Document of The World Bank FOR OFFICIAL USE ONLY Report No.: 19757 IMPLEMENTATION COMPLETION REPORT BOSNIA AND HERZEGOVINA EMERGENCY DISTRICT HEATING RECONSTRUCTION PROJECT TRUST FUND CREDIT NO. 024034 October 6, 1999 Energy Sector Unit 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 (as of August 6, 1999) Currency Unit Konvertible Marka (KM) IKM US$0.55 US$1 KMI.80 AVERAGE EXCHANGE RATES (Not applicable, new currency introduced in 1998) WEIGHTS AND MEASURES (Metric System) kV Kilovolt kW Kilowatt MW Megawatt = (1,000 kilowatts) kWh Kilowatt hours GWh Gigawatt hour= Imillion kWh MVA Megavolt amperes - 1,000 volt amperes ABBREVIATIONS AND ACRONYMS BiH Bosnia and Herzegovina DH District Heat EC,EU European Commission, European Union HOB Heat Only Boiler ICR Implementation Completion Report PIU Project Implementation Unit PSA Project Start-Up Advance PPF Project Preparation Facility RS Republika Srpska SDR Special Drawing Rights TF Trust Fund BOSNIA AND HERZEGOVINA FISCAL YEAR January 1 to December 31 Vice President : Johannes F. Linn Country Director Christiaan J. Poortman Sector Director Hossein Razavi Sector Manager Henk Busz Program Team Leader Richard Hamilton FOR OFFICLiL USE ONLY IMPLEMENTATION COMPLETION REPORT BOSNIA AND HERZEGOVINA EMERGENCY DISTRICT HEATING RECONSTRUCTION PROJECT TRUST FUND CREDIT NO. 024034 CONTENTS PREFACE .......................................................i EVALUATION SUMMARY ........................................................ ii Part I. PROJECT IMPLEMENTATION ASSESSMENT ..........................................1 A. Statement and Evaluation of Objectives .........................................................1 B. Achievement of Objectives ........................................................2 C. Major Factors Affecting The Project .........................................................8 D. Project Sustainability .........................................................9 E. Bank Performance ........................................................9 F. Beneficiary Performance ....................................................... 10 G. Assessment of the Outcome ........................................................ 10 H. Future Operations ........................................................ 10 I. Key Lessons Learned ........................................................11 Part II STATISTICAL TABLES ........................................................ 12 Table 1: Summary of Assessments ........................................................ 13 Table 2: Related Bank Loans/Credits ....................................................... 14 Table 3: Project Timetable ....................................................... 14 Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual ..................................... 15 Table 5: Key Indicators for Project Implementation ....................................................... 15 Table 6: Key Indicators for Project Operation ....................................................... 16 Table 7: Studies Included in Project ....................................................... 16 Table 8A Project Costs ........................................................ 17 Table 8B Project Financing ....................................................... 18 Table 9: Economic Costs and Benefits ....................................................... 19 Table 10: Status of Legal Covenants ....................................................... 20 Table 11: Compliance with Operational Manual Statements ........................................................ 21 Table 12: Bank Resources: Staff Inputs ....................................................... 21 Table 13: Bank Resources: Missions ....................................................... 22 ANNEXES: Annex A. Borrower's Contribution to the ICR Annex B. Future Operations Plan Annex C. ICR Mission Aide Memoire Map IBRD 27772 - Bosnia and Herzegovina: Emergency District Heating Reconstruction Project 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. - i - IMPLEMENTATION COMPLETION REPORT BOSNIA AND HERZEGOVINA EMERGENCY DISTRICT HEATING RECONSTRUCTION PROJECT (TRUST FUND CREDIT No. 024034)' Preface This is the Implementation Completion Report (ICR) for the Emergency District Heating Reconstruction Project in Bosnia and Herzegovina, for which Trust Fund Credit 024034 in the amount of US$20 million was approved on May 14, 1996 and made effective on July 18, 1996. The credit was lent to Bosnia and Herzegovina (BiH) on standard IDA terms and on-lent to the Toplane-Sarajevo and Toplana- Banja Luka District Heating Enterprises with a 20-year maturity, including a five-year grace period, and at the standard IDA service charge. Due to the emergency nature of the projects in BiH following the war, funds had to be mobilized very quickly. As a result, Regional Management decided to create Project Start-up Advances (PSAs). The PSAs permitted funds to be made available to three emergency energy projects before Board approval and effectiveness. One PSA (US$5.3 million) was created for the District Heating Project itself, to be reimbursed once Trust Fund Credit 024034 became effective. PSAs for the Emergency Power Project (US$3.8 million) and the Emergency Natural Gas Project (US$5 million) were included in Trust Fund Credit 024034, allowing disbursements to be made for power and gas expenditures as soon as Trust Fund Credit 024034 became effective. Arrangements were made to allow the District Heating Project to withdraw amounts equal to these PSAs from the Emergency Power Project (Cr. 2903) and the Emergency Natural Gas Project (Cr. 3029), respectively, after these became effective. The Trust Fund Credit was closed on March 31, 1999, one year later than the original closing date of March 31, 1998. The closing date extension was due to delays in the availability ofcofinancing and, to a lesser extent, disbursement-related complications with the PSAs. Financing of the project will continue under Dutch Trust Funds administered by the Bank and financing from the Govemment of Finland and the EU. The ICR was prepared by Marie-Theres Schurrer (Energy Consultant responsible for day-to-day project supervision), Anna Bjerde (Financial Analyst) and Richard Hamilton (Program Team Leader), Energy Sector Unit, Europe and Central Asia Region. The ICR was reviewed by Henk Busz, Sector Manager, Energy Sector Unit, Europe and Central Asia Region, Baelhadj Merghoub (Consultant) Bosnia and Herzegovina Country Department, and cleared by Christiaan Poortman, Country Director, Bosnia and Herzegovina. Preparation of the ICR began during the Bank's final supervision/completion mission in May 1999. It is based on continuous supervision in the field by Ms. Schurrer, mission findings, material in the project file, and information and comments provided by the principal Beneficiary, Toplane-Sarajevo. Toplane-Sarajevo contributed to the preparation of the ICR by furnishing its own assessment of the project's performance. I World Bank support for the reconstruction of BiH following the war came primarily from a World Bank Trust Fund in the amount of USS 150 million, of which USS 125 million was provided on IDA tenns. The Trust Fund Credit 024034 in the amount of USS20 million was one of several emergency projects funded from the Trust Fund. - i - IMPLEMENTATION COMPLETION REPORT BOSNIA AND HERZEGOVINA EMERGENCY DISTRICT HEATING RECONSTRUCTION PROJECT (TRUST FUND CREDIT No. 024034) EVALUATION SUMMARY Introduction 1. From 1991-1995, Bosnia and Herzegovina (BiH) experienced one of Europe's most destructive wars since World War II. Direct war damage to district heating systems inBiH started in 1991 and was followed by indirect damage caused by the absence of maintenance and non-operation of the district heating systems for the entire duration of the war. Following the Dayton Peace Agreement in December 1995, IDA took a lead role in establishing a reconstruction program for the energy sector. One of the projects it prepared was the US$40 million Emergency District Heating Reconstruction Project. A special World Bank Trust Fund provided US$19.5 million for the reconstruction of the district heating system inSarajevo, and US$0.5 million for the preparation of a reconstruction project in Banja Luka. Co-financing was provided by the Governments of the Netherlands, Denmark and Finland, and by the EU. Project Objectives 2. The project objectives were to: (i) restore district heating services inSarajevo as soon as possible by reconstructing both the district heat supply system as well as building intemal installations; (ii) enable BiH to potentially reduce its gas consumption through fuel switching by Toplane-Sarajevo from gas to fuel oil, which would enhance the country's strategically important security of energy supply; (iii) strengthen Toplane-Sarajevo's institutional capacity; and (iv) initiate network improvements. 3. The project included the following components: (a) in Sarajevo: (i) technical assistance for project management, including an engineering survey and staff training, master plan and tariff studies; and (ii) critically needed investments for the reconstruction of all parts of the district heating network, including building internal installations; and (b) in Banja Luka, technical assistance for project preparation (engineering and assessment) only. 4. Two key indicators were selected to evaluate the achievement of project objectives. These were: (i) the number of flats reconnected to the district heating system; and (ii) Toplane-Sarajevo's revenue collected as a percentage of total annual operating costs. Implementation Experience and Results 5. At the time of the Trust Fund Credit closing (March 31, 1999), some expenditures to be funded by cofinanciers had not been completed. Additional investments in the rehabilitation of boilers, substations, internal installations and the remote monitoring and control system totaling US$4.4 million will be undertaken during 1999 and in the first half of 2000 to further improve the district heating system. ii 6. A project financing gap of US$3.5 million remained uncovered at the time of the Trust Fund Credit closing. The project components affected by this lack of funding are heat meters in individual apartments and equipment related to the remote monitoring and control system. The proposed US$18 million in donor contributions to Toplane-Sarajevo to cover fuel costs in 1996-1998 were never pledged by donors. 7. The Sarajevo project was designed around two phases to meet its physical objectives. The immediate "fast track" repair phase, focused on engineering surveys and assessments and the restoration of heating services to as many consumers as possible for the first heating season (1996/97). The 2-year "reconstruction" phase focused on fuller rehabilitation and improvement to the district heating network system as well as institutional strengthening of Toplane-Sarajevo. By March 1997, 18,000 flats had been reconnected and by March 1999, 29,000. The physical aspects of both phases are rated as satisfactory, although delays in obtaining cofinancing for the reconstruction phase has delayed the completion of certain components until June 2000. 8. The objective of strengthening Toplane-Sarajevo's institutional capacity was partially achieved. With assistance from the Government of Finland, a strong PIU was established and a billing and collection system was reintroduced in December 1996. In addition, studies related to district heating development, tariffs, billing and collections and network interconnection as well as training in financial and commercial management, engineering and project management were undertaken. 9. The institution-building component of the project is rated as marginally satisfactory, because actual cost recovery from collection of heating bills remained problematic throughout the project period. While it should be noted that Toplane-Sarajevo faces several challenges, including an economically weaker consumer base (often refugees) than, for example, the gas utility, lack of qualified staff and inadequate internal controls caused its financial performance to deteriorate over time. While bill collections from consumers steadily increased during the project (from 0% of total billings in 1996 to 55% of total billings to date in 1999), total collections (including subsidies) did not improve at the pace anticipated. Revenue collected as a percentage of total operating expenses was 18% in 1996, 73% in 1997 and 60% in 1998 compared to the agreed targets of 15%, 50% and 75%, respectively. Furthermore, it had been planned that Toplane-Sarajevo would recover the investments in building internal installations through a special surcharge to the building owners over a period of five years, starting in 1997. This special surcharge has not yet been introduced, although it is under discussion now. 10. Under the Toplana-Banja Luka (TBL) component, DM 558,239 (US$310,132 equivalent) were fraudulently withdrawn from the Credit Account through bypassing both the Sarajevo Resident Mission staff and Headquarters Operations staff. Investigations by the local police and the Bank's Auditor General established the fraudulent withdrawal by an unauthorized person using a falsified signature. IDA has requested the Government of Bosnia and Herzegovina to refund the DM 558,239. The Banja Luka component was not completed and is rated as unsatisfactory. Major Factors Affecting the Project 11. Five major factors that affected the project were: (i) simplified and accelerated project processing; (ii) streamlined procurement procedures; (iii) consultant support to the PIU; (iv) having Bank staff responsible for day-to-day supervision in the field; and (v) a delay in project implementation due to delayed cofinancing and difficulties relating to the administration of PSAs. Bank and Beneficiary Performance 12. Bank performance is rated as satisfactory. The Bank responded very quickly to the emergency reconstruction needs; took the lead role among donors in designing the project and in seeking additional cofinancing; and provided critical assistance to the start-up phase of the project. 13. Toplane-Sarajevo's overall performance is rated as satisfactory throughout the preparation and implementation of the project's physical components. However, Toplane- Sarajevo was less successful in achieving the institutional objectives of the project due to lack of adequate staffing and insufficient revenue collection. Toplana-Banj a Luka's performance is rated as unsatisfactory as a result of improper withdrawal of funds from the Credit Account. Project Sustainability 14. It is likely that the achievements generated by the project will be sustained. There is strong commitment by Toplane-Sarajevo to maintain the quality of the reconstructed system and to continue to develop the district heating network. However, the long term viability of the enterprise is contingent on an improvement in cost recovery and on further improvements in staffing. Assessment of the Outcome 15. The outcome of the project is satisfactory. The project met nearly all of its physical objectives and made progress towards the financial and institutional objectives. The economic rate of return is 19%, which is well above BiH's cost of capital (around 15%). Future Operations and Key Lessons Learned' 16. Toplane-Sarajevo's future operations plan is satisfactory and includes action steps to improve cost recovery and overall management of the enterprise. 17. The key lessons learned are the following: (a) The project demonstrated that emergency operations require flexibility in project design and intensive Bank supervision, especially in the start-up phase, but also strong coordination within the Bank, particularly in the disbursement area. (b) A strong PIU within the beneficiary is required for successful project implementation. Factors contributing to the effectiveness of the PIU were: (i) adequate quality, quantity and continuity of staff, (ii) support by foreign experts; (iii) sufficient autonomy; and (iv) adequate enterprise autonomy. (c) Even though the flexible approach followed by IDA in financing items in which other donors were not interested allowed the project to quickly respond to the emergency needs of I Recommendations regarding the Toplana-Banja Luka component can be found in the review undertaken by the Bank's Internal Auditing Department (Report No. IBRD FY99-78; June 29, 1999). iv the sector, difficulties in securing donor financing caused major delays in the implementation of the second (reconstruction) phase of the project. The lack of available financing also delayed the disbursements of the Trust Fund Credit, since the latter had to be used to finance civil works related to equipment financed by cofinanciers. When a project needs to go ahead without firmnly committed cofinancing, as was the case here, the Bank components should be as independent as possible and viable on their own if timely closing of the Credit is considered an important objective of an emergency project. (d) While the Project Start-up Advances made it possible to procure some goods and equipment before Board approval of the project, a number of difficulties arose when disbursements were made concerning the handling of transfers and adjustments between the projects with PSAs. While advance funding for future emergency projects is critical, a mechanism to avoid problems referred to above needs to be designed. As an example, it might be useful to consider the use of extended Project Preparation Facilities (PPFs), thereby avoiding the difficulties entailed in inter-project transfers of funds. IMPLEMENTATION COMPLETION REPORT BOSNIA AND HERZEGOVINA EMERGENCY DISTRICT HEATING RECONSTRUCTION PROJECT (TRUST FUND CREDIT No. 024034) PART I. Project Implementation Assessment A. Statement and Evaluation of Objectives Introduction 1. From 1991-1995, Bosnia and Herzegovina (BiH) experienced one of Europe's most destructive wars since World War II. During the war, damages and gas shortages drastically reduced the operation of the Sarajevo district heating system. At the end of the war, only 16,000 flats were connected to the Toplane-Sarajevo district heating system, compared to 48,300 flats (which housed 40% of the city's population) before the war. During the war, unsupplied cOnsumers resorted to making, unsafe, improvised connections to the gas network. 2. Following the signing of the Dayton Peace Agreement in December 1995, the Bank quickly established a lead role in reconstructing the energy sector in post-war Bosnia and Herzegovina. The Emergency District Heating Reconstruction Project was the first post-war Bank operation in the energy sector. The project became effective on July 18, 1996. A Project Start-up Advance (PSA), Trust Fund 024028, provided for expenditures to be made prior to the project becoming effective. 3. Designed as a US$40 million operation (costs later increased to US$44.5 million when more accurate estimates became available), the project was financed through a Trust Fund Credit in the amount of US$20 million on IDA terms and US$21 million in contributions from other donors. These donors included the Governments of the Netherlands (US$9.3 million), Finland (US$8.4 million) and Denmark (US$1.4 million), and the European Union (US$1.9 million). A financing gap of US$ 3.5 million currently remains uncovered. Project Objectives 4. The project objectives were to: (i) restore district heating services in Sarajevo as soon as possible by reconstructing both the district heat supply system as well as building intemal installations; (ii) enable BiH to potentially reduce its gas consumption through fuel switching by Toplane-Sarajevo from gas to fuel oil, which would enhance the country's strategically important security of energy supply; (iii) strengthen Toplane-Sarajevo's institutional capacity; and (iv) initiate network improvements. 5. Before the war, the Sarajevo district heating system consisted of 130 individual heat only boilers (HOBs) with a total installed capacity of 515 MW, a peak load of 387 MW (75% of capacity) and a network with a total length of 62 kilometers. The system was divided into two parts with entirely different technologies: (i) 43 independent area networks, supplied by medium to large sized individual boilers; and (ii) 87 separate buildings, supplied by one small rooftop boiler each. 2 6. At the end of the war, only 60 out of the 130 HOBs were operative (200 MW equivalent), parts of the 62 kilometer network required repairs, most of the 120 substations suffered from direct damage or lack of maintenance, all the remote control equipment was destroyed, only 30% of the building internal installations were operative and all heat metering was out of order due to lack of maintenance. 7. Project implementation followed a two-phased approach to meet both the need for rapid restoration of basic heat supply and the requirements of longer term, sustainable, reconstruction of the district heating network: (i) the first, fast-track repair phase, focusing on engineering surveys and assessments of the war damage and the reconnection of as many consumers as possible to basic heat supply in time for the first post-war winter; and (ii) the second, two-year reconstruction phase, focusing on restoring full heat supply, rehabilitate and improve the district heating system, and improve the institutional capacity of Toplane-Sarajevo. 8. The objectives were consistent with IDA' s Country Assistance Strategy dated March 5, 1996, which included a series of emergency rehabilitation projects to support priority needs, such as transportation, water supply, district heating, power and war victims rehabilitation. The restoration of district heating services was critical to serve the basic need for heating in the country's capital. In parallel, the Emergency Natural Gas System Reconstruction Project (Cr. 3029-BOS) aimed at regularizing the city's gas connections, including the disconnection of illegal gas connections made by district heating consumers. These two reconstruction projects were well received and supported by the Government of BiH and by the donor community. B. Achievement of Objectives Project Costs and Financing 9. At the time of appraisal, the project was estimated to cost US$40 million equivalent, of which US$20 million were to be financed by the Trust Fund Credit. During the fast track phase of the project, more accurate cost estimates were made based on an assessment of actual damage to the district heating system. This assessment found the project costs to exceed the estimated costs by about 11%. Thus, the cost of the project increased to US$44.5 million, comprising local costs of US$18.6 million (compared with the appraisal estimate of US$14.7 million) and foreign costs of US$25.9 million (compared with the appraisal estimate of US$25.3 million). External financing covered all foreign and local costs, and taxes and import duties were waived for the project. 10. The PSA for the District Heating Project closed on July 18, 1996, when the Trust Fund Credit became effective. The Emergency Power and the Emergency Natural Gas Projects, including their district heating components in compensation for PSA allocations within the District Heating Project to these two projects, closed on December 31, 1998 and July 31, 1999, respectively. Furthermore, the Bank-administered Dutch Trust Funds 020874 (US$0.3 million) and 024771 (US$5.5 million) closed on December 31, 1998 and July 31, 1999, respectively. Cofinancing from the Government of Denmark (US$1.4 million) was completed and closed in 1998. 11. Remaining financing for the project includes cofinancing from the Government of Finland (US$0.3 million) and the EU (US$0.6 million). Both are expected to close at the end of 1999. In addition, the Government of the Netherlands has provided a Trust Fund (021192) in the amount of US$3.125 million to be managed by the Bank. This Trust Fund was declared effective only on August 23, 1999. In early 1999, at the Government's request, the money 3 originally allocated for this fund was reduced by US$0.375 million to finance another Bank managed project in BiH. To compensate for this transfer, a new Dutch Trust Fund in the amount of US$0.375 million is expected to be arranged. These two Dutch Trust Funds are expected to close on June 30, 2000. The total amount remaining to be disbursed under the above cofinancing arrangements is US$4.4 million. 12. The project suffered substantial delays due to: (i) delay in the effectiveness of the Emergency Natural Gas Credit (Cr. 3029-BOS) until April 1998, thereby postponing Toplane- Sarajevo's access to the district heating component of this Credit (to offset the Gas PSA); (ii) delays in the effectiveness of Dutch Trust Fund 024771 by six months until December 1997 and 021192 by nine months until August 1999. This was due to these trust funds being part of larger "umbrella" Dutch Trust Funds for BiH, whereby all trust funds under the umbrella had to be ready for effectiveness before individual trust funds within the umbrella could be declared effective; (iii) delay in the internal clearance process of Dutch Trust Fund 021192; and (iv) a two year delay (until April 1999) and a significantly smaller amount of EU cofinancing than had originally been expected (US$1.9 million instead of US$6 million). These delays caused a delay in the closing of the Trust Fund Credit since funds from the Credit were required to finance the local costs associated with the Finnish, Danish and EU funding. 13. There was greater spending on the rehabilitation of boilers and technical assistance than expected at the time of appraisal. Total costs for boiler rehabilitation are estimated at US$20.5 million compared to the appraisal estimate of US$11.4 million. The reason for this increase in boiler costs is that at the time of appraisal only very preliminary costs estimates could be made. It was only during the implementation of the first phase of the project that more accurate cost estimates were possible based on detailed surveys of actual damage to the system. The increase in costs for technical assistance was due to the fact that it became necessary to keep the foreign experts in place to assist the PIU since project implementation was delayed due to the cofinancing constraints. Also, auditing of project and entity accounts had to be partially financed by the Trust Fund Credit as Toplane-Sarajevo remained short of cash. Project costs were less than expected for distribution networks (US$2.9 million rather than US$9.0 million) and substations (US$1.1 million rather than US$3.6 million) since there turned out to be less damage to these parts of the district heating system than anticipated. No spending turned out to be required for construction site preparation, as the project only focused on reconstructing the existing plants. 14. At the time of the closing of the Trust Fund Credit, a financing gap of US$3.5 million remained uncovered. The project components affected by the lack of funding are heat meters (US$1.8 million) in individual apartments and components related to the remote monitoring and control system (US$1.7 million). Although heat metering is important to encourage energy savings and the remote monitoring and control system will need to be completed eventually, these two components were considered the least important in achieving the overall project objectives. 15. In addition to the project costs, US$18 million in donor contributions toToplane- Sarajevo required to cover fuel costs during 1996-1998 were requested from donors at the time of project appraisal. These contributions did not come forward during project implementation. Instead, Toplane-Sarajevo relied on subsidies from the Sarajevo Canton Government to pay for its fuel supplies. However, these subsidies did not cover all of Toplane-Sarajevo's fuel costs, contributing to its substantial operating losses each year. 4 Physical Components 16. The fast track repair phase successfully achieved its objectives. During August 1996-March 1997, 18,000 flats were reconnected to the district heating system, resulting in a total of 34,000 flats connected to district heating by the end of the first heating season. This phase included initial repair work on most parts of the network. Fuller rehabilitation was carried out during the reconstruction phase. Initial repair measures included: (a) Carrying out emergency repairs in 27 boiler plants; (b) Installing 9 new and repairing most of the 120 old substations; (c) Repairing internal installations in more than 20,000 flats; (d) Reconstructing 3 kilometers of pipeline in the distribution network. 17. In parallel with the emergency repairs, large boilers, with a capacity to provide 62% of the heat load, were converted to allow for dual-firing (fuel oil or gas). This proved critical, since gas supply to Sarajevo was completely cut off during the 1996/97 heating season, allowing Toplane-Sarajevo to use fuel oil to supply heating services. 18. During the fast-track phase of the project, an engineering survey of the system was carried out jointly by local experts and the consultants team provided by the Govemment of Finland. The survey produced a full overview of the damage caused by direct war impact, lack of maintenance and the fact that the system did not operate for five-years. A database of building internal installations and consumers (many of them new) was established, serving both as a basis for reconstruction and as a basis for billing and collection. In addition, an engineering assessment, including a network interconnection study, was undertaken by the Finnish experts to identify the least cost option for rehabilitation of the district heating system. The options assessed were: (i) reconstruction to pre-war configuration; and (ii) interconnection of several of the 44 separate sub-systems in order to eliminate inefficient boiler plants and shift heat production to more efficient boiler units. The assessment showed that the costs of option (ii) would have exceeded the funds available under the project and that the costs of interconnection would not be offset by the elimination of inefficient boiler units. Consequently, the system was reconstructed to its pre-war configuration with improvements to individual components. 19. Substantial achievements were also made under the reconstruction phase, although implementation of components has been substantially delayed due to delays in, and lack of, cofinancing. At the time of project closing almost 45,000 flats were connected to the Toplane- Sarajevo district heating system and the following work had been undertaken: (a) Comprehensive repair work on 120 consumer substations had been completed (including furnishing 50 of them with metering) and 9 new substations had been installed; (b) A total of 25 boiler plants had been reconstructed and 18 had undergone repair work; (c) 45,000 building internal installations had been repaired; (c) 9 kilometers of the distribution network had been reconstructed. 20. Another 300 flats are expected to be reconnected by the end of 1999, bringing the total number of connected flats to the Toplane-Sarajevo district heating system to about 45,300. This is somewhat less than the 48,300 connected before the war because some apartments were 5 too destroyed to be reconnected to the district heating system, some flats (600) remain in Serb controlled territory, and some consumers have switched to gas. 21. Under the Toplana-Banja Luka (TBL) component, a local engineering firm was contracted by TBL without the prior approval of the Bank. It was only after the first payment of DM 138,320 (US$76,844 equivalent) had been made to the consultant that Bank Operations staff were alerted to this contract. After the investigation of the selection procedure used by TBL and the qualifications of the consultant, IDA notified TBL to terminate this contract. Because of genuine misunderstanding of IDA's procurement procedures by TBL due to the extreme difficulty of communicating with Banja Luka in late 1996/early 1997, IDA accepted to let the first payment stand. However, despite such notification, an additional DM 558,239 were subsequently fraudulently withdrawn from the Credit Account through bypassing both the Sarajevo Resident Mission staff as well as Headquarters Operations staff. The resulting investigations by the Banja Luka police and the Bank's Auditor General established the fraudulent withdrawal by an unauthorized person using a falsified signature. IDA requested Bosnia and Herzegovina to immediately refund the DM 558,239. The matter is still pending resolution by Govemment. Technical Assistance 22. Training was provided in the areas of: (i) project management; (ii) billing and collection; (iii) cost recovery, cost analysis, tariff setting, international accounting standards and basic business planning; and (iv) preventive maintenance of the newly reconstructed system. In addition, studies were undertaken in the following areas: district heating development, billing and collection, tariffs and network interconnection. 23. Assistance in project management has been provided to the PIU by Finnish consultants throughout project implementation and will be completed by the end of 1999. It includes day-to-day support in planning, procurement, contract monitoring, disbursement monitoring, supervision, and reporting. The Finnish consultant also assistedToplane-Sarajevo in re-introducing billing and collection systems and procedures. This included implementation of a modernized billing and collection system, re-creation of a consumer database and reporting. Although significant progress has been made to re-establish the systems for billing and collection, actual bill collection performance remains below expectations (para. 28). 24. In order to address the weaknesses in financial and commercial operations and management, a Danish consultant provided training to several departments of the enterprise. The training aimed at educating staff in the basic financial and commercial practices of a market oriented enterprise. Through interactive training courses with key staff, intemational accounting standards were reviewed, the cost structure of the enterprise analyzed, the principles of cost recovery and tariff setting were discussed, and the principles of business planning were presented. Although these training courses made a contribution to the transition, additional training and possibly hiring of highly qualified key staff are required to tum Toplane-Sarajevo into a commercially operated and managed company. 25. Training of technical staff in the operation of newly installed equipment was provided throughout project implementation. To ensure proper handling and adequate operation of new equipment, suppliers were obliged to provide training during the installation of technically complex equipment. 6 26. The four studies made a significant contribution to the project. The district heating development plan and the network interconnection studies helped decide on the most cost-effective reconstruction of the district heating system. The billing and collection study was used to decide upon the design and implementation of the billing and collection system and procedures; and the tariff study helped analyze tariff requirements and provided the analytical basis required to achieve the 1999 tariff increase of 17%. Financial Aspects 27. During the war, Toplane-Sarajevo was forced to continue to operate its remaining facilities without billing or collection. As a consequence, Toplane-Sarajevo had accumulated significant cash deficits and a large debt to its gas supplier, Sarajevogas, by the end of the war. 28. The key problem facing Toplane-Sarajevo is the lack of revenue collected. Although direct payments from consumers themselves have improved (from 0% of total billings in 1996' to 36% in 1997, 43% in 1998 and 55% for the first six months in 1999), total collections (including subsidies from the Canton Government) did not improve at the pace anticipated. Revenue collected from annual billings increased from 50% in 1996 to 80% in 1997 and dropped to 70% in 1998. Revenue collected for the first six months in 1999 was 77%. The drop in 1998 compared to 1997 is due to a lower than anticipated increase in direct payments from consumers and an overall reduction in Canton Govemment assistance and elimination of voucher payment schemes for soldiers. 29. It had been planned that Toplane-Sarajevo would recover the investments in building internal installations through a special surcharge to the building owners over a period of five years, starting in 1997. This special surcharge has not yet been introduced for socio- economic reasons, since the consumers' ability to pay was until recently deemed inadequate. However, options for recovering these investments are currently under discussion with the Canton Govemment. 30. Key reasons for the overall less than satisfactory collection performance are the following: (i) lack of qualified staff in the finance and commercial departments; (ii) the billing and collection procedures are still fraught with weaknesses, including a consumer database based on official owners of apartments rather than current occupants; invoicing made in advance for the five months to come, with collection due every month (consumers tend forget paying bills after the first month); and a general difficulty in generating billing and collection data, including the inability to include arrears on the current bills; (iii) a significant percentage of district heating consumers are among the poorest segment of the population (often refugees); (iv) most consumers cannot be individually disconnected; in order to disconnect a non-paying consumer, the entire apartment building would have to be disconnected; and (v) a decrease in Canton Government subsidies to Toplane-Sarajevo and the consumers. 31. To improve its collection perforrnance, Toplane-Sarajevo has introduced a number of measures, including aggressive legal action, increasing the number of payment points and disconnecting where technically possible. It is also working with the Finnish consultants to substantially improve the billing and collection system, allowing for monthly invoicing and including arrears on each month's bill. The Finance Department has also been strengthened through the hiring of a well-qualified billing and collection expert. Toplane-Sarajevo resumed billing in December 1996. 7 32. At the time of project appraisal it was recognized that Toplane-Sarajevo would only gradually be able to achieve full cost recovery. A financial covenant measuring revenue collected as a percentage of total annual operating expenses was agreed to in order to track progress towards cost recovery. Toplane-Sarajevo complied with the revenue collection covenant in 1996 and 1997 but was unable to meet the 1998 covenant. 1996 1997 1998 Target (%) 15 50 75 Actual (%) 18 73 60 33. An important step towards improved cost recovery was taken in March 1999, when tariffs were increased by 17%. This increase resulted in a residential tariff of I KM/m2 and a commercial tariff of 3 KM/m2. However, further measures need to be taken to reduce operating costs, particularly the cost of natural gas, which is inordinately high and accounts for a major portion of Toplane-Sarajevo's cash operating costs. 34. Toplane-Sarajevo complied with the financial covenant to have the project accounts audited each fiscal year. Although not required under the Trust Fund Credit Agreement, Toplane-Sarajevo also had its 1998 company accounts audited by an international audit company in the spring of 1999. In its Management Letter, the auditors stressed that the key weakness in Toplane-Sarajevo is the poor record keeping of trade receivables and lack of coordination between the Accounting and Collection Departments to reconcile the balance of uncollected heating bills at the end of the year. 35. The institutional component is rated as marginally satisfactory. It should be noted, however, that Toplane-Sarajevo faced (and continues to face) many challenges after the war period, including: (i) an influx of many refugees who are unable to pay for heating; and (ii) the fact that individual units cannot easily be disconnected without disconnecting the entire apartment-building, including paying consumers. Economic Rate of Return 36. The economic rate of return was recalculated using the same method as at appraisal. The costs included: the project cost (except for the Banja Luka component); natural gas (the current financial cost is equal to the economic cost, according to the tariff study prepared under the project); other energy (fuel oil); and operations and maintenance. Taxes and import duties were excluded. The benefits included district heat revenue; consumer's surplus (one-third of revenue as at appraisal); and heat savings from valve control (10% as at appraisal). The economic rate of return was estimated to be 19%, compared to 22.9% at appraisal. The reduction is due to the exclusion of the benefits to consumers of rehabilitating building internals. The intention at appraisal was to charge consumers for the cost of this rehabilitation. This charge was never introduced (para. 30). If it is assumed that consumers value this rehabilitation by at least as much as the cost, the economic rate of return would rise to 27%. 8 37. There were other more or less offsetting differences between the updated calculation and the one done at appraisal. The natural gas cost was more than twice as high because of: more consumption per household (1,320 m3 per year versus 785 m3); some consumption by commercial users (about 4% of the total in terms of space to be heated); and a higher gas price (US$167 per thousand m3 versus $140). Operations and maintenance costs were also greater. The higher costs were roughly offset by higher revenue than estimated at appraisal, and a correspondingly higher consumers' surplus. C. Major Factors Affecting the Project 38. There are five key factors that affected the project: (a). Simplified and accelerated project processing. Due to the emergency nature of the project, the project design, financing and procurement plan had to be prepared quickly and, due to the loss of records and absence of a detailed survey, on the basis of rough estimates and preliminary assessments. Bank management allowed the project to go ahead with a loosely defined financing plan, which was primarily based on pledges made at a conference of donors for the reconstruction program for all sectors. The flexibility that resulted from the simplified and accelerated project processing helped start reconstruction of the district heating system almost immediately and was therefore a critical element in the Bank's responsiveness to the post-war conflict. (b). Streamlined procurement procedures. The project's procurement plan at appraisal reflected the requirements of accelerated project processing and the limited amount of data available under emergency reconstruction operations. It was decided up-front that the plan would have to be adjusted in the course of reconstruction to match actual requirements as they surfaced, as well as the terms and conditions of cofinancing. The adjustments to the procurement plan that became necessary during project implementation originated mainly from the fact that the planned, large tum key contracts proved not to be suitable for emergency reconstruction of this district heating network and particularly not for the building intemal installations. Most of the large contracts for works and equipment had to be broken down into smaller packages because of: (i) the need to do some very quick initial work on part of the system under the fast-track repair phase; (ii) the fact that the actual quality and quantity of damage could be determined only as reconstruction progressed; (iii) small, flexible packages were necessary to cover changing needs; and (iv) the Govemments of Finland and Denmark were only willing to supply equipment. This had to be complemented by having the Trust Fund Credit and the Dutch Trust Funds finance associated materials and installation works. In addition, works contracts had to be smaller than anticipated in order to: (i) perform work as quickly as possible once a package of materials arrived; and (ii) perform work immediately after the scope of work had been identified for a system component. (c). Joint local and international staffing of the PIU. Toplane-Sarajevo was a first time borrower of World Bank funds. As such, it had very limited experience with the implementation of large scale investment programs and under initially chaotic conditions to boot. Teaming the local PIU staff up with international experts in project management, implementation and procurement proved very successful. The international experts ensured that the project met its implementation schedule based on available financing. The delays in project implementation are primarily due to lack of timely available financing and not the PIU. For funding that is yet to be disbursed (e.g. Dutch TF 021192), the PIU has already carried out most of the procurement preparations. 9 (d). Placement of staff in the field. Given that Toplane-Sarajevo was a first time borrower and the need for intense Bank supervision, it was decided that the project would benefit from having a Bank staff member responsible for the day-to-day supervision of the project based in the Bank's Resident Mission. This helped the project get off the ground and allowed for the project to be implemented as quickly as donor funding became available. (e). Delays in the availability of funds and difficulty in disbursements of the PSAs. The implementation of the second (reconstruction) phase suffered from the lack of timely and available financing. The lack of timely funding from the EU caused a major delay in the implementation schedule and was later partly compensated for by additional contributions from the Dutch Government. Dutch funding was made available in the form of "umbrella" trust funds to Bosnia and Herzegovina. Therefore, the district heating project could only access the Dutch funding when the trust funds for BiH as a whole were declared effective. The TF 024771 was only declared effective in the end of 1997, and TF 021192 only became effective on August 23, 1999. Also, the use of PSAs led to a number of difficulties when disbursements where made concerning the handling of "transfers" and adjustments between the District Heating, Power and Gas Projects and this in itself repeatedly caused temporary shortages of funds. In addition, the delay in the effectiveness of the Emergency Natural Gas Project prevented the District Heating Project from accessing the district heating component of the Gas Project (sum equivalent to the Gas Project's PSA) until it became effective in April 1998, as opposed to mid-1997 as originally planned. D. Project Sustainability 39. It is likely that the achievements generated by the project will be sustained. Toplane-Sarajevo has demonstrated the technical ability to rehabilitate, upgrade and operate the district heating system by successfully implementing the project. With proper maintenance and operating practice, the rehabilitated facilities will be productive for many years. Further investments will be needed to enforce energy savings, introduce automation and enhance overall efficiency. However, a key requirement for the viability of Toplane-Sarajevo is an improvement in cost recovery, a reduction in operating expenses (notably by securing fuel supply at more competitive prices, e.g. natural gas) and strengthening of key positions in the enterprise. A Gas Development Study is currently being undertaken under the Emergency Natural Gas System Reconstruction Project (Cr. 3029-BOS) which will identify options for decreasing the cost of natural gas to Bosnia and Herzegovina. These measures are required to ensure Toplane-Sarajevo has the funds and capability required to maintain the rehabilitated system. The management of the enterprise has recognized that both the technical and financial areas are critical for the future operation of the system and address this in the future operations plan attached in Annex B. E. Bank Performance 40. Bank performance is rated as satisfactory. The Bank responded very quickly to the Borrower's request for emergency reconstruction and took the lead role among donors in the rehabilitation of district heating in BiH during a difficult and confusing period of time. Bank involvement in the project served as a catalyst for financing by other donors. 41. Concerning implementation of the Banja Luka component, a special review of internal Bank controls by the Auditor General identified deficiencies in communication between departments (e.g. the failure of the Loan Department to check with the Resident Mission staff or Operations staff at headquarters prior to making disbursements, and the omission of Operations staff to inform the Regional Procurement Advisor of TBL's violation of the procurement rules) as 10 possible reasons for the failure to prevent disbursements after Toplana Banja Luka had been informed to terminate its contract with a consultant. Hence, the Bank's performance in this specific area was less than satisfactory. F. Beneficiary Performance 42. The performance of Toplane-Sarajevo is rated as satisfactory throughout preparation and implementation of the project's physical components. Project management, cooperation with foreign experts, and coordination with the Bank were undertaken in a competent and reliable manner by the Toplane-Sarajevo PIU. Toplane-Sarajevo's performance with regard to the institutional aspects of the project is rated as marginally satisfactory as a result of inadequate staffing in certain key areas throughout the project implementation period and insufficient revenue collection. Clearly, however, Toplane-Sarajevo started from an exceedingly difficult base. 43. The performance of Toplana Banja Luka is rated unsatisfactory due to improper withdrawal of funds from the Credit Account and the consequent failure to prepare a proper rehabilitation investment program. G. Assessment of the Outcome 44. The overall outcome of the project is satisfactory. Despite delays in project implementation, the project met nearly all of its physical objectives and there was progress towards the financial and institutional objectives under difficult post-war circumstances. All facilities rehabilitated under the project are operating satisfactorily and progress continues to be made on the institutional front. The economic rate of return is 19%, which is well aboveBiH's cost of capital (around 15%). H. Future Operations 45. A future operations plan for the enterprise has been developed by Toplane- Sarajevo and agreed with the Bank. The plan aims at ensuring the sustainability of project investments while addressing the enterprise's primary weaknesses in management, operational efficiency, staffing and cost recovery by: (i) establishing energy metering, initially by installing rneters at the building level and completing the second and third phases of the remote control and monitoring system; (ii) strengthening the organizational performance by reorganization of the utility's structure and planning process and introducing a modernized information system; (iii) establishing an advanced maintenance program which will ensure the reliability and full lifetime usage of equipment as well as reducing costs caused by system failure and emergency repairs; (iv) improving cost recovery and financial management by establishing consumer centers to facilitate bill payment, introducing International Accounting Standards, improving financial planning and seeking lower gas purchase prices; and (v) ensuring adequate staffing by hiring new staff to the financial, commercial and marketing departments, training and improving human resource management practices. In the longer term, Toplane-Sarajevo will also seek to undertake investments to install individual heat meters and combined cycle heat-and power production. 46. The following key monitoring indicators have been agreed to: (i) number of apartments and business premises connected to the district heating system; (ii) number of consumers receiving heat who are both the official and actual tenants of the premises; (iii) heat generated and ratio between gas and oil consumption; (iv) revenue collection performance and total revenue collected relative to operating costs; and (v) net income. I1 I. Key Lessons Learned 47. The key lessons learned are the following2: (a) The project demonstrated that emergency operations require flexibility in project design and intensive Bank supervision, especially in the start-up phase, but also strong coordination within the Bank, particularly in the disbursement area. (b) A strong PIU within the beneficiary is required for successful project implementation. Factors contributing to the effectiveness of the PIU were: (i) adequate quality, quantity and continuity of staff; (ii) support by foreign experts; (iii) sufficient autonomy; and (iv) adequate enterprise autonomy. (c) Even though the flexible approach followed by IDA in financing items in which other donors were not interested allowed the project to quickly respond to the emergency needs of the sector, difficulties in securing donor financing caused major delays in the implementation of the second (reconstruction) phase of the project. The lack of available financing also delayed the disbursements of the Trust Fund Credit, since the latter had to be used to finance civil works related to equipment financed by cofinanciers. When a project needs to go ahead without firrnly committed cofinancing, as was the case here, the Bank components should be as independent as possible and viable on their own if timely closing of the Credit is considered an important objective of an emergency project. (d) While the Project Start-up Advances made it possible to procure some goods and equipment before Board approval of the project, a number of difficulties arose when disbursements were made concerning the handling of transfers and adjustments between the projects with PSAs. While advance funding for future emergency projects is critical, a mechanism to avoid problems referred to above needs to be designed. As an example, it might be useful to consider the use of extended Project Preparation Facilities (PPFs), thereby avoiding the difficulties entailed in inter-project transfers of funds. 2 Recommendations regarding the Toplana Banja Luka component can be found in the review undertaken by the Bank's Internal Auditing Department (Report No. IBRD FY99-78; June 29, 1999). 12 Part II: STATISTICAL TABLES Table 1: Summary of Assessments Table 2: Related Bank Loans/Credits Table 3: Project Timetable Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual Table 5: Key Indicators for Project Implementation Table 6: Key Indicators for Project Operation Table 7: Studies Included in Project Table 8A: Project Costs Table 8B: Project Financing Table 9: Economic Costs and Benefits Table 10: Status of Legal Covenants Table 11: Compliance with Operation Manual Statements Table 12: Bank Resources: Staff Inputs Table 13: Bank Resources: Missions 13 Table 1: Summary of Assessments A. Achievement of Objectives Substantial Partial Negligible Not applicable Macro Policies _ . Sector Policies _ Financial Objectives 0Z Institutional Development _ Q Physical Objectives E _ - Poverty Reduction _ - -- 0 Gender Issues E _ Other Social Objectives _- 0 Environmental Objectives _ 0 Public Sector Management _ _ 0 Private Sector Development _ _ 0 Other (specify) - - 0 B. Project Sustainability Likely Unlikely Uncertain 0 C. Bank Performance satisfactory Satisfactory Deficient (I) (I) (Z) Identification _0 E Preparation Assistance 0 Appraisal -: 0 Supervision 0 D. Borrower Performnance satisfactory Satisfactory Deficient (:) (I) (Z) Preparation 0 Implementation 0 Covenant Compliance El Operation (if applicable) 2, 0 Highly Highly E. Assessment of Outcome satisfactory Satisfactory Unsatisfactory unsatisfactory (. 0 )( ) -) .. z : 14 Table 2: Related Bank Loans/Credits Loan/credit title Purpose Year of approval Status Following operations 1. Emergency Electric To restore electricity 1996 Closed 12/31/1998 Power Reconstruction service to acceptable Project levels in major cities and BA-PE-44395 ~~for vital industries in the BA-PE-44395 Federation. 2 Emergency Natural To restore safe and 1997 Closed 07/31/1999 Gas System reliable gas supply to Reconstruction Project BiH, in particular to BA-PE-44391 Sarajevo. 3. Second Electric To continue the 1998 Under implementation Power Reconstruction restoration of safe Closing on 06/30/2000 Project electricity service to BA-PE-45483 acceptable levels in BiH. Table 3: Project Timetable Steps in Project Cycle Date Planned Date Actual/ Latest Estimate Identification (Executive Project Summary) N.A. N.A. Preparation N.A. N.A. Appraisal N.A. 01/09/1996*,** Negotiations N.A. 04/30/1996** Board Presentation N.A. 05/02/1996** Signing N.A. 05/20/1996*** Effectiveness N.A. 07/18/1996*** Trust Fund Credit Closing N.A. 03/31/1999*** * First World Bank mission. ** Based on Memorandum and Recommendation of the President dated 04/30/96. *** Based on database of Loan Department. 15 Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual (US$Millions) FY96 FY97 FY98 FY99 Appraisal estimate 2.3 19.3 20.0 - Actual 2.96 9.7 14.9 20.0 Actual as % of estimate 128.6 50.2 74.5 100 Date of final disbursement April 27 * Based on Memorandum and Recommendation of the President dated 04/30/96. ** Based on actual disbursements provided by Loan Departnent. Table 5: Key Indicators for Project Implementation Estimated Actual Completion Completion I. Key implementation indicators in PAD (Technical Annex) 1. Full engineering survey of the Sarajevo DH system 1996 1996 2. Assessment of system re-design measures and efficiency improvements 1996 1996 3. Reconstruction of boiler plants* 1996 2000 4. Replacement of distribution network piping 1996 1998 5. Reconstruction of substations* 1996 2000 6. Reconstruction of consumers to the DH system* 1996 2000 7. Rehabilitation of building internal installations* 1996 2000 8. Installation of dual gas/oil fuelling capacity in large boilers 1996 1997 9. Installation of heat meters in boiler plants and substations 1996 1998 1 0. Introduction of preventive maintenance 1997 1998 11. Establishment of consumer database 1996 1997 12. Re-introduction of billing and collection systems and procedures 1996 1997 13. Technical assistance in project and financial/commercial 1998 1999 14. Preparation of a DH project in Banja Luka 1996 Not implemented * Rehabilitation of these components under cofmancing is expected to continue through June 2000. 16 Table 6: Key Indicators for Project Operation Estimated Actual I. Key operating indicators in PAD (Technical Annex) 1. Reconnection of consumers to Re-connect as many 45,000 out of 48,300 the DH system consumers as possible and as apartments connected prior to quickly as possible. the war to the Toplane- Sarajevo DH system were reconstructed by Trust Fund Credit closing. 2. Institute billing and collection Bill collection.of at least 15%, 18% in 1996, 73% in 1997, and system 50% and 75% of total annual 60% in 1998. operating expenses for 1996, 1997 and 1998. Table 7: Studies Included in Project Study Purpose as defined at Status Impact of study appraisal/redefined 1. District Heating For identification of preferred Completed Used to identify Development Plan system improvement options investments for reconstruction phase 2.Tariff Study For adjustments of district Completed Used to assess tariff heating tariffs increase requirements 3. Billing and Collection For re-establishment of Completed Used to design and System billing and collections implement billing and collection system 4. Interconnection Study For assessment of DH Completed Used to determine interconnection option cost/benefit of interconnection 5. Project Preparation Study For preparation of future Not Not Applicable for Banja Luka investment program Completed 17 Table 8A: Project Costs* Appraisal estimate Actual/latest estimates (USS million) (US$ million) Item Local Foreign Total Local Foreign Total costs costs costs costs A. Toplane-Sarajevo Component 1. Boilers 3.8 7.6 11.4 8.3 12.2 20.5 2. Distribution Networks 4.0 5.0 9.0 1.8 1.1 2.9 3. Substations 0.6 3.0 3.6 0.4 0.7 1.1 4. Intemal Installations 4.4 3.6 8.0 4.5 4.2 8.7 5. Meters 0.1 1.4 1.6 0.4 1.4 1.8 6. Other Equipment** 1.1 0.6 1.7 2.7 0.2 3.0 7. Construction Site Preparation 0.4 0.1 0.5 0 0 0 8. Technical Assistance 0.1 3.6 3.7 0.3 5.7 6.0 B. Banja Luka Component 1. Project Preparation 0.2 0.3 0.5 0.2 0.3 0.5 Total 14.7 25.3 40.0 18.6 25.9 44.5 * xAppraisal estimates include labor, spare parts and 20% contingencies. Taxes and duties were waived under the project. ** Includes remote monitoring and control equipment 18 Table 8B: Project Financing Appraisal estimate Current Estimate (US$ million) (US$ million) Item Local Foreign Total Local Foreign Total costs costs costs costs World Bank Trust Fund Credit 20.0 10.9 9.1 20.0 Of which: Compensation for PSA to Cr. 3029 2.0 3.0 5.0 Compensation for PSA to Cr. 2903 0.8 3.0 3.8 Netherlands 5.8 5.18 4.12 9.3 Of which: TF 20876 0.3 0.0 0.3 TF 24771 2.4 3.1 5.5 TF 21192 2.0 1.1 3.1 TF to be determined 0.3 0.1 0.4 Finland 12 0.0 8.4 8.4 Other donors unidentified at appraisal 2.2 EU 0.8 1.1 1.9 Denmark 0.0 1.4 1.4 Financing Gap Total 40.0 1.7 1.8 3.5 18.6 25.9 44.5 Notes: * Neither the technical Annex nor the MOP include a breakdown of the project financing plan based on local and foreign costs, due to the impossibility of making such a distinction. * 100% of the total costs were covered by extemal financiers. * The actual project costs increased by 11% to US$44.5 million in the course as project implementation as more accurate estimates were made. Actual costs can only be established once other ongoing cofinancing is terminated. * Project costs do not include the proposed allocation by donors of US$18 million to fund Toplane- Sarajevo's fuel expenses. 19 Table 9: Economic Costs and Benefits Economic Rate of Return Calculation (US$million) Costs Benefits Project Natural Other Other District Consumer Heat Radiator Benefits Year Cost Gas Energy O&M Heat Rev. Surplus Savings Revenue Net 1996 2.7 0.1 0.5 0.5 1 0.1 -1.7 1997 10.6 1.7 3.1 3.1 7.7 1.5 0.8 -8.5 1998 11 6.9 2.2 4.1 11.3 2.2 1.3 -9.4 1999 12.3 8.9 4.8 14 4.7 1.4 -5.9 2000 3.4 8.9 4.8 15.1 5.1 1.4 4.5 2001 8.9 4.8 15.1 5.1 1.4 7.9 2002 8.9 4.8 15.1 5.1 1.4 7.9 2003 8.9 4.8 15.1 5.1 1.4 7.9 2004 8.9 4.8 15.1 5.1 1.4 7.9 2005 8.9 4.8 15.1 5.1 1.4 7.9 2006 8.9 4.8 15.1 5.1 1.4 7.9 2007 8.9 4.8 15.1 5.1 1.4 7.9 2008 8.9 4.8 15.1 5.1 1.4 7.9 2009 8.9 4.8 15.1 5.1 1.4 7.9 2010 8.9 4.8 15.1 5.1 1.4 7.9 IRR= 19% All data are in 1996 prices. The project costs were converted to 1996 prices and exclude US$504,000 for Banja Luka. Gas costs were taken from the financiai statements; costs after 1999 were assumed to remain at the 1999 level. Other energy costs were taken from the financial statements. O&M costs were taken from the financial statements. Costs from 2000 are assumed to be at the 1999 level. District heat revenue was taken from the financial statements. It includes a small amount of non-household revenue (11% of total). The higher revenue from 2000 takes account of a 17% tariff increase in mid-1999. The consumer surplus was estimated at 1/3 of district heat revenue, the same as at appraisal. Heat savings were estimated at 10% of the heat consumed in the absence of valves (as at appraisal) and valued at the costs of gas plus other energy plus O&M. Radiator revenue is put at zero in the absence of any arrangement for charging consumers for rehabilitation of building internals. 20 Table 10: Status of Legal Covenants Covenant Present Original Revised Description of Covenant Comments Agreement Section Type Status Fulfillment Fulfillment Date Date Credit 2.02(b) j C Borrower to open and maintain a Done special account in a commercial bank. 3.03 10 C 12/31/96 Undertake a tariff study. Done 4.01(a) I C Maintain records in accordance Done with sound accounting practices. 4,01(b) I C Have project accounts including Done Special Account audited annually by an Independent Auditor. Project 4.02 5 C Toplane-Sarajevo to establish and Done (Toplane- maintain a PIU until completion of Sarajevo) the project. 4.03 2 PC Toplane-Sarajevo to comply with Complied in 1996 & 1997, the targets for revenue collections not in 1998 as a percentage of operating expenses. 4.05 10 C 06/30/97 Develop a District Heating Master Formulated a Development Plan. Plan 4.09(a) I C Toplane-Sarajevo to maintain Done records and accounts. 4.09(b) I C Toplane-Sarajevo to have records Done and accounts for each fiscal year audited. 4.11 10 C 09/30/99 06i02/l999 Toplane-Sarajevo to furnish to Done IDA, no later than 6 months after the closing date, a future operations plan. Project 4.02 10 NC 11/30/96 TBL to carry out the engineering Component terminated due (Toplana survey. to fraudulent withdrawals Banja-Luka) 4.05(a) I NC TBL to maintain records and Not Applicable accounts. 4.05(b) I NC TBL to have records, accounts and Not Applicable financial statements for each fiscal year audited. 4.06 10 NYD 09/30/99 TBL to furnish to IDA, no later Not Applicable than 6 months after the closing date, a future operations plan. Covenant types: Present Status: I. = Accounts/audits 8. Indigenous people C = covenant complied with 2. Financial perfornance/revenue generation from 9. = Monitoring, review, and reporting CD = complied with after delay beneficiaries I10. = Project implementation not covered CP = complied with partially 3. Flow and utilization of project funds by categories 1-9 NC = not complied with 4. Counterpart funding 11. = Sectoral or cross-sectoral budgetary or 5. Management aspects of the project or executing other resource allocation agency 12. = Sectoral or cross-sectoral policy/ 6. = Environmental covenants regulatory/institutional action 7. = Involuntary resettlement 13. = Other 21 Table 11: Compliance with Operational Manual Statements Statement number and title Describe and comment on lack of compliance 1. All OM statements complied with 2. 3. Etc. Table 12: Bank Resources: Staff Inputs Planned Revised Actual Stage of project cycle Weeks US$ Weeks US$ Weeks US$ (000) (000) (000) Preparation to Appraisal N.A. N.A. 14.3 79.8 For Appraisal N.A. N.A. 35.7 91.6 Negotiations through Board N.A. N.A. N.A. 0.9 approval Supervision** 24.1 53.4* 83.6 198.6 Completion N.A. N.A. 7.0 15.0 Total 24.1 53.4 130.5 371.8 m COS reports dated 08/05/99. ** Project supervised on continuous basis by staff based in the field. 22 Table 13: Bank Resources: Missions Performance Rating' Types of Stage of project cycle Month/ No. of Days in Specialization' Implem. Developm. Pb]3 Year Persons Field status objectives Through Appraisal Appraisal through Board approval Supervision 1 06/96 3 8 TM, Ec, E S S F, I, CoF Supervision 2 09/96 3 112* TM, Ec, E S S I, CoF, F Supervision 3 04/97 1 10 TM S S P, 1, CoF, F Supervision 4 11/98 2 8 TM, FA S S 1, Cof, F, P Completion** 06/99 3 14 TM, FA, Ec Total I - Key to Specialized staff skills: 2 - Key to Performance Ratings: 3 - Key to Types of Problems: TM-Task Manager S-Satisfactory F-Financial Ec-Economist I-Institutional E-Engineer P-Procurement FA-Financial Analyst CoF-Cofinancing * Project supervised on a continuous basis by staff based in the field. ** PSR was not completed for completion mission. ANNEX A K. J. K. P TOPLANE-SARAJEVO Project Implementing Unit Semira Fraste 22 Tel. + 387 71 543 266 71000 Sarajevo, Bosnia and Herzegovina Fax. + 387 71 667 287 IMPLEMENTATION COMPLETION REPORT BOSNIA AND HERZEGOVINA EMERGENCY DISTRICT HEATING RECONSTRUCTION PROJECT in SARAJEVO CREDIT WBTF 24034-BOS (3029-BOS Part D, 2903-BOS Part H) APPENDIX B BORROWER'S CONTRIBUTION TO THE ICR JULY, 1999 K.J.K.P TOPLANE-SARAJEVO 2 Project Implementing Unit A. PRE-WAR SITUATION I. The district heating (DH) system of Sarajevo started operations in 1968. A municipal heating entity, J. K. P. Toplane-Sarajevo was operating the system and provided heat, by the end of 1991, approximately 40% of the population (about 180 000 inhabitants) and part of the public sector in all communities of the city. 2. The DH system consisted of 130 individual heat-only boilers (HOB) with a total installed capacity of 515 MW, a peak load of 387 MW (75% of capacity), and network with a total length of 62 km. The system is divided into two parts of different technologies: (i) 43 independent area networks, supplied by one boiler plant each, provide hot water for heating only; and (ii) 87 separate buildings, supplied by one small roof-top boiler plant each. The number and size of boilers varies in the boiler plant depending on the heat load of the network parts and buildings. 120 substations are located in the supply areas of big boiler plants and are located either in the boiler plant itself or in the basement of apartment building they supply. 3. The average number of the radiators per flat at the end users' premises was calculated to be 4,5 meaning in total 225 000 radiators in 48.300 flats connected to the district heating system in Sarajevo. 90% of flats were property of commercial entities, while 10% belonged to the municipal housing company SARAJEVOSTAN. Radiators and connecting internal network (Internal Installations) were part of the property. B. PRE-PROJECT SITUATION 4. During the war gas shortages and direct impact damages reduced the system to operation of low-pressure gas lines only. Unsupplied consumers were initially using alternative energy sources such as coal, wood and paper heating their flats individually. As the war continued and those sources of fuel were depleted, more and more consumers resorted to make illegal gas connections to the gas network modifying internal heating installations into gas distribution network. As a result only 16 000 (32%) of the 50 000 flats originally connected to the district heating network were heated by Toplane dropping heat demand from 387 MW to 141 MW (36%). 5. Out of the 130 boilers only about 60 were operative representing in total 200 MW or 60% of the total pre-war installed capacity. 6. Distribution network did not appear to have major war damages but due corrosion, freezing and insulation damages the need of repairs was estimated to be about 15% of the total length of 62 km. 7. Most substations were affected by lack of maintenance due to lack of spare parts and wear and tear. For those substations that were out of operation and without water for about 4 years corrosion, freezing and insulation problems were expected to be pervasive. K.J.K.P TOPLANE-SARAJEVO 3 Project Implementing Unit 8. The remote control center, which served 105 boilers including all 87 rooftop boilers and 18 of 44 boiler plants as well as 40% of distribution substations, was totally destroyed during the war. Only part of the wiring, local interface equipment and parts of the original building were left. 9. Based on the average pre-war number of radiators per flat, i.e. 4,5 per flat, 50 000 flats with total of 226 000 radiators were connected to the district heating system of Toplane-Sarajevo. After the war only 30 % (65 000) of all radiators was in operative condition. The reasons were corrosion, clogging and leaking of radiator, valves and internal pipelines, and on the other hand the use of internal heating installations for individual gas heating by connecting them directly to the gas network. 10. Metering of heat consumption was partly done in rooftop boiler houses with one pipe system and in part of substations. Due to the lack of maintenance during the war almost all of meters were out of order and/or disconnected. 11. Institutional activities as maintenance, billing and collecting, financial planning were more or less neglected during the war either due to lack of tools and spare parts or damages to the premises. C. THE PROJECT OBJECTIVES AND EVALUATION 12. The objectives of the project were to: (i) restore district heating service in Sarajevo as soon as possible by reconstructing both the district heat supply system as well as by reconstructing building internal heating installations; (ii) enable BiH to potentially reduce its gas consumption through fuel switching by Toplane- Sarajevo from gas to fuel oil, which would enhance the country's strategically important security of energy supply; (iii) strengthen Toplane-Sarajevo's institutional capacity; and (iv) include system improvements in the reconstruction process to the extent feasible. The project would enhance energy efficiency and energy conservation and reduce environmental pollution by enabling disconnection of about 34 000 flats in Sarajevo from self- made gas connections. The importance of the project's second main objective has been abundantly demonstrated during the war. The total dependence of Sarajevo on natural gas imported from Russia and transiting through Serbia means that Sarajevo's energy supply is not secure. The DH system's ability in principle to use dual firing and, hence, the option of using light fuel oil for district heating rather than gas would enhance Bosnia's security of energy supply. The capability to use this dual firing option will be fully rebuilt under the proposed project. K.J.K.P TOPLANE-SARAJEVO 4 Project Implementing Unit The project start was in March 1996 and the completion is estimated to be at the end of March 2000. The credit now in question was planned to form the financing in the beginning phase of the project meanwhile searching the additional financing sources for the rest part of the project. The most urgent needs covering material supplies were financed through the credit granted by the Government of Finland. 13. The project complied with both the emergency situation and the complexity of the Sarajevo district heating system in a two-phase reconstruction approach: (i) a fast track repair program through the ongoing construction season to re-supply as many consumers as possible with district heat; and (ii) a reconstruction program for full rehabilitation and improvement of the entire district A heating system through September 1997. 14. FAST TRACK REPAIR PROGRAM (Emergency Program) * About 30 000 flats were heated through District Heating Network by the end of 1996. By the end of the first heating season after the war, 1996-1997, about 34 000 flats were heated (April 1997). * The repair works were carried out in about 20 000 flats including installations of new radiators of different types, new radiator valves and connectors, pipework with insulation and cleaning of internal networks in the buildings. * About 3 kilometers of damaged and worn-out network segments reconstructed in the numerous most critical areas. * 9 pieces of new Compact Consumer Substations installed and existing substations were repaired by replacing damaged components to cover the heat supply to the flats. * Emergency repairs in Boiler Plants to fulfill the heat demands of the flat to be heated. * Billing and Collecting System operative in December 1996. * Toplane's business premises reconstructed and repaired for housing the personnel of Toplane's management and Project PIU Team. 15. MAIN RECONSTRUCTION PROGRAM * By the start of the heating season 1999-2000 totally about 45 000 flats will be heated covering all the flats which were heated before the war except very badly damaged ones needing additional civil works repairs, and those left to the Serbian side. The figure includes 7 000 flats repaired by EU funding. * About 9 kilometers of network repaired according to the plan. * Comprehensive repair works of consumer substations completed; 50 of them provided with heat meters. * 25 total or partial reconstruction of boiler plants completed including additional 8 total rooftop boiler plant construction. K.J.K.P TOPLANE-SARAJEVO 5 Project Implementing Unit * In 18 other boiler plants minor/major repair works were carried out to increase reliability in heat production at least to the level as prevailed before the war. * Final Report of Development Plan was issued. The Master Plan Study and System Planning were modified to cover only a shorter term "Development Plan". 16. By the end of July, 1999, which is the closing date of the part of the project financed through credits WBTF 24034-BOS (closing date March 31, 1999), credit 3029-BOS Part D (closing date July 31, 1999) , and credit 2903-BOS Part H (closing date December 31, 1998) the contracted goods and works are well within the project plan. However the project implementation schedule has been revised three times since 1997 and corresponding extentions have needed to the credit. 17. Due to the financial gap of about USD 3,5 millions following tasks will be left uncompleted: * Establishing the energy metering system with test laboratory for meter calibration * Implement II and III phase of Remote Control and Monitoring System * Complete the reconstruction of the facilities of the second priority Phase I of Remote Control and Monitoring System includes mainly monitoring function in 66 of 87 Rooftop Boiler Plants, 9 of 43 Major Boiler Plants and 9 of 120 substations. D. IMPLEMENTATION ARRANGEMENTS 18. Within Toplane-Sarajevo the Project Implementing Unit (PIU) was established. PIU was supported by the Finnish experts from the company Ekono Energy Ltd. giving Technical Assistance in the following areas: (i) project management (general, project management, scheduling, procurement and cost control); (ii) engineering; (iii) financial and commercial management; and (iv) system planning. Each of these tasks has included a significant staff-training component. The amount of the PIU's personnel has varied from 40 in the beginning to 25 at the moment so that the amount of the Finnish staff has decreased according to the possibility to transfer the tasks to be performed by the Bosnian personnel. PIU carried out all tasks in the project supported by the Toplane personnel which in their part participated in the selection of main equipment, contractors and in site supervision as well as commissioning. One of the biggest tasks was preparing of Technical Specifications for the procurement of the Goods and Works. K. J.K. P TOPLANE-SARAJEVO 6 Project Implementing Unit The main part of equipment and materials for the reconstruction was procured through international shopping (IS) while major part of the works was carried out by Bosnian enterprises and entities as turnkey basis. During the work it became apparent that the comprehensiveness and the complexity of the program is essentially bigger than originally estimated and the plans were changed in several phases. This caused PIU to work under the continuous pressure. E. OPERATION EXPERIENCE 19. The total project costs based in the known financing possibility will be total USD 41 million, from which the credit now reported is USD 20 millions. Other credits and donations covering the rest of the costs are from the governments of Finland and Denmark, European Union, and two Dutch Trust Funds managed by the World Bank. 20. A Part of the credit of USD 20 millions was given to Banja Luka District Heating Project (500 000 USD), a part to Elektroprivreda (3 800 000 USD) and a part to the Gas Project (5 000 000 USD, which caused financial problems before getting the given parts back to the Sarajevo Emergency District Heating reconstruction Project. Due to the delays in starting of new contracts project time schedules and plans were revised continuously. However, the World Bank was capable to arrange co-financing with the Government of the Netherlands as a form of the Dutch Trust Fund, USD 5,5 millions in 1998 and USD 3,5 millions in 1999 through which the original implementation plan was realized. 21. The planned objectives in the Fast Track Repair program were all achieved and those in Main Reconstruction Program as far as the funding was available although in the latter program almost two years later than estimated in the Project Document. 22. The involvement of different donor-countries and organizations, and vain expectations for new credits caused during the whole project much additional work and frustration to PIU personnel particularly, when the resources were too small compared with the extensiveness of the Project. European Union was planned to participate in the project funding already in the autumn 1996 as indicated in all plans, but finally the only contract was signed in February, 1999, including only minor part of preliminary planned components. F. BANK PERFORMANCE 23. The project was started fast and particularly the preparation phase and start-up of the project was carried-out in a satisfactory way. K.J.K.P TOPLANE-SARAJEVO 7 Project Implementing Unit Some difficulties occurred in finding out new donors for participating in project financing after the basic bank credit was allocated. Particularly this came-up in the components, which were planned to be financed through European Union. As a total, however, taking into consideration the all factors the World Bank managed well. Furthermnore it has to be stated that the bank's actions in prolonging the credits' availability have been excellent. G. PERFORMANCE OF THE BORROWER AND BENEFICIARY 24. The perfornance of the Government of BiH and different ministries have been satisfactory although in some cases delays have occurred in settling of formalities in reallocation of credits and releasing new credits to the project. The management of Toplane-Sarajevo has given all necessary support to the project. Special attention is to be given to the human resources in participation of site supervision. H. KEY LESSONS LEARNED 24. The main and most important lesson learned during the implementation is that the project planning shall be done by professionals and in proper way. In the case of the project the structuring of the project was done in insufficiently without taking into consideration the complexity of the district heating system and the different technical level of the system components. Furthermore the estimation of needed resources and time for design and engineering was wrong just due to the lack of proper project structuring. The amount of procurement packages was totally wrongly estimated as well as the content of the packages. It was very idealistic in the beginning of the project to estimate that with the available information big turnkey packages could have been specified. However, the implementation by the using of the local contractors to the works where the size of the contract was suitable for the National Competitive Bidding procedure has proved to be very useful. Despite of the problems in the project realization the extensions of the project schedule have not increased the project costs except in case of PIU. It can be verified that the proper Technical Specification and good competition in contracting have saved more than PIU costs have increased. Finally it can be emphasized that although there were some difficulties and problems the results can be considered good and Toplane has received, what was expected when starting the project up to the credit availability. However, the missing financing should be found and uncompleted tasks implemented, after which Toplane can start its normal operations on the good basis. ANNEX B KJKP TOPLANE-SARAJEVO DISTRICT HEATING SYSTEM Sarajevo, Semira Fra{te 22 Tel/fax.: 450-030, 450-047 IMPLEMENTATION COMPLETION REPORT BOSNIA AND HERZEGOVINA Emergency District Heating Reconstruction Project Credit NO. TF 024034 OPERATIONAL PLAN PLANNED ACTIONS TO ENSURE PROJECT SUSTAINABILITY + Maintain increased operational availability and reliability of heat production and distribution * Improve heat production and supply by continuing the reconstruction of the production plants, distribution networks and transmission substations * Support the institutional improvements and strengthen Toplane's institutional capacity + Improve operational performance and increase system efficiency * Upgrade the existing norm system on energy consumption in all aspects ( gas consumption, oil consumption, electricity consumption ) * Establish a new program of undertaking measures for energy saving and rational and effective energy use 1. Complete all unfinished tasks * Establish energy metering system ( first phase: meters in front of all buildings) together with energy metering test laboratory * Continue II and IlIl phase of remote control and monitoring system * Complete reconstruction of all facilities to needed extent 2. Organization improvement * Develop and realize basic plan of organization improvement * Develop and realize reengineering (reorganization) of the company based on the most modern knowledge • Establish a certification quality assurance system according to requirements of standard ISO 9002 * Make a realistic medium-term strategic plan for the period 1999-2004 * Make a realistic long-term strategic plan for the 1999-2015 * Establish a modern and functional information system as a link of all separate parts of company, ( integration of all parts of information ANNEX B system into one united information system, and carrying out all missed software's) For all items mentioned above ( 1 - 2 ) planned budget is as follows: Measurement 3,455 mil US$ Remote control system 1,700 mil US$ Completion of reconstruction 5,678 mil US$ Organization improvement 0,600 mil US$ TOTAL COSTS 11,433 mil USs Note: Financial gap within Emergency District Heating Reconstruction Project is 3.5 mil US$ (estimation cost of the Project 44.5 mil US$, available funds 41.0 mil US$). During the realization of the Project has been learned that real costs have been more than estimated ( 52,433 mil US$ instead of 44.5 mil US$ estirpated). MAINTENANCE OF REHABILITATED FACILITIES * Establish and organize an new effective maintenance system based on already created preventive maintenance software in all segments in the company ( preventive planning, follow up, reporting, analysis... ) which will meet operation and maintenance costs, and ensure a stabile, effective and timely, mostly preventive maintenance * Define and specify measuring methods and devices for surveying and defining conditions of different components in the system, and provide necessary devices and tools as well * Fill up preventive maintenance software with all data regarding all important equipment based on the recommendations of the equipment manufactures, operational instructions, internal regulation and technical practice * Provide all necessary spar parts * Continue and strengthen education in this area for all level of staff in the company in order to provide qualified personnel * Strengthen responsibility on all staff level INSTITUTIONAL BUILDING AND FINANCIAL IMPROVEMENT Completion of relevant law regulations * Establish a sufficient number of modern and operative Centers for consumers (by areas), and undertake appropriate measures to enable a transparent process, safe and economic operation of all parts of Toplane's system * Develop accounting procedures towards the International Accounting Standard, which would enable the management to use financial data for right and up-to-date decisions * Develop permanently financial planning in order to foresee the problems and opportunities in order to be able to react timely and in advance * Improve the cooperation with related companies and institutions, and especially with Canton of Sarajevo, and establish cooperation on a permanent basis ANNEX B * Engage on establishment of a new tariff system for gas price ( big and other consumers), and try to improve existing tariff system for heating by changing the collection system for 12 months to 7 months, so that tariff is designed to the cost structure * Strengthen the Billing and Collection Department * Engagement of new staff ,especially in the financial, commercial and marketing area * Improve the existing billing and collection software in accordance with actual needs, specific requirements of tariff system and law regulation * Organize training for all management levels, encompassing organization modernization, investment optimization, operational cost control and monitoring * Introduce a modern management practice which must reduce misunderstanding, de-motivation, delays etc. * Increase the collection rate * Undertake measures and monitoring for reducing all costs * Define all necessary procedures and links between particular organization units and completely direct their circulation ( for ex, billing and collection department and Service of internal installations, ...) + Organize a totally new service - Marketing that must initiate consumer care activities, perform a permanent market analysis, and enable a transparent mutual relation Toplane - consumer. + In order to use high level of knowledge and experiences learned through the realization and implementation of Emergency District Heating Reconstruction Project, keep the key Project Implementation Unit staff, and put them on adequate positions MONITORING INDICATORS FOR IMPROVEMENT OF FUTURE OPERATION The following indicators will be used to measure the operational performance: + Number and surface of apartments connected to the system * Number and surface of connected business premises + Total surface of connected consumers * Unsatisfied demand (number of apartments, total surface * Unofficial consumers ( in some cases illegal consumers) number of apartments, total surface ) * Owners of unofficial consumers * Canton subsidies * Heat generation ( MWh + Gas consumption ( Nm3) * Oil consumption ( kg, I ) + Electricity consumption ( kWh * Net income * Revenue collection relative to the amount billed + Revenue collection relative to the cash operating costs General Manager Hazim Zezevic Sarajevo, 2 June, 1999 ANNEX C BOSNIA and HERZEGOVINA Emergency District Heating Reconstruction Project (TF024034, TF024027, TF024026, NETH TF024771, NETH TF021192) Supervision Mission May 24 - June 4, 1999 Aide Memoire Introduction 1. A World Bank mission visited Bosnia and Herzegovina from May 24 to June 4, 1999 to carry out a final supervision and Implementation Completion Report (ICR) mission of the Emergency District Heating Reconstruction Project (TF024034, TF024027, TF024026, NETH TF024771 and NETH TF021192). The mission held discussions with officials of the Toplane-Sarajevo District Heatirig Company and the Canton Government of Sarajevo. The Bank team included Richard Hamilton (Program Team Leader), Marie-Theres Schurrer (Energy Consultant) and Anna Bjerde (Financial Analyst). This Aide Memoire summarizes the findings and conclusions of the mission, and is subject to confirmation by World Bank management. The mission expresses its appreciation for the co-operation and hospitality received. Project Implementation Status 2. Project Completion. The IDA Credit was closed on March 31, 1999. By that date, all the funds under the Credit had been disbursed, with the exception of US$1 million under the Emergency Natural Gas System Reconstruction Project. These funds are available to the District Heating Project in compensation for a project start-up advance, provided from the District Heating Credit to the Gas Project in 1996, which will close on July 31, 1999. Project components under IDA managed Trust Funds and parallel financing from the Netherlands, Denmark, Finland and the EU are expected to be completed by February 2000 and end-1999, respectively. 3. Procurement. (i). IDA Financed Components. The IDA-financed contracts under the Project, with a total value of US$20 million, are 94% complete. The remaining disbursements are for contracts for measuring instruments and monitoring-and-control equipment, at a value of US$1 million, (see para 2) and will be completed by July 1999 before closing of Credit 3029. IDA funds were used in a ratio of 53% for goods and 47 % for works and services. Most of the installation works for donor-financed equipment had to be financed by IDA 2 and Bank-administered funds. Thus, the implementation of donor funds and Bank funds was closely linked. The resulting overall status of implementation is as follows': (a) Boiler plant reconstruction: Out of a total of 42 boiler plants and 85 roof-top boilers in the Sarajevo district heating system, 59 destroyed boilers have been fully rehabilitated to-date and 8 are still under reconstruction, using Bank- administered Trust Funds. Completion of the component is expected by end- 1999. The two largest contracts for boiler equipment, the majority of locally procured auxiliary equipment, and most contracts for installation and civil works at the boiler plants were funded by IDA for a total amount of US$10.4 million. (b) Substations: Out of a total of 106 substations, all damaged substations underwent repair, resulting in full reconstruction of 49 destroyed substations to- date. An additional 33 are still under reconstruction, using Bank-administered Trust Funds, with completion expected by February 2000. IDA funds were used for civil and installation works and for equipment at a total value of US$0.3 million. (c) Distribution Network: Out of a total of 60 km of network piping, 17 km were heavily destroyed and were replaced under the Project. US$1.6 million of IDA funds were used for this component, financing primarily the installation of donated piping material. The component is completed. (d) Building Internal Installations: Out of a total of 48,000 internal heating installations in 48,000 apartments, 41,000 have been rehabilitated under the Project to-date. Installations in 7,000 apartments are still to be reconstructed with EC-funding, with completion expected before winter 1999. IDA funds were used for locally procured equipment and for the entire installation works at a total value of US$4.9 million. (e) Technical Assistance: Technical assistance was provided with Finnish and Danish funding in the areas of finance, billing and collection, preventive maintenance, and project management. As a result, a new billing and collection system was procured, staff received training in international accounting standards and business planning, a preventive maintenance program has been introduced, and assistance to the PIU in project management is being provided until end-1999. In addition, a basic Masterplan for the district heating system was developed. IDA funds of US$0.2 million were used to undertake an engineering survey of the entire system, and to cover 50% of the costs of the financial audit of the enterprise for the year of 1998. Operating costs and overtime payment for the PIU were A detailed overview and accurate status of the achievements and financing arrangements under the project will be presented in the forthcoming ICR. 3 covered by IDA under a declining support scheme throughout project implementation. (f) Other Items: The rehabilitation of Toplane-Sarajevo's office-, service- and workshop facilities at a cost of US$0.6 million was funded by IDA and completed in 1997. (ii). IDA-managed Trust Fund Components. The above-mentioned Project components are co-financed by the two Bank-administered Dutch Trust Funds, which have a total value of US$9.3 million. The Trust Funds were provided to the Project under rules and provisions similar to those for IDA proceeds. Implementation is expected to be completed by February 2000. Forty-five percent of the Funds have been disbursed to- date. One-third of the Trust Fund proceeds are being used for works and services, and two-thirds for goods of mostly local origin. (iii). Parallel Financing by Other Donors. Parallel financing to the Project was provided by the Governments of Finland and Denmark, and the EU. The tied Finnish contribution of US$8.6 million was used for equipment and technical assistance. The physical contribution was successfully completed in spring 1999, while technical assistance will continue through 1999. The tied Danish contribution of US$1.4 million was used for network equipment and technical assistance, and achieved its objectives in 1998. The EU contribution of US$2.1 million is dedicated exclusively to the rehabilitation of building internal installations in areas where refugees are returning to Sarajevo. Implementation started only in April 1999, and completion is expected by end- 1999. Project Financing and Disbursement. 4. The financing plan and status of disbursements as of May 30, 1999 are as follows: Financier Project Funds Disbursed to-date Closing Date US$ million IDA 20.0 100 % closed Netherlands 9.3 60 % Feb-2000 Finland 8.6 100 % Dec- 1999 EU 2.1 Advance Payment Nov-1999 Denmark 1.4 100 % closed Financing Gap 3.1 TOTAL 44.5 The financing gap of US$3.1 million remains uncovered. The project component affected by the lack of funding is primarily the heat metering in individual apartments. 4 This component was considered to have the lowest priorities towards achieving the Project's emergency reconstruction objectives. Revised Project Cost 5. The initial Project cost of US$40.0 million was based on first estimates of damage to the complex and heavily destroyed district heating system. When more accurate estimates were made in the course of reconstruction, the Project cost increased by approximately 11% to US$44.5 million. With the financing gap of US$3.1 million remaining uncovered, however, Project cost is now estimated to be US$41.4 million. This represents an increase of 3.5% over the initial Project cost. Institutional and Financial Aspects 6. Management and Staffing. The mission was pleased to note that a new General Manager has now been appointed to Toplane, following a long period in which the company was headed by an acting General Manager. In addition, a well-qualified billing and collection expert has been hired to strengthen the Finance Department. The mission emphasized that further strengthening of the Financial (particularly Accounting), Commercial and Technical Departments is still required. 7. Audit. The mission met with PricewaterhouseCoopers, who have carried out an audit of Toplane's 1998 company accounts. While the auditors did not express an opinion on the income and cash flow statements as at December 31, 1998, it is their opinion that the Balance Sheet represents fairly the financial position of Toplane as at December 31, 1998. In its Management Letter, the auditors stressed that the key weaknesses in Toplane are the poor record keeping and system for trade receivables and payables, and the lack of cooperation between the Accounting and Collection Departments; which in turn is resulting in a lack of readily available and reliable data for day-to-day decision making. The mission stressed the critical importance of keeping proper and reliable records to the new General Manager. 8. Financial Performance. The mission reviewed the 1999 revenue collection performance and found that this still remains a very problematic area for Toplane. The mission was particularly disappointed by the March and April collections of 64% and 58% of billings, respectively, following the outstanding collection of 90% in February. Toplane provided the following reasons for the deterioration in collection performance: (i) a general lack of affordability among many of its consumers; (ii) collections dropping as a result of the rise in temperature since consumers are less concerned about being without heating at this time of the year; and (iii) inability to process invoices and reminders in March and April due to computer problems. The mission was informed that improvements to the capacity and functionality of the billing and collection software are being undertaken with assistance from the Finnish consultants. 5 9. The new General Manager pointed to the following actions to improve the collection performance during 1999 and beyond: (i) establish consumer service centers to process payments and handle complaints; (ii) upgrade the billing and collection system to allow for automatic and monthly processing of bills; (iii) send out specialized collection teams to consumers' homes; (iv) establish telephone lines to handle consumer queries and complaints; (v) and carry out a consumer awareness campaign on the need for consumers to pay for heating services. The mission expressed its support for these measures and suggested that Toplane should work closely with the Canton in these efforts, particularly the awareness campaign. In a meeting with the Canton Government, the mission was informed that the new Canton Prime Minister would take initiative to launch media campaigns for the payment of utility bills, to resolve the issue of disputed ownership over refugee-occupied apartments, and to lower what appears to be an inordinately high price for natural gas, both at the city gate to Sarajevo, and, in particular, the gas retail price to Toph7ne. 10. Based on the audited 1998 results, the mission reviewed compliance with the key financial covenant (revenue collected as a percentage of annual expenses) and found that Toplane did not comply with the 1998 covenant. Revenue collected as a percentage of total annual operating expenses reached 60%, compared to the 1998 covenant of 75%. Toplane did comply with the 1996 and 1997 covenants. 11. New tariff rates were introduced as of March 1, 1999. There is an overall increase of 17% resulting in rates of 1 KM/m2 for residential consumers and 3 KM/m2 for commercial and public sector users. These rates allow Toplane to cover all production costs, depreciation and interest, but do not allow for any provision for bad debts and profit. The mission prepared financial projections for 1999 that show that, with the new tariffs and a collection rate of about 70%, Toplane would incur a cash deficit of at least KM 3.8 million (US$ 2 million) in 1999. If the collection performance was improved to about 90%, Toplane would be in a position to meet all of its cash flow requirements. Preparation of the Implementation Completion Report (ICR). 12. The mission discussed the requirements for completing an ICR for the project. Toplane will prepare its own evaluation report on the project's execution and operation, cost and benefits, the Bank and the Project Beneficiary's perfornance of their respective obligations under the Credit Agreement, and the extent to which the purposes of the Credit were achieved. 13. During the mission, Toplane prepared a future operations plan for the project which will be included in the ICR (also attached to this Aide Memoire). This plan includes the actions that will be undertaken by Toplane to ensure that the project will continue to yield benefits, including indicators to monitor and evaluate future operations. The mission finds the plan satisfactory. 6 14. The following schedule was agreed with Toplane for the preparation of the ICR: June 30, 1999 Draft contribution to the ICR to be sent by Toplane to the Bank. August 15, 1999 Draft ICR to be sent by the Bank to Toplane for comments. August 30, 1999 Toplane to forward its comments, if any, on the Draft ICR to the Bank. September 30, 1999 The ICR will be finalized and printed by the Bank. Copies will be forwarded to the relevant government agencies of Bosnia and Herzegovina and Toplane. Future World Bank Support to the District Heating Sector. 15. The mission discussed future district heating investment requirements with the Energy Sector Task Force, the General Manager of Toplane and the Canton Government. The Task Force raised the need for investments in various district heating systems around the country. Toplane requested that the Bank continue its support to improve the Sarajevo district heating system and stressed the need for additional investments in the following areas: (i) computerized operating- and management systems; (ii) remote monitoring and control; (iii) individual heat metering; and, in the longer term, (iv) combined cycle heat-and power production. 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