank. Loan Subloan criteria C Ensure half of the subloans are for $3 million or less. Loan Subloan criteria Limit repayment period to 3 years or None made. less and grace period to I year or less for energy audit loans. Loan 3.04(a) Subloan criteria Limit repayment period to 10 years or None made. less and grace period to 2 years or less for other energy related loans to specified Technical Enterprises (Category 4); l Loan Sched. Subloan criteria C Limit all other loans to 15 years or 4.C.2.3 less and grace periods of 3 years or less. Loan 3.06 (a) Subloan criteria C Onlend at the Bank's variable rate 2% margin is equal on plus a commission sufficient to permit average to the margin on the subloans to contribute pro-rata other loans from foreign with the revenues of all loans of the resources by borrower. borrower from foreign resources to the borrower's expenses, including taxes, reserves and loss write-offs. Agreement Section Covenant Present | Original Revised Description of Covenant | Comments Type Status Fulfillment Fulfillment Date Date Loan 3.06(b) Subloan criteria C 07/01/91 Energy subloans made from domestic sources should have interest rates adjusted periodically to achieve positive real levels. Loan 2.08b Subloan criteria C No subloan repayment period should extend beyond the latest repayment date for the loan. Loan 2.08b C Each subloan should provide for Equal principal payments, approximately equal semi-annual or interest payments declining more frequent payments of principal with repayment of or of principal plus interest. principal. Loan 2.09 C If a subloan is repaid or otherwise None repaid in advance. disposed of in advance, the Borrower must repay the amount withdrawn from the loan account. _ Loan 3.05 Procurement C Procurement of goods and consultant services should be in accordance with Schedule 4, parts D and E. Loan 4.01 Monitoring C Maintain records to monitor the progress of subprojects and enable the Bank's representatives to inspect the records. Loan 4.02 Audit C Furnish financial statements audited Audit reports by Slovene by independent auditors 6 months Company SDK before after each year and furnish other 1990. Audit reports by information on these statements as the Coopers & Lybrand and Bank may request. SDK from 1990 on. Agreement | Section Covenant Present Original | Revised | Description of Covenant Comments Type Status Fulfillment Fulfillment Date Date Loan 4.03 Financial C Borrower should not repay any debt None repaid before before maturity if it would affect its maturity. ability to meet its financial obligations. Loan 4.04 Financial CD 10/91 The Borrower should protect against LB's borrowers from foreign exchange risks. foreign resources bear the foreign exchange risk. Loan 4.05(a) Financial NC 12/31/90 The Borrower should keep amounts Equivalent protection will on deposit equal to 5 % of its Joint be achieved through Liability Fund and Reserve Fund. restructuring of NLB supported by the Bank Loan 4.05(b) Financial NC The Borrower should not amend its program to pay revenues into the Joint Liability Fund and Revenue Fund with respect to writing off exchange losses. Loan 4.06 Financial CP 09/30 The Borrower should furnish a one- Data were not provided each year year plan for the interest rate spread after 1989 due to financial on its loans. difficulties following the break-up of former Yugoslavia. Loan 4.07 Financial CP 03/3 1 Furnish to the Bank three-year Data were not provided each year operational and financial projections after 1989 due to financial difficulties following the break-up of former I__________ ___________________________________ Y ugoslavia. Loan 3.01 Project CP Maintain adequate staff for a Recruited staff but did not implementation supervision, internal audit, investment set up supervision division. arrangements promotion, and planning and analysis. Agreement Section Covenant Present | Original Revised | Description of Covenant Comments Type Status Fulfillment Fulfillment Date Date l Loan 2.02(a) Disbursement C Withdrawals should be made in conditions accordance with Schedule 1. Loan 2.05 C The Borrower should pay a Bank approved reductions commitment charge of 3/4 of 1% on to 1/4%. the principal amount not withdrawn. Loan 2.06(a) C The Borrower should pay interest on the principal amount withdrawn at a rate equal to 1/2% per year above the Cost of Qualified Borrowers for the previous semester. Loan 2.07 C Interest and other charges should be paid on February 15 and August 15 each year. Loan 2.08 C The Borrower should repay the principal amount withdrawn in accordance with the amortization schedule in Schedule 2. Loan 2.08(c) Subloan C The Borrower should seek the Bank's One request was made, but procedures prior approval for any substantial was rejected by the Bank. changes in the repayment provisions of any subloan. Loan 3.01(b) Project C The Borrower should carry out the implementation project and operate its affairs in arrangements accordance with sound financial standards and practices, with qualified management and personnel and in accordance with the statutes of the Borrower and the Statement of Operations and Policies for the Project l_____________ ________ __________ __________ (Schedule 4). Agreement Section Covenant Present Original Revised Description of Covenant Comments Type Status Fulfillment Fulfillment l_ _ _ _ _ _ _ _ _ _ _ _ _ O__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ D a te D a te Loan 3.02 Project CP The Borrower should ensure that Some exceptions for limnplementation adequate funds are available including subloans guaranteed by l arrangements those requested by subborrowers to other banks. carry out their subprojects or energy audits in a timely manner. Loan 4.02(b) Disbursement C For expenditures made using The Borrower has agreed lconditionis statements of expenditure the to do so. Borrower should maintain separate records until one year after the audit report is received by the Bank for the fiscal year in which the last withdrawal was made and enable the Bank's representative to examine these records. Loan 4.02(b)(iv) Financial CP The Borrower should ensure that such The separate accounts were separate accounts are included in the audited but separate annual audit and a separate opinion on opinions were not given by them given by the auditor. the auditor. Loan 4.08 Project C The Bank and the Borrower should implementation exchange views from time to time on arrangements the administration, operation and financial condition of the Borrower, and the Borrower should furnish the information requested by the Bank. Guarantee 2.01 C The guarantor guarantees due and agreement punctual payment of the principal and interest and other charges on the loan and the premium, if any, on prepayment. Agreement Section Covenant Present Original Revised Description of Covenant Comments Type Status Fulfillment Fulfillment Date Date Guarantee 2.02 Project C The guarantor should not interfere agreement implementation with performance by the Borrower arrangements and should take appropriate action to enable the Borrower to perform its obligations under the loan agreement. , . .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~O - 27 - Table 8: Bank Resources: Staff Inputs Stage of Year No. of No. of Specialization J Rating Project Cycle | Persons Staffweeks Represented Status Preparation FY85 1 1.8 LOF Preparation/ FY85 2 39.9 LOF, ECO Preappraisal Appraisal FY85/86 9 75.6 ECO, FNA EGR, OPA LOA Negotiation FY86 2 13.6 ECO, LOA LEG Supervision 1 FY87 3 3.7 EGR, ECO 2 2 FY88 5 17.1 EGR, ECO 2 3 FY89 6 15.1 EGR, ECO 2 4 FY90 8 18.8 EGR, ECO 2 5 FY91 7 10.8 EGR, ECO 2 6 FY92 7 13.0 ECO 2 7 FY93 3 2.7 ECO 2 8 FY94 1 0.7 ECO 2 Project FY94 1 3.0 EGR, ECO Completion Report EGR - Engineer ECO - Economist FNA - Financial Analyst LEG - Legal LOF - Loan Officer OPA - Operations Assistant PA - Procurement Advisor REA - Research Assistant September 23, 1994 - 28 - Table 9 Energy Savings and Internal Rates of Return (IRR) (as Provided by the Enterprises) Energy Savings IRR Predicted Actual Predicted Actual Subprojects 0 W 06 Perutnina, Ptuj 21 0 17.9 NAP WO Mineral, Ljubljana 57 30 39.5 24 Lepenka, Prevalje 52.5 NYA 25.3 NAP Gorenjska Predilnica 21 20 20.7 <0 Steklarna Hrastnik NRR 13.5 NRR WO Elektroelement 23.5 30.6 37.4 NAP Iskra Power Tools 21 35 34.5 NAP Iskra Autoelektrika Production line was closed Niko Zelezniki 48 40 12.25 17.2 Impol 11 16 22.0 -7.9 Rogaska Slatina NYA 10.3 NYA Gabrovka Dole 60.4 52.6 30.8 <0 Slovenijavino 15.8 38.4 51.5 28.6 Steklarna Boris Kidric 29.2 21.3 15.3 5.1 Tekstilna Tovarna 37.7 41.5 21.2 31.5 Javor Pivka 22.2 NYA 27 NYA a/ NAP - company was not able to provide IRR calculation because of total restructuring NRR - company did not send any report NYA - data not yet available either because 1994 is first year of normal operation, or the project is not yet finished b/ It should be realized that the IRR calculations are in no way correlated with the energy conservation. Many external factors were of much greater influence on the profitability of the companies than energy conservation. c/ Not listed here are the subprojects in Croatia and Macedonia (Varazdinka Varazdin and Ohis), the environmental projects and the energy conservation project from category 2. ANNEX A - 29 - Pae 1 of 2 001Ijubljanska banka Nova Ljubljanska banka d.d. Ljubljana FINAL EVALUATION REPORT Energy Conservation and Substitution Project (Loan 2790-8 SLO) Date: December 20, 1994 This is the Final Evaluation Report on the Energy Conservation and Substitution Project in Slovenia (originally Yugoslavia), for which Loan 2790-8 SLO (originally Loan 2790-YU) was approved and Loan Agreement was signed on June 3, 1987 between International Bank for Reconstruction and Development (IBRD) and Ljubljanska banka. Ljubljanska banka as the borrower and IBRD as the creditor have had a successful working relationship since signing the Loan Agreement and we evaluate the performance of both parties through all stages of the Loan as satisfactory. We asses that the project was carried out with due diligence and in accordance with the terms and conditions of the Loan Agreement, General Conditions and other IBRD rules and procedures, except for the unusual duration of the disbursement period. Therefore, for the purpose of this report, i.e. evaluation of the execution of the project, we would like to give hereby our explanation of the underlying causes and reasons. In our opinion the extension of the disbursement period was caused by circumstances connected directly to the Loan and by the changes in the economic and political environment of former Yugoslavia and Slovenia. Circumstances connected directly to the Loan: During the preparation stage of the Loan Ljubljanska banka, acting as a direct borrower towards IBRD for the first time, did not perceive the full complexity of the IBRD procurement procedures (appraisal of the projects, preparation of the tender documentation) and disbursement procedures (disbursements, opening and maintaining of the Special Account). As we believe this an important reason for the slow loan utilisation, we would like to suggest to IBRD to provide future borrowers with detailed instructions and explanations at early stages of loan preparation already. Changes in the economic environment in former Yugoslavia and Slovenia: * The first year of the operation of the Loan was marked by several withdrawals of the loan applications linked to unfavourable investment environment. The main reason was the deterioration of the financial condition of the companies, which had viable projects. ANNEX A - 30n - -__ __ _ _ Page 2 of 2 Slovenia became an independent state in 1991 by dissolution of former Yugoslavia. The processes of restructuring of the economy and privatisation of socially owned enterprises have been in place since then. In the transition period after the dissolution of the former state the investment capability of the companies was affected by the loss of the Yugoslav market. In addition to that the interest of the companies in new investments was also diminished by privatisation plans, which were not an incentive to raise the value of the company by new investment. Due to all this facts Ljubljanska banka had suggested to IBRD to extend the purpose of the Loan. IBRD extended the purpose of the Loan by including Environmental Projects in 1990 and the Flood Rehabilitation Project (catastrophic flood in Slovenia in 1990) in 1991. Very significant for further utilisation of the Loan was the last extension of the purpose which introduced the Republic of Slovenia as borrower for more than one third of the originally approved amount of the Loan. We would like to conclude our evaluation report with the following estimation: 1. We assess the performance of IBRD as a creditor as satisfactory during all the stages of the Loan. By having the opportunity to work closely with IBRD Ljubljanska banka has acquired specific knowledge such as: . appraisal of energy conservation, substitution, environmental and flood damaged projects, * monitoring of procurement procedures, . disbursement and repayment of funds, * opening and maintaining the Special Account, * monitoring of accomplishment of investment and supervision of it. IBRD all the time guided Ljubljanska banka in managing the Loan and helped solving the above mentioned problems which occurred during the disbursement period of the Loan . 2. On the other side we also assess the borrower's performance through all the stages of the Loan as satisfactory. Ljubijanska banka has had some financial difficulties in the past caused largely by dissolution of former Yugoslavia and the breakdown of the former Yugoslav economic system. On January 1, 1993 Ljubljanska banka entered the rehabilitation process and on July 27, 1994 Nova Ljubljanska banka was established by legislative Act of the National Assembly of the Republic of Slovenia. Although Ljubljanska banka went through several changes in economic and political environment and institutional changes we are assessing that Ljubljanska banka managed to fulfil all the obligations under the Loan Agreement completely and in due time in accordance with IBRD procedures. lrbaia-ttuIarN Zmuc Dorot te'al Senior Mana er Acti G neral Manager International Loans and Guarantees Corresp ndent Banking -31- ANNEX B Page 1 of 5 The Republic of Slovenia MINISTRY OF THE ENVIRONMENT AND REGIONAL PLANNING REPUBLIC DIRECTORATE FOR ENVIRONMENTAL PROTECTION AND WATER CONTROL LJUBLJANA, Vojkova lb Ljubljana, Oct. 30, 1994 RESULT ESTIMATION OF INVESTMENTS INTO REHABILITATION PROGRAMME TO ELIMINATE THE CONSEQUENCES OF DAMAGE AFTER THE FLOODS IN NOVEMBER 1990 The Ministry of the Environment and Regional Planning has prepared a two-year rehabilitation programme which includes the elimination of dire flood consequences in November 1990, caused on hydrological and municipal buildings and plants. On June 12, 1991 the Assembly of the Republic of Slovenia adopted the Act on raising a loan for elimination of the consequences of floods in the central Slovenia in 1990 (Off. Gaz. of RS No. 26/91). Based on the above-stated act the Republic of Slovenia raised the loan in the amount of 30 mio USD in tolar countervalue at Ljubljanska banka, d.d. Ljubljana; the amount was drawn down from the loan assets of the International Bank for Reconstruction and Development. Immediately after the adoption of the Act at issue the Ministry of the Environment and regional Planning began with intensive realization of the rehabilitation programme, particularly with the activities required to start the draw down of the loan assets granted by the International Bank. The Commission appointed to audit and estimate the projects related to the elimination of the dire consequences of the flood in 1990, which had operated within the Ministry of the Environment and Regional Planning since November 1990 on, received 89 claims from 17 communities for rehabilitation of municipal buildings and plants, whereas for the rehabilitation of hydrological buildings and plants 250 claims from 8 hydrological regions were addressed to the above Commission. The Commission audited the claims and projects and stated that in most cases projects met the terms and conditions of the loan granted by International Bank for Reconstruction and Development. The technical documentation related to the rehabilitation of the damaged hydrological buildings and plants was preliminary audited by the Commission for expert monitoring of rehabilitation programmes for the damaged hydrological buildings and plants and natural waters at the time of the floods in November 1990. The submitted claims and projects related to the hydrological and municipal economy obtained approvals granted by the World Bank for Loan Draw Dawn. By the granted IBRD loans, the municipal budget assets and the state budget most of the flood consequences in hydrological and municipal planning were eliminated within the period of three years, i.e. up to December 31, 1993. Within this period it was not possible to eliminate damages caused by the floods in November 1990 in whole. -32- ANNEX B Page 2 of 5 In the current year the rehabilitation programme to eliminate the damages caused by floods in November 1990 continues within the assets provided by the state budget programme of the year 1994 amounting to SIT 246.445.600,00. For the completion of the rehabilitation programme in the field of hydrological economy at least a USD 5 mio loan would be required, whereas in the field of municipal infrastructure the same amount would be sufficient only for the first stage of the rehabilitation programme related to the flooded deposit sites of municipal wastes. In the field of municipal economy the rehabilitation programme was successfully completed except in cases of flooded deposit sites. In the field of hydrological economy the range of the necessary rehabilitation programme to eliminate the damage caused by floods in November 1990 was not completed in whole and will continue at least through the following year. The implementation of the rehabilitation programme of the damages caused by floods in November 1990 was carried out in all of the eight water regions; the relevant reports were prepared. On the bases of the above reports the below estimations of the results of investment into the rehabilitation programme to eliminate the consequences of the damages of floods in November 1990 were submitted. THE SOCA WATER REGION In this water region the safety against floods has been essentially improved in the valley of the Reka river, in the towns of Idrija and Cerkno. By the rehabilitation of landslides the expected results were not realized. Only the urgent works were performed in order to prevent further sliding. Therefore, it would be necessary to eliminate mainly the causes of land sliding in the first stage and take care of the hinterland and drain its waters. The destroyed transversal constructions were rehabilitated or replaced by more corresponding ones and in most cases they were also more environment-friendly. THE UPPER CARNIOLA WATER REGION The rehabilitation programmes of landslides, transversal constructions, embankment preservations were suitably carried out. Within the range of regular maintenance of the relevant waterflows it will be necessary to perform the rehabilitation of minor landslides and reconstruction of individual dams and fences. Also on torrents, where allowed by terrain conditions, it will be necessary to plan transversal constructions to prevent floating of wood and wood-wastes, which was one of the main reasons of floods and damages. -33- ANNEX B Page 3 of 5 The flood safety of the torrents included in the rehabilitation programme was improved except in the downstream of the torrents Lusa and Hotaveljscica (above Marmor) where major control works were required. THE LOWER CARNIOLA WATER REGION The rehabilitation programme did not improve the degree of safety against high waters as the rehabilitation constructions do not have the function of preservation of the existing river bed of the Sava in order to transfer the medium waters as well as mastering of the water regime. The rehabilitation programme provided only preservation at individual locations. On the other parts of the Sava the conditions of the constructions and preservation thereof are of unstable balance and the next high waters may cause dam.ages at different parts of the Sava river. Consequently larger investments into the rehabilitation programme of the Sava river would be imperative. THE SAVA - IJUBLJANICA WATER REGION The rehabilitation measures were performed suitably and successfully, which was proved during high waters of lesser intensity a few times after 1990. The safety against floods on the torrents included in the rehabilitation programme was considerably improved. Within the following years it will be necessary to monitor, maintain and complete all the constructions at issue. At the same time it will be necessary to establish planning of all torrents beds which were not included in the rehabilitation programme, due to the relevant minor damages caused up to now. Quite a lot of measures are urgently required in hinterlands of some torrents where vase erosion centers and landslides are encountered. With regard to the natural waterflows the emphasis was given to the stability of the conditions and prevention of further damages. By the improvement of individual parts the safety against floods was obtained. Within the period between 1992 and 1994 the constructions have successfully resisted high waters. THE DRAVA WATER REGION By the rehabilitation measures taken on the Mislinja river the previously existing safety against floods was established relative to a ten- to 30-year period and an increased safety of the river bed against erosion. In the upstream torrent part of the natural river bed of Suhadolnica the flow did not increase by the rehabilitation programme, nevertheless the safety against erosion improved considerably. By the embankment preservation, the stability of water level and building of fences against floods at the Javor stream the safety against the side and depth erosion increased, which reflects in the reduction of floatings from the springs. The rehabilitation programme relative to indents -34- ANNEX B Page 4 of 5 on the river Pesnica reestablished a 30-year period water flow, whereas the rehabilitation programme relative to indents on the river Dravinja increased the safety against erosion. As the rehabilitation of the damaged part on the river Dravinja in whole was not performed, the high waters in November 1992 increased the damages in the upstream of the same part and the rehabilitation programme is being carried out in this year. THE SAVINJA-SOTLA WATER REGION Within the water region of the river Savinja the rehabilitation programmes and measures taken reestablished the basic flow profiles of the river beds and therefore floods are prevented already at lower high waters.- The so-established embankments are not in condition to resist erosions caused by high waters. Due to the vastness of the damaged regions it was not possible to execute all the measures. The rehabilitation included mainly the river beds of major torrent affluents and the most endangered slid hillsides, by which the range of centers and the danger of floats sweeping away are reduced. The existing dikes against floods, which protect major urban regions in the valley of the river Savinja and its major affluents, were included in the rehabilitation programme, whereas local preservation of urban regions and measures to improve the exploitation of retention of high water areas and the reduction of high water wave peaks were not included. Indents at the most endangered parts were included in the rehabilitation programme in order to prevent a further increase of erosion, which would result in the global change of high water regimes of water flows. On the individual parts in the territory of larger residential areas the programme tended to increase the present safety against floods and to the improvement of the conditions. The planned measures are not completed, which may result in the danger to partially annulate the already taken measures. Nevertheless the up-to-date measures have improved the conditions, which was reflected during the high waters in autumn 1992 and 1993. On the river Savinja, most of all in its midstream, it would be necessary to improve the destroyed areas in 1990 such as the dams Marinckov jez, Nazarski jez, Spodnji Letuski jez, Polzelsld jez, the chute at Sempeter, which were not carried out due to the high costs. These constructions are of global importance because they control the gravel flow (in the upstream) on the one hand, and on the other their rehabilitation would stop dire erosion and deepening of the Savinja river bed, which already seriously endangers the safety against erosion of the Savinja river embankments as well as some of the traffic communication constructions (bridges). -35- ANNEX B Page 5 of 5 THE MURA WATER REGION From the planned necessary rehabilitation of the high water preservation dikes within the length of 26 km the programme included only the part of the dike Lendava - Kot and partially Lendava - Petisevci in the total length 5,428 km or 1/5 of the total embankment length. The other planned and required improvements on natural waterflows and water collectors were performed only in the part of the Scavnica river bed in the area of Ljutomer - Grabe within the length of 4,892 km in order to increase the safety against floods of the town Ljutomer. The degree of safety against floods has increased only slightly so that the conditions relative to the danger of floods in this region with regard to the year 1990 is unchanged. THE PRIMORJE WATER REGION In 1990 the torrent waters flooded the entire length of the river Reka from Zabic to Ilirska Bistrica and further on. The damaged embankments, major and minor indents appeared on several locations. The rehabilitation programme - with regard to the available finances - included only the largest and the most critical indents. The rehabilitation programme was successfully carried out as the performed works offer stability against high water floods and sufficiently stable conditions of the water beds. In the following period it is urgent to take measures concerning withholding on the Reka river, particularly in the upstream part above Zabic. Prepared by: Antonija Dodic, Assistant to Manager. -36 - ANNEX C Page 1 of 17 REPORT OF VISITS TO IMPLEMENTED SUBPROJECTS a. Report of visit to the Mozirie Sewage System Subproiect: The Mozirje Sewage System in the Savinja Valley (project X-9) Project type: flood rehabilitation: municipal projects Cost: Actual cost SIT 94,125,175 IBRD Loan US$ 318,991 Date of Completion: End 1992 Date of visit: 11-09-94 People met: Danilo Beden, Director PUH (main contractor) Ales Horvat, Chief Engineering PUH Discussion: This subproject is the rehabilitation of the Mozirje Sewage plant and sewer pipeline systems feeding the plant from Mozirje and from Nazarje. The contractor for this project was PUH (Podjetje ZA Urejanje Hudournikov p.o. = Torrent and Erosion Control Service) from Ljubljana. The existing sewage treatment plant that was only a few years old was partly destroyed and replaced by a new, biotreatment installation (biodiscs system). It was operating well and in good working condition. Existing pipelines were repaired and partly replaced. Waste water leaving the plant is in compliance with Slovenian pollution standards: there is no industry in these towns that discharges polluted water. The treated water is discharged in the Savinja river. Conclusion: this is a good rehabilitation project with improved environmental water control. b. Report of visit to the Lucnica Vallev Subproject: The Lucnica river regulation and landslide in Podveza: phase II: chute control (subproject F 25/2) Project type: flood rehabilitation: repair and stabilization of Lucnica river banks Cost: Actual cost SIT 54,856,991 IBRD Loan US$ 198,934 Date of Completion: Not yet completely finished Date of visit: 11-09-94 People met: Danilo Beden, Director PUH (main contractor) Ales Horvat, Chief Engineering PUH Discussion: Located upstream from Mozirje at the Lucnica river, feeding into the Savinja river. A severe landslide blocked the whole valley and destroyed the road. The blockage ANNEX C 37 Page 2 of 17 caused extensive flooding upstream where all bridges (35) were destroyed. River banks were widely damaged. The rehabilitation work for the riverbanks and steep hill slopes was done by PUH. To open the valley and road 120,000 m3 of soil had to be removed. This soil was used in landfills that were afterwards very well landscaped and transformed in cattle grazing meadows. The slope surface was balanced and consolidated. Natural vegetation is being restored to improve the consolidation of the slope. The area is now closely monitored on soil movements at ten measuring points. No further movements after consolidation have occurred. Conclusion: this is a successful rehabilitation of the river valley with awareness of the requirements of the environment. c. Report of visit to Iskra Industriia Kondenzatoriev in opreme d.o.o. Semic Subproject: Iskra Industrija Kondenzatorjev in opreme, Semic, subproject 1-K Project type: energy conservation, category 2 Cost: Planned US$ 5,734,285 Actual 5,275,280 IBRD Loan 1,830,000 Disbursed 1,826,702 Date of Completion: October 1990 Internal rate of return: expected 30.8%, actual 22.7% Enerqv Conservation: not applicable for category 2 projects Procurement: Price quotations Date of visit: 11-10-94 People met: Drago Crnic, Director Mechanical Division M.Klopcic, Manager Technology Stanislav Golobic, Investment Manager Discussion: This is the only category 2 subproject of the Loan. Iskra, Semic manufactures electrical capacitators partly used to improve the power factor in existing industrial and other installations. Other product lines are capacitators for use in electronic equipment, for radio interference prevention, and for power electrical appliances. Further their production program includes several electrical appliances and industrial electrical equipment. The subproject loan was used for purchasing a winding machine for their power capacitor line, equipment to manufacture tools and machines such as electrostatic filters, equipment for waste water pre-treatment (degreasing and pH correction), precision milling and grinding machines and instruments for ANNEX C 38- Page 3 of 17 their R&D department. In fact, only the winding machine is part of a direct production line. All other equipment is either used in R&D or is a side line of their main production that is only loosely connected with energy conservation. The company sold before independence an important part of their production on the Yugoslavian markets. Due to improved quality of their products they were able to replace fully these markets in export. Important clients are now in Germany, South Korea, Taiwan and Hongkong! Finance: Although the bank that serves Iskra indicates a present IRR of 22.76 it is impossible to allocate this to the investments made within the scope of this subproject. This is due to the diversity of equipment purchased of which only a part was used in production and to the lack of profit centers or allocation of costs and profits to the different product lines. Environment: during the mission's plant visit waste water treatment sample analyses were checked in the laboratory. It showed that the purification of waste water from inorganic solids and ammonia was not as successful as indicated and several contaminants were well above the limits regulated by the Government of Slovenia Conclusion: Given the circumstances, the enterprise did an impressive marketing and sales effort in securing new markets and neutralizing the effects of the severe inflation. The World Bank funding promoted directly product quality improvements, environmental improvement (waste water pre- treatment) and indirectly energy conservation through the production of electrical equipment used in other products. d. ReDort of visit to Tovarna Kovinskih Izdelkov in Livarna Titan, Kanmik Subproject: Titan, Kamnik, subproject 1-T Project type: environmental project, category 1/2 Cost: Planned US$ 546,792 Actual 370,783 IBRD Loan 347,501 Disbursed 358,919 Date of Completion: December 1992 Internal rate of return: not applicable Procurement: PQ Date of visit: 11-11-94 People met: Franc Pfeifer, Technical Director Bojan Pollak, Project Manager ANNEX C - 39 - Page 4 of 17 Discussion: This metal foundry manufactures locks, fittings, foundry products of malleable steel and car components. The environmental problems that confronted Titan were the following: (i) generation of dust from the electric smelting furnace containing large amounts of iron and zinc oxides (capacity furnace is 5 ton scrap per hour, zinc is mainly from galvanized iron scrap). This exhaust gas was scrubbed with water and the resulting suspension of metal oxides was filtered. But the waste water after filtration still contained too high amounts of zinc. The filtered solid waste was dumped at a waste disposal site endangering ground water contamination; (ii) air pollution at the work place of the foundry was above allowed limits; (iii) air pollution with trichloro-ethylene (TCE) from open air degreasing installation with a workplace pollution of over 700 mg TCE/m3; (iv) air pollution from lacquer burning installation to remove lacquer from metal parts; (v) air pollution from a degreasing installation using freon 11. Electric furnace: a dry air filtering unit was installed and dust emissions are now well within permitted limits (was 112.3 mg/m3, present 1.13 mg/m3 exhaust gas, limit is 15 mg/m3). It was originally the intention to send the collected dust containing 30-401 zinc (about 30 ton zinc per year) to a zinc production plant in Macedonia. However, this cannot be done anymore. A local zinc producer asks DM 1/kg to take over the dust and a local brick manufacturer asks DM 0.50/kg. According to Titan this is too much. The dust is now bagged in polythene bags and stored. Inspection of the storage in the open showed many bags were broken and dust was spilled all over the place contaminating storm water. Also laboratory measurements of dust in the air after filtration showed still 29 mg Zn/m3 and 1.1 mg Pb (lead)/m3. It is clear from our site visit that the environmental mitigation measures are only partly successful and steps should be taken by Titan to improve this situation. E.g. the price that the brick manufacturer asks for taking over the dust to use it in bricks is not too high compared with other companies that sell the dust to brick manufacturers. The emissions of zinc and lead are also worrying especially for the people working at this plant. DecreasinQ: for degreasing Titan replaced TCE with perchloro- ethylene (PCE) in a closed circuit degreasing and washing installation. This system does not work properly and requires ANNEX C Page 5 of 17 about ten times more PCE than anticipated. The result is that some metal parts have still to be degreased with TCE (their annual use of TCE has decreased from 40 ton to 10 ton). The PCE contaminated with oil and grease is sold to a petrochem- ical company that distills the solution and sells back the pure PCE to Titan. The very disappointing results with the PCE installation cannot be blamed on the manufacturer: the experiments that Titan did before purchasing the equipment were too superficial and not sufficiently detailed. The whole installation will have to be replaced and a new detergent technology will be installed. Lacauer burninq: This installation that was built to replace open air burning was out of production due to the collapse of the market for ski bindings. It is now only used a few times a year to burn lacquer from locks, the main product of Titan. Degreasing with freon 11: this process was used to degrease plastic parts of ski bindings. As already stated above this market has collapsed and the installation is not used anymore. Conclusion: In general it can be concluded that this project was a failure, although several improvements in environmental pollution were achieved. Inspection of the plant also showed that maintenance status was not optimal. The defective operation of the air filtration in the electric furnace plant could well be caused by insufficient maintenance. e. Report of visit to Slovenijavino, Liubliana Subproject: Slovenijavino, Ljubljana, subproject 1-Y Project type: energy conservation, category 4 Cost: Planned US$ 937,428 Actual 1,041,263 IBRD Loan 515,000 Disbursed 513,109 Date of Completion: May 1992 Internal rate of return: expected 51.5%, actual at present 28.6% but a production curve to 100% capacity was planned for 4 years; it is expected that the predicted IRR will be achieved in 1996. Energy Conservation: total energy savings are 38.4% for electricity and natural gas. However, energy savings cannot be allocated to this subproject investment alone. See for explanation the following evaluation. Procurement: Price quotations Date of visit: 11-11-94 People met: Miro Artnak, Technical Director Mrs Breda Arnsek, ANNEX C - 41 - Page 6 of 17 Director Purchasing Department Discussion: This investment was made primarily for the production of sparkling wines, improvement of wine quality and increase in bottling efficiency. A byproduct was an increase of energy efficiency for the whole plant. Energy savings are in the use of natural gas and electrici- ty. Natural gas savings are 4.15 GJ/1000 cartons (one carton unit contains 12 bottles of 750 ml each or 9 liters of wine) and electricity savings 208,608 kWh/1000 cartons. Electricity savings were achieved by renovating and partly replacing the bottling lines. This decreased the use of compressed air from 53.5 m3/h to 1.94 m3/h or with 247,968 m3/1000 cartons. Besides bottling of sparkling wines, the bottling includes now also 187 ml bottles (that are very popular with airlines). It is not possible to calculate or measure the energy savings that can be allocated to the subproject investment. The most important part of the subproject investment was in fact a new production line for sparkling wines which did not contribute to energy savings at all. Besides this several other changes outside the subproject were made at the same time. The indicated energy savings are for the whole operation. Finance: This enterprise was before the break-up of Yugoslavia one of the big wine traders and bottlers with a participation in world trade of about 1%. For 1993 total sales of 18 million liters of wine were based on local grape production. The bottling capacity of the plant has been increased by the investment for the subproject and by other investments from 2500 bottles to 3500 bottles/hour. The IRR that has been calculated by the company is for 1993 and the first 10 months of 1994 is 28.6 W. Management expects, however, a substantial increase for 1994/1995. Environment: The waste water contains small amounts of organic products from wine depots and a very low amount of sulfur dioxide (S02) of <1 promille. Water usage is 4,000 m3/month of which 3800 m3 is waste water. The balance is used in soft drinks production. The waste water is discharged in the municipal sewer system after mechanical screening. Conclusion: the subproject was successfully installed and operated. It achieved energy savings, efficiency improvements and better quality control. It is, however not clear what percentage of these achievements can be allocated to the subproject. This would require more detailed measurements that the company is not able to do. ANNEX C - 42 - Page 7 of 17 f. Report of visit to Goreniska Predilnica, Skofia Loka Subproject: Gorenjska Predilnica, Skofja Loka, subproject 1-G Project type: energy conservation, category 4 Cost: Planned US$ 2,780,000 Actual 2,075,457 IBRD Loan 1,747,000 Disbursed 1,666,933 Date of Completion: end 1989 Internal rate of return: expected 20.7%, actual negative Energy Conservation: planned 21% (about 45 TJ) actual 20% (42.8 TJ) Procurement: Price quotations Date of visit: 11-14-94 People met: Miha Jese, Director Bogomil Kandus, Maintenance & Energy Manager Discussion: This project comprises five subprojects: Project Cost US$ of which IBRD Loan (1) New jersey line 659,795 559,148 (2) Thermal treatment 652,433 548,263 (3) Dyed nylon fibers 645,637 541,721 (4) Heat recovery 100,616 83,847 (5) Boiler improvement 16,976 14,030 The new investments do perform in saving energy as predicted. Specific energy savings for each subproject are given in the section about energy conservation. 1993 was the first year of normal production; production achieved was well above the production in 1988. Employment has decreased from 840 to 660 people and 640 next year. Management is convinced that thanks to the new investments the enterprise can survive: auality was greatly improved and the company can compete now in export markets. Without the investment it would have been bankrupt and closed in 1993. Productivity has increased by 25%. The company is at present also modernizing other parts of the plants. Lack of new employees limits now the production and will require further automation in the near future. For wool spinning (not part of the subproject) a joint venture was formed with a Belgian company and wool spinning production was increased from 120 tons/month in 1989 to 200 tons/month in 1994. Energy Conservation: This company carefully measured its energy consumption before and after the investment. ANNEX C ~-43 Page 8 of 17 Electricity is given in kWh/t, fuel consumption (natural gas or oil) in GJ/t. Before (1988) After (1993) Project kWh/t GJ/t kWh/t GJ/t New Jersey Line 1,140.7 20.6 741.5 3.6 Thermal treatment line 529.1 20.5 264.6 2.9 Dyed nylon fibers 5,391.3 13.6 3,504.3 9.2 Heat recovery: process 1,155.6 exhaust gas 158,463 m3 nat.gas/t Boilerimprovements 42,500 m3 nat.gas/t Finance: The collapse of the Yugoslavian market has inflicted heavy losses on the enterprise. The total loss of internal markets and an unrealistically high exchange rate made competition in export in 1990 impossible. In 1991 the short war with Serbia caused a new set-back. In 1990 the decrease in production was 40%, in 1991 80%. The year 1992 showed recovery and in 1993 more than 90% of the production capacity was reached. Former Yugoslavian markets are now fully replaced by export markets, however, at appreciably lower prices. In 1993 the enterprise was still loss making partly due to the heavy capital charges caused by new investments. It is clear that an IRR calculation, which was not done, would show a negative return. Environment: Environmental pollution by the enterprise is minimal: water pollution is prevented by pre-treatment of waste water (containing dyes) and discharging the water to the local water treatment plant. Air pollution is very low: the boiler is based on natural gas combustion (sulfur content of the gas is < 0.1%). The only noteworthy workplace pollution is the very high noise levels (95 - 100 dBA) caused by old spinning machines. Although ear protection is provided, this was not always used. During the visit the mission found also air borne dust (fine fibers) rather high. This could be improved by better focused air recirculation and filtration. Conclusion: The investment, although delayed, achieved its goals in energy conservation, quality improvement, increase in productivity and environmental control. The enterprise has successfully reoriented itself to export. The financial situation is, however, not very good but could be further improved by increasing productivity and probably forming more joint ventures to focus on profitable specialties. ANNEX C 44 Page 9 of 17 g. Report of visit to Mineral d.o.o., Ljubljana Subproject: Mineral, Ljubljana, subproject 1-C Proiect type: energy conservation, category 4 Cost: Planned US$ 1,975,000 Actual 1,781,000 IBRD Loan 854,183 Disbursed 748,596 Date of Completion: December 1989 Internal rate of return: expected 39.5%, actual 24% Enerqv Conservation: planned for granite 57%, actual 77% for marble 11%, actual 53% Mineral has not calculated the actual specific energy consumption, but total energy use decreased by 30% from 3,135,486 kwh in 1991 to 2,217,293 kWh in 1993. Procurement: Price quotations Date of visit: 11-14-94 People met: Miroslav Zajc, Director Production and Technical Department Discussion: The following equipment was purchased through Bank funding for the Podpec location: one gater saw mill for granite one circular saw for granite for the Lesno Bdro site: one drilling machine one diamond band saw one pneumatic hammer for the Ljubljana site: one bridge grinder one precision grinder, computer driven The locations at Ljubljana and Podpec were visited. All machines inspected were in full production and performing as guaranteed. Like most enterprises in Slovenia Mineral suffered heavily from the breakup of Yugoslavia: the main import of raw stone was in 1988 from Croatia, Macedonia and Serbia only 10% came from inside Slovenia. Total production in 1988 was 13,000 m2 granite and 60,000 m2 marble. There is still some import from Macedonia (5%) through Bulgaria, Romania, and Hungary. About 10% is coming from Croatia. The balance comes from other countries: e.g. Brazil, Zimbabwe, Russia, India, Malaysia, Ukraine. In the last few years the market for granite and marble has completely reversed: now 70% of the production is sold as granite slabs and 30% as marble. Due to the new granite ANNEX C 45 - Page 10 of 17 sawing and finishing machines Mineral was able to follow this market reversal and plans now to buy additional granite processing equipment. Energy consumption was reduced by 77% for granite processing, and 53% for marble. Environment: Mineral has taken several steps to suppress dust formation; it now applies only wet cutting, grinding and polishing. Used water is filtered through a filter press and recirculated. The wet filter cake consisting of water insoluble, inert dust is deposited in the municipal deposits (Due to the high water content cement or brick manufacturers refuse to use it). Note: Mineral would be interested in an additional World Bank loan of US$ 2 million. We pointed out possibilities with IFC or suppliers credits. Conclusions: This is one of the most successful subprojects in the Loan. The cause of this success is not only the efficient production and intensive use of the equipment installed under the sunproject, but the fact that MINERAL was not too severely affected by Slovenia's independence and subsequent war and was able to replace raw material supply rather quickly. h. Report of visit to Impol and Impol Montal, Slovenska Bietrica Subproject: Impol, Slovenska Bistrica, subproject 1-0 Project tvse: energy conservation, category 4 Cost: Planned US$ 27,361,355 Actual 23,825,938 1) IBRD Loan 15,000,000 Disbursed 15,000,030 Date of Completion: Project is not yet finished 1) Internal rate of return: expected 22%, actual -7.9% Enerqy Conservation: planned 1,352 kWh/kg actual 1,306 kWh/kg during September Procurement: Limited international bidding/price quotations Date of visit: 11-15-94 People met: Jernej Coki, General Director Alojz Gorcenko, Director and Project Manager Mrs Cvetka Kozir, Manager Foreign Trade Departm. Vlado Leskovar, Director Finance and Economy. Note: 1) The project is not yet finished due to some guarantee claims of Impol on agreed tolerances of the end - ANNEX C - 46 - Page 11 of 17 product. Difference is estimated by Impol between US$ 200,000 and $300,000. Discussion: The project was delayed by 1.5 years due to a collapse of the financial resources of Impol because of high inflation. In addition losses were incurred by export on fixed contracts in US$ during the large depreciation of the US dollar in relation to the German Mark (imported raw materials were all priced in DM). Although the war in Slovenia was very short it upset totally the progress of the project: orders for equipment to be imported were not honored by the suppliers because the governments of the countries of the suppliers refused to guarantee payments due on purchase of equipment by Impol. The investments were made in the profiles and extrusion departments, which were visited and inspected. The production in 1994 is now running on full capacity: rods and tubes 1000 t/month profiles 630 t/month wire 60 t/month The related specific energy consumptions are as follows: 1994 1992 Savings Electr. Gas Electr. Gas Electr. Gas kWh/kg GJ kWh/kg GJ Rods and tubes 1.07 1,000.9 1.392 no gas 23 - Profiles 0.46 2,664.0 0.506 3,639.1 26.7 A high percentage of Impol's products are now exported: 95% of rods and tubes and 60% of profiles. In fact the export of profiles is much higher because Montal, a 100% subsidiary of Impol, exports an important part of its production of windows and other products where profiles are used. Exact figures were not available. The quality of the products is greatly improved due to the investments: Impol was granted the ISO 9001 certificate. This improvement of quality has greatly contributed to the increased exports (in 1988 only 25% of the production was exported). Financial losses in 1993 were US$ 4 million (depreciation was $ 8 million), and in 1994 the expected loss will be $ 1.5 million (depreciation $ 6 million). Impol expects to make a profit in 1995. Losses in 1993 and 1994 were mainly incurred by heavy interest payments and low aluminum product prices. ANNEX C -47 - Page 12 of 17 These prices have now greatly improved. Environment: Impol has reduced water and air pollution substantially. Water is now recycled in a closed system without any discharge in the river, and air pollution caused by the use of hexa-chloro-ethane for degassing aluminum smelt has improved due to process changes. Degassing is now performed with a gas mixture of argon, nitrogen and chlorine followed by gas cleaning with an ALPUR filter that absorbs all chlorine (filters developed in France). Conclusion: Technically the project is a success, meeting expected energy conservation goals and quality improvements. Environmentally the plant has g:reatly improved compared with our last visit in 1988. Also workplace environment was improved by the subproject investments. Financially Impol had a difficult time for reasons out of its control and unrelated to the project. i. Report of visit to Iskra WO Elektricno Orodie (ERO), Krani Subprolect: Iskra WO Electrical Tools, Kranj, subproject 1-J Prolect tyve: energy conservation, category 4 Cost: Planned US$ 3,944,000 Actual 4,045,000 IBRD Loan 1,862,000 Disbursed 1,971,294 Date of Completion: May 1993 (16 months delay) Internal rate of return: expected 34,5%, actual IRR cannot be calculated at present due to several reorganizations of accounting and bookkeeping departments. Enerqy Conservation: planned 21% (1.32 kWh/machine) actual 35% (2.17 kWh/machine) Procurement: Limited international bidding Date of visit: 11-165-94 People met: Milan Bajzelj, Managing Director Igor Polsak, Investment Project Manager Jakob Sink, Production Manager Discussion: Before project implementation Iskra ERO exported 45% of its production and 55% went into the Yugoslavian market generating 70% of its revenues (1988). After project completion 85% is exported, 5% goes to former Yugoslavian Republics and 10% is sold on the Slovenian market. After the short war with Serbia Iskra ERO was practically broke and was taken over by the Republic Development Fund. ERO was restructured. The new production line (the subproject) started up in 1993 and reached full production as ANNEX C * 48 - Page 13 of 17 planned in 1994. The project consists of the replacement of manual stator production for electric motors by a practically fully automated line to produce high efficiency motors. Energy savings in this new production are better than expected (from 21% to 35%). The efficiency has increased by 10 compared with motors from the old production line. This is an extra energy saving achieved by the ultimate users of the motors (mainly drilling, sanding and sawing appliances). The production line was inspected and found satisfactory. Ouality was improved to such an extent that an ISO 9002 certificate was granted. This quality improvement is such that Iskra sells now its know-how to Poland and India. And a new factory was founded in Ecuador. Iskra owns a Swiss company, Perles, under which name it exports its products. It is now in direct competition with Black and Decker, the globally biggest manufacturer of these tools. Iskra has a cooperation agreement with the Netherlands company Skill, another producer of electrical tools. Privatization of Iskra ERO is being actively pursued. Financially Iskra made losses in 1993 and 1994. These losses were, according to Iskra, mainly due to the heavy interest payments that had to be made on loans. Environment: According to management there are no important environmental problems: due to lack of time the mission had no opportunity to discuss this subject further. Conclusion: The new production line achieves results as planned. However, Iskra was badly hit by the political upheaval of Yugoslavia and it is expected that it will take at least another year before financial results will be satisfying. Quality improvements play an important role in the recovery of Iskra ERO j. Report of visit to Niko Kovinarsko Podietie, Zelezniki Subproiect: Niko, Zelezniki, subproject 1-N Project type: energy conservation, category 4 Cost: Planned US$ 3,001,980 Actual 3,345,924 IBRD Loan 947,600 Disbursed 1,008,779 Date of Completion: April 1991 Internal rate of return: expected 12.25%, actual 17.2% - 4 ANNEX C Page 14 of 17 Energy Conservation: planned 48% (102 kWh/i mill.units) actual 40% (85 kWh/1 mill.units) Procurement: Price quotations Date of visit: 11-16-94 People met: Mrs Tina Nastran, Managing Director Mrs Ivanka Pogacnik, Manager Finance Mr Filip Bharniz, Manager Production Discussion: This subproject consisted of the replacement of an old electroplating unit for nickel electroplating of binder mechanisms. The objectives were: (1) electrical energy savings, (2) mitigation of environmental pollution, (3) quality improvements, (4) increase in production. The old method used for electroplating produced product with inferior quality, high nickel losses and high electricity use. The inferior quality caused difficulties in the export (75% of the production was exported). The investment comprises a new automatic electroplating unit costing US$ 832,677 and a waste water treatment to recover nickel costing US$ 177,209. In the new production line the energy consumption decreased to 0.128 MWh/l million binder mechanisms, saving about 40% (85 kWh/1 million binder mechanisms). The new process allows also much lower nickel use (30%). The planned production increase was achieved: from 20 million in 1989 to 30 million binder mechanisms in 1994. Employment was curtailed from 362 to 317 employees. Ouality has substantially improved and is matching qualities from competitors in export. Environment: The old technology produced waste water containing 2-5 mg nickel/liter, 1-2 mg iron and 10-20 mg oil and grease. The new process now discharges 0.5-0.8 mg nickel/liter (allowed maximum 1 mg), 0.2-0.6 mg iron (allowed 2 mg) and 5-10 mg oil and grease (allowed 10 mg). All the water emissions are now under the allowed limits. Total waste water discharge is about 60,000 m3/year with average 0.6 mg nickel/liter. The water is discharged in a river. River water is not used as drinking water anywhere downstream. Recovered nickel containing sludge is used in a brick factory where the nickel ions are converted in insoluble silicate compounds. Niko pays the brick company DM 0.50/kg sludge that contains about 60% dry matter. Conclusion: Technically the project achieved its goals (although energy savings are slightly less than predicted). Financially the company went through a deep recession (the ANNEX C -50 - Page 15 of 17 loss of Yugoslavian markets, the very high interest rates and the completion delay with 6 months): profit in 1993 was, however, already 1i; the expected profit in 1994 was 4%. It is expected that the actual IRR will be zero or negative. k. Report of visit to Javor Koncern d.o.o., Pivka Subproject: Javor, Pivka, subproject 1-AB Prolect type: energy conservation, category 4 Cost: Planned US$ 2,171,431 Actual 1,922,952 IBRD Loan 550,367 Disbursed 568,106 Date of Completion: January 1994 Internal rate of return: expected 27%, actual not calculated because 1994 is first year with full production Energy Conservation: planned 22,23% actual not yet known, 1994 is first year of full production Procurement: Direct contracting with Cremona and Babcock Date of visit: 11-17-94 People met: Mrs Valerija Kokosar, vice president financing Igor Milavec, Project manager and Head Quality Control Department Discussion: Javor operates 8 plants for wood processing and has 1,200 employees. Total revenue is US$ 50 million of which 70% is from export, mainly to Western Europe, USA and Russia. Besides wood products and intermediates Javor also manufactures wood processing machinery. Privatization of Javor will be finalized at the end of 1994: the company will be bought by its employees. The energy conservation projects, also covering product quality improvements, are of three types: (1) drying kilns for solid wood products; (2) drying kilns for wood veneer; (3) steaming of blockboards; and (4) transport system for waste products to boilers (saw dust, wood chips, bark, etc) Javor operates 20 drying kilns, of which 6 had to be renovated: one kiln was fully replaced, five were renovated. Drying in these kilns is now fully computer controlled. This has resulted in a very much improved quality and less waste. Three of four veneer kilns were renovated and installed with a computer controlled automatic system. Ten steam chambers for steaming wood blocks were of old ANNEX C 51 - Page 16 of 17 design without insulation. They have been renovated and provided with adequate insulation. Pneumatic saw dust and wood chips transport from the wood processing sites to the boilers were replaced by closed conveyor belt systems, which reduced electricity use. In total ten energy conservation projects were implemented, only one proposed project was not done due to a decreased demand for the specific product. The actual investments were lower than planned due to import tax exemptions and exchange rate differences between the US$, DM and SIT (Slovenian tolars) Energv savinQs: The predicted energy savings were as follows: 1990 after project savings implementation 1993 Heat energy (steam) 228.5 TJ 179.1 TJ 49.4 TJ Electricity 53.0 44.4 8.5 Total savings were not achieved in 1993 because of project delays (lack of own funds). Changes were finished in January 1994 and at present no figures were available to calculate specific energy consumption savings. It is expected that results will be only slightly below the predicted ones. The situation is a bit confused by the fact that in the same time some electricity savings projects were implemented that were not financed from the World Bank credit: e.g. cos phi was improved from 0.80 to 0.98-0.99. Ouality: The project has improved the quality of several products visibly: Javor is now applying for an ISO 9001 certificate. Javor will try to make an IRR calculation: not much can be expected from it because in 1993 a loss was made of SIT 100 million (US$ 670,000). In 1994 a profit of SIT 100 million is expected. Environment: as long as logging is in accordance with a planned tree replanting the Javor enterprise is environmentally friendly. All wood waste is used as fuel, dust formation has been practically eliminated in the new system. ANNEX C - 52 - Page 17 of 17 Conclusions: The project is technically a success: energy savings are expected in the predicted range, quality of the wood products has improved which has given Javor a competitive edge in its export markets. Financially the same negative factors as for the other subprojects have been causing a severe decrease in profitability. For 1994 profits seemed to be recovering. ANNEX D ~-53 Page 1 of 6 SUMMARY OF SUBPROJECTS NOT VISITED Subproject: PERUTNINA, PTUJ subproject 1-B Project type: energy conservation, category 4, chicken meat processing Cost: Planned US$ 39,014,537 Actual 17,570,218 IBRD Loan 5,993,233 Disbursed 6,086,628 Date of Completion: June 1990 Internal rate of return: expected 17.94%, actual NA Energy Conservation: planned energy consumption 4.05 GJ/ton of meat actual for 1992 6.70 GJ for 1993 6.76 GJ Procurement: International cpmpetitive bidding/price quotations Comment: pre-project specific energy consumption was not available, but from the above figures it seems that the project has missed about 50% of the predicted energy savings. Subproiect: PALOMA LEPENKA, PREVALJE, subproject 1-D Project type: energy conservation, category 4, cardboard production Cost: Planned US$ 1,265,305 Actual 1,198,897 IBRD Loan 872,394 Disbursed 934,417 Date of Completion: April 1990 Internal rate of return: expected 25.3t, actual NA Energy Conservation: planned energy savings 52.5% natural gas 10.8% (37.5 m3/ton) electricity NA per ton board Procurement: Price quotations Subproject: STEKLARNA HRASTNIK, subproject 1-H Project type: energy conservation, category 4, glass manufacture Cost: This company has not sent any report about the project although LB made several requests. Planned US$ 5,800,000 Actual not available IBRD Loan not available Disbursed US$ 4,305,815 Date of Completion: NA Internal rate of return: expected 13.47%, actual NA ANNEX D -54 - Page 2 of t Energy Conservation: NA Procurement: Internationa competitive bidding Subproject: WO ELEKTROELEMENTB EQ. IZLAKE, subproject 1-I Prolect type: energy conservation, category 4, electro- mechanical products and technical ceramics Cost: Planned US$ 3,237,287 Actual 2,063,156 IBRD Loan 1,344,000 Disbursed 1,201,743 Note: the difference in planned and actual cost are custom duties for which the enterprise got an exemption Date of Completion: June 1950 Internal rate of return: expected 37.4%, actual NA Enerqy Conservation: actual specific energy savings 17%/product unit Note: it is not clear how Elektroelement achieved 17% savings per ton of product. Energy consumption and production figures provided by the enterprise show only increased energy consumtion per ton of product: GJ/t product 1987 1990 1993 planned actual 20.32 21.71 23.78 Total energy consumption was in 1987 55.78 TJ on a production of 2,692 ton, and actual in 1993 85.60 TJ for 4,350 ton (planned production was 4,770 ton). Company informed us that it was not able to calculate the actual IRR due to reorganizations and unavailability of appropriate data. Procurement: Price quotations Subproiect: ISKRA AUTOELEKTRICA, NOVA GORICA, subproject 1-B Project type: energy conservation, category 2, electronic ignition equipment for cars Cost: Planned US$ 9,988,202 Actual 11,406,526 IBRD Loan 1,870,000 Disbursed 1,874,841 Date of Completion: 1990 Internal rate of return: production of electronic ignition equipment was developed for the Yugoslavian Zastava car which is manufactured in Serbia. After the independence of Slovenia the connections with the Serbian automobile industry were cut and Iskra Autoelektrica had to close down this production line. The subborrower's bank has guaranteed the loan procurement: Price quotations 55 ANNEX D Page 3 of 6 Subproiect: KOMUNALNO-STANOVANJSKA PODJETJE HRASTNIK, subproject 1-Q Prolect type: environmental project, category 4, Urban Waste handling Cost: Planned US$ 518,573 Actual 429,481 IBRD Loan 185,147 Disbursed 179,019 Date of Completion: May 1992 Internal rate of return: not applicable for environmental project Procurement: Price quotations Note: this project is for combined industrial and municipal waste handling. Leach water is collected and pumped to the municipal water treatment plant. The project designs the compacting of solid waste. Subproject: MEBLO IVERKA, subproject 1-S Project type: environmental project, category 2, chipboard production Cost: Planned US$ 1,373,400 Actual not yet available IBRD Loan 646,670 Disbursed 699,648 Date of Completion: project is not yet completed due to lack of tolar funds for completing it. Internal rate of return: environmental project not applicable Energy Conservation: although this is an environmental project the company planned to decrease specific energy consumption with 5.4k from 141.13 kWh/m3 to 133.54 kWh/m3. Procurement: Price quotations Subproiect: ZDRAVILISCE ROGASKA SLATINA, subproject 1-U Project type: energy conservation, category 4, health resort for thermal baths Cost: Planned US$ 1,676,103 Actual project not yet finished IBRD Loan 1,318,700 Disbursed 1,394,928 Date of Completion: project not yet completed Internal rate of return: expected 10.3%, actual not available Enercw Conservation: expected energy conservation through heat recovery from a thermal spring: 10,153 MWh/year Procurement: Price quotations Note: the preparation of the project was severely delayed by the changes in Yugoslavia which affected the exploitation of the resort. In addition the enterprise changed technology when the project was already underway. ANINEX D - 56 - Page 4 of 6 Subproiect: MERCATOR KMETIJSKA ZADRUGA, CROMELJ. subproject 1-V Prolect type: environmental project, category 2, slaughter houseprocessing Cost: Planned SIT 167,905,000 Actual 194,000,000 (US$ 1,701,000) IBRD Loan US$ 631,912 Disbursed 602,909 Date of Completion: November 1993 Internal rate of return: environmental project Procurement: Price quotations Note: The new slaughter house has improved on water pollution, solid waste disposal and meat processing quality (meat surpluses are now reprocessed in salami and sausage products!). The project includes a waste water treatment plant. COD went down from 7660 mg 02/liter waste water to 1450 mg. BOD5 is now 670 mg 02/liter. This waste water is discharged in a municipal waste water treatment plant. Subproiect: KMETIIJSKO GOZDARSKA ZADRUGA GABROVKA DOLE, Gabrovka, subproject 1-W Proiect tyvpe: energy conservation, category 4, fruit and vegetable juices pasteurization and bottling Cost: Planned US$ 1,172,277 Actual 1,151,781 IBRD Loan 702,522 Disbursed 758,999 Date of Completion: December 1992 Internal rate of return: expected 30.8%, actual <0% Energy Conservation: Energy consumption before planned actual MJ/1000 ltr electricity 161.8 140.3 102.1 fuel oil 1539.2 533.8 703.6 total 1701.0 674.1 805.7 saving % 60.4 52.6 Procurement: Price quotations Note: actual savings are less than planned because the company decided to change from crown shaped caps to vacuum safety caps (twist-off type) which was more expensive and uses more energy. Changes in the market within the period of the investment plan changed drastically the profitability. Subprolect: STEKLARNA "BORIS KIDRIC". ROGASKA SLATINA. subproject 1-Z Project type: energy conservation, category 4, glass manufacturing ANNEX D - 57 - Page 5 of 6 Cost: Planned US$ 6,818,182 Actual 6,004,598 IBRD Loan 3,800,000 Disbursed 3,852,584 Date of Completion: December 31, 1992 Internal rate of return: expected 15.3%, actual 5.1% Energy Conservation: Energy consumption before planned actual electricity GWh 17,045 23,918 17,230 gas 1000 m3 9,116 7,738 12,399 specific energy MJ/kg 89.6 63.4 70.5 savings % 29.2 21.3 Procurement: International competitive bidding/Price quotations Environment: The new process generates less waste mud containing lead (with 51%), solid particles in the exhaust gas is lowered from 565 mg/l to 20 mg/l. Note: the higher gas consumption reflects the fact that the company has chosen another combination of fuels for the smelting bath as originally planned (less electricity and more gas). This project does not only decrease energy consumption per kg glass but is also quite beneficial to the environment. Subproject: TEKSTILNA TOVARNA. PREBOLD, subproject 1-AA Project type: energy conservation, category 4, textile finishing Cost: Planned US$ 3,952,000 Actual 4,313,701 IBRD Loan 3,952,000 Disbursed 4,061,478 Date of Completion: March 1993 Internal rate of return: expected 21.2t, actual 31.5% Enerqy Conservation: Specific energy consumption before the investment and after the investment as planned and actual are as follows: Before After Actual investment investment in 1993 as planned Electricity kWh/m2 0.27 0.13 0.27 Fuel MJ/m2 12 7.6 7.12 Total MJ/m2 13 8.1 7.6 Procurement: Limited international bidding/price quotations ANNEX D - 58 - Page 6 of 6 Sublroiect: ALPOS INDUSTRIJA KOVINSKIH ISDELKOV IN OPREME, SENTJUR, subproject 1 AD Prolect type: environmental project, category 2, steel furniture Cost: Planned US$ 4,661,941 Actual 4,334,544 IBRD Loan 2,302,072 Disbursed 2,345,996 Date of Completion: project not yet finished Internal rate of return: environmental project Environment: Serious air pollution was caused by an old varnishing unit. This unit will be replaced and air pollution control and waste water treatment equipment will be installed. Emission and pollution before the investment and as planned after the investment are as follows: Parameter Unit Before After investment investment as planned Emissions: Fine particles from pigments mg/m3 63 1 Fine particles from lacquer dep. mg/m3 583 10 Carbon monoxide mg/m3 >2500 25 Organic compounds mg/m3 > 200 5 NOx mg/m3 95 100 Water Pollution: Inorganic salts mg/l 10,665 700 Insoluble chemicals mg/l 108,896 80 Iron mg Fe/l 22 2 Oil mg/l 105 10 COD mg 02/1 4,430 160 Procurement: International competitive bidding/price quotations Comment: If the company can achieve the emissions and water pollution figures that are planned, the environmental improvements will be considerable. 13' 30 Is .00' 1^ 30 15-00, 15-30 1ow 16 30 I BRD h8B S L O V E N I A _ The b ...dore - o- - ~~~~ENERGY CONSERVATION AND SUBSTITUTION PROJECT ° /lnoc°ohn LOCATIONS OF SUBPROJECTS WITHIN SLOVENIA ToT-6 - "I I" rrd' 'OoFI A U S TRIA olrmr rr G 7O;5~~~~~~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ T.' 6>i;g K.h., roPntlebbo~~~~v ,1 - T . D '-f f r OlErssar^ . < 0'~~~~~~~~~~~~~~~~~T , f.~~9, =y , f..r 41_v ro Pu/o ro R,/@io c R O A Tk KI A 7'-'r PRED', 1~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1~PI 9 IMAGING Report No: 15177 Type: ICR