Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4524 PROJECT COMPLETION REPORT YUGOSLAVIA NAFTOVOD OIL PIPELINE PROJECT - LOAN 1173-YU May 31, 1983 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. FOR OFFICIAL USE ONLY YUGOSLAVIA NAFTOVOD OIL PIPELINE PROJECT - LOAN 1173-YU PROJECT COMPLETION REPORT TABLE OF CONTENTS Page No. Preface ...................... i Basic Data Sheet .. ii Highlights ........................................... iv PROJECT COMPLETION REPORT I. INTRODUCTION ......................................... 1 II. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL .... 2 III. IMPLEMENTATION .. 4 Background . . 4 Implementation Delays ............................. 4 Achievement of Objectives . . 5 Project Costs .. 6 Disbursements .. 7 Performance of Consultants. 7 Peformance of Contractors . . 7 IV. THROUGHPUT AND OPERATIONS.......... 8 V. FINANCIAL PERFORMANCE.8 Financial Covenants .10 VI. ECONOMIC EVALUATION .10 Conclusion .........II..-------.......... ll VII. INSTITUTIONAL DEVELOPMENT AND PERFORMANCE ............ 12 Background ......... 12 Organization and Management . . 12 Staffing and Training .. 12 Project Management ................................ 13 VIII. THE ROLE OF THE BANK......................13 IX. CONCLUSIONS .. 14 This document has a restricted distribution and may be used by recipients only in the performance of r official duties. Its contents may not otherwise be disclosed without World Bank authorization. TABLE OF CONTENTS (contd.) TABLES 1. Actual and Appraisal Estimate of Project Costs 2. Foreign and Local Financing for the Project 3. Revenue Accounts 4. Balance Sheet 5. Cash Flow Statement ANNEXES 1. Economic Justification - Background and Assumptions (Includes 9 tables) ATTACHMENT MAP: IBRD 11586 YUGOSLAVIA NAFTOVOD OIL PIPELINE PROJECT - LOAN 1173-IN PROJECT COMPLETION REPORT Preface Loan 1173-YU for the Yugoslavia Oil Pipeline Project was signed on November 19, 1975. The loan for $49.0 million was fully disbursed in June 1981 except for $0.6 million previously cancelled due to misprocurement on two contracts. Implementation delays required postponement of the original closing date of December 31, 1979. This report consists of a Project Completion Report (PCR) prepared by the Energy Department and the Europe, Middle East and North Africa Projects Department. The PCR is based on the findings of a Bank mission which visited Yugoslavia in July 1981 and documents and data furnished by the Borrower. A copy of the PCR was sent to the Borrower for comments. The reply is reproduced as Attachment. Appropriate changes have been made to the PCR to refLect the Borrower's comments. Under the selective auditing system, the project has not been audited by OED staff. - ii - YUGOSLAVIA NAFTOVOD OIL PIPELINE PROJECT - LOAN 1173-YU PROJECT COMPLETION REPORT Key Project Data * Appraisal Actual or Current Item Expectations Estimate Total Project Cost (US$ million) 377.0 525.1 Overrun (%) 39.0 Loan amount (US$ million) 49.0 48.4 Disbuarsed - 48.4 Cancelled - 0.6 Repaid to 7/31/81 - 4.0 Outstanding to 7/31/81 - 44.4 Date physical components completed 5/79 12/79 Proportion completed by above date (%) - 100 Proportion of time overrun (%) - 15 Economic rate of return 50% 30% Financial performance Good Good Institutional performance Competent Competent Other Project Data Actual or Item Original Plan Revisions Estimated Actual First mention in files or timetable - - 1970-71 Govt., Application - - 1973 Negotiations - - 7/75 Board Approval - - 11/4/75 Loan Agreement Date 11/19/75 Effective Date 2/28/76 Closing Date 12/31/79 12/31/80 3/31/81 Borrower Jugoslavenski Naftovod Executing Agency Jugoslavenski Naftovod Fiscal year of Borrower January 1 - December 31 Follow-on project (none) - iii - Mission Data No. of No. of Man Date of Item Month/Year Weeks Persons Weeks Report Identification 12/73 Preappraisal 9/74 3 4 12 10/14/74 Appraisal 1/75 3 3 9 10/07/75 Total Supervision I 1/76 1.5 2 3 2/24/76 Supervision II 2/77 1 1 1 3/17/76 Supervision III 7/77 1 1 1 8/01/77 Supervision IV 1/78 1 1 1 2/21/78 Supervision V 2/79 1 1 1 2/12/79 Supervision VI 1/81 1 1 1 1/22/81 Completion 7/81 1.0 2 2 Total 14 16 31 Country Exchange Rates Name of Currency (abbreviation) Yug Dinars (Din) Year. Appraisal year average: Exchange rate: US$17.0 Din Intervening years average: US$1 = 1976 US$1 = 18.2 Din 1977 US$1 = 18.4 Din 1978 US$1 = 18.6 Din Completion year average: 1979 US$1 = 19.1 Din - iv - YUGOSLAVIA NAFTOVOD OIL PIPELINE PROJECT - LOAN 1173-YU PROJECT COMPLETION REPORT Highlights 1. The loan under review was for US$49 million to assist in financing a marine terminal on the Adriatic Coast and a pipeline system to deliver imported crude oil to inland refineries. A new entity. Jugoslavenski Naftovod was formed by the three main regional oil and gas enterprises in Yugoslavia to design, construct and operate the project facilities. The Executive Directors approved the loan on November 4, 1975. 2. The principal objective of the project was to provide an economic means of transporting imported crude oil landed at Krk Island Terminal to refineries in Yugoslavia, Hungary and Czechoslovakia. It was agreed with the offtakers that the pipeline system would be ready to deliver 16 million tons per year by May t978 and 20 million tons a year later. Actually, the pipeline was not completed until December 1979, but because of slack demand following the steep rise in the price of crude oil, the offtakers agreed to postpone deliveries until January 1980 (paras. 3.02, 3.03, 3.04 and 3.05). The pipeline has been in operation since then but at a greatly reduced rate, only 6.3 million tons during 1981. The 20 million ton rate is only expected to be reached in the year 1990. However, the Borrower, if it so elects, is largely protected against financial loss by the oil transport agreement with the offtakers who are required to pay 80% of the unused capacity the contract allocates to them (para. 3.07). 3. Project implementation was delegated to the Borrower but its authority to carry out this task was severely limited. A council of 12 governors appointed by the founders was responsible for all policy decisions, and overall management responsibility was held by a general director guided by a coordinating committee of six members from the founders (para. 7.01). 4. The final project cost excluding interest during construction was US$525.1 million of which US$396.3 million was for local and US$128.9 million for foreign expenditures. At appraisal the local and foreign exchange cost were estimated to be US$183.8 million and US$193.20 million respectively giving a total cost US$377.00 equivalent to an overrun of US$49.00 million or 39%. The cost overrun was mainly due to project changes and delays and to the large underestimate of local costs. The latter was further compounded by the fact that the ratio of local to foreign costs was much higher than originally estimated, and since the local inflation rate was projected to be higher than the international rate, the price contingency was considerably underestimated (para. 3.08). -v - 5. Financial projections have remained satisfactory despite the reduced through-put and the need to finance a sizeable cost overrun. However, future cash flow problems could develop as a result of domestic offtakers' inability to meet their obligations. Further cash flow problems may result from a dispute about price escalation with the foreign offtakers and their force majeure claims regarding import curtailments caused by Iran-Iraq war (para. 5.07). Economically, the project remains a sound investment, even without the benefit derived from foreign transit oil (paras. 6.01 through 6.05). 6. On completion of the construction phase, the Borrower became a full fledged commercial enterprise with essentially full autonomy over its activities except for policy matters which remained the prerogative of the governing council. The enterprise has a competent staff recruited from the local refineries which were able to provide a manpower pool with the requisite skills. Its operational and managerial performance has been entirely satisfactory (paras. 7.01 and 7.02). 7. Experience has shown that project implementation involving more than one jurisdiction in Yugoslavia can result in complications and delays. In two instances regional and parochial interests of the founders led to misprocurement on Bank financial contracts, and resulted in the cancellation of US$582,000 of the loan (para. 7.05). 8. Although the Bank loan covered only a modest portion of the estimated project cost (13%), the fact that the Bank was helping to finance the project played an important role in attracting other lenders. Two loans in the amount of US$195 million by Kuwait and Lybia were contingent on the Bank's participating in the project finances (para. 8.01). YUGOSLAVIA PROJECT COMPLETION REPORT Naftovod Oil Pipeline Project - Loan 1173-YU I. lntroduction 1.01 The Socialist Federal Republic of Yugoslavia and three oil and gas enterprises of Yugoslavia --INA, Naftagas and Energoinvest-- requested the Bank ito help finance a pipeline system to transport imported crude oil from an Adriat-ic port to refineries in Yugoslavia and to Hungary and Czechoslovakia. YugosLavia's main energy resources are lignite, coal and hydropower. Total fossi:L fuel reserves are estimated at 4100 million tons of oil equivalent (toe) with low grade coal and lignite accounting for 97% and hydrocarbons only 3%. Despite large coal reserves Yugoslavia is not self-sufficient in energy and has to rely on imports of hydrocarbons and coking coal to satisfy internal demand. This is principally due to the low quality of lignite and brown coal which prohibits transport over long distances and limits its use to power and steam generation. Domestic oil production has not kept pace with the growing demand and the country has had to rely on imports from Russia and the Mi.ddle East to meet the requirements of its six refineries. It was estimated that import of crude would increase from 7.9 million tons in 1975 to 28 million tons in 1980, most of it from the Middle East through the Adriatic ports. With the exception of Rijeka, all the Yugoslav refineries are located inland and were being supplied by a combination of pipelines, barges and rail tank cars. It was rightly considered that the volumes of imports required by 1980 to supply the refineries and the countries could not be economically transported by conventional means and that the only feasible solution would be a pipetline system connecting the port of entry with the inland refinereis and with Hungary. 1.02 On November 4, 1975 the Executive Directors approved the US$49 million loan to Yugoslavia to finance part of the foreign exchange cost of a pipeline system comprising a marine oil terminal and a 750 km pipeline togeth,er with ancillary facilities to be built from the Adriatic coast to Lendava and the Hungarian border in the north and to Novi Sad and Pancevo in the east. Stage I of the project comprising facilities to transport 16 million tons of crude oil per annum was to be completed by mid-1978 and Stage II, increasing the capacity to 20 million tons, by mid-1979. 1.03 The principal oil and gas enterprises of Yugoslavia --The Founders-- INA of Croatia, Energoinvest of Bosnia-Herzegovina and Naftagas of Serbia-- jointly established a new enterprise, Jugoslavenski Naftovod, to design, build and operate the port and pipeline facilities. The loan agreement for US$49 million was signed between this new enterprise as the borrwer, and the Bank on November 19, 1975; the loan became effective on February 28, 1976. 1.04 This was the first loan by the Bank to Yugoslavia for an oil pipeline project, although in 1973 the Bank approved a loan for a gas pipeline. Overall the Bank has approved a total of 23 loans amounting to US$1,248.4 million in the tranpsort sector (12 for highways, 7 for railways, 2 for ports and 2 for pipelines) and five loans totalling US$288 million in the power sector as of March 1, 1982. - 2 - 1.05 This report is based on the findings of a Bank mission that visited Yugoslavia in July 1981 and the documents and data furnished by the borrower. II. Project Identification, Preparation and Appraisal 2.01 Investigations for a pipeline project were first initiated by Yugoslav authorities in 1970-71 but were de:Layed by competing regional interests. Various areas on the Adriatic coast were considered and two different systems were proposed but it was not possible to reach interregional agreement as to which was better. In 1972, within the framework of the Yugoslav Transport Survey, the Bank reviewed the two proposed projects and concluded that the least cost alternative would be a system originating in the area of Rijeka (Rijeka Bay) and connecting all the refinereis, with a branch line to Hungary, primarily because of its proximity to the refineries and because of the reduced length of mountainous terrain that the pipeline would have to traverse as compared to other areas. Thereafter (July 1973) the three oil and gas enterprises of Yugoslavia jointly established a new enterprise, Jugoslavenski Naftovod, to design, build and operate the pipeline. Following the Bank Annual Meeting in Nairobi (September 1973) the Bank decided that it might participate with a limited amount in the financing of this system provided Yugoslavia would define a rational policy for the overall development and utilization of the energy resources available to the country. 2.02 A Bank identification mission went to Yugoslavia in December 1973 and inter-alia, suggested that experienced consultants be appointed to prepare a detailed project proposal including a complete definition of the project, reliable cost estimates, relevant data for an economic evaluation and a suitable financing plan. After further discussion with a Yugoslav delegation in Washington it was agreed that the study would be undertaken by a Yugoslav consultant in collaboration with a foreign consultant. This study was completed by July 1974 and submitted to the Bank in Augsut 1974. Thereafter a preappraisal mission visited Yugoslavia in September 1974 and discussed various details of the project and the financing plan. It was agreed that additional studies would be undertaken in order to optimize tanker unloading facilities including oil storage capacity, crude oil despatching procedures and pipelines diameter before the project was appraised. It was also agreed that the energy sector study carried out by the Federal Secretary for Economy late in 1973 (which provided justification for the project) that was being updated by a new committee --The Federal Committee for Energy and Industry-- would be made available prior to appraisal. 2.03 The appraisal, originally scheduled for November 1974, actually took place in January 1975 because of the delay in collating the data mentioned in the preceding para. The project as defined at appraisal comprised the following: (a) construction of two marine oil berths on KrK island in Omisalji Bay capable of handling tankers from 30,000 to 350,000 DWT, and procurement of two tugs of 2,000 HP each plus other floating craft; (b) construction of pipeline system of about 736 km (18 to 36 inches diameter) from the port in the island of KrK across the Strait of - 3 - Omisalj in the Adriatic to five inland refineries and to the Yugoslav-Hungarian border; (c) construction of oil storage tank farms with a capacity of about 900,000 M3 and seven pumping stations; (dl) procurement and installation of a supervisory control system including telecommunications, telemetering and telecontrol; and (e*) provision of related engineering services. (a map of the pipeline system is attached) The project was to be carried out in two stages: Stage I to provide for an annual throughout capacity of 16 million tons and Stage II to provide for an annual. throughput capacity of 20 million tons. The system was also to be designed to permit eventual expansion to an annual throughput capacity of 34 millicon tons. 2.04 The project was estimated to cost US$400 million (including interest during construction of US$23 million) of which US$216.2 represented foreign exchange. A special feature of this project was that it was to be financed entirely with borrowed funds, US$294 million coming from foreign and US$106 milion from local sources. Initially only US$30 million was proposed as the Bank loan, later at the time of negotiations, this was raised to US$49 million as it was felt that the smaller amount would be insufficient to enable the Bank to finance the foreign exchange costs of consulting and construction services (along with some equipment items) throughout the implementation period, this was considered to be the minimum level of participation that would enable the Bank to obtain a satisfactory degree of influence over the implementation of the project. A loan of US$49 million represented about 13% of the project cost whilst that of US$30 million would have represented only about 8%. The other foreign loans were as follows: Amount Interest rate Grace Period Repayment US$ million Annual % Years Years Kuwait 125.0 8.5 4 8 Libya 70.0 9.0 3 7 Hungary 25.0 8.2 3 6 Czechoslavakia 25.0 9.0 3 7 Total 245.0 The loan from Kuwait was to include about 58,000 tons of pipe representing about 33% of its loan and the rest in cash. The Czech loan was to be in the form of 28-in pipe (about 15,000 tons) and construction services for the Sisak-Hungarian border pipeline. The Hungarian and Libyan loans were to be in convertible currency. - 4 - 2.05 The Bank loan was to meet the foreign exchange costs of consultants, civil works (excluding project materials) and loading arms for the two berths. Since securing of finance, both foreign and local, was crucial to the implementation of the project, a condition of effectiveness of the Bank loan was the effectiveness of the other loans. III. Implementation Background 3.01 At the time of appraisal, transport agreements were concluded with the local and foreign offtakers providing for the commencement of deliveries of stipulated quantities of oil from 1978 and the payment of penalties in case of failure to transport the stipulated quantities. Therefore, completion of the project by 1978 was of prime concern and the implementation schedule was drawn up accordingly, Stage I to be completed by May 1978 and Stage II one year later. This required that Naftovod place orders for pipe and long lead materials for Stage I in late 1975 and the starting of site clearing, grading and blasting in Omisalji by the beginning of 1976, with the pipeline construction starting soon thereafter. However, valuable time was lost, mostly through no fault of the Borrower, in arranging financing and resolving procurement problems. For example, for the Omisalji-Sisak pipeline, the two lowest tenderers were unresponsive and the third lowest delayed signing the contract until the bid bond expired, thus forcing the borrower to lengthy negotiations with the fourth lowest bidder. Implementation Delays 3.02 A statement of the estimated and actual start-up and completion of the various items of work is given below: Start lJp Completion Estimate Actual Estimate Actual Omisalji Terminal 7/75 7/76 5/78 12/79 Melnice Pump Station 8/77 9/78 8/78 1/80 Omisalji-Sisak Pipeline 12/76 11/77 5/78 9/79 Sisak Terminal 3/77 10/78 5/78 1/80 Sisak-Gola Pipeline 5/77 3/78 12/77 5/79 Virje Terminal 4/77 12/77 6/78 3/80 Virje-Lendura Pipeline 5/77 4/78 12/77 3/80 Works 11/80 Testing Sisak-B. Brod Pipeline 5/77 9/78 6/78 8/79 Bosanski Brod Terminal 4/77 12/77 8/78 11/79 Bosanski Brod-Novisad Pipeline 5/77 3/78 6/78 12/79 Novisad Terminal 4/77 12/77 8/78 3/80 Novisad-Pancevo Pipeline 5/77 3/78 6/78 12/79 Telemetry 3/ 10/78 3/ 3/81 1/ Cathodic Protection 3/ 12/78 3/ 4/81/ 1/ Local indication and control only. 2/ All but Bosanski Brod to Novisad. 3/ Originally scheduled with each station 3.04 Additional reasons for delay were as follows: (a) The Omisalji-Sisak Pipeline was completed by 4/79 except for the Adriatic crossing which had to await the completion of the arches of the bridge (being built by the local authorities with a financial contribution from the borrower) until 9/79. Had a submarine pipeline been constructed (as was the original intention) there would have been a saving of six months. (b) Melnice pump station was delayed partly because of some difficulty in design work and partly because of inclement weather. (c) At Dobra station, planned for completion towards the end of the construction period, the discovery of caverns resulted in a slight change of location and filling of some of the caverns with concrete, causing delays in design work and execution. (d) Provision of increased storage capacity. (e) Slow work by a local contractor resulted in half of the Sisak- Bosanski Brod section being given to another contractor after time- consuming negotiations. (f) The Sisak-Gola line which was to be completed by 12/79 by a Czechoslovak contractor had to be given to another contractor because the former was unable to perform and this resulted in delay and expense. (g) It was decided to move the Bosanski Brod termianl close to the refinery across the river, and this resulted in two unforeseen river crossings and a delay of about nine months. (h) Cathodic protection --about 20 power companies had to be coordinated and mobilized to instal short lines and transformers-- a time- consuming process. 3.06 The pipeline was commissioned in December 1979, the Omisalji storage receiving first crude in October 1979, and the different sections of the pipeline being filled and the different pumping stations being started up between December 1979 and December 1980. Achieviements of Objectives 3.07 The project has achieved the objective of providing an economical means of transport for crude oil from the coast to the various refineries. It was expected that Stage I would be ready by May 1978 with a capacity of 16 million tons and Stage II a year later with a capacity of 20 million tons. In actual execution, however, the pipeline was commissioned only in 12/79 after both stages had been completed. Compared to the anticipated completion of Stage I, there was a delay of 18 months, but with reference to the project as a whole there was a delay of only 7 months. Further, the delay did not materially affect the operations of the borrower nor the offtakers, since, due to the high cost of imported crude oil the expected growth in demand did not materialize and the offtakers agreed to postpone their use of the pipeline until 1980. -6- Project Costs 3.08 The project has been completed except for some small items of project expenditure that are still to be incurred. Iaking into account the expenditure that has been incurred and provid[ing for the items that are still to be incurred the total project cost amounts to US$525.1 million (excluding interest during construction) as against the appraisal estimate of US$377 million --a cost overrun of about 39%. Actual and estimated costs are compared in Table 1. Because of the fluctuations in the exchange rate of the Yug. Dinar, vis-a-vis the dollar, the cost overrun expressed in Yug. Dinars would be about 63%. The main reasons for this increase are analyzed below: Extra Costs Million US$ (a) For operational, ecological and social considerations the total length of the pipeline was increased from 733.9 km to 763.1 km and the weight of pipes for the Omisalji-Sisak section increased from 33,000 tons to 46,400tons because of the extended length of the pipeline and because of the increased thickness to provide for a higher safety coefficient requested after appraisal by the local authorit:ies 16.7 (b) Extra pumping horsepower required as a result of lower pump efficiencies, longer pipel.ines and speed increasers 4.4 (c) Bridge crossing instead of submarine crossing from KrK island to the mainland 2.6 (d) Larger plot plants, extra buildings and additional floor space in the buildings over thal: provided in the preliminary design 11.9 (e) Relocation of the Bosanski Brod terminal requiring a longer tie-line and two extra river crossings 4.1 (f) Provision of a bubble barrier instead of a floating boom for oil spill control at the tanker terminal, relocation of Dobra pump station and longer tie lines at Sisak due to relocation of the main line to protect it from earthquakes 4.4 (g) Increased yearly inflation rates, in excess of appraisal estimate, affecting both local and foreign costs 32.2 (h) Telemetry and telecontrol which was made up 'Largely of cable instead of microwave for security reasons 7.9 (i) Overstimate of foreign costs (lower inflation rates) and underestimate of local costs which had a higher inflation rate 62.9 $148.1 -7- Disbursements 3.09 Delay in project implementation affected the disbursement schedule of the loan. The table below compares the actual disbursements with the appra:isal forecast: Cumulative Loan Disbursement IBRD Fiscal Year Estimates Actual (US$ O0Os) 1975-76 1,500 nil 1976-77 12,700 2,700 1977-78 29,100 17,050 1978-79 42,300 42,770 1979-80 49,000 46,430 1980-81 48,420_ 1/ Lower figure due to cancellation Barring the first year when there was no disbursement and the second year when disbursement were rather low because of the delay in the commencement of operat:ions, the profile of disbursement was not significantly different from that forecast. Performance of Consultants 3.10 The borrower assigned overall design responsibility to a local consuting firm assisted by a foreign firms who were responsible for basic designs, tender preparations, project coordination and the other items listed in Annex 3 of the appraisal report. The borrower assigned construction supervision to a second local firm assisted by the foreign consultants. Generally the performance of the consultants was satisfactory. The principal local consultants were pressured by the three owners to sub-contract to other local firms on the basis of parochial and regional considerations, and while some cf this was expected at appraisal, the impact was not then fully anticipated. The plethora of local sub-contracts caused problems in coordination and moderately delayed the progress of implementation, but this was unavoidable in the context of the decentralized Yugoslav politico-economic system. Further, the foreign consultants were perhaps too pliant and inclined to accept various proposals without effective questioning even though they involved delay and expense. This was due in part to the hostile environment and partial vacuum in which they worked and also because the borrower did not have confidence in their staff. Had the foreign consultant provided a more senior and aggressive team, many gf the problems would have been avoided and progress would have been smoother. Performance of Contractors 3.11 The performance of the various contractors was generally satisfactory, and some of the experienced ones were very good. For example, the contractor who did the tanker terminal completed the work on schedule - 8 - without creating any problems. Because of parochial and regional considerations (i.e. the tendency to balance the interests of the three regions in which the three founding enterprises are located by dividing the work among enterprises from those regions) a large number of construction and equipment contracts (many not financed by the Bank) were entered into resulting in problems of coordination and supervision which were not antipated at appraisal. But, considering the regional competition inherent in interregional projects, this was perhaps inevitable and, under the circumstances, it can be said that the overall performance was satisfactory. IV. Throughput and Operations 4.01 The pipeline has been in operation since December 1979. A spot inspection of the oil terminal and some tank farms and pumping stations revealed that the facilities were manned by competent personnel and being operated efficiently and maintained adequately. 4.02 The substantial increase in the price of foreign crude has forced the Federal Government to introduce various measures to conserve and substitute energy thereby restricting the import of crude. Th,erefore, because of circumstances beyond the control of the borrower, the pipeline is being operated very much below its capacity of 20 million tons per annum. As against the estimated throughput of 19.8 million tons during 1980, the actual quantity transported was only 5.1 million and the estimate for the year 1981 is only 6.3 million tons. According to current estimates, the crude oil that the pipeline can be expected to handle is likely to increase to only about 14 million tons by 1985. The economic and financial implications of this shortfall in the throughput are analyzed separately. V. Financial Performance 5.01 At the time of appraisal the financial projections were based on the assumption that the pipeline would be commissioned by mid-1978 and that full operations would start by mid-1979. The pipeline was actually commissioned only in December 1979 with the full capacity of 20 million tons and commercial operations started only from January 1980. Consequently for comparison with actuals only the figures for 1980 are available. 5.02 Further, as stated in part IV above, the pipeline is operating below capacity. On the basis of the actual quantities of crude that are likely to be transported, the annual income of the borrower will be limited. But the borrower is legally protected from financial difficulties because of the provision in the agreements with the offtakers that transport costs will be payable for the full reserved quantities each year whether transported or not. The original agreement with the offtakers provided for a yearly transport of crude oil to the five refineries in Yugoslavia and to Hungary and Czechoslovakia ranging from 8.3 million tons in 1978 to 27.4 £' llion tons in 1985. Just before commissioning of the pipeline, Naftovod agreed with the offtakers to delay the commencement of operations from 1978 No 1980 and to provide for a yearly transport of crude oil ranging from 27.9 million tons in 1980 to 34.8 million tons in 1985. 5.03 Though the existing capacity of the pipeline is ony 20 million tons per year, the increased quantities specifiedl above were agreed upon because - 9 - most of the capital investment for a throughput of 34 million tons has already been incurred and only a small additional investment is now required to increase the capacity beyond 20 million tons to 34 million. Domestic refineries are required to pay transportation costs on the basis of the toal fixed operating costs of the relevant section of the pipeline for transporting the reserved quantities (the fixed costs including the amount required for repayment of loans that is not covered by normal depreciation, as also interest charges) plus variable costs in proportion to the actual quantities transported and allowing for a surplus of about 11% of the operating costs. Foreign offtakers are to pay transportation costs on the basis of a basic rate per ton plus escalation calculated annually on the changes in the cost of steel, electricity and labor, 80% of such costs being paid as penalty for any unused capacity. 5.04 Because of the increase in the cost of the project Naftovod had to procure additional financing, partly local and partly from foreign sources. A complete list of the financing obtained for the project is given in Table 2. 5.05 At the time of appraisal it was assumed that the port facilities would be entrusted for operation to the port of Rijeka (or similar organization) on an annual charge which would cover at least the debt charges (estirnated at Din. 89.9 million) on the capital investment involved. Naftovod, however, has entered into a different agreement with the port of Rijeka under which (a) the two tugs have been leased to the port on payment of an annual fee; (b) the port will use the tugs to render the services required by the tankers on a priority basis; and (c) Naftovod will be free to collect berthing and other normal port charges from the tankers. Also, at the time of appraisal it was assumed that the line fill would be provided by the Federal Directorate for Reserves of Foodstuffs and Strategic Stocks (MATRIZ); but on commissioning of the pipeline, the line fill has been provided by the local refineries. 5.06 Taking into account the increased cost of the project (and the conseq[uent increased debt service obligations and depreciation charges) and the other changes mentioned above a revised statement of income and expenditure as compared to appraisal estimates for the period 1978-1985 is given in Table 3. Salaries and wages have been escalated at 16% per annum and electricity charges, maintenance and sundry expenses at 10% per annum. Revised statements of balance sheet and of cash flow for the same period are also in Tables 4 and 5. 5.07 Though the financial projections show a satisfactory picture, in actual practice Naftovod is likely to experience a cash flow problem because of the inability of the offtakers to meet their obligations. Legally speaking, Naftovod is fully covered, in view of the agreements with the refineries (supported by Bank Guarantees) that transportation costs will be paid for the reserved quantities. But the refineries do not have the requisite foreign exchange to buy foreign crude and are operating far below their rated capacity with serious repercussions on their finances and consequently their ability to pay. During 1980, as against a cash requirement of Din. 1,857 million, Naftovod actually received only Din. 1,451 million and was, therefore, forced to resort to short-term borrowings from local banks. The pcsition is expected to improve this year, but with the continued operation of the refineries below capacity, the possibility of a serious cash - 10 - problem cannot be ruled out. Further, Naftovod is having difficulties with the foreign off-takers who are disputing the price of steel in the escalation formula and are also invoking the Force Majeure clause in the agreement to avoid liability because of the Iran-Iraq war which has curtailed their imports. It is understood that arbitration proceedings are being resorted to. Consequently the satisfactory position reflected in the cash flow statement might not materialize and Naftovod might have to resort to short- term borrowings from banks. Financial Covenant 5.08 In contravention of sec. 5.12 of the Loan Agreement, annual financial statements audited and certified by the Social Accounting Service have not been furnished by Naftovod. However though there is a technical breach of the covenant, Naftovod is not really in default since it has been submitting the statements to the Yugoslav audit authorities who have held them in abeyance because under Yugoslav regulations annual statements of new enterprises whose assets are under construction need not be audited until such enterprises are, on completion of construction, changed to operating enterprises. Naftovod has been formally transferred into an operating enterprise from 6/81 and the annual financial statements will be audited and certified from the year ending December 1981 onwards. This does not imply that the accounting transactions of Naftovod have not been subject to any audit; they have been under continuous audit since all vouchers had to be passed by the Social Accounting Service before they could be presented to the Bank for payment (see para. 4 of Annex 4 of Appraisal Report). VI. Economic Evaluation 6.01 The economic return was estimated in terms of the equalizing discount rate between the pipeline costs and those of the next best alternative mode of transporting crude to the offtakers. At appraisal this was calculated to be 50% and sensitivity analysis indicated that if throughput were 15% below the level estimated for 1990 of 34 million tons, the return would be reduced to about 43%. The reevaluation estimates the return at 30% or only 25% if transit oil traffic does not materialize. 6.02 The re-evaluation estimates that throughput in 1990 will reach only 20 million tons (the capacity of the pipeline) and then, only if transit traffic to Hungary and Czechoslovakia develops rapidly. In view of the failure of this traffic to come up to appraisal expectations and because of the present dispute between the parties, the project benefits were re- evaluated on two alternatives bases: with a growing but lower volume of transit traffic than forecast at appraisal; and without any transit traffic.l/ Yugoslav demand for imported crude oil is forecast by the Government to increase at about 7% per annum (Annex 1, Table 1). In view of Yugoslavia's comparatively low per capita consumption of petroleum at present, the Government may find difficulty in restricting growth to a 7% annual rate and this is therefore a conservative basis on which to evaluate the 1/ Disappearance of transit traffic reduces rate of return by only 5% (from 30-25%); eliminating growth in domestic throughput would reduce the rate of return by a further 5% to about 20%. -11 - project.I/ Yugoslavia's largest refinery, at Rijeka, is expected to reduce its intake from 1981 to 1983 and the refineries supplied by the pipeline to increase their intake, so that pipeline throughput, excluding transit oil, will increase at an average of about 11% per annum over the period 1981-88; if Naftovod's estimate for transit oil is included, pipeline throughput shows a 17% growth rate over the same period. 6.03 The re-evaluation takes as economic benefits of the project the saviag in railway capital and operating costs which would have been incurred without the pipeline. This is essentially the same approach as that used in the appraisal report, except that barge transport was eliminated as an alternative since it is no longer regarded as feasible or competitive by the Yugoslavs. 6.04 The appraisal report estimated that transport of the 34 million tons of oil then forecast for 1990 would require the acquisition of some 12,500 rail tank cars and 750 locomotives, and of an unspecified number of barges and pusher tugs. The re-evaluation indicates that, without the pipeline, the tank car fleet would have to be expanded by 11,635 cars between 1981 and 1990; in addiition, replacements over this same period (estimated at 5% per annum) would have totalled about 5,870 (Annex 1, Table 6). Insufficient detail is avaiLable on the appraisal calculation to reconcile the differences between theses figures, but a major factor is clearly the appraisal report assumption that, in the "without" case, a proportion of the oil would move by barge. The assumptions underlying the re-evaluation are shown explicitly in Annex 1 Table 6, and are reasonable. It was conservatively assumed that no additions to the locomotive fleet would be required, but that traffic growth would be handled through improved productivity of the existing fleet. Tank cars made surplus by the pipeline are treated as a sunk cost. 6.05 The calculation of the railway operating cost savings by construction of the pipeline is based on rail tariffs for the routes involved. The railways are operating at a substantial deficit and if tariffs were high enough to cover this deficit the project benefits would be corresppondingly higher. On the other hand, the tariffs should cover an indeterminate amount of depreciation for the routes involved. The amount of this depreciation is roughly equivalent to the amount of the deficit, and therefore, tariffs are a reasonable proxy for economic operating costs on the routes concerned. The appraisal report used a figure of Din. 0.17 per ton-km for operating costs; the re-evaluation figures range between Din. 0.54 and Din. 0.67 per ton-km. The difference could easily be accounted for by inflation and depreciation of the ) Rail Costs(4) BENEFITS 1976 77.9 77.9 ( 77.9) 1977 99.9 99.9 ( 99.9) 1978 144.1 144.1 (144.1) 1979 123.0 123.0 (123.0) 1980 44.0 5.8 49.8 15.5 70.7 36.4 1981 12.6 11.5 24.1 162.3 105.7 243.9 1982 12.9 12.9 93.1 122.6 202.8 1983 14.5 14.5 140.3 148.2 274.0 1984 16.2 16.2 99.8 164.9 248.5 1985 18.1 18.1 105.7 182.1 269.7 1986 20.3 20.3 96.4 196.8 272.9 1987 22.8 22.8 99.2 211.4 287.8 1988 25.6 25.6 71.5 218.2 264.1 1989 28.8 28.8 94.5 229.2 294.9 1990 32.4 32.4 48.5 238.3 254.4 1991 32.4 32.4 48.5 238.3 254.4 1992 32.4 32.4 48,5 238.3 254.4 1993 32.4 32.4 48.5 238.3 254.4 1994 32.4 32.4 48.5 238.3 254.4 1995 32.4 32.4 48.5 238.3 254.4 1996 32.4 32,4 48.5 238.3 254.4 1997 32.4 32.4 48.5 238.3 254.4 1998 32.4 32.4 48.5 238.3 254.4 1999 32.4 32.4 48.5 238.3 254.4 Internal Rate of Return: 30% NOTES: 1. Excludes customs duties of 469.3 million dinars (US$23.6 million). 2. Excludes depreciation, taxes and interest. 3. Value of tank cars which would have had to be purchased in the absence of the pipeline (Annex ). From 1991 onwards, the value of replacement cars only is used. 4. Estimated incremental economic cost of transporting oil by rail instead of pipeline. Benefits are in line with pipeline throughput until 1990, when the pipeline capacity is reached. 5. Economic benefits exclude a benefit derived from postponement by at least 5 years in the need for increased railway track capacity between Rijeka and Zagreb. The planned project, which includes a 25 km tunnel, would cost possibly as much as US$500 million. Postponement by 5 years of such a project would yield annual savings of US$60 million at a 12% cost of capital. SOURCES: Naftovod and Bank Staff. - 31 - ANNEX 1 Table 9 YUGOSLAVIA OIL PIPELINE COMPLETION REPORT ESTIMATED COSTS AND BENEFITS - EXCLUDING TRANSIT TRAFFIC (US$ Millions) Pipeline Total Economic Benefits(5) TOTAL Capital Operating Economic Rolling Avoided NET Cost() Costs(2) Costs Stock(3) Rail Costs(4) BENEFITS 1976 77.9 77.9 ( 77.9) 1977 99.9 99.9 ( 99.9) 1978 144.1 144.1 (144.1) 1979 123.0 123.0 (123.0) 1980 44.0 5.8 49.8 15.5 67.9 1981 12.6 11.2 23.8 128.8 94.4 199.4 1982 12.5 12.5 70.8 105.6 163.9 1983 14.0 14.0 114.6 125.6 226.2 1984 15.5 15.5 50.5 131.0 166.o 1985 17.2 17.2 54.2 136.9 173.9 1986 19.1 19.1 42.7 140.2 163.8 1987 21.2 21.2 43.4 143.6 165.8 1988 23.7 23.7 31.3 143.6 151.2 1989 26.8 26.8 6o.o i49.7 182.9 1990 30.2 30.2 67.3 157.6 194.7 1991 30,2 30.2 32.7 157.6 160.1 1992 30.2 30.2 32.7 157.6 160.1 1993 30.2 30.2 32.7 157.6 160.1 1994 30.2 30.2 32.7 157.6 160.1 -1995 30.2 30.2 32.7 157.6 160.1 1996 30.2 30.2 32.7 157.6 160.1 1997 30.2 30.2 32.7 157.6 160.1 :998 30.2 30.2 32.7 157.6 160.1 1999 30.2 30.2 32.7 157.6 160.1 Internal Rate of Return: 25% NOTES: 1. Excludes customs duties of 469.3 million dinars (US$23.6 milLion). 2. Excludes depreciation, taxes and interest. 3. Value of tank cars which would have had to be purchased in the absence of the pipeline (Table 6). From 1991 onwards, the value of replacement cars only is used. 4. Estimated incremental economic cost of transporting oil by rail instead of pipeline. Benefits are in line with pipeline throughput until 1990, when they are assumed to be limited by refinery capacity. 5. Economic benefits exclude a benefit derived from postponement by at least 5 years in the need for increased railway track capacity between Rijeka and Zagreb. The planned project, which includes a 25 km tunnel, would cost possibly as much as US$500 million. Postponement by 5 years of such a project would yield annual savings of US$60 million at a 12% cost of capital. SOURCES: Naftovod and Bank Staff. - 32 - AiTTCH'MENT Page 1 of 5 JIUGOSLAVENSKI NAFTOVOD - u osnivanju Rijeka SEKTOR u P P. u Rijeci 131 P. P. u Zagrebu 383 THE WORLD BANK Telex u Rijeci YUNARI 24424 Telex u Zagrebu YUNAZA 21682 Ciperations Evaluation Dpt. 2iro radun broj 33800-601-4767 SDK Rijeka Att.Mr. Shiv S. Kapur 1818 H. Street, N.W. Vas znak i broj: Nag znak i broj: Ref. JT/ZO1/-34/63. Washington, D.C.20433 - U.S.A. Zagrebu April4,19p3. Subject: Project Completion Report on Yugoslavia Oil PIpeline - Loan 1173 YU Dear Mr. Kapur, Thank you very much for your "Project Completion Report on Yugoslavia Oil Pipeline - Loan 1173 YU", which we received in February 1983 and which we immediately analized at the level of our administrations and consequently we would like to bring forth the following: Your report is prepared correctly and it represents our Project in all stages of implementation comptsing its beckground. We emphasise that we have no remarks concerning the data and interpretation of the same except that we somehow desagree with the understanding of certain statements which are components of your report, i.e: - Page 2, Chapter II: "Conflicting regional interests": the same formulation regards the background of the Project, that is the preliminary appraisal of needs ald possibilities of domestic and foreign partners for the subject Project - transportation of crude oil by pipeline. It was only upon Organizacione jedinice u Rijeci, Nikole Tesle 9, telefon 30-800 Terminal Oinisalj, Kancinar 1, telefon 888-052 Organizacione jedinice u Zagrebu, Radnicki dol 50 tel. 444900o Terminal Bosanski Brod, telefon 232-101 Terminal Novi Sad, Kacki put bb, telefon 24-060 Organizaciione jedinice u Zagrebu, Veslaika 25, tel. 510-705, 510-712 Predstavnistvo Beograd, 29. Novembra 15/lV, telefon 346-068 - 33 - TTA.1L' e no Page 2 of 5 the agreement of all partners and the definition of rends for each off-taker that the decision for construction Cf: the pipeline had been made. The earlier works represent an optimum solution of the most suitable choice for -the pipeline alignment and the tanker port, because possibilities fvr their locations existed from the South to the Nt-h- Adreatic coast. The choice was made in common by cvalI oil economy of Yugoslavia, what is familiar to your experts and administration as well. Therefore we suggest -tat your wording be replaced by the following sentence: c' Ccet- tove relations of groups of oil economy ( INA - Energoinvest Naftagas)". Page 6. item 14. "the storage farm at Omisalj was filled with oil in March .. " Our comments thereof is s-.iqLtI. different, provoding this date is considered to be iChse dcav of completion of the tank farm at Omi9alj.Ccnseq's"nt1,Vi advise that the first tanker "Slavisa Vainer -lEi' had already been accommodated, connected and unloaded cn OLSc-r 5 1979 and that the amount of about 140.000 tons of crude oil stored on December 22, 1979 at the terminal. By the end of 1980 the amount of 850.000 tons of crude oil was taken over via the Omisalj port and tank fa . in the direction of Sisak - other refineries. Since Lhe terlrmnaL (tank farm) represents unique whole, and as such iJt has been given the permit for use by the Inspection administrations on Federal and Republic levels, it is obvious that the se installation had been completed significantly prlrx; Commissioning Date. (December 22, 1979), Page 8, Item 18. Performance of Consultants: The activity o_f the consultants was continuous from the time of the coacept design, preparation of the main design for construction, - 34 - ATTACHMENT n oii cl Page 3 of 5 assistance during elaboration of the design, supervision of construction works includinq the commissioning of particular installations and the Pro-ject as a whole. Also, your statement "Hostile envirornment", and "vacuum - in which they worked", as well as "did not have confidence in their staff", is not real and does not express the real atmosphere which was established among us. The consultant was continually incorporated in the work from the beginning to the end of the Project implementation, and Jugoslavenski naftovod together with the Managements of the consultants agreed upon the replacements of experts in particular fields, but in fully amicable and correct environment on the part of both partners. Similar remarks of the consultants were never addressed officially totheEmployer. Also, your statement in the samae Item 18, Page 8, "plethora of subcontractors caused problems in coordination and ...", "but this was unavoidable in the context of the decentralized Yugoslav politico - economic system". Our comment would be: The engagement of all available capacities of domestic consultants in the stage of design pr-eparation and implenfentation of the Project - Jugoslavenski naftovod - represented one necessity, due to the size and importance of the Project which, beside the already said it has also an international character, and the capacities and the possibilities of the domestic engineering - designing organizations. For these very reasons we contracted the foreign consultants, first IMEG - London, and then OTP - IParis, and this can not be explained as being necessary consequence of the "decentralized political and economic system of Yugoslavia", as stated in your report. Also, we stress that the domestic consultants are at the same time members of the sponsors, and it is . - 35 - ATTACHMENT UflO Page 4 of 5 quite normal to engage their capacities for their own Project. - Page 4. item 11. ..." Valuable time was lost in arranging financing and in corresponding with bidders". (section Omisalj - Sisak etc.). Jugoslavenski naftovod followed to the maximum the proposed procedure of IBRD, which could also, due to its inflexibility contribute to your above mentioned statement to decline the effectivenes and promptness of contractors choice, as it was for example the choice of the contrator for the Omigalj - Sisak pipeline section. You know that only the fourth bidder signed the contract, after long negotiations and much later than it could have been normally done. Could the Employer eliminate more simply uniterested bidder without certain formalities which the bidder - contrector used, and which were provided to him by the procedure procured by IBRD, more significant saving of time would have been gained from the moment of contracting to the moment of Contructor's introduction in field (work). Our remarks are general and we believe that you would analyze the same and in the limits possible correct your final report. At the end we wish to stress that we are very grateful for the assistance given by your experts to our professional services and professionals during the official visits to Yugoslavia and Washington and we believe that your experts as well, who participated on this project were also pleased with the cooperation and the relations with our experts and all other participants in the Project implementation. It is our wish to meet again your experts, and IBRD . - 36 - ATTACHMENT Page 5 of 5 ,una respectively on other project in our country, who have given until now great and concrete support on many projects in our country. With many wishes for future fert:lle mutual cooperation we send our best regards, Yours sincerely, dr. Zvonko Petfinovi6 General Manager of Jugoslavenski naftovod IBRD 11586- 9 i > M A C E D O5N I A0508 SzO~~~~~~~~~ ENAPAREEZE7 LINEN A LBA N IA ¾ f tsr RANRTENNAR fRUPC IA~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~EEINI EESA -AN ,--- EIV:>A LEEN N I E R Z E G L V I N SESTEENENN NNEE N NE NE GA NA NS TN A 3 (JGSAVNK NAFTOVOD J _ PIPEL,ENINE ALYTEMEETIE I I A NA rNAIINtCAAIILNA ' t If5UTRN IR ~ INDMD N7NIRE KIDRRSmv NANRRJd -4 s t L t IR° teR P IR' rto \,> zf SS T |'~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~,