(i) Reconstructing the power system. The Federation and RS governments place high priority on reconstructing the power system as one of the primary means to relaunch economic activity. IDA and other international donors have been supporting this reconstruction, mainly through the Emergency Electric Power Reconstruction Project (Cr. No. 2903) and the Second Electric Power Reconstruction Project (Cr. No. 3071). Further investments are needed to continue the post-war reconstruction program.

(ii) Improving cost recovery. Since the Dayton peace accord, the revenue situation of the three enterprises, both in terms of tariff levels as well as collection performance, has improved, particularly for EPBiH. Further progress is required, however, to reach full cost recovery, including coverage of normal depreciation charges. This will require progressive increases in: (i) billing and collection; (ii) cost efficiency through adequate system repair and maintenance and commercial trade of electricity within BiH; and (iii) tariff levels.

(iii) Improving tariff structures. A recently completed tariff study has shown that average industrial tariff rates in BiH are not far below economic and financial costs. By contrast, household rates for all three enterprises are well below cost levels. The strategy of the Governments and companies is to gradually raise household rates towards the economic level in accordance with the financial requirements of the companies and as the ability of households to pay increases.

(iv) Increasing mutually beneficial power exchanges between EPBiH, EPM and EPRS. In the period immediately following the war, power exchanges between the different parts of BiH were restricted because of the breakdown of many transmission lines and the existence of three separate vertically-integrated power enterprises which were reluctant to cooperate with each other. The exchanges which were made were in kind and constrained so that net trade between any pair of companies was always zero or close to it (e.g., exports from one company to a service area with a power deficit of another company are offset by imports of the same amount from a power surplus area of the other company). The development of commercial trade was also hindered by difficulties in making payments because of a poorly functioning banking system. More recently, commercial exchanges have been initated on a limited scale. Re-establishment of unhindered power exchanges would: (i) permit surplus power of one company to be used to alleviate shortages of another company (caused by inadequate generation capacity or by outages of large generating units or surges in power demand); (ii) reduce transmission costs by allowing the most direct routes to be used, regardless of whether these routes cross the territories of the other companies; and (iii) reduce generating costs by permitting the lowest cost generating units in the country to be used at each time of day and year. A Joint Power Coordinating Center (JPCC) was established in March 1999 to facilitate the eventual economic dispatching of power for the whole country, but the companies themselves still maintain responsibility for the physical controls and are not obliged to accept the recommendations of the JPCC. Further progress towards improved power exchanges would be demonstrated by the establishment of more commercial trade contracts between the three companies, a readiness by the companies to help each other out in emergencies, and an increasing acceptance by the three companies of the power dispatch recommendations of the JPCC.

(v) Power sector reform. Prior to the war, BiH had a single vertically-integrated socially-owned power company. There are currently three vertically-integrated companies (two in the Federation and one in RS) serving three separate groups of consumers (Bosniacs, Croats and Serbs). The current arrangements lack the economies of scale and coordination that existed before the war. They also lack the potential benefits of competition (lower costs and prices and greater supply quality and reliability). Until now, although private investors have expressed some limited interest, there has not been any private sector investment in the sector. Private involvement, particularly if it comes from abroad, could bring valuable expertise as well as new resources for investment. The challenge for the future is to establish clear policies for reform in the Federation and Republika Srpska, incorporate these in electricity legislation which is in tune with developments in the European Union, establish a regulatory framework, and establish a power sector structure which is conducive to both the emergence of beneficial competition and privatization. However, privatization may require significant third part guarantees in order to reduce perceived risks.

(vi) Restructuring the coal mine sector in the Federation. Investments have been carried out to enable the Federation coal mines to meet the needs of the thermal power stations of Tuzla and Kakanj over the next several years. In the medium term the forecast needs of the power stations could be met from about four low-cost mines. The other mines appear to be financially and economically unviable. A coal sector restructuring study is being carried out under Power 2, which will determine which mines are economically viable, recommend an organizational structure for these mines, and propose appropriate measures to protect the incomes of redundant coal miners and help them find alternative employment.

The project development objective is to ensure access to reliable, lower cost electricity, to be supplied with reduced environmental and safety risks, and improved cost recovery by suppliers. The component outputs contributing to this objective include: (i) improved safety at hydropower plants; (ii) reduced pollution at thermal power plants; (iii) increased transmission capacity; (iv) increased distribution capacity; (v) improved operation of the BiH power system on an integrated basis; (vi) establishment of a legislative and regulatory framework conducive to competition and eventual privatization; and (vii) institution building through corporatization of the power companies and operation on a commercial basis. The project would continue and substantially complete the post-conflict reconstruction program in the power sector.

The project would focus on restoration of the 400 kV and other high voltage transmission systems, especially reconstruction of damaged substations. This would help BiH to restore the pre-war interconnections with the other parts of former Yugoslavia and eventually to re-join the Union for the Coordination of Transmission in Europe (UCTE). The project could also include a Supervisory Control and Data Acquisition (SCADA) System component to improve power dispatching and facilitate the operation of the high voltage network within BiH on an integrated basis. It would include investments in power distribution to provide electricity to returning refugees and to reconstruct damaged facilities, thereby relieving serious overloading in some areas and enable reduction in the high levels of technical distribution losses. It would cover some investments at hydropower stations to improve safety and plant availability. Investments at thermal power stations would be limited to reducing pollution. Technical assistance would be provided for commercialization of the power companies and implementation of power sector restructuring.

Pending completion of the ongoing feasibility studies on priority investments in power transmission, distribution and hydropower plants and SCADA, and further development of proposals by EPBiH and EPRS on environmental improvements at thermal power stations, it is not possible at this stage to provide a detailed description of the equipment to be financed under the project. Similarly, neither the allocation of the investments covered under the project between the three power companies, nor cost estimates are currently available. These data are expected to be available by late November 1999. An order of magnitude estimate would put total project cost in the US$200 million range.

Transmission Lines
Transmission substations
SCADA/telecommunications
Distribution
Safety investments at hydropower stations
Environmental investments at thermal power stations
Technical assistance for commercialization and establishment of regulatory framework

The IDA credit would be lent to Bosnia and Herzegovina and onlent through the Federation Government to EPBiH and EPM and through the Government of Republika Srpska to EPRS. Onlending would be at the IDA service charge, for a 20 year term, including five years of grace.

Co-financing would be provided through parallel financing arrangements, with each donor responsible for separate components. As a result, possible delays in implementation of one donor's component would generally cause little or no delay in implementation of other donors' components.

The proposed project would be expected to be completed within a period to be determined by the feasibility studies, but currently expected to be about three years. Management of all aspects of project implementation, except those to be carried out by the Federation and RS Governments (i.e., sector reform), would be carried out by EPBiH, EPM and EPRS, who would be responsible for execution of their respective parts. Procurement and disbursement of funds would be handled in accordance with the agreements reached between each donor and Bosnia and Herzegovina. All three Elektroprivredas have qualified staff and expert support required for project management. The PIUs responsible for implementation of Power 2 (The Federal PIU, the branch PIUs in EPBiH and EPM, and the PIU in EPRS) would be expected to continue for the proposed project. However, the PIUs in EPRS and EPM need assistance in procurement-related activities. A procurement capacity assessment of the implementing agencies will be carried out by appraisal. The implementation of the sub-projects would be the responsibility of the local generation, transmission and distribution entities.

The financial management systems of the three Elektroprivredas will be reviewed by appraisal and appropriate measures to strengthen these systems would be included under the project. The financial statements of these companies and the project accounts would be audited annually by qualified, independent, external auditors acceptable to IDA and under terms of reference approved by IDA, as is being done under Power 2. All audit reports would be made available to IDA within six months after the end of the fiscal year. The Beneficiaries would prepare and furnish to IDA quarterly project implementation reports summarizing the status of procurement and disbursements, implementation progress for each component, as well as financial reports in a form acceptable to IDA.

Factors critical for sustainability include: (i) overall macroeconomic progress, which is needed to restore consumers' ability to pay for electricity; (ii) satisfactory financial performance of the three Elektroprivredas; and (iii) satisfactory coordination between the enterprises to operate the BiH power system in the interest of BiH as a whole. At this time the prospects for sustainability of Power 3 look to be good.

The project would build on the successful performance of Power 1 and Power 2. One lesson learned from these projects is the importance of ensuring the timely availability of co-financing. It is proposed to invite donors to participate in the pre-appraisal and appraisal missions and to hold a power sector donors' conference following the completion of the draft final report of the main feasibility study (which will identify the individual investments and provide cost estimates). This report is scheduled to be available in late October 1999. A second lesson is the importance of having strong, well-staffed PIUs. The PIUs being used for Power 2 would be expected to continue under Power 3. A third lesson is that progress towards power sector coordination and reform requires patience and an active role by the Bank because of the need to gain the agreement of the three project beneficiaries and the three Governments under the existing political climate. In practice, only the Bank can perform this leadership role.

9. Program of Targeted Intervention (PTI) N

The major issue associated with the restoration of the transmission system is to assure that the system being restored is safe with respect to exposure of local residents to electromagnetic radiation by establishing that the levels are within acceptable limits (BiH, EU standards, etc.) during operation.

The major issue is the possible presence of polychlorinated biphenyls (PCBs) in the transformers, or other equipment in the substations (e.g. condensers), and if found, the manner in which the PCBs will be disposed of.

Other issues are associated with movement of men, materials, and equipment during construction (noise, dust) and noise and communication interferences during operation.

Minor issues include exposure of local residents to electromagnetic radiation and noise from restored substations is within acceptable limits (BiH, EU standards, etc.). Additionally, if any of the existing transformers have experienced leaks, there is the possibility of existing soil and/or groundwater contamination.

A minor issue is associated with disruption to transport, communications, etc. during the construction phase.

Since the objective is to reduce pollution, there should be no major negative environmental issues. However, the components as yet have not been defined. In the course of deciding on specific components, their environmental benefits as well as possible adverse effects will be identified and evaluated.

Task Manager
Mian Iftikhar Khalil
The World Bank
1818 H Street, NW
Washington D.C. 20433
Telephone: 202-458 4171
Fax: 202-477-7977

Note: This is information on an evolving project. Certain components may not be necessarily included in the final project.